Business Law D6

PART A: THE ZAMBIAN LEGAL
SYSTEM
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THE ZAMBIAN LEGAL SYSTEM
We start our coverage of Zambian law by examining the sources of law, beginning with the constitution
as the most important source of law. We then look at the role of statutory and case law, and also
explain the significance of the different courts in Zambia. We then move onto other important sources
of law.
The final section of the chapter deals with the important distinction between criminal and civil liability.
chapter
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syllabus
references
topic index
1 The constitution of Zambia 1A

2 The role of legislation 1B
3 The role of case law and the court structure 1C
4 The role of English law 1D
5 The role of international law 1D
6 Criminal and civil liability 1E
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LEARNING OBJECTIVES
 Explain the importance of the Zambian constitution in underpinning law in Zambia
 Explain the role of legislation
 Describe the rules and presumptions used by the courts to interpret legislation
 Explain the importance of case law and precedent
 Describe the structure and operation of the courts in Zambia
 Describe the significance of English law in the law of Zambia
 Distinguish between civil and criminal liability
1 The constitution of Zambia

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We start by examining the role of the constitution of Zambia, which is the supreme source of law.
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1.1 Introduction
To understand how the principles of Zambian have developed, you must know first the sources of such
principles and the importance to attach to each source. This chapter thus discusses the various sources
of law, beginning with the most important. It also covers the distinction between Criminal and Civil
liability.
The sources of law in Zambia include the following, listed in order of importance to the legal system:
 The Constitution
 Acts of Parliament and Subsidiary legislation
 Judicial decisions
 English common law
 Equity statutes
 Customary law
1.2 The constitution as a primary source of law

A constitution is a set of rules or fundamental principles of a nation. This is the most fundamental
source of law. It is chapter 1 of the laws of Zambia.
The Constitution sets out the structure and powers of government. It indicates people’s rights and duties
vis a vis the State. Article 1(3) of the Constitution of Zambia expressly provides as follows;
‘This Constitution is the supreme law of Zambia and if any other law is inconsistent with this
Constitution that other law shall, to the extent of the inconsistency, be void.’
The Supremacy of the Constitution has been pronounced upon by the Zambian judiciary in a number of
cases.
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Banda v the People
The High Court struck down the provisions of section 24(c) of the Penal Code Chapter 87 of the Laws of
Zambia which provided for corporal punishment as one form of punishment among others that a court
can impose. The Court reasoned that Section 24(c) was unconstitutional because it offended Article 15
of the Constitution of Zambia which provides as follows:
‘A person shall not be subjected to torture or to inhuman or degrading punishment or other like
treatment.’
Thomas Mumba v the People 1984
The applicant was standing trial in the subordinate court for an offence under the Corrupt Practices Act.
S 53 (1) of the Act required that where an accused elected to say something in his defence, he had to
say it on oath only (thus excluding the option to make an unsworn statement). The defence submitted
that the provisions of the section referred to above were in contravention of Article 20 (7) of the
Constitution.
Held: The High Court of Zambia struck down the s 53 (1) the Corrupt Practices Act for contravening
Article 20 of the constitution. The Court stated:
‘As the Constitution is supreme and above all the laws and as Section 53 (1) of the Corrupt Practices
Act is in direct conflict with Article 20(7) of the Constitution, I have no hesitation in declaring that
Section 53 (1) of the Corrupt Practices Act is unconstitutional and therefore null and void and it should
be severed from the Act. An accused person in a criminal trial cannot be compelled to give evidence if
he wants to say something in his defence. In Zambia like many other countries that have a written
constitution, the Constitution is the Supreme law, any other laws are made because the Constitution
provides for their being made; and are therefore subject to it. It therefore follows that unless the
Constitution is specifically amended, any Act made that is in contravention of the Constitution is null
and void. Therefore section 53(1) of the Corrupt Practices Act was declared unconstitutional, null and
void.’
Christine Mulundika et al v the People 1995
PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

The appellants were charged with a criminal offence for conducting a public procession without first
obtaining a permit in accordance with the provisions of the Public Order Act Cap 104 of the laws of
Zambia. The appellants raised a constitutional issue when they challenged the constitutionality of
certain provisions of the Public Order Act Cap 104, especially section 5(4). The challenge was based on
the fundamental freedoms and rights guaranteed by arts 20 and 21 of the Constitution. It was
contended that The Public Order Act, which is subordinate to the Constitution, cannot take way the
fundamental rights guaranteed by the Supreme law, the Constitution. A subsidiary challenge related to
the exemption of certain office-holders from the need to obtain a permit.
Held: The Supreme Court of Zambia held:
‘In sum and for the reasons which we have given we hold that subsection 4 of section 5 the Public
Order Act, CAP 104, contravenes Articles 20 and 21 of the constitution and is null and void, and
therefore invalid for unconstitutionality. It follows also that the invalidity and the constitutional guarantee
of the rights of assembly and expression preclude the prosecution of persons and the criminalisation of
gatherings in contravention of the subsection pronounced against. Accordingly, a prosecution based on
paragraph (a) of section 7 which depends on subsection 4 of section 5 would itself be inconsistent with
the constitutional guarantees and equally invalid.’
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The above cases clearly demonstrate the Supremacy of the Zambian Constitution over all other laws.
Any law that is in conflict with the provisions of the Constitution can be declared null and void to the
extent of the conflict.
This is also emphasised by Article 6 of the Constitution of Zambia which provides as follows:
‘Subject to the other provisions of this Act, and so far as they are not inconsistent with the Constitution,
the existing laws shall continue in force after the commencement of this Act as if they had been made in
pursuance of the Constitution, but shall be construed with such modifications, adaptations,
qualifications and exceptions as may be necessary to bring them into conformity with the Constitution’.
1.3 System of government

As well as being the supreme source of law, the Constitution also helps to promote an orderly system of
government. It sets out the structure of government structure, how a government is formed and how
laws are made. It describes who a citizen of a country is and describes the rights and duties of citizens
The Constitution gives Government institutions the powers to function and places limits on how far these
powers can be used. Thus the constitution of Zambia provides for the creation and existence of three
independent and equal branches of Government that are the fundamental pillars of the democratic
governance of the country:
 The Executive, which includes the Republican President and Ministers supported by civil
servants;
 The Legislature or Parliament
 The Judiciary, made up of local courts, magistrates’ courts, Industrial Relations Court, the High
Court and the Supreme Court.
The Constitution explains the relationship among these branches in terms of setting checks and balances
of power.
The Constitution reflects the wishes of the people on how they want to be governed. Thus the preamble
to the Constitution states that;
‘ An Act to provide for the new constitution of the Republic of Zambia, to provide for the savings and
transitional provisions of existing offices, institutions and laws; to provide for the savings of succession to
property and assets, rights and liabilities obligations and legal proceedings; and to provide for matters
connected with or incidental to the foregoing.’
1.4 Amendment of constitution

The Constitution is sacrosanct and it cannot be amended by implication. To amend the constitution
certain requirements have to be met, as provided for in Article 80 of the Constitution. A certificate has to
be inserted on the Bill as provided for in Section 5 (3) of the Acts of Parliament.
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The Zambian constitution is the supreme source of law in Zambia and promotes an orderly system of
government.
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2 The role of legislation

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We next look at the importance of legislation as a source of law and consider how legislation is
interpreted.
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2.1 Legislation
The second source of law in Zambia is Acts of Parliament. These are enacted by Parliament by the
powers vested in it by the Constitution under Article 62 of the Constitution, Chapter 1 of the Laws of the
Zambia.
2.2 Interpretation of legislation

The courts in Zambia are given the powers of interpreting the law contained in the statute books or
legislation that has been made by the legislature (parliament). In normal life when someone says
something that you do not understand, you ask them to explain themselves fully. This is impossible with
the interpretation of statutes. When Parliament has passed an Act, the words of the Act are authoritative
as words. Only these words have passed through the legal machinery of law making. Members of
Parliament cannot be put into the witness box to supplement or interpret what has been formally
enacted to help with the interpretation of legislation.
Therefore various rules of construction of statutes have been devised as dictated by common sense.
2.3 The context rule

The judge may look up the meaning of a word in a dictionary or technical work. This ordinary meaning
may be controlled by the particular context. The document may be its own dictionary, showing an
intention to use words in a special shade of meaning. The rule requiring regard to be had to the context
is sometimes expressed in the Latin maxim Noscitur a sociis translated as ‘A word may be known by the
company it keeps’.
You may look not only at the rest of the section in which the word appears but at the statute as a whole,
and even at earlier legislation dealing with the same subject matter. It is assumed that when parliament
passed an Act, it probably had the earlier legislation in mind and probably intended to use words with
the same meaning as before. Reference may even be made to later statutes, to see the meaning that
Parliament put on the same words in a similar context. However words need not always have a
consistent meaning attributed to them. The context may show that the same word bears two different
senses even when it is repeated in the same section.
When reading a statute you should always look for a definition section, assigning special meanings to
some of the words in the statute.
In addition to the interpretation section in the statute, the Interpretation Act Chapter 2 of the Laws of
Zambia operates as a standing legal dictionary of some of the most important words used in legislation.

Ntombizine Mudenda v Attorney General 1979
This was an application for Habeas corpus ad subjudiciendum. The applicant was detained under reg.
33(1) of the Preservation of Public Security Regulations and was served with the following grounds of
detention. ‘that you on unknown dates but during the year 1978 and October 1979 in collusion with
others yet unknown indulged in the illegal and illicit trafficking in precious stones like emeralds’. Counsel
for the applicant contended that the grounds of detention were too general, imprecise and vague… that
the words ‘ like emeralds’ are vague as these might be interpreted to mean precious stones, which are
similar to emeralds, in respect of which being in possession of, or trafficking in, would not warrant a
detention order.
Held: ‘According to the dictionary meaning, therefore, the word ‘like’ in the context in which it was here
used meant that the precious stones were the ‘same as’ or ‘similar to emeralds. The question is: could a
reasonable person have understood the word in this way? In the ordinary course of things… one relies
upon the ordinary or common sense meaning… there are only two types of precious stones the
trafficking in which is illegal namely diamonds and emeralds. It is therefore not misleading or vague to
use the phrase ‘like emeralds’ because it can only refer to emeralds or diamonds and that is the case
that the detainee has to answer and she has very good opportunity to do so.’
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2.4 Interpretation in the light of policy (fringe rule)
When interpreting statutes the courts often announce that they are trying to discover ‘the intention of the
legislature’. If a court finds it hard to know whether a particular situation comes within the scope of a
statute or not, the probability is the situation was not foreseen by the legislature. In this situation the
‘intention of the legislature’ is a fiction.
The words we use, though they have a central core of meaning that is relatively fixed, have a fringe of
uncertainty when applied in practice. For example, the general notion of a ‘building’ is clear. However a
judge may not find it easy to decide whether a temporary wooden hut, or a telephone kiosk, or a wall, or
a tent is a ‘building. In this situation, the process of interpretation is indistinguishable from legislation
and the judge is therefore a legislator. If he decides that a wooden hut is a ‘building’, the judge is in
effect adding an interpretation clause to the statute which gives ‘building’ an extended application. If he
decides that the hut is not a building, he adds a clause to the statute which gives it a narrower meaning.
The words of a statute as they stand are insufficient to give an answer to the question before the judge.
However in practice the judge will state that his judgement is based on the words of the Act, though the
judge may confess he is being guided by its general policy that lies behind the Act. The rational
approach is to say that the issue, being legislative, must be settled with the help of the policy implicit in
the Act, or by reference to convenience, social requirements or generally accepted principles of fairness.
Attorney General v Steven Luguru 2001
The Respondent was a Tanzanian national employed in the Zambian civil service. After his request to
buy his house as a sitting tenant was rejected he brought an action before the Lands Tribunal, which
ordered the sale of the house to him within a specified period.
Held: On appeal a number of issues were raised including the interpretation of the preamble to the
legislation. The court held that the Tribunal misdirected itself and erred in ignoring the preamble. The
Tribunal ignored the spirit of empowering Zambians to acquire their own houses. The Tribunal thought
that so long as you are e a civil servant and a sitting tenant and so long as you qualify under section 3 of
the Lands Act, you would qualify. On strict interpretation of the cabinet circular and interpretation of the
cabinet circular and interpretation of the Local Government and Housing and the University of Zambia
circulars on the sale of houses, the intention of Government became very clear. The intention was to
empower Zambians who were sitting tenants to purchase pool houses and not other nationals.
2.5 The mischief rule

Judges can apply the ‘mischief rule’, also known as the rule in Heydon’s case. This rule compels the
Judges to look at the common law (i.e. the legal position) before the Act, and the mischief that the
statute intended to remedy. The Act should then be construed in such a way as to suppress the mischief
and advance the remedy. The practical utility of the rule depends to some extent upon the means that
the courts are entitled to employ in order to ascertain what the mischief is and to advance the remedy.
In practice, therefore, the judge generally interprets the object of a statute from perusal of its language,
in the light of his knowledge of previous law and general knowledge of social conditions.
People v Shamwana and Others 1974
The accused were charged with treason. Proving the case was dependent on Act No. 35 of 1973. Prior
to this Act, the law provided that one could not be convicted unless there are two witnesses to an overt
act or two witnesses who each observed a separate overt act of the same kind of treason. This was the
law in England and Zambia. Act No.35 of 1973 changed the law in Zambia ensuring that there is no
requirement as to a specific number of witnesses to prove the offence of treason. The offence can be
proved like any other criminal offence.
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Held: The Court stated:
‘What is the effect of Act No.35 of 1973? I seek guidance from what Lindley, M.R, said in the case of
Re Mayfair Property Company (1898) 2 Ch. 28 at p.35. ‘ in order to properly interpret any statute it is
necessary now as it was when Lord Coke reported Heydon’s case to consider how the law stood when
the statute to be construed was passed, what the mischief was which the old law did not provide and
the remedy provided by the statute to cure that mischief.’ In Macmillan and Co. v Dent (1907) 1 Ch.
107 Fletcher Moulton LJ put it this way at p.120. ‘ in interpreting an Act of Parliament you are entitled,
and in many cases bound to look to the state of the law as it then stood under the previous statutes in
order properly to interpret the statute in question. These may be considered to form part of the
surrounding circumstances under which the Legislature passed it and in the case of a statute just as in
the case of every other document you are entitled to look at the surrounding circumstances at the date of
its coming into existence, though the extent to which you are allowed to use them in the construction of
the document is a wholly different question.’
2.6 The literal rule

Although words have a certain elasticity of meaning, the general rule remains that judges must regard
themselves as bound by the words of a statute when they clearly govern the situation before the court.
The words must be applied with nothing taken away. The general principle is that the court can neither
extend the statute to a case not within its terms, though perhaps within its purpose, nor curtail it by
leaving out a case that the statute literally includes, though it should not have.
According to this rule, the courts should not use the ‘mischief rule’ when the statute is ‘plain and
unambiguous’. They can use the mischief rule if the statute is ambiguous, but must not ‘invent fancied
ambiguities’ in order to do so.
It is nevertheless, difficult to reconcile the literal rule with the context rule. We understand the meaning
of words from their context. In day-to-day life the context includes not only other words used at the
same time but the whole human or social situation in which the words are used.
Mutale v Attorney General 1976
The applicant sought leave to apply for a writ of habeas corpus. He challenged his detention under the
preservation of the Public Security regulations, on the grounds that the detaining authority had not
complied with the Constitutional requirements to furnish him with a statement in writing specifying in
the detail the grounds upon which the applicant was detained. The statement of grounds furnished read:

‘that between 1 January 1979 and 11 December 1983, you conspired with other persons in Zambia to
commit crimes and that you organized and managed the commission of serious crimes in Zambia which
acts are prejudicial to the security of the Republic of Zambia.’
Held: The detention was declared unlawful. The Court stated:
’ The question that arises in my view is: what is meant by the phrase ‘specifying in detail’? The words in
detail have been considered in the case of Kapwepwe and Kaenga and it was common ground that both
Boyle C.J and Baron J.P (as then he was) refrained from applying the dictionary meaning. Perhaps they
did so for the simple reason that the dictionaries are not generally resorted to as a means of elucidating
the construction of the statutes, and their use has sometimes been deprecated…be that as it may, it has
been said that dictionaries may afford some help… Cozens –Hardy, M.R, said in Camden (Marquis) V
IRC (1914) 1KB 641 at p.647 that: ‘it is for the court to interpret the statute as best as it may. In doing
so the court may no doubt assist themselves in the discharge of their duty by any literally help they can
find, including of course the consultations of the standard authors and reference to well known and
authoritative dictionaries. ’
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It seems to me therefore that the construction of the words should be taken in their literal meaning
which is not necessarily the dictionary sense but the sense in which the words are used in common
parlance. What then is the popular sense of the phrase ‘specifying in detail’ the popular sense of the
phrases in my view is therefore that the detaining authority must furnish sufficient information which
should enable the detainee to direct his mind to it when making his representations.
2.7 The golden rule (interpretation to avoid absurdity)

Courts sometimes allow themselves to construe a statute in such a way as to produce a reasonable
result, even though this involves departing from the prima facie meaning of words. The rule that a
statute may be construed to avoid absurdity is conveniently called the “golden” rule. However it is
generally only applied in three types of case.
In its first application, the golden rule allows the court to prefer a sensible meaning to an absurd
meaning, where both are linguistically possible. It does not matter that the absurd meaning is the more
natural and obvious meaning of the words.
The above application of the golden rule does not contradict the literal rule provided that the absurdity of
the particular proposed application of the statute is conceded to be a reason for finding an ambiguity in
it. According to the golden rule, it can be a powerful motivating force leading the court to detect such an
ambiguity. It is frequently said that the question of absurdity cannot influence a decision in any situation
except this one.
However the courts sometimes act on a second principle. Judges may read in additional words which
they consider to be necessarily implied by words which are already in the statute. Judges have a limited
power to add to, alter or ignore statutory words in order to prevent a provision from being unintelligible,
absurd or totally unreasonable, unworkable or totally irreconcilable with the rest of the statute.’
Judges have applied this principle occasionally when they have corrected a statute that said “and” when
it meant “or” or that said “or” when it meant “and”. However, the argument must be very strong to
persuade the court to changes the word in a statute. Instances occur where the courts feel obliged to
construe a statute in a way that they themselves acknowledge creates outrageous injustice.
Attorney General and the Movement for Multi Party Democracy v Lewanika et al 1994
The four respondents were members of the Movement for the Multi Party Democracy (hereinafter called
‘MMD’). On 31 October they stood for elections on the tickets for MMD. They won elections and took
their seats in the National Assembly. On 12 August, 1993, there was a press conference at Pamodzi
Hotel at which all the four Respondents except Katongo Mulenga Maine, attended and announced their
resignation from the MMD. On 13 August 1993 the National Secretary for the MMD wrote to the
speaker of the National Assembly informing him that the respondents were no longer members of the
party. On 27 August 1993, in consequence of that official notification by the National Secretary for the
MMD, the speaker wrote to the respondents that in terms of Art.71 (2) (c) of the Constitution of the
Republic of Zambia, they ceased to be members of Parliament with effect from 13 August 1993, a date
when the national secretary gave the notification to the speaker. The respondents then petitioned the
Attorney General, contending that although they had resigned from the party on whose ticket they won
the elections they were still Members of Parliament. They asked the Court to declare the Speaker’s
decision that their seats were vacant null and void.
Held: The Court stated:
‘It is perfectly clear on the face of it that the article is intended to prohibit floor crossing generally. In the
event the wording of it does not clearly carry out that intention. If we were to follow the construction
contended for by Mr Shamwana, the result would be discriminatory in favour of party members who
become independent. Both Maxwell and Craies on Statutes said only where there is absurdity or
repugnance can the Court come in to modify the language used in the statute. We are therefore satisfied
that art.71 (2) (c) is discriminatory and therefore, unreasonable and unfair and it is the duty of the Court
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to make it reasonable as it offends against art.23 of the Republican Constitution. It is clear from the
Shariz and Nothman cases that the present trend is to move away from the rule of literal interpretation
to ‘purposive approach’ in order to promote the general legislative purpose underlying the provision. It
follows, therefore, that whenever the strict interpretation of a statute gives rise to an unreasonable and
unjust situation, it is our view that judges can and should use their good common sense to remedy it,
that is by reading words in if necessary, so as do what Parliament would have done had they had the
situation in mind. We therefore propose to remedy the situation in this case by reading words so as to
make the constitutional provision fair and undiscriminatory.
For the foregoing reasons, we shall allow the appeal by the appellants.
2.8 Presumptions
In interpreting statutes, various presumptions may be applied, all of which are of a negative or restrictive
character. They are the background of legal principles against which the Act is viewed and in the light in
which Parliament is assumed to have legislated without being expected to express them. Examples
include:
 The presumption against the taking of property without compensation

 The presumption against interference with contract
 The rule that a statute is presumed not to be retrospective except in procedural matters
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The second major source of law is legislation, also known as statute law.
Legislation must be interpreted correctly before judges can apply it fairly. The literal, golden and
mischief rules of interpretation have developed over time.
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3 The role of case law and the court structure

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We next consider how case law is used by the courts and consider the structure of the court system
in Zambia.
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3.1 Hierarchy of courts in Zambia
The Judicature of Zambia is set out in Article 91 of the Constitution of Zambia which establishes the
Hierarchy of the courts as follows:
‘The Judicature of the Republic shall consist of:
(a) the Supreme Court of Zambia;

(b) the High Court for Zambia;
(c) the Industrial Relations Court;
(d) the Subordinate Courts;
(e) the Local Courts; and
(f) such lower Courts as may be prescribed by an Act of Parliament.’
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3.2 Supreme Court
The Supreme Court is the highest court in the land. It is created under Article 92 of the Constitution.
The jurisdiction and procedure of the Supreme Court is set out in the Supreme Court Act Chapter 25 of
the Laws of Zambia. This Act’s preamble states that it is:
‘An Act to provide for the constitution, jurisdiction and procedure of the Supreme Court of Zambia; to
prescribe the powers of the court and to provide for matters connected therewith or incidental thereto.’
Decisions of the Supreme Court are binding on all the lower court. Its decisions are final and conclusive.
This was made very clear in the case of Trinity Engineering (Pvt) Limited v Zambia National
Commercial Bank Limited 1997 where it was held that
‘As we see it, the question is not whether or not the High Court has jurisdiction to order a stay of
execution of this Court’s decision but whether or not there can be a stay of execution of a final judgment.
Judgments of this court are final and there can be no stay of execution of a final judgment. It is for this
reason that the single Judge of this court discharged the ex-parte order.’
3.3 High Court

The High Court was created pursuant to Article 94 of the Constitution which provides as follows:
‘94. (1) There shall be a High Court for the Republic which shall have, except as to the proceedings in
which the Industrial Relations Court has exclusive jurisdiction under the Industrial and Labour Relations
Act, unlimited and original jurisdiction to hear and determine any civil or criminal proceedings under any
law and such jurisdiction and powers as may be conferred on it by this Constitution or any other law.’
Its constitution, jurisdiction and procedures are set in the High Court Act, Chapter 27 of the Laws of
Zambia. Its preamble states that it is:
‘An Act to amend the law with respect to the jurisdiction and business of the High Court and with
respect to the officers and the offices of the High Court and otherwise with respect to the administration
of justice and the validation of certain acts.’
Any appeal from the decision of the High Court goes to the Supreme Court. As already mentioned, the
High Court is bound by the decision of the Supreme Court.
3.4 Subordinate courts

The subordinate courts are created pursuant to the Subordinate Court Act Chapter 28 of the Laws of
Zambia. They are also called magistrates’ courts. These are found in each district. The preamble of the
Act states that it is:
‘ An Act to provide for the constitution, procedure and jurisdiction of the subordinate courts; to provide
for appeals from such courts to the High Court; and to provide for matters incidental to or connected
with the foregoing.’
Any appeal from the Subordinate Courts goes to the High Court and the Subordinate Courts are bound
by the decisions of the Supreme Court and High Court.
3.5 Local courts

These courts are created pursuant to the Local Courts Act Chapter 29 of the Laws of Zambia. The
preamble of this Act states that it is:
‘An Act to provide for the recognition and establishment of local courts, previously known as native
courts, to amend and consolidate the law relating to the jurisdiction of and the procedure to be adopted
by local courts; and to provide for matters incidental thereto.’
The local courts are concerned with customary law. Any appeals from the decision of the local court
goes to the subordinate courts.
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3.6 Industrial Relations Court
This court is created pursuant to the Industrial and Labour Relations Act Chapter 269 of the Laws of
Zambia. It is concerned with labour and industrial disputes. The preamble to the Act states that it is:
‘An Act to revise the law relating to trade unions, the Zambia Congress of Trade Unions, employers’
associations, the Zambia Federation of Employers, recognition agreements and collective agreements,
settlement of collective disputes, strikes, lockout, essential services and the Tripartite Labour
Consultative Council; the Industrial Relations Court; to repeal and replace the Industrial Relations Act
1990; and to provide for matters connected with or incidental to the foregoing.’
Any appeal from the decision of the Industrial Relations Court goes to the Supreme Court and not to the
High Court because they are of the same ranking. The Industrial Relations Court is also bound by the
decision of the Supreme Court.
3.7 Small Claims Court

This court is established pursuant to the Small Claims Court Act Chapter 47 of the laws of Zambia as
amended by the Small Claims Court Act No.14 of 2008. The jurisdiction of the court is limited to
liquidated claims not exceeding fifteen million Kwacha. Lawyers have no rights of audience in the small
claims court. The court is presided over by legal practitioners who are called Commissioners.
3.8 Precedents
The Courts are also a source of law in the sense that the interpretation of statutes, as they are applied in
the courts, results in the creation of binding judicial precedents. Zambian precedents take priority over
precedents from other parts of the world, some of which are only of persuasive value. English precedents
are the primary source of precedents if there is a lacuna (gap) in the Zambian laws.
3.9 Importance of court hierarchy

The use of case authorities is also governed by the hierarchical nature of the court system. The decisions
of the higher courts are binding on the lower courts. The Supreme Court as the highest Court in the land
binds itself, although not absolutely. In the case of Paton v Attorney-General And Chona In His Capacity
Of Minister Of Home Affairs And Changufu In His Capacity Of Minister Of Home Affairs 1968 it was
held that:
‘The Court of Appeal for Zambia is not absolutely bound by its previous decisions. A previous decision
will not be followed only for very compelling reasons and only where the court clearly considers that the

previous decision was wrong.’
In another case of Kasote v the People, the Supreme Court of Zambia had opportunity to comment on
the doctrine stare decisis (let the decision stand) which is the cornerstone of judicial precedents. The
court held:
‘The principle of stare decisions is essential to a hierarchical system of courts. Such a system can only
work if, when there are two apparently conflicting judgments of the Supreme Court, all lower courts are
bound by the latest decision…The Supreme Court being the final court in Zambia adopts the practice of
the House of Lords in England concerning previous decisions off its own and will decide first, whether in
its view the previous case was wrongly decided and, secondly, if so, whether there is a sufficiently
strong reason to decline to follow it.’
The rule is that if the Supreme Court decides a case in ignorance of its previous decision, going the other
way, it will stand by the later decision.
Where a judgment of a lower court is overruled, that is held to be wrongly decided in a different case on
appeal or reversed in the same case on appeal, it loses all authority. The later opposing decision of two
courts of equal rank is problematic because the conflicting decisions may have to be resolved by the
Supreme Court at some point. The High Court may thus disapprove another High Court decision but not
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overrule it. The High Court decisions are binding on the subordinate courts. Decisions of the lower courts
do not bind anyone.
What is regarded as precedent and therefore to be followed is the ratio decidendi of a case or the rule
upon which the decision is founded. Cases are thus decided the same way when the legally material
facts are the same. The ratio decidendi is therefore made up of the material facts of the case and the
decision thereon. The ratio decidendi possesses the binding force, with the consequence that a new rule
of law or precedent has been evolved and constituted.
This means that the principle laid down in the decisions becomes binding on the whole community. The
actual parties to the case are of course bound by the judgment. If another dispute, in which similar facts
are present, comes before the same judge, he will as a rule follow his own previous decision in
accordance with the doctrine of stare decisis, that is stand by the decision. Likewise, another judge of
the same rank will follow the decision already given. Similarly a bench of judges will follow their own
previous decision and also of another court of equal standing. The effect is that the new rule will be
enforced by all single judges or if laid down by a court consisting of more than one judge, it will be
enforced by all similarly constituted courts. The decision may be overruled or altered by a higher court
on appeal. However the new decision simply becomes law instead of the former.
……………………
Case law is judge-made law based on the underlying principle of consistency. Once a legal principle
is decided by an appropriate court, it is a judicial precedent
The main courts in Zambia include the Supreme Court, the High Court, Subordinate Courts and
Local Courts.
……………………
4 The role of English law

……………………
We next examine the influence of English law on the Zambian legal system.
……………………
4.1 Common law

Common law is the law that has not been set out in legislation. It is the law created by the custom of
the people and decisions of the judges, which we call precedents. Sometimes common law may refer to
law that is not equity, such as the law developed by the old court of Chancery. It may also refer to
foreign law - the law of England or of other countries (such as America) that have adopted English law
as a starting point. It contrasts with Roman law or French law and in this sense it includes the whole of
English law, even customs, legislation and equity.
4.2 Equity
The term equity in ordinary language means natural justice. Equity is a term which applies to a specific
set of legal principles which were developed by the Court of Chancery to supplement (but not replace)
the common law. It is based on fair dealings between the parties. It added to and improved on the
common law by introducing the concept of fairness.
The interaction of equity and common law produced three major changes.
(a) New rights. Equity recognised and protected rights for which the common law gave no
safeguards.
(b) Better procedure. Equity may be more effective than common law in resolving a disputed matter.
14
(c) Better remedies. The standard common law remedy for the successful claimant was the award of
damages for his loss. The Chancellor developed remedies not available in other courts. Equity
was able to make the following orders.
(i) That the defendant must do what he had agreed to do (specific performance)
(ii) That the defendant must abstain from wrongdoing (injunction)
(iii) Alteration of a document to reflect the parties' true intentions (rectification)
(iv) Restoration of the pre-contract status quo (rescission)
Where equitable rules conflict with common law rules then equitable rules will prevail: Earl of Oxford's
case 1615.
4.3 Use of English law

Thus English law (cases) and the principles of equity, as well as selected English Statutes are applicable
in Zambia. These may be termed as the ‘reserve law’, resorted to in order to fill in gaps in local
legislation and case precedents.
The extension of the application of English law and Equity is provided in the British Acts Extension Act
Chapters 10 and The English Law (Extent of Application) Act chapter 11 of the Laws of Zambia. The
preamble to Chapter 11 provides as follows;
‘An Act to declare the extent to which the Law of England applies in the Republic’…
Further s2 of the said Act provides as follows:
‘Subject to the provisions of the Constitution of Zambia and to any other written law-
(a) the common law; and
(b) the doctrines of equity; and
(c) the statutes which were in force in England on the 17th August, 1911 (being the
commencement of the Northern Rhodesia Order in Council, 1911); and
(d) any statutes of later date than that mentioned in paragraph (c) in force in England, now applied
to the Republic, or which hereafter shall be applied thereto by any Act or otherwise; and
(e) the Supreme Court Practice Rules of England in force until 1999’
The following case illustrates the application of Chapter 11 of the Laws of Zambia.

The People v Shamwana and others 1982
The accused were charged with treason. Among the issues that were raised was whether the law
applicable to the offence was by virtue of the English Law (Extent of Application), the English Treason
Act of 1795.
Held: The High Court ruled inter alia that ‘the English law (Extent of Application) Act, CAP 4 is an
enabling Act in that in the absence of any legislation in Zambia on any subject, English statutes passed
before 17th August will apply. This means that were Zambia enacts an Act which has similar provisions
to an English Act, the Zambian Act is used and not the English statute.’ The law that applicable
therefore was the Zambian Act No. 35 of 1973 and the accused was convicted.
……………………
English law is used as reserve law in Zambia, to fill in gaps in local legislation and case precedents.
……………………
15
5 The role of international law
……………………
We next look at how international law is applied IN Zambia.
……………………
5.1 International law

International law is divided into customary international law and bilateral or multilateral agreements.
The agreements only apply to Zambia if they have been ratified by the Zambian government or the
government has acceded to such agreements. Furthermore, these agreements can only be enforced by
the courts where Parliament has passed the relevant enabling legislation. This is because Zambia
follows the doctrine of dualism as opposed to monism, and therefore international instruments are not
self executing. Allowing international treaties to be applicable automatically would give the executive law
–making powers, bypassing Parliament.
5.2 Customary international law

The position with regard to customary international law is less clear. However, the English position is
that customary rules of international law are deemed to be part of the law of the land and applicable by
English courts, provided they do not conflict with statutory law and have been determined by English
courts of final authority.
The Zambian Court had an opportunity to determine the application of International Law in the following
case:
Zambia Sugar PLC v Fellow Nanzuluka 2001
In this case the Respondent was employed by the appellant in 1992. His employment was terminated
without notice in 1996. He was paid three months salary in lieu of notice. He brought an action in the
Industrial Relations Court. The Court accepted that the conditions of service had been complied with but
held that the action was contrary to the International Labour Convention No. 158 of 1982 which forbids
termination of workers employment without valid reasons.
Held: On appeal to the Supreme Court, it was held that international instruments on any law although
ratified and assented to by the state cannot be applied unless they are domesticated; Zambia had not
domesticated the Convention. Although the Court was empowered to do substantial justice, that had to
be done within the sphere or scope of domestic law.
The above case made it very clear that international law would only be applicable in Zambia if it is
domesticated and made part of Zambian law through legislative enactment.
……………………
International agreements only apply to Zambia if they have been ratified by the Zambian government
and the Zambian Parliament has passed the relevant enabling legislation.
……………………
6 Civil and criminal liability

……………………
We finish this chapter by drawing the important distinction between civil and criminal liability.
……………………
16
6.1 Legal liability
The distinction between a criminal and a civil liability does not reside in the nature of the wrongful act
itself but in the legal consequences that follow it.
A crime is a wrong where the sanction is punishment. eg imprisonment and pecuniary fines.
In the civil liability of tort the sanction is unliquidated damages.
In criminal law, the award of compensation is incidental to the criminal process. In tort compensation is
normally the object.
6.2 Criminal proceedings

In criminal proceedings the procedure is as follows. A prosecutor prosecutes a defendant. The result of
the prosecution, if successful, is a conviction. The defendant may be punished by one of a variety of
punishments ranging from imprisonment to a fine. Alternatively the defendant may be released on
probation or discharged without punishment.
6.3 Civil proceedings

In civil proceedings, the procedure generally is that a plaintiff sues or brings an action against a
defendant. The proceedings, if successful, result in judgement for the plaintiff. The judgment may order
the defendant to:
 Pay the plaintiff money

 Transfer property to him
 Do or not to do something (injunction)
 Perform a contract (specific performance).
In other applications, the parties are called petitioner and respondent. In matrimonial cases, the parties
are called petitioner and respondent.
Furthermore, the word ‘guilty’ is primarily used for criminals in criminal law. The corresponding word in
civil cases is ‘liable’.
……………………
In criminal liability the sanction is punishment, in civil liability the sanction is damages.
……………………
EXAM ALERT PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system
The concept of precedent is a particularly important topic for exam purposes in this chapter.
17
Chapter Roundup
 The Zambian constitution is the supreme source of law in Zambia and promotes an orderly system of
government.
 The second major source of law is legislation, also known as statute law.
 Legislation must be interpreted correctly before judges can apply it fairly. The literal, golden and
mischief rules of interpretation have developed over time.
 Case law is judge-made law based on the underlying principle of consistency. Once a legal principle is
decided by an appropriate court, it is a judicial precedent.
 The main courts in Zambia include the Supreme Court, the High Court, Subordinate Courts and Local
Courts.
 English law is used as reserve law in Zambia, to fill in gaps in local legislation and case precedents.
 International agreements only apply to Zambia if they have been ratified by the Zambian government
and the Zambian Parliament has passed the relevant enabling legislation.
 In criminal liability the sanction is punishment, in civil liability the sanction is damages.
Quick Quiz
1 What are the three pillars of government provided for in the Zambian constitution?
2 How is the mischief rule applied?
3 Which court deals with claims not exceeding 15 million Kwacha?
4 What is the significance of English cases and statutes, and equity, known as reserve law in Zambia?
Answers to Quick Quiz

1 Executive; Legislature; Judiciary
2 The mischief rule requires judges to look at the position before the relevant legislation and consider the
mischief that the legislation was intended to remedy.
3 The Small Claims Court
4 English reserve law can be resorted to fill gaps in local Zambian legislation and case precedents.
18
PART B: BUSINESS LAW
19
20
LAW OF CONTRACT
Individuals and businesses form contacts all the time. Contracts do not all need to be in writing and
signed. Many valid contracts involve no written or spoken communication at all – for example when a
person buys something from a shop.
This chapter describes what a contract is and the essential elements that make up a contract. We then
examine the importance of the terms of a contract. Most contracts end with the intended result,
however many contracts end with one party breaching the terms of the contract. We end this chapter
chapter
by examining what breach of contract is and what the remedies are for the injured party.
2
syllabus
references
1 Nature of a contract 2A
topic index
2 Offer 2A
3 Acceptance 2A
4 Consideration 2A
5 Intention to create legal relations 2A
6 Form 2A
7 Capacity 2A
8 Terms and conditions 2B
9 Misrepresentation 2C
10 Discharge of contracts 2D
11 Remedies under the law of contract 2E
21
LEARNING OBJECTIVES
 Describe the features of a simple contract
 Define offer and distinguish it from an invitation to treat
 Define acceptance and explain its consequences
 Explain the importance of consideration
 Describe the presumptions relating to intent to create legal relations
 Distinguish terms from misrepresentation
 Explain the consequences of misrepresentation
 Describe the ways in which contracts are discharged or terminated
 Explain the remedies available under contract law
1 Nature of a contract
……………………
We start by considering in general terms what a contract is.
……………………
1.1 What is a contract

A contract has been defined as a legally binding agreement. In the words of Sir Fredrick Pollock: ‘a
promise or set of promises which the law will enforce’.
Most people think that a contract is a formal written document which has been signed by the parties in
the presence of independent witnesses. However if all contracts took this form, there would be little
room for argument about whether the parties had entered into a binding agreement, the obligations they
had undertaken or the consequences of failing to carry out the terms of the agreement. In practice
however, there are very few contracts which are like this. The vast majority of contracts are entered
without formalities. The parties may not even be aware of the legal significance of their actions.
Therefore:
 What is a contract?
 When is a contract formed?
 What happens if either party breaks the agreement?
1.2 Types of contract

Not all agreements or promises give rise to contracts. The law recognizes two types of contracts.
1.2.1 Speciality contracts

These formal contracts are also known as deeds. They have to be in writing , ‘signed, sealed and
delivered’. The signature of the person must be witnessed and attested. Attestation involves making a
statement to the effect that the deed has been signed in the presence of a witness. Certain contracts,
such as conveyances of land, must be made in the form of a deed.
22
1.2.2 Simple contracts
Contracts which are not deeds are called simple contracts. They are informal contract, and may be
made in any way that is orally, in writing or they may be implied from conduct.
……………………
A valid contract is a legally-binding agreement, formed by the mutual consent of two parties.
The three essential elements of a contract are offer and acceptance, consideration and intention to
enter into legal relations.
……………………
2 Offer
……………………
This section looks at what an offer is.
……………………
2.1 Need for agreement

The first requisite of any contract is an agreement. An agreement is formed when one party accepts
the offer of another. At least two parties are required. One of them the offeror, makes an offer which the
other, the offeree accepts.
2.2 Nature of an offer

An offer is a proposal made on certain terms by the offeror together with a promise to be bound by that
proposal if the offeree accepts the terms. An offer may be made expressly, or implied by conduct. The
offer may be made to a specific person, in which case it can only be accepted by that person. If an offer
is made to a group of people, it may be accepted by any member of the group. An offer can be made to
the whole world, such as where someone offers a reward fro the return of a lost dog. This offer can be
accepted by any one who knows about it and finds the dog.
Carlill v Carbolic Smoke Ball Co.1893
The company inserted advertisements in a number of newspapers stating that it would pay £100 to
anyone who caught flu after using its smoke balls as directed for 14 days. The company further stated
that to show its sincerity in the matter, it had deposited £1000 at the Alliance Bank to meet possible
claims. Mrs Carlill bought one of the smoke balls, used it as directed but still caught flu. She claimed
the E100 reward but was refused, so she sued the company in contract. The company put up a number
of arguments in its defence:
PART B: BUSINESS LAW // 2: Law of contract
(a) It claimed that it attempted to contract with the whole world, which was clearly impossible. The
Court of Appeal held that the company had made an offer to the whole world and it would be
liable to anyone who came forward and performed the required conditions.
(b) The company further submitted that the advertisement was in the nature of a trade “puff” and too
vague to be a contract. The court dealt with this argument by asking what ordinary members of
the public would think about the advertisement. The court took the view that the details of use
were sufficiently definite to constitute the terms of the contract. The reference to the E1000
deposited at the bank was evidence of an intention to be bound.
(c) The company also argued that the claimant had not provided any consideration in return for its
promise.
(d) Finally, the company submitted that there was no notification of the acceptance in accordance
with the general rule.
23
Held: In this kind of contract, which is known as a unilateral contract, acceptance consists of performing
the requested act. Notification of acceptance is not necessary. The court concluded that Mrs Carlill was
entitled to recover the £1000 reward.
2.3 Supply of information

Only an offer in the proper sense may be accepted so as to form a binding contract. A statement which
sets out possible terms of a contract is not an offer unless this is clearly indicated.
Harvey v Facey 1893
The claimant telegraphed to the defendant 'Will you sell us Bumper Hall Pen? Telegraph lowest cash
price'. The defendant telegraphed in reply 'Lowest price for Bumper Hall Pen, £900'. The claimant
telegraphed to accept what he regarded as an offer; the defendant made no further reply.
Held: The defendant's telegram was merely a statement of his minimum price if a sale were to be
agreed. It was not an offer which the claimant could accept.
If in the course of negotiations for a sale, the vendor states the price at which he will sell, that statement
may be an offer which can be accepted.
Bigg v Boyd-Gibbons 1971
In the course of correspondence the defendant rejected an offer of £20,000 by the claimant and added
'for a quick sale I would accept £26,000 .... if you are not interested in this price would you please let
me know immediately'. The claimant accepted this price of £26,000 and the defendant acknowledged
his acceptance.
Held: In this context the defendant must be treated as making an offer which the claimant had
accepted.
2.4 Invitation to treat

It is important to identify when a true offer has been made because once it is accepted the parties are
bound. If the words and actions of one party do not amount to an offer, however, the other person
cannot, by saying ‘I accept’ create a contract. A genuine offer must, therefore, be distinguished from
what is known as an ‘invitation to treat’.
This is where a person holds himself out as ready to receive offers, which he may then either accept or
reject. Examples of invitations to treat include the display of goods with a price ticket in a shop window
or on a supermarket shelf. An invitation to treat is not an offer to sell but an invitation for customers to
make an offer to buy.
Bell v Fisher 1960
A shopkeeper had a flick-knife on display in his shop window. He was charged with offering for sale an
offensive weapon contrary to the provisions of the Restriction of offensive weapons Act 1959.
Held: His conviction was quashed on appeal. The court held that the display of goods with a price ticket
attached in a shop window is an invitation to treat and not an offer to sell
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Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd 1952
Boots operated a self-service, ‘supermarket’ system at its Edgware branch in which the merchandise,
including drugs on the poisons list, was laid out on open shelves around the shop. Customers selected
their purchases from the shelves, placed them in a wire basket and paid for them at a cash desk which
was supervised by a registered pharmacist. The Pharmaceutical Society claimed that by operating this
system, Boots had committed an offence contrary to section 18 of the Pharmacy and Poisons Act 1933
which states that the sale of drugs included on the poisons list must take place in the presence of a
qualified pharmacist. The Pharmaceutical Society argued that the sale took place when a customer
placed his purchase in the basket, which was not supervised by a pharmacist.
the display of drugs on the open shelf constituted an invitation to treat. The customer made the offer to
buy at the cash desk and the sale was completed when the cashier accepted the offer. Since the cash
desks were supervised by a registered pharmacist, the requirements of the Act had been fulfilled and
therefore Boots had not committed an offence.
It is thus a clearly established principle of contract that if goods are displayed for sale with an incorrect
price ticket attached to them, the retailer is not obliged to sell at that price.
2.5 Advertisements, catalogues and brochures

Many businesses make use of the press, T.V, commercial radio and, in more recent times, the Internet,
to sell their products direct to the public. Even if the word ‘offer’ is used, it is not an offer to sell but an
invitation for customers to make an offer to buy.
Partridge v Crittenden 1968
Partridge placed an advertisement in the Cage and Aviary Birds magazine, which read ‘Bramblefinch
cocks, bramblefinch hens, 25s each. A Mr Thonson replied to the advertisement and was sent a
bramblefinch hen. Partridge was charged with ‘offering for sale’ a wild bird contrary to the provisions of
the Protection of Birds Act 1954 and was convicted at the Magistrates court. His conviction was
quashed on appeal. The court held that since the advertisement constituted an invitation to treat and not
an offer to sell, Partridge was not guilty of the offence with which he had been charged.
An advertisement placed in a newspaper or magazine by a mail order firm constitutes an invitation to

treat. The customer makes the offer, which may be accepted or rejected by the mail order firm.
Similar principles apply to electronic trading via the internet also known as e-commerce. Posting
advertisements on a website amounts to an invitation to treat. By selecting the products and services
required, the customer is making an offer to buy, which may be accepted or rejected by the seller.
So if a company by mistake advertises on its website $200 DVD players for sale at $2, it could refuse to
sell the goods at the advertised price. Although most advertisements will be treated as invitations to
treat, there are some situations where an advertisement may be regarded as a definite offer, for example
in the case of Carlill v Carbolic Smoke Ball Co.
2.6 Company prospectuses

When a company wishes to raise capital by selling shares to the public, it must issue a prospectus (an
invitation to treat). Potential investors apply for shares (the offer) and the directors then decide to whom
to allot shares (the acceptance).
25
2.7 Auctions
At an auction sale the call for bids by an auctioneer is an invitation to treat. The bids are offers. The
auctioneer selects the highest bid. Acceptance is signified by the fall of the hammer.
Payne v Cave 1789
The defendant made the highest bid for the claimant’s goods at an auction sale, but withdrew his bid
before the fall of the auctioneer’s hammer.
Held: The defendant was not bound to purchase the goods. His bid amounted to an offer which he was
entitled to withdraw at any time before the auctioneer signified acceptance by bringing down the
hammer. Furthermore, advertising a forthcoming auction sale does not amount to an offer to hold it.
Harris v Nickerson 1873
The defendant, an auctioneer, advertised in the London papers that a sale of various goods including
office furniture would take place in Bury St Edmunds. The claimant travelled from London to attend the
sale. However the items of furniture he had been commissioned to buy were withdrawn from the sale.
Held: The defendant auctioneer was not obliged to compensate the claimant for the wasted journey.
Advertising that a sale of certain items will take place is a mere declaration of intention. It does not
create a binding contract with anyone who acts on the advertisement by attending the sale.
However advertising that an auction will be ‘without reserve’ amounts to an offer by the auctioneer that
once the auction has commenced the lot will be sold to the highest bidder however low the bids might
be.
2.8 Tenders
Large undertakings such as public authorities often place contracts by inviting interested firms to tender
(offer) for the business. An invitation to tender can give rise to a binding obligation on the part of the
inviter to consider tenders submitted in accordance with the conditions of the tender.
Blackpool and Fylde AeroClub Ltd V Blackpool Borough Council 1990
The defendant council invited the claimant club, together with six other parties, to tender for the
concession to offer pleasure flights from the council-owned airport. The invitation to tender required
tenders to be submitted in accordance with an elaborate procedure and stated that tenders received
after 12 noon on 17 March 1983 would not be considered. The Club’s tender was delivered by hand
and placed in the letterbox in the Town Hall at 11 am on 17 March. Unfortunately, the letter box was
not cleared until the following day. The concession was awarded to another tenderer. The club sued for
breach of contract to consider tenders which conformed to the requirements specified by the council.
Held: The Court of Appeal held that by adopting a formal tendering procedure the council impliedly
undertook to consider all conforming tenders. The council’s invitation to tender and the submission by
the club of a tender within the time limit was an acceptance. The club was entitled to damages for
breach of contract.
26
2.9 Statements of price in negotiations for sale of land
Where the subject matter of a proposed sale is land, the courts are reluctant to find a definite offer to
sell unless very clearly stated.
Harvey v Facey 1893
Harvey sent a telegraph to Facey, ‘will you sell us Bumper Hall Pen? Telegraph lowest cash price…’
Harvey telegraphed his response: We agree to buy Bumper Hall pen for $900 asked by you. Please send
us your title deeds.’
Held: There was no contract. Facey’s reply to Harvey’s initial enquiry was not an offer to sell but merely
a statement of the price he might be prepared to sell at if he wished to sell. As Facey had not made an
offer, Harvey’s second telegram could not amount to an acceptance.
Clifton v Palumbo 1944
In the course of negotiations for the sale of a large estate, the claimant wrote to the defendant. ‘I am
prepared to offer my Lytham Estate for $600,000. I also agree that sufficient time shall be given to you
to complete a schedule of completion.’
Held: These words did not amount to a firm offer to sell, but rather a preliminary statement as to price.
Gibson v Manchester 1979
In 1970, the Council adopted a policy of selling houses to tenants. The city treasurer wrote to Mr Gibson
in February 1971 stating that the council might be prepared to sell’ the freehold of his house to him at a
discount price. The letter invited Mr Gibson to make a formal application which he duly did. In May
1971 control of the council passed from the Conservative party to the Labour party and the policy of
selling houses was reversed. Only legally binding transactions were allowed to proceed. The council did
not proceed with Gibson’s application.
Held: The City Treasurer’s letter was an invitation to treat and not an offer to sell. Mr Gibson’s
application was the offer. As this had not been accepted by the council, a binding contract had not been
formed.
2.10 Termination of offer

An offer can end in a number of ways.
2.10.1 Acceptance
An offer that has been accepted constitutes a contract. The offer is no longer available for acceptance.
2.10.2 Rejection
An offer is rejected if the offeree:
 Notifies the offeror that he does not wish to accept the offer;
 Attempts to accept subject to certain conditions
 Makes a counter-offer
27
Hyde v Wrench 1840
Wrench offered to sell his farm to Hyde for £1,000. Hyde replied with a ‘counter-offer’ of £950, which
was refused. Hyde then said that he was prepared to meet the original offer of £1,000.
Held: No contract had been formed. The ‘counter-offer’ of £950 had the effect of rejecting Wrench’s
original offer.
Sometimes it is difficult to decide whether the offeree is making a counter-offer or simply asking for
more information about the offer. A request for more information is not a rejection of the offer.
Stevenson v Mclean 1880
The defendant offered to sell a quantity of iron to the claimants for cash. The claimants asked whether
they could have credit terms. When no reply to their enquiry was forthcoming, the claimants accepted
the terms of the original offer. Meanwhile, the defendant had sold the iron elsewhere.
Held: The enquiry for more information was a request and not a rejection of the offer. The defendant
was liable for breach of contract.
2.10.3 Revocation before acceptance

An offer may be revoked (withdrawn) at any time before acceptance but it will only be effective when the
offeree learns about it.
Byrne v Van Tienhoven 1880
The defendants posted a letter in Cardiff on 1 October to the claimants in New York, offering to sell
them 1,000 boxes of tinplates. On 8 October, the defendants posted a letter withdrawing the offer,
which was received by the claimants on 20 October. However, on 11 October the claimants telegraphed
their acceptance which they confirmed by letter posted on 15 October.
Held: A revocation takes effect only when communicated to the offeree. The contract in this case came
into existence when the defendant’s offer was accepted by claimants on 11 October. The letter of
revocation was ineffective as it was received after the acceptance was complete
It is not necessary that the offeror himself should tell the offeree that the offer has been revoked; the
information may be conveyed by a reliable third party.
Dickinson v Dodds 1876
The defendant on Wednesday, offered to sell some property to the claimant, the offer to be left open
until 9am, Friday. On Thursday, the claimant heard from a Mr Berry that the Defendant had sold the
property to someone else. Nevertheless, the claimant wrote a letter of acceptance which was handed to
the defendant at 7 am on the Friday morning.
Held: As the claimant had heard about the revocation from Berry, who was a reliable source, the offer
was no longer available for acceptance. No contract had been formed.
28
In the above case, it should be noted that the offer was expressed to be open until Friday at 9am. Such
an offer may be revoked before the end of the time limit, unless it has already been accepted.
Routledge v Grant 1828
The defendant offered to buy the claimant’s house, giving the claimant six weeks to consider the
proposal.
Held: The defendant could withdraw the offer at any time before acceptance, even though the deadline
had not yet expired. The claimant’s attempt to accept the offer after it had been withdrawn was
ineffective.
An offer may be revoked by a second, subsequent offer. However the second offer must be sufficiently at
odds with the first offer so that both cannot be accepted.
Pickfords Ltd v Celestica Ltd 2003
The claimants P, a removal company, had been approached by the defendant C, an IT company,
concerning a proposed move of workshop and office equipment from Stoke-on-Trent to Telford. On 13
September 2001, P sent a fax to C, offering to carry out the work at a rate of £890 per load (excluding
VAT) plus extras for insurance etc. P calculated that it would take 96 loads to complete the move, giving
rise to an estimated budget figure of £100,000. During the next fortnight P carried out a more detailed
survey of the proposed move. On 27 September P sent a further, more detailed, document to C in which
it was stated that P would carry out the work for a fixed price quotation and that the cost was not to
exceed £98,760. A copy of P’s standard terms and conditions were enclosed. On 15 October 2001, C
sent a fax to P headed ‘Confirmation’ which stated that an order had been raised to cover the quotation
and the cost was not to exceed £ 100,000. P carried out the work and claimed the fixed sum of
£98,760. C paid only £33,000.
Held: The Court of Appeal applied the following analysis to the sequence of events.
(a) 13 September fax from P to C was an offer to carry out the work for a fixed price per vehicle load
(the first offer).
(b) 27 September proposal from P to C was an offer to carry out the fixed overall price of £98,760
(the second offer). The court took the view that this second offer superseded the first offer and
had the effect of revoking the first offer. Its reasons for reaching this conclusion were that the
basis of calculating the price was quite different in the two offers. The second offer contained
more detail than the first offer and included P’s terms and conditions.
(c) C’s fax of 15 October purported to be an acceptance of the first offer. However, as this offer had
been revoked, it could not be accepted. C’s fax was a counter-offer, which P accepted by carrying
out the removal. Even if the first offer had not been revoked C’s fax would have been a counter-
offer as it included a new term limiting the overall cost to £100, 000.
A promise to keep an offer open will be binding if it can be enforced as a separate contract. A legally
binding option will be created if the offeree provides some consideration in return for the offeror’s
promise to keep the offer open.
Mountford v Scott 1975
The purchaser of a house paid the seller £1 for an option to buy, exercisable within six months.
Held: The seller could not withdraw the offer before the option expired.
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2.10.4 Lapse of offer
The offeree may stipulate that the offer is only open for a limited period of time. Once the time limit
has passed, any acceptance will be invalid. Even if no time limit is mentioned, the offer will not remain
open indefinitely. It must be accepted within a reasonable time.
Ramsgate Victoria Co v Montefiore 1866
The defendant offered to buy shares in the claimant’s company in June. The shares were eventually
allotted in November. The defendant refused to take them.
Held: The defendant’s offer to take the shares had lapsed through an unreasonable delay in acceptance.
However, what is a reasonable time will vary with the type of contract.
2.10.5 Death
If the offeror dies after having made an offer and the offeree is notified of the death, any acceptance will
be invalid. However, where the offeree accepts in ignorance of what has happened, the fate of the offer
will depend on the nature of the contract. An offer which involves the personal service of the offeror
clearly cannot be enforced. However other offers may survive, be accepted and carried out by the
deceased’s personal representatives. If the offeree dies, there can be no acceptance. The offer was made
to that person and no else can accept.
2.10.6 Failure of condition attached to offer

An offer may be made subject to conditions. These conditions may be stated expressly by the offeror or
implied by the courts from the circumstances. If the conditions are not satisfied, the offer cannot be
accepted.
Financings Ltd v Stimson 1962
The defendant saw a car at the premises of a dealer on 16 March. He wished to obtain the car on hire
purchase. He signed a form provided by the claimant company, which stated that the agreement would
be binding only if signed by the financing company. The defendant took possession of the car and paid
the first instalment on 18 March. However as he was dissatisfied with the car, he returned it to the
dealer two days later. On the night of 24-25 March the car was stolen from the dealer’s premises and
was recovered badly damaged. On 25 March the Finance Company signed the Hire Purchase agreement
unaware of what had happened. The defendant refused to pay the instalments and was sued for breach
of the hire purchase agreement.
Held: The hire purchase agreement was not binding because the defendant’s offer to obtain the car on
hire purchase was subject to the implied condition that the car would remain in substantially the same
state until acceptance. Since the implied condition had not been fulfilled at the time the finance
company purported to accept, no contract had come into existence.
……………………
Agreement to a contract is usually evidenced by offer and acceptance. An offer is a definite promise
to be bound on specific terms and must be distinguished from the mere supply of information and an
invitation to treat.
An offer may only be accepted while it is still open. In the absence of acceptance, an offer may be
terminated by rejection, counter-offer, lapse of time, revocation, failure of a condition or death.
……………………
30
3 Acceptance
……………………
We next examine when an offer is deemed to have been accepted.
……………………
3.1 Conditions for acceptance

Once the presence of a valid offer has been established, the next stage in the formation of an agreement
is to find an acceptance of that offer. The acceptance must be made while the offer is still open.
Acceptance must be absolute and unqualified.
3.2 Unconditional acceptance

If the offeree attempts to vary the terms offered, this will be treated as a counter –offer. As we have
already seen in Hyde v Wrench, this has the effect of rejecting the original offer. A similar problem exists
in ‘battle of forms’ cases. This is where the offeror makes an offer on his own pre-printed standard form,
which contains certain terms, and the offeree accepts on his own standard form, which contains
conflicting terms. In
Butler Machine Tool Co. V Ex-Cell- O Corp (England) 1979
The claimants offered to supply a machine tool to the defendants for £75,535. However, the quotation
included a term which would entitle the sellers to increase this price (price-variation clause). The
defendants accepted the offer on their own standard terms, which did not provide for any variation of
the quoted price. The claimants acknowledged the order. When the machine was delivered, the
claimants claimed an extra £2,892, which the defendants refused to pay.
Held: The defendants had not unconditionally accepted the original offer. They had made a counter-
offer, which had been accepted by the claimants. The defendants’ terms governed the contract. The
claimants’ action to recover the increase in price therefore failed.
One form of conditional acceptance is the use of the phrase ‘subject to contract’ in negotiations involving
the sale of land. These words usually mean that the parties do not intend to be bound at that stage.
However if there is clear evidence of a contrary intention, a court may be prepared to find that a contract
has been concluded despite the use of the customary words ‘subject to contract’. The advantage of ‘
subject to contract’ agreements is that they allow either party to withdraw from the agreement at any
time and for any reason without facing an action for breach of contract. The problem is that the parties
may incur considerable expense on negotiations that do not ultimately result in a contract being formed.
Some legal systems overcome this problem by imposing a duty to negotiate in good faith. English law,
for example however, does not recognize such a duty. An agreement to negotiate will not be binding.
Walford v Miles 1992
The defendants owned a photographic processing business, which they wished to sell. In 1985 a
company made an unsuccessful offer. In 1986, the claimants heard that the business was for sale for
about E2 Million. The claimants were keen to buy at this price because they thought that the business
had been considerably undervalued. In March 1987, the claimants and defendants reached a ‘subject to
contract’ agreement for the sale of the business. The defendants asked for a letter known as a ‘comfort
letter’ from the claimants’ bankers confirming that they would provide the finance for the deal. In return
the defendants promised to terminate negotiations with any third parties. The comfort letter was
provided as agreed but the defendants sold the business to the company which had made the
unsuccessful offer in 1985. The claimants sued for breach of an implied term to negotiate in good faith.
31
Held: An agreement to negotiate is unenforceable because it lacks the requirement of certainty. In this
case no time limit was given for the exclusive negotiations. However it would be possible to enter into a
binding ‘lock out’ agreement, that is an agreement to deal exclusively with one party and not to consider
other offers for a limited period.
3.3 Method of acceptance

An acceptance may take any form. It can be given orally or in writing. However silence cannot normally
amount to an acceptance.
Felthouse v Bindley 1862
The claimant had been negotiating to buy his nephew’s horse. He eventually wrote to his nephew: ' If I
hear no more about him, I shall consider the horse is mine at £30 15s.' The nephew did not reply to
this letter but he did ask the auctioneer, who had been engaged to sell all his farming stock, to keep the
horse out of the sale as he had sold it to his uncle. The auctioneer by mistake included the horse in the
sale and was sued by the uncle in the tort of conversion. The basis of the uncle’s claim was that the
auctioneer had sold his property.
Held: The uncle had no claim. Although the nephew had mentally accepted the offer, some form of
positive action was required for a valid acceptance. Since there was no contract between the uncle and
the nephew, ownership of the horse had not passed to the uncle.
The above case established the principle that the offeree’s silence or failure to act cannot constitute a
valid acceptance. The rule is particularly useful when the problem of ‘inertia selling’ arises. This is where
a trader sends unsolicited goods to a person’s home, stipulating that if he does not receive a reply within
a specified time, he will assume that his offer to sell the goods has been accepted and the indicated
price is payable. The Felthouse rule makes it clear that a recipient of goods in these circumstances is
not obliged to pay, because his silence or inaction cannot amount to an acceptance. Many people,
however, have paid up in ignorance of the law.
The Felthouse case seems to suggest that only an oral or written acceptance will be valid. However,
acceptance may be implied from a person’s conduct.
Brogden v Metropolitan Railway 1877
Brogden had supplied the railway company with coal for many years without the benefit of a formal
agreement. Eventually the parties decided to put their relationship on a firmer footing. A draft agreement
was drawn up by the company’s agent and sent to Brogden. Brogden filled in some blanks, including the
name of an arbitrator, marked it as ‘approved’ and returned it to the company’s agent who put it in his
drawer. Coal was ordered and supplied in accordance with the terms of the ‘agreement’. However, a
dispute arose between the parties and Brogden refused to supply coal to the company, denying the
existence of a binding contract between them.
Held: A contract had been concluded. Brogden’s amendments to the draft agreement amounted to an
offer which was accepted by the company either when the first order was placed under the terms of the
agreement or at the latest when the coal was supplied. By their conduct the parties had indicated their
approval of the agreement.
Examples of acceptance by conduct include the return of the lost dog in a reward case or using a smoke
ball in the prescribed manner in Carlill Smoke Ball Co.
32
The offer or may state that the acceptance must be in a particular form. It follows that the offeror’s
wishes should be respected. If, for example, he asks for an acceptance in writing, a verbal acceptance
by telephone will not be valid. Sometimes the offeror may say ‘reply by return post’ when he really,
means ‘reply quickly’ and a telephone call would be acceptable. Provided that the chosen method of
acceptance fulfils the intentions of the offeror, it will be binding.
Yates Building Co. Ltd v R J Pulleyn 1975
The vendors of a piece of land stated that an option to buy it should be exercised by ‘notice in writing…
to be sent registered or recorded delivery’. The acceptance was sent by ordinary post.
Held: The vendors’ intention was to ensure that they received written notification of acceptance. The
requirement to use registered or recorded delivery was more in the nature of a helpful suggestion than a
condition of acceptance.
3.4 Communication of acceptance

The general rule is that an acceptance must be communicated to the offeror, either by the offeree or by
someone authorised by the offeree. The contract is formed at the time and place the acceptance is
received by the offeror. If the post, however, is the anticipated method of communication between the
parties, then acceptance is effective immediately the letter of acceptance is posted. Provided the letter is
properly stamped, addressed and posted, the contract is formed on posting, even if the letter is delayed
or never reaches its destination.
Adams v Lindsell 1818
On 2 September 1817 the defendants who were wool traders based in Huntingdon wrote to the
claimants, who were wool manufacturers in Bromsgrove, offering to sell them some wool and asking for
an answer ‘in course of post’. This letter was wrongly addressed and as a result it did not reach the
claimants until 5 September. The evidence was that if the offer letter had been correctly addressed, a
reply ‘in course of post’ could have been expected by 7 September. On 8 September the defendants sold
the wool to someone else.
Held: The contract was formed when the claimants posted their letter of acceptance. In reaching this
conclusion the court may have been influenced by the fact that it was the defendant’s misdirection of
the offer letter which led to the delayed acceptance.
Household Fire Insurance Co v Grant 1879

Grant applied for shares in the claimant company. A letter of allotment was posted but Grant never
received it. When the company went into liquidation, Grant was asked, as a shareholder, to contribute
the amount still outstanding on the shares he still held.
Held: Grant was a shareholder of the company. The contract to buy shares was formed when the letter
of allotment (acceptance) was posted.
The ‘postal rule’ has been applied to acceptances by telegram but not to more instantaneous methods of
communication such as telex and telephone.
33
Entores v Miles Far East Corp 1955
The claimants, a London company, made an offer to the defendants’ agents in Amsterdam by means of
a telex message. The Dutch agents accepted the offer by the same method. The claimants later alleged
that the defendants had broken their contract and wished to serve a writ (now claim form) on them,
which they could do if the contract was made in England.
Held: The Court held in favour of the claimants, in the following terms: ‘ so far as Telex messages are
concerned, though the dispatch and receipt of a message is not completely instantaneous, the parties
are to all intents and purposes in each other’s presence just as if they were in telephonic
communication. I can see no reason for departing from the general rule that there is no binding contract
until notice of thee acceptance is received by the offeror. That being so, and since the offer was made by
the claimants in London and notification of the acceptance was received by them in London, the
contract resulting therefrom was made in London.’
3.5 Electronic acceptance

Acceptances sent by electronic means are likely to be treated in the same way as telephone or telex
acceptances. The seller’s acceptance will only be effective when received by the customer.
The problem of applying this approach to e-commerce is that if a seller is doing business with customers
based in different countries, the contract will be formed in the country (and jurisdiction) where the
customer is based. A trader can avoid these difficulties by confirming customers’ orders by e-mail and
asking if the customer to confirm purchase by clicking on the confirmation button. The effect of these
precautions is that the contract will be concluded at the seller’s place of business.
Clearly the ‘postal rules’ are a potential problem for an offeror: if the letter of acceptance is lost in the
post, the offeror may be unaware that a binding contract has been formed. An offeror can protect
himself by specifically stating that the acceptance is only complete when received on or before a certain
date.
Holwell Securities v Hughes 1974
Dr. Hughes had agreed to grant Holwell Securities Ltd an option to purchase his premises. The option,
which would constitute the acceptance, was exercisable ‘by notice in writing’ to the doctor within six
months. The company posted a letter of acceptance but it was never delivered.
Held: No contract had been formed. Since Dr. Hughes had stipulated actual ‘notice’ of the acceptance,
the postal rules did not apply. The acceptance would only be effective when received by the doctor.
It is important to note that the postal rules only apply to the communication of acceptance. Offers or
revocations of offers must be communicated to be effective.
……………………
Acceptance must be an unqualified agreement to all the terms of the offer. Acceptance is generally
not effective (and hence there is no contract) until communicated to the offeror, except where the
postal rule applies.
……………………
34
4 Consideration
……………………
Consideration is another vital element of a valid contract, and this section looks at what
consideration is.
……………………
4.1 Need for consideration

To be an agreement there must be an offer and acceptance. However an agreement alone does not
make a contract. The law is also concerned with bargains. This means that each side must promise to
give or do something for the other. The element of exchange is known as ‘consideration’. Consideration
is an essential element of every valid simple contract. A promise of a gift will not be binding unless
made in the form of a deed. Consideration can take two forms: executed or executory.
4.1.1 Executed consideration

Executed consideration is where one party promises to do something in return for the act of another, for
example give a reward. A contract with ‘cash with order’ terms is an example of executed consideration.
4.1.2 Executory consideration

Executory consideration is where the parties exchange promises to perform acts in the future, eg ‘cash
on delivery’ terms.
4.2 Rules governing consideration

There are a number of rules determining whether consideration given is valid.
4.3 Consideration must not be in the past

If one party voluntarily performs an act, and the other party then makes a promise, the consideration for
the promise is said to be in the past. Past consideration is regarded as no consideration at all. For
example John gives Susan a lift home in his car after work. Upon arrival Susan offers John E1 towards
the petrol. She finds she has not got any change, and says she will give him the money the next day at
work. In this case John cannot enforce Susan’s promise because the consideration for the promise
(giving the lift) is in the past. John would have given Susan the lift home without expecting payment and
so there was no bargain between the parties.
Re McArdle 1951
Mr McArdle died leaving a house to his wife for her lifetime and then to his children. While Mrs Mc
Ardle was still alive, one child and his wife moved in the house. The wife made a number of
improvements to the house costing £488. After the work had been completed, all the children signed a
document in which they promised to reimburse the wife when their father’s estate was finally
distributed.
Held: This was a case of past consideration. The promise to pay £488 to the wife was made after the
improvements had been completed and was therefore, not binding.
The rule about past consideration is not always strictly followed. If, for example, a person is asked to
perform a service, which he duly carries out, and later a promise to pay is made, the promise will be
binding.
35
Re Casey’s Patents, 1892
Casey agreed to promote certain patents which had been granted to Stewart and another. Two years
later, Stewart wrote to Casey promising him a one-third share of the patents ‘in consideration’ of Casey’s
efforts.
Held: Stewart’s original request raised an implication that Casey’s work would be rewarded. The later
letter merely fixed the amount of the payment.
4.4 Consideration must move from the promise

If A (the promisor) makes a promise to B (the promisee), the promise will only be enforceable if B can
show that he has provided consideration in return for A’s promise. (This does not apply however if the
promise is made in the form of a deed.
Tweddle v Atkinson 1861
John Tweddle and William Guy agreed that they would pay a sum of money to Tweddle’s son, William,
who had married Guy’s daughter. William Guy died without paying his share and William Tweddle sued
his late father –in –law’s executor (Atkinson).
Held: His claim failed because he had not provided any consideration for the promise to pay
The rule that consideration must move from the promise is closely related to the doctrine of privity of
contract. This doctrine states that a person cannot be bound by, or take advantage of, a contract to
which he was not a party.
4.5 Consideration must not be illegal

The courts will not uphold a contract where the consideration is contrary to a rule of law or is immoral.
4.6 Sufficiency and adequacy

It must be possible to attach some value to the consideration. However there is no requirement for the
bargain to be strictly commercial. If a man is prepared to sell his Jaguar car for E1, the contract will not
fail for lack of consideration. The following cases are examples where the consideration was of little
value, but, nevertheless it was held to be sufficient.
Thomas v Thomas 1842
After the death of her husband Mrs Thomas agreed to pay rent of £1 a year in order to continue living in
the same house.
Held: It was held that the payment of £1 was valid consideration.
36
Chappell & Co Ltd V Nestle Co Ltd 1960
Nestle was running a special offer whereby members of the public could obtain a copy of the record of
‘Rockin’ Shoes’ by sending off three gift wrappers from Nestle’s six penny chocolate bars plus 1s 6d.
The records had been made by Hardy & Co but the copyright was owned by Chappell & Co Ltd, which
claimed that there had been breaches of its copyright. The case turned round on whether the three
wrappers were part of the consideration.
Held: Even though they were thrown away when received they were sufficient consideration. In the
words of Lord Somerville, ‘A peppercorn does not cease to be good consideration if it is established that
the promise does not like pepper and will throw away the corn.
A person who promises to carry out a duty which he is already obliged to perform is in reality offering
nothing of value. The consideration will be insufficient. However, if a person does more than he is bound
to do, there may be sufficient consideration. The duty may involve a public duty imposed by law.
Collins v Godefroy 1831
Collins was subpoenaed to give evidence in a case in which Godefroy was a party (a subpoena is a court
order which compels a person’s attendance at court). Godefroy promised to pay 6 guineas for Collins’
loss of time.
Held: Collins’ action to recover this money failed because he was already under a legal duty to appear in
court. He had not done anything extra.
Glasbrook Bros v Glamorgan County Council 1925
Glasbrook Bros were the owners of a strike-hit mine. They asked for police protection for the safety of
men whose presence was necessary to prevent the mine flooding. They were unhappy with the
arrangements originally offered by the local police. Eventually it was agreed that 70 policemen would be
stationed in the colliery and that Glasbrook would pay for this extra security.
Held: Since the police had provided more protection than they thought necessary, this constituted
consideration. They were entitled to payment.
Similar principles apply where a person is bound by a pre-existing contractual duty.
Stilk v Myrick 1809

During the course of a voyage from London to the Baltic and back, two of a ship’s crew deserted. The
captain promised to share the wages of the deserters amongst the remaining crew.
Held: This promise was not binding as the sailors were already contractually bound to meet such
emergencies of the voyage. They had not provided consideration.
The above position was reconsidered in the following case.
37
Williams v Roffey Bros & Nicholls (Contractors) Ltd 1990
The defendant building contractors were awarded a contract to refurbish a block of 27 flats. They had
sub-contracted the carpentry work to Williams for £20,000. After the contract had been running some
months, during which Williams had completed nine flats and received £16,200 on account, it become
apparent that Williams had underestimated the cost of the work and was in financial difficulties. The
defendants were concerned that the carpentry work would not be completed on time and as a result
they would fall foul of a penalty clause in their main clause. They therefore agreed to a further £575 per
flat. Williams completed eight more flats but did not receive full payment. He stopped work and brought
an action for damages. The defendants argued that they were not obliged to pay, as they had promised
Williams extra pay for something he was already contractually bound to do, ie complete the work.
Williams in turn submitted that the defendants obtained benefit in that they had avoided a penalty for
late completion and did not have the expense of engaging another contractor.
Held: Williams was entitled to the extra payment. Where A promises additional payments to B in return
for B’s promise to complete work on time, and by giving his promise A obtains a benefit by avoiding a
penalty clause, for example, then B’s promise may constitute sufficient consideration to support A’s
promise has not been obtained as a result of fraud or economic duress.
Hartley v Ponsonby 1857
When almost half of the crew of a ship deserted, the captain offered those remaining £40 extra to
complete the voyage. In this case, the ship was so seriously undermanned that the rest of the journey
had become extremely hazardous.
Held: This fact discharged the sailors from their existing contract and left them free to enter into a new
contract for the rest of the voyage.
A problem however arises where a person agrees to accept a smaller amount of money as full payment
under a contract to pay a larger amount. For example, what is the legal position if Peter owes Mary
£100, but Mary says that she will accept £90 in full settlement? Can Mary change her mind and sue for
the outstanding £10? The long–established common law rule, known as the rule in Pinnel’s case 1602,
is that an agreement to accept a lesser sum is not binding unless supported by fresh consideration.
Foakes v Beer 1884
Mrs Beer had obtained judgment for a debt against Dr Foakes. She agreed that she would not take
further action in the matter, provided that Foakes paid £500 immediately and the rest by half-yearly
instalments of £150. Foakes duly kept to his side of the agreement. Judgment debts, however, carry
interest.
Held: Mrs Beer was entitled to the £360 interest which had accrued. Foakes had not ‘bought’ her
promise to take no further action on the judgment. He had not provided any consideration.
38
Re Selectmove Ltd 1995
Selectmove owed the Inland Revenue large sums of money and national insurance. In July 1991,
Selectmove’s Managing Director suggested to a collector of taxes that the company should pay future
income tax and national insurance contributions as they became due and clear the arrears at E1000 per
month from 1 February 1992. The collector said that he would have to obtain approval for this proposal
and that he would come back to the company if it was not acceptable. Selectmove heard no more from
the Inland Revenue until 9 October 1991, when the Revenue demanded payment of the arrears in full
and threatened to present a petition for winding–up. The question was whether the proposal made by
Selectmove’s managing director in July had become a binding agreement. It was argued on behalf of
Selectmove that the decision in Williams v Roffey Bros was authority for the proposition that a promise
to perform an existing obligation can amount to good consideration, provided there are practical benefits
to the promise.
Held: The Williams principle, which related to a case involving the supply of services, should not be
extended to a situation involving an obligation to make a payment which is clearly governed by the
authority of House of Lords in Foakes v Beer. The Court concluded that if there was an agreement
between Selectmove and the Inland Revenue, it was unenforceable because of the absence of
consideration.
There are some exceptions to the rule.
4.6.1 Acceptance by creditor

If the smaller payment is made, at the creditor’s request, at an earlier time, at a different place, with an
additional item or by a different method, consideration has been shown. Payment by cheque rather than
by cash does not necessarily release a debtor from his obligation to pay the full amount.
Stour Valley Builders v Stuart 1993
The claimants were a small firm of builders. They carried out some work for Mr and Mrs Stuart. On
completion of the work, the claimants submitted a bill which, after the deductions for payments on
account, came to £10,204. Following a query by Mr Stuart, the bill was revised to £10,163. Mr Stuart
continued to dispute an amount of £3,000 but made an offer to settle of £8,471. He wrote to the
claimants enclosing a cheque for £8,741 ‘in full and final settlement. The claimants paid the cheque
into their bank account. However, after seeking advice from their solicitor the following day, contacted
Mr Stuart to say that they would not accept the cheque full settlement.
Held: Although cashing in of a cheque is strong evidence of agreement, if, as in this case , the banking
of the cheque was closely followed by a rejection of the offer to settle, there could be no ‘accord and
satisfaction’ so as to discharge the debt.
4.6.2 Composition agreement

The rule does not apply to a composition agreement. This is where a debtor agrees with all his creditors
to pay so much in the E of what he owes. Provided that the debtor honours the agreement, a creditor
cannot sue for any outstanding sum.
4.6.3 Third party payment

A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the part-
payment is made by a third party on condition that the debtor is released from the obligation to pay the
full amount.
39
4.6.4 Promissory estoppel
The equitable rule of promissory estoppel can be applied, on the basis that it seems very unfair that a
court will support a person who has gone back on his word, especially where the agreement to accept a
lesser amount has been relied upon. The equitable rule of promissory estoppel was developed in the
following case.
Central London Property Trust Ltd v High Trees House Ltd 1947
In 1937 the claimants granted a 99-year lease on a block of flats in London to the defendants at an
annual rent of £2,500. Owing to the outbreak of war in 1939, the defendants found it very difficult to
get tenants for the flats. Therefore in 1940 it was agreed that the rent should be reduced to £1,250. By
1945, the flats were full again and the claimants sued to recover the arrears of rent as fixed by the
1937 agreement for the two last quarters of 1945.
Held: They were entitled to recover this money, but if they had sued for the arrears from 1940-45, the
1940 agreement would have defeated their claim. The defendants had relied upon the reduction in the
rent and equity would require the claimants to honour the promises contained in the 1940 agreement.
Thus it seems that if a person promises that he will not insist on his strict legal rights, and the promise
is acted upon, then the law will require the promise to be honoured even if it is not supported by
consideration. The following should be noted about promissory estoppel:
(a) The rule can only be used as a defence and not as a cause of action. Promissory estoppel must
be used ‘as a shield and not as a sword’. Consideration is still an essential element in the
formation a contract.
(b) The rule will only operate if the promise has relied upon the promise, so that it would be
inequitable to allow the promisor to insist on his strict legal rights. At first it was thought that the
promise must have acted to his detriment. However, Lord Denning argued that detrimental
reliance is not essential. It is sufficient that the promise has altered his position by acting
differently from what he would have otherwise done.
(c) It is a principle of equity that whoever seeks the help of equity must himself have acted equitably
or fairly. Thus, the promisor must have acted according to his conscience if he is to rely on
promissory estoppel.
D & C Builders v Rees 1966
D & C Builders, a small building company, had completed some work for Mr Rees for which he owed
the company E482. For months, the company, which was in severe financial difficulties, pressed for
payment. Eventually, Mrs Rees who had become aware of the company’s difficulties, contacted the
company and offered E300 in full settlement. She added that if the company refused this offer, it would
get nothing. The company reluctantly accepted a cheque for £300 ‘in completion of the account’. The
company later sued for the balance.
Held: The company was entitled to succeed.. Mr Rees could only rely on promissory estoppel to resist
the claim because his wife had held the company to ransom. They could not be said to have acted
equitably. In addition, the different method of payment, ie by cheque rather than by cash, did not
release Mr Rees from the obligation to pay the full amount owed.
The rule does not extinguish rights: it only suspends the rights of the promisor. Thus if the promise
refers to a particular period of time or a state of affairs (eg war conditions), the promisor can revert to
the original position at the end of the stated time or when conditions change by giving notice to the
promise.
40
Tool Manufacturing Co Ltd v Tungsten Electric Co Ltd 1955
Tool Metal granted a licence to Tungsten Electric to deal in products protected by patents owned by Tool
Metal. Tungsten Electric agreed to pay ‘compensation’ if it manufactured more than a specified amount.
In 1942, Tool Metal indicated that it wished to prepare a new licence agreement and in the meantime
would claim compensation. Tool Metal later gave notice that it wished to resume its claim for
compensation.
Held: Tool Metal was entitled to claim compensation after giving reasonable notice of its intention to do
so.
……………………
Consideration is an essential part of most contracts. It is what each party brings to the contract.
Consideration may be an act or a promise. It may not be past. It need not be adequate but it must
be sufficient.
……………………
5 Intention to create legal relations

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A contract can only be valid if the parties intend to create legal relations, and this section examines
how the courts have interpreted this maxim.
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5.1 Need for intention

In addition to the two requirements for a valid contract that we have discussed, agreement and
consideration, the law demands that the parties intended to enter into a legal relationship. After all, if
you invite a friend round for a social evening at your house, you would not expect legal action to follow if
the occasion has to be cancelled. So how does the law decide what the parties intended? For the
purpose of establishing the intention of the parties, agreements are divided into two categories:
 Business/commercial agreements
 Social/domestic agreements
5.2 Business/commercial agreements

In the case of a business agreement, it is presumed that the parties intended to make a legally
enforceable contract. It is possible, however, to remove the intention by inclusion of an express
statement to that effect in the agreement.
Rose and Frank Co v Crompton (JR) & Bros Ltd 1923
The defendants, English paper tissue manufacturers, entered into an agreement with the claimants, an
American company, where the claimants were to act as sole agents for the sale of the defendants’
tissues in the USA. The written agreement contained the following ‘Honourable Pledge clause’: ‘This
arrangement is not entered into…as a formal or legal agreement and shall not be subject to legal
jurisdiction in the law courts…but it is only a definite expression and record of the purpose and intention
of the parties concerned to which they honourably pledge themselves that it will be carried through with
mutual loyalty and friendly co-operation.’ The claimants placed orders for tissues which were accepted
by the defendants. Before the orders were sent, the defendants terminated the agency agreement and
refused to send the tissues.
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Held: The sole agency agreement was not binding, owing to the inclusion of the ‘honourable pledge
clause’. In so far as orders had been placed and accepted, however, contracts had been created. The
defendants, in failing to execute them were in breach of contract.
When the parties enter into an agreement subject to contract, they are expressly stating that they will
not be bound unless and until a formal contract is drawn up. There are situations where it would appear
at first sight that the parties had entered into a commercial arrangement, but, nevertheless, a contract is
not created.
5.2.1 Collective agreements

Employers and trade unions regularly enter into collective agreements about rates and conditions of
employment. These are not intended to be legally binding unless they are in writing.
5.2.2 Advertisements
Generally speaking vague promises or guarantees given in the course of promoting a product are not
intended to be taken seriously. By contrast, more specific pledges such as, ‘if you can find the same
holiday at a lower price in a different brochure, we will refund you the difference,’ are likely to be
binding (Carlill v Carbolic Smoke Ball Ltd)
5.2.3 Public bodies

Where one of the parties is a public body which is bound by an Act of Parliament to supply a particular
service, there is no intention to enter into a contract with customers. For example if you post a letter by
ordinary first class mail and it is delayed or lost, you cannot sue the post office for breach of contract.
5.2.4 Letter of comfort

A comfort letter is a document supplied by a third party to a creditor, indicating a concern to ensure that
a debtor meets his obligations to the creditor. Comfort letters are sometimes provided as an alternative
to a formal guarantee in respect of a loan but are usually carefully worded so as to avoid the creation of
any legal obligation. In Kleinwort Benson Ltd v Malaysian Mining Corporation Bhd 1989, the Court of
Appeal held that despite the commercial nature of the transaction which gave rise to a presumption of
an intention to create legal relations, the comfort letter provided by the Malaysian Mining Corporation
merely stated its current policy and did not amount to a contractual promise to meet the liabilities of its
subsidiary.
5.2.5 Letter of intent

A letter of intent is a device by which one person indicates to another that he is likely to place a contract
with him, but is not yet ready to be contractually bound. A typical example of a situation where a letter
of intent might be provided is where a main contractor is preparing a tender and he plans to subcontract
some of the work. He would need to know the cost of the subcontracted work in order to calculate his
own tender, but would not want to be committed to that subcontractor until he knows whether his
tender has been successful. In these circumstances the main contractor writes to tell the subcontractor
that he has been chosen. Normally, the letter is carefully worded so as to avoid any legal obligations.
However, if the letter of intent invites the subcontractor to begin preliminary work, an obligation to pay
for the work will arise even though a formal contract may never be concluded.
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5.3 Social or domestic arrangements
Social arrangements between friends do not normally amount to contracts because the parties never
intended their agreement to be legally binding. You might agree to meet someone for lunch or accept an
invitation to a party, but in neither case have you entered into a contract. If it can be shown however
that the transaction had a commercial nature, the court may be prepared to find the necessary intention
for the contract.
Simpkins v Pays 1955
The claimant Simpkins lodged with the defendant Mrs Pays and her granddaughter. Each week the
three ladies jointly completed a competition run by a Sunday newspaper. The entries were sent off in the
defendant’s name. One entry won a prize of £750, which the defendant refused to share with the
claimant.
Held: The parties had embarked on a joint enterprise expecting to share any prize money. There was an
intention to enter into a legal relationship and the claimant was entitled to one-third of the winnings
Most domestic arrangements within families are not intended to be legally binding. An agreement
between husband and wife or parent and child does not normally give rise to a contract. In some
circumstances there can be business contracts between members of a family. Many family businesses
are run as partnerships. A wife can be employed by her husband. If the husband and wife are living
apart, they can make a binding separation agreement.
Merritt v Merritt 1970
Mr Merritt had left his wife to live with another woman. He agreed that if his wife completed the
mortgage repayments on the matrimonial home, he would transfer the house to her. Mrs Merritt duly
completed the repayments but her husband refused to convey the house to her.
Held: As the parties were living apart, the agreement was enforceable.
Judge v Crown Leisure Ltd 2005
J was employed as operations manager for CL. He was paid substantially less than a new office
manager, who had been recruited from CL’s sister company. The reason for the differential was that the
new manager had received assurances that his remuneration would not be reduced. A senior manager at
CL had informed all operation managers that their remuneration would be brought into line. J claimed
that the senior manager promised at CL’s Christmas party in 2001 that J would be put onto the same
scale as the new manager within two years. When J was told subsequently that his remuneration would
not be increased to match the remuneration of the new manager, he resigned claiming constructive
dismissal. He claimed that CL was in breach of contract by not fulfilling the promises made at the
Christmas party.
Held: The Court of Appeal upheld the decision of the EAT which held that ,even if the alleged promise
had been made at the Christmas party, it had been made at the course of a casual conversation at a
social event and, given the ‘convivial spirit of the evening’ there was no intention to create a legally
binding contract.
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Business or commercial arrangements are generally assumed to be based on an intention to create
legal relations, whereas social and domestic arrangements are not.
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6 Form
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We next look at the forms that contracts can take.
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6.1 Need for formality

Some contracts are indeed in writing. However the majority of contracts are created much more
informally, either orally or implied from conduct. Generally the law does not require complex formalities
to be observed to form a contract. There are however contracts which are exceptions to this rule.
6.2 Contracts which must be in the form of a deed

Certain transactions involving land require the execution of the deed, ie conveyances, legal mortgages
and leases for more than three years. A promise of a gift is not binding unless in this form.
6.3 Contracts which must be in writing

The Law of Property (Miscellaneous Provisions) Act 1925 provides that a contract for the sale or other
disposition of land can only be made in writing and by incorporating all the terms which the parties have
expressly agreed in one document, or where the contracts are exchanged, in each. The document must
be signed by or on behalf of each party to the contract. Under the Bills of Exchange Act 1882, bills of
exchange, cheques and promissory notes must be in writing. Similarly, the transfer of shares in a limited
company must be in writing.
6.4 Contracts which must be evidenced in writing

S4 of the Statute of Frauds 1688 requires a contract of guarantee to be evidenced in writing. If you
borrow money or buy goods on credit, you may be asked to find someone who will guarantee the debt.
This means that if you do not or cannot repay the money, the guarantor will pay the money for you. The
requirement of written evidence does not affect the formation of such contracts. The absence of writing
does not make the agreement void, so if any money or property has changed hands, it can be kept.
However, if one of the parties wishes to enforce the contract in the courts, the necessary note or
memorandum must be produced.
……………………
As a general rule a contract may be made in any form.
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7 Capacity
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This section explains what types of people have limited capacity to enter contracts.
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7.1 Freedom of contract
It is public policy that freedom of contract should apply. This means that men of full age and competent
understanding shall be able to enter into contracts. If they enter contracts freely and voluntarily, the
contracts shall be enforced by the courts. It is assumed that everyone is capable of entering into a
contract. There are, however, some groups of people who are in need of the law’s protection, either
because of their age or inability to appreciate their own actions. The groups which are covered by
special rules are those under the age of 21(minors), mental patients and drunks.
7.2 Minors
The rules relating to contractual capacity are designed to protect the minor from exploitation by adults. A
minor is free to enter into contracts and enforce his rights against an adult. The adult’s rights will
depend on the way in which the contract is classified.
7.2.1 Valid contracts

There are two types of contract which will bind a minor. These are contracts for necessary goods and
services and beneficial contracts of services. A minor must pay a reasonable price for ‘necessaries’ sold
and delivered to him or her. Necessaries have been defined as “goods suitable to the condition in life of
the minor and to his actual requirements at the time of sale and delivery’. Clearly luxury goods are
excluded. Expensive but useful items may be necessaries if they are appropriate to the social
background and financial circumstances of the minor. If the minor is already adequately supplied, the
goods will not be classed as necessaries.
Nash v Inman 1908
A Savile Row tailor sued an infant Cambridge student for the piece of clothes (including 11 fancy
waistcoats) he had supplied.
Held: The tailor failed in his action because the student was already adequately supplied with clothes.
A minor is also bound by contracts of employment, apprenticeship and education, which, taken as a
whole, are for his or her benefit.
Roberts v Gray 1913
The infant defendant had agreed to go on a world tour with the claimant, a professional billiards player.
After the claimant had spent much time and money organizing the tour, the infant changed his mind
and refused to go. The claimant sued for breach of contract.
Held: This was essentially a contract to receive instruction. Since this was the infant’s benefit, the
contract was valid. The claimant was awarded £1, 500 damages.
If the minor sets himself up in business, he will not be bound by his trading contracts, even though they
are for his benefit. The minor can, nonetheless, sue on these contracts.
Cowern v Neild 1912
Nield was an infant hay and straw dealer. He refused to deliver a quantity of hay which had been paid
for by Cowern.
Held: Provided the infant had not acted fraudulently, he was not liable to pay Cowern
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7.2.2 Voidable contracts
There are three kinds of contract which are voidable:
 Leases of land
 Partnerships
 The purchase of shares
Voidable means that the contract is binding on the minor until he decides to reject it. He must repudiate
the contract before becoming 21 or within a reasonable time of reaching 21. The main effect of
repudiation is to relieve the minor of all future liabilities, but he can be sued for liabilities which have
already accrued, such as arrears of rent.
7.3 Drunks and mental patients

These are also required to pay a reasonable price for necessaries in the same way as minors. If a person
is suffering from mental disability or drunkenness at the time of making the contract, he will be able to
avoid his liabilities if he can show that he did not understand what the agreement was about and the
other person was aware of his disability.
……………………
Some persons have restricted capacity to enter into contracts. Minors cannot enter into contracts for
goods other than necessities. Those who lack mental capacity or who were intoxicated can avoid
contacts if they can show that they did not understand the nature of their actions and the other party
ought to have known about their disability.
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8 Terms and conditions

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We now look at more detail at the terms and conditions within contracts.
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8.1 Terms
The obligations undertaken by parties in a contract are known as terms of a contract. If a dispute arises,
the terms will become the object of intense scrutiny as the parties seek to justify their positions. The first
task for the court is to establish exactly what was agreed by the parties. This may appear to be relatively
simple when the details of the agreement have been enshrined in a written contract. However even then,
problems may arise:
 The parties may have failed to express their intentions clearly
 They may have omitted to mention a particular matter which later assumes great importance
 The written document may contradict what was said during the course of oral negotiations.
Where the contract is made wholly by word of month, the job of ascertaining the contents of the
contract becomes even more difficult.
The terms of the contract are essentially a matter of express agreement between the parties. It should be
noted, however, that additional terms can be implied into an agreement, even against the wishes of the
parties. In addition certain terms which have been clearly stated, such as exclusion clauses, can be
rendered completely ineffective by operation of the law.
It is thus important to examine the basic requirement of certainty of terms for the creation of a contract,
and also review how the contents of a contract are determined and the relative importance that may be
attached to the duties and obligations undertaken by the parties. It is important to consider the effect of
clauses which purport to exclude or limit the liability of one of the parties.
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8.2 Certainty of terms
The terms of an agreement may be so vague and indefinite that in reality there is no contract in
existence at all.
Scammell v Ouston 1941
Ouston agreed to buy a new motor van from Scammell. When placing an order for a particular type of
van, Ouston wrote ‘this order is given on an understanding that the balance of the purchase price can be
had on hire-purchase terms over a period of two years.’ Scammell accepted the order but no discussions
subsequently took place about the details of the hire-purchase arrangement. Scammell later refused to
deliver the van and Ouston sued for damages for non-delivery. Scammell defended the case by arguing
that a contract had never been concluded.
Held: The phrase ‘hire purchase terms’ was so vague and indefinite that there was no contract at all.
The parties needed to complete the agreement by reaching a consensus about unresolved matters such
as rates of interest and frequency of payments.
Bushwall Properties Ltd v Vortex Properties Ltd 1976
The parties concluded an agreement for the sale of 51.5 acres of land at £500,000, to be paid in three
instalments. The first payment of £250,000 was to be followed in 12 months by a second instalment of
£125,000, with the balance to be paid after a further 12 months, and on the occasion of each
completion proportionate part of the ‘land’ should be released to the buyers.
Held: As the parties had failed to provide a mechanism fro allocating the ‘proportionate part of the land’
the entire agreement failed for certainty.
8.3 Meaning of terms

The presence of a vague term will not prove to be fatal in every case. Various devices exist for
ascertaining the meaning of terms.
8.3.1 Express terms

The contract itself may provide the machinery to resolve any disputes about the operation of the
agreement.
Foley v Classique Coaches Ltd 1934

Foley sold part of his land to a coach company for use as a coach station on condition that the company
would buy all its petrol from him ‘at a price to be agreed between the parties’. It was also agreed that
any dispute arising from the contract should be submitted to arbitration. The parties failed to agree on a
price and the company refused to buy petrol from Foley.
Held: The agreement to buy petrol was held to be binding despite the failure to agree a price because
the parties had agreed a method by which the price could be ascertained ie by arbitration. Price is an
essential term of a contract. In the absence of a mechanism to ascertain the price, failure to agree on
this core term is likely to render the contract unenforceable.
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8.3.2 Implied terms
A court can ascertain the terms of a contract by reference to statute, court judgement a trade or custom
or a previous dealing between the parties.
Hillas & Co Ltd v Arcos Ltd 1932
The parties concluded a contract for the sale of a certain quantity of softwood timber ‘of fair
specification’ over 1930. The agreement also contained an option to buy further quantities in 1931, but
no details were given as to the kind or size of timber or the date of shipment. The 1930 agreement was
carried out without difficulty. However when the buyers tried to exercise the option in 1931, the sellers
refused to supply the wood, claiming that they had only agreed to negotiate a further contract for 1931.
Held: The sellers were bound to carry out the 1931 option. The terms of the contract could be
ascertained by reference to the previous course of dealings between the parties.
However it should not be assumed that just because parties have dealt with each other over a long
period of time, that a court will find an obligation to continue doing business with each other.
8.3.3 Meaningless term

A meaningless term which is subsidiary to the main agreement can be ignored and the rest of the
contract enforced.
Nicolene Ltd v Simmonds 1953
The claimants placed an order with the defendant for the supply of 3000 tons of steel reinforcing bars.
The defendant wrote to the claimants to accept the order adding that ‘we are in agreement that the
usual conditions of acceptance apply’. There were no usual conditions of acceptance, so the words were
meaningless.
Held: As the rest of the contract made sense, the meaningless clause could be ignored.
8.4 Puffs, representations and terms

The first step in determining the terms of a contract is to establish what the parties said or wrote. That is
not to say that all statements made during the course of negotiations will automatically be incorporated
in the resulting contract. The statement may be a trader’s puff, a representation or a term. If it turns out
to be untrue, the claimant’s remedy will depend on how the statement is classified. The differences are
as follows.
8.4.1 Trader’s puff

If a car is described as ‘totally immaculate’ and ‘incredible value’, this is nothing more than typical
advertising exaggeration. We are not expected to take such sales talk seriously. Consequently, there is
no civil remedy if the statement turns out to be true.
8.4.2 Representation
This is a statement of fact made by one party which induces the other to enter into the contract. As will
be seen later with regard to misrepresentation, the remedy for a misrepresentation is determined by the
type of misrepresentation.
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8.4.3 Term
Breach of a term of the contract entitles the injured party to claim damages. If he has been deprived of
substantially what he bargained for, he will also be able to repudiate the contract.
8.5 Types of contractual term

The terms of a contract define the obligations of the parties. These may vary greatly in importance.
Traditionally terms have been divided into two categories: conditions and warranties.
8.5.1 Conditions
A condition is a major term which is vital to the main purpose of the contract. A breach of condition will
entitle the injured party to repudiate the contract and claim damages. However the breach does not
automatically end the contract. The injured party may choose to go on with the relationship, despite the
breach, and recover damages instead.
8.5.2 Warranties
A warranty is a less important term. It does not go to the root of the contract. A breach of warranty will
only give the injured party the right to claim damages. He cannot repudiate the contract. The difference
between a condition and a warranty is illustrated by the following cases.
Poussard v Spiers 1876
Madame Poussard was engaged to appear in an operetta from the start of its London run. Owing to
illness, she was not available until a week after the show had opened and the producers were forced to
engage a substitute. They then refused Madame Poussard’s offer to take up her part.
Held: The obligation to perform from the first night was a condition of the contract. Failure to carry out
this term entitled the producers to repudiate Madame Poussard’s contract.
Bettini v Gye 1876
Bettini, an opera singer, was engaged by Gye to appear in a season of concerts. He undertook to be in
London six days before the first concert for the purpose of rehearsals. He arrived three days late and Gye
refused to accept his services.
Held: The promise to appear for rehearsals was a less important term of the contract. Gye could claim
compensation fro breach of warranty but he could not repudiate Bettini’s contract.
……………………
Statements made by the parties to a contract may be classified as terms or representations.
As a general rule, the parties to a contract may include in the agreement whatever terms they choose
(freedom of contract).
Terms clearly included in the contract are express terms. Terms may be implied by the courts, by
statute or by custom.
Statements which are classified as contract terms may be further categorised as conditions or
warranties. A condition is a vital term going to the root of the contract, while a warranty is a term
subsidiary to the main purpose of a contract.
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9 Misrepresentation
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We now examine what happens when one party to a contract makes misrepresentations to another.
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9.1 Nature of misrepresentation

The most basic requirement of a contract is the presence of an agreement. It must have been entered
into voluntarily and involved ‘a genuine meeting of minds’. The agreement may be invalidated by a
number of factors such as mistake, misrepresentation, duress and undue influence. We will focus on
misrepresentation.
The formation of a contract is often preceded by a series of negotiations between the parties. Some of
the statements may later turn out to be false. The nature of the statement will determine whether a
remedy is available and, if it is, the type of the remedy. A false statement, which is not incorporated into
the contract, is known as a misrepresentation. A misrepresentation is a false statement made by one
party which induces the other to enter into a contract.
9.2 Positive statement

As a general rule, a positive statement must be made. Keeping quiet about something does not normally
amount to misrepresentation. In a recent case the seller of a house failed to disclose that it had been the
scene of a gruesome murder of a young girl, with the possibility that parts of the victim’s body might still
be hidden in the house. The silence of the seller was held not to amount to a misrepresentation. Sykes v
Taylor-Rose 2004.
Gestures, smiles and nods can amount to a statement. A course of conduct can also amount to a
representation.
Spice Girls Ltd v Aprilia Worls Service BV 2000
The claimant, SGL, was a company formed to promote the Spice Girls pop group. At the beginning of
May 1998, SGL entered into a contract with the defendant, AWS, an Italian company which
manufactured motorcycles and scooters, to film a TV commercial to be shown until March 1999. When
the contract was signed, the Spice Girls consisted of five members. However, a month earlier, Geri
Halliwell had announced to the other members of the band and to management that she intended to
leave the group at the end of September 1998.
It had been decided to keep this information confidential and AWS was not informed when the contract
was signed. SGL brought an action for money allegedly due under the agreement.
Held: By participating in the ‘shoot’ of the TV commercial, SGL represented by conduct that it did not
know or had no reasonable grounds to believe that any of the members of the group intended to leave.
As the members of the group knew Ms. Halliwell intended to leave during the period when the
commercial was to be used, this amounted to a misrepresentation.
9.3 Failure to speak

There are certain situations where the failure to speak will amount to an actionable misrepresentation:
 Where there is a relationship of good faith between the parties, eg partners
 Where the contract is one of utmost good faith, eg proposals for insurance cover;
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 Where a half truth is offered. In one case a solicitor stated that he was not aware of any
restrictive covenants on a piece of land, which was literally true. However if he had bothered to
read relevant documents, he would have discovered that there were restrictive covenants
(Nottingham Patent Brick and Tile Co. v Butler 1886)
 Where there has been a change in circumstances between the time of the negotiations and the
conclusion of the contract.
With v O’Flanagan 1936
The defendant was a doctor who wished to sell his medical practice. In January 1934, during the
course of negotiations with the claimant, he stated (correctly) that the practice was worth £2000 a year.
Unfortunately, the defendant then fell ill and the practice was run by other doctors. By the time the
contract of sale to the claimant was signed in May, receipts had fallen to £5 per week.
Held: The defendant’s failure to inform the claimant of the change of circumstances between initial
negotiations and the conclusion of the contract was a misrepresentation.
9.4 Statement of fact

A statement of law may amount to a misrepresentation.
Pankhania v London Borough of Hackney 2002
The claimant, P, bought a property in London at auction from the defendants. The catalogue stated that
the tenant of the property had a licence. However in fact the tenant held a secure tenancy.
Held: The principle that no action could lay for misrepresentation as to law had not survived the House
of Lords decision in Klein Benson Ltd v Lincoln City Council 1998.
9.5 Statement of intention

A statement of intention will not normally amount to a misrepresentation because a representation is a
statement about existing events or past events. However, if a person misrepresents what he intends to
do in the future, he may be liable for misrepresentation.
Edgington v Fitzmaurice 1885
The directors of a company invited members of the public to lend money to the company. The directors
stated that the money would be used to improve the company’s building and extend the business. The
directors’ real intention was to pay off the company’s existing debts.
Held: The directors’ statement was a fraudulent misrepresentation. As Bowen LJ put it: ‘There must be a
misstatement of an existing fact: but the state of a man’s mind is as much a fact as the state of his
digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is,
but, if it can be ascertained, it is as much a fact as anything else. A misrepresentation as to the state of
a man’s mind is, therefore a misstatement of fact.
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9.6 Statement of opinion
A statement of opinion will not normally be actionable as a misrepresentation because an opinion is a
statement of belief which is not capable of proof.
Bisset v Wilkinson 1927
During the course of negotiations for the sale of a farm in New Zealand to Wilkinson, Bisset stated that
the land would support 2,000 sheep. The farm had not previously been used for grazing sheep and
Wilkinson knew this.
Held: Bisset was merely expressing his opinion. There was no misrepresentation.
There are occasions when a statement of opinion may amount to a representation of fact. If it can be
established that the person making the statement did not hold that opinion or that he was in a position
to know the facts on which his opinion was based, there may be an actionable misrepresentation.
Smith v Land and House Property Corporation 1884
The vendors of a hotel stated that it was ‘let to a Mr. Fredrick Fleck (a most desirable tenant).’ In fact
Mr. Fleck was in arrears of rent.
Held: The description of Mr Fleck was not a mere expression of opinion. The vendors were in a position
to know the facts about their tenant. Their opinion that he was a desirable tenant was not supported by
facts within their knowledge.
It must be shown that the statement has induced the person to whom it was made to enter into the
contract. If the person attempts to check the truth of what has been said, he has clearly not relied on
the statement.
Attwood v Small 1838
The seller of a mine made exaggerated claims about its earning capacity. The buyer appointed expert
agents to investigate the mine. The agents reported that the seller’s claims were true and the sale went
ahead.
Held: An action by the buyer to rescind the contract must fail because the buyer had relied on his
agents’ report rather than the seller’s statements.
9.7 Types of misrepresentation and their effects

There are three kinds of misrepresentation: fraudulent, negligent or innocent. In each case, the contract
is voidable.
9.7.1 Fraudulent misrepresentation

A person will be liable for fraud if he makes a statement which he knows to be false, or he has no belief
in its truth or he is reckless, careless whether it is true or false: Derry v Peek (1889). The injured party
may also rescind the contract and also sue for damages for the tort of deceit. The assessment of
damages for fraudulent misrepresentation was discussed by the House of Lords in the following case.
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Smith New Court Securities Ltd v Scrimgeour Vickers 1996
The claimant, Smith New Court, was induced by a fraudulent misrepresentation made by the
defendants’ employee to buy shares in Ferranti at 82.25p per share. At the time of purchase, the shares
were trading at about 78p per share. Unknown to either party, the shares were grossly overvalued
because Ferranti was the victim of a fraud totally unconnected with the current case. When the fraud
became known, the price of the shares slumped. The question for the court was whether the claimant
could recover the difference between the contract price and the value of the shares had it known of the
fraud (44p per share).
Held: The claimant was entitled to recover for all the damage resulting from the transaction. The loss
suffered by the claimant was £10,764,005, which represented the difference between the contract
price and the value of the shares with knowledge of the fraud.
The House of Lords has confirmed that a defendant who makes a fraudulent misrepresentation cannot
raise a defence of contributory negligence (Standard Chartered Bank V Pakistan National Shipping
Corporation 2003).
9.7.2 Negligent misrepresentation

This is where the person making the false statement has no reasonable grounds for believing the
statement to be true. Damages may be awarded under the principle established in Hedley Byrne & Co
Ltd v Heller and Partners Ltd 1963.
Esso Petroleum Co Ltd v Mardon 1976
Mardon entered into a three-year tenancy agreement with Esso in respect of a newly developed petrol
filling station. During the negotiations an experienced dealer representative employed by Esso told
Mardon that the station would have an annual throughput of 200,000 gallons by the third year. Despite
Mardon’s best efforts, the throughput only reached 86,000 by the third year. Mardon lost a considerable
sum of money and was unable to pay for petrol supplied by Esso. Esso sued for money owed and
possession of the petrol station. Mardon counterclaimed for rescission of the tenancy agreement and
damages for negligence.
Held: The Court of Appeal applied the principle established in Hedley Byrne & Co Ltd v Heller and
Partners Ltd. When Esso’s representative forecast the station’s potential as part of the pre-contractual
negotiations, a duty of care arose. Esso intended that its forecast would be relied upon by Mardon. Esso
was in breach of the duty of care because of the error made by its representative. Esso was liable in
damages for its negligence
Damages may also be awarded under the Misrepresentation Act of the Law of Zambia. According to
s69:
‘The injured party is more likely to be successful under the Act, because it reverses the normal burden of
proof. Thus, the defendant will only escape liability if he or she can prove that the statement was made
innocently. The court may also award rescission as well as damages.’
9.7.3 Innocent misrepresentation

An innocent misrepresentation is a false statement made by a person who had reasonable grounds to
believe that it was true, not only when it was made, but also when the contract was entered into. The
basic remedy is rescission of the contract.
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Misrepresentations can be classified as fraudulent, negligent or innocent. Any misrepresentation
results in the contract being voidable by the injured party.
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10 Discharge of contracts
……………………
This section explains the circumstances when contracts are deemed to have been discharged.
……………………
10.1 Methods of discharge

The contract may come to an end and the parties discharged from their contractual obligations in four
ways:
 Performance
 Agreement
 Frustration
 Breach
10.2 Performance
The general rule is that the parties must carry out precisely what they agreed under their contract. If one
of the parties does something less than, or different from, that which he agreed to do, he is not
discharged from the contract and, moreover, cannot sue on the contract.
Cutter v Powell 1795
Cutter agreed to serve on a ship sailing from Jamaica to Liverpool. He was to be paid 30 guineas on
arrival at Liverpool. The ship sailed on 2 August, arriving in Liverpool on 9 October but Cutter died at
sea on 20 September.
Held: His widow could not recover anything for the work done before he died. Cutter was obliged to
complete the voyage before he was entitled to payment
Bolton v Mahadeva 1972
Bolton installed a central heating system in Mahadeva’s house for an agreed price of £560. The work
was carried out defectively and it was estimated that it would cost £179 to put matters right.
Held: Since Bolton had not performed his side of the contract, he could recover nothing for the work he
had done.
In each of these cases, one party has profited from the failure of the other to provide complete
performance. A strict application of the rule about precise performance would frequently lead to injustice
and thus certain exceptions to the rule have developed.
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10.2.1 Doctrine of substantial performance
If the court decides that the claimant has substantially carried out the terms of the contract, the
claimant may recover for the work he or she has done. The defendant can counterclaim for any defects
in performance.
Hoeing v Isaacs 1952
The claimant agreed to decorate the defendant’s fault and fit a bookcase and wardrobe for £750. On
completion of the work, the defendant paid £400 but he complained about faulty workmanship and
refused to pay the balance of £350.
Held: The court held that the contract had been substantially performed. The claimant was entitled to
the outstanding £350, less the cost of remedying the defects, which was estimated at £55 18s 2 d.
10.2.2 Acceptance of partial performance

If one of the parties only partially carries out his side of the contract, but the other party, exercising a
genuine choice accepts the benefit of the partial performance, the court will infer a promise to pay for
the benefit received.
10.2.3 Performance prevented by promise

A person who is prevented from carrying out his side of the bargain by the other party can bring an
action to recover for the work he has done.
Planche v Colburn 1831
The claimant agreed to write a book on ‘Costume and Ancient Armour’, on completion of which he was
to receive £100. After he had done the necessary research and written part of the book, the publishers
abandoned the project.
Held: He recovered 50 guineas for the work he had done. The claimant’s claim was based on quasi-
contract. He could not sue on the contract because the obligation to pay him did not arise until he had
completed and delivered the work to the publishers, which he had not done. He was able to sue on a
quantum meruit basis for the work he had done.
10.2.4 Divisible contracts

Some contracts are said to be ‘entire’. This means that a party is not entitled to payment until he has
completely performed his part of the contract (Cutter v Powell 1795). Other contracts may be divisible,
ie the obligations can be split up into stages or parts. Payment can be claimed for each completed
stage. A contract to build a house usually provides for payment to be made in three stages:
 After the foundations have been laid

 When the roof goes on
 On completion of the house
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10.3 Agreement
The parties may have agreed in their original contract that it should end automatically with the
happening of some event or after a fixed period of time.
The agreement may have included a term allowing either party to terminate the contract by giving
notice. A contract of employment, for example, can be brought to an end by either the employer or
employee giving reasonable notice to the other.
A contract may be discharged by the execution of a separate agreement. The new agreement will only
discharge the old contract if it possesses all the characteristics of a valid contract. In particular, there
must be consideration. When neither party has yet performed his side of the contract, there is no
difficulty. Both sides, by waiving their rights, are providing something of value which constitutes
consideration. The situation is different where one side has already completely performed his obligations
and the other party wishes to be released. The person seeking release must either provide fresh
consideration or the agreement must be drawn up in form of a deed.
10.4 Frustration
An agreement which is impossible to perform from the outset will be void for mistake. However the
question arises about the position where initially it is perfectly possible to carry out the contract, and
then a change in circumstances occurs, making it impossible to carry out the agreement. Formerly the
parties were under an absolute duty to perform their contractual obligations. A person was not excused
simply because outside events had made performance impossible. In Paradine V Jane (1647)82 ER
897,
Paradine v Jane 1647
During the course of the English Civil War a tenant was evicted from certain property by Prince Rupert’s
army. The landlord took action to recover three years’ arrears of rent.
Held: The tenant was not relieved from the obligation to pay rent simply because he had been unable to
enjoy the property.
However the courts have recognized an exception about absolute contracts under the doctrine of
frustration. If further performance of the contract is prevented because of events beyond the control of
the parties, the contract is terminated and the parties discharged from their obligations. The doctrine
will apply in the circumstances described below.
10.4.1 Physical impossibility

This is where something or someone necessary to carry out the contract ceases to be available.
Taylor v Caldwell 1863
The claimant had hired the Surrey Gardens and Music Hall for a series of concerts. However, after
making the agreement and before the date of performance, the hall was destroyed by fire.
Held: The contract was discharged and the parties were released from their obligations.
If the presence of a particular person is necessary for the execution of the contract, the death of the
person will clearly discharge the contract. Frustration may also apply if a party is unavailable because of
illness, internment or imprisonment.
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Hare v Murphy & Bros 1974
Hare was sentenced to 12 months imprisonment for unlawful wounding and was, therefore, unavailable
to carry out his responsibilities as a foreman.
Held: This frustrated his contract of employment.
Thus an employee who loses his job as a result of long-term illness or as in the above case, a substantial
term of imprisonment, may find that his contract of employment has been frustrated. The significance of
such a finding is that there will not have been a ‘dismissal’ according to statutory provisions relating to
unfair dismissal (and redundancy). If there has been no ‘dismissal’, the employee cannot bring a claim
for unfair dismissal (or redundancy) against his employer.
10.4.2 Supervening illegality

A subsequent change in the law or in circumstances may make performance of the contract illegal. An
export contract will be discharged if war breaks out with the country of destination.
Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd 1944
The House of Lords refused to enforce an option to purchase a timber yard which was part of a contract
involving the sale of timber because subsequent government regulations had made performance of the
main part of the contract, trading in timber, illegal.
10.4.3 Foundation of contract destroyed

The parties may have made their contract on the basis of some forthcoming event. If the event fails to
take place and, as a result, the main purpose of the contract cannot be achieved, the doctrine of
frustration will apply.
Krell v Henry 1903
Henry hired a room overlooking the route of Edward VII’s coronation procession. The procession was
cancelled owing to the King’s serious illness. Although it would have been possible to come and sit in
the room, the main purpose of the contract to view the procession had been destroyed.
Held: The contract had been frustrated.

A contract will only be frustrated if the change in circumstances has had a substantial effect on the main
purpose of the contract.
Herne Bay Steam Boat Company v Hutton 1903
The claimant agreed to hire a steam boat, the Cynthia, to the defendant for two days so that the
defendant could take paying passengers to see the naval review at Spithead on the occasion of Edward
VII’s coronation. An official announcement was made cancelling the review, but the fleet still gathered
and the Cynthia could have been used for a cruise around the fleet. The defendant did not make use of
the boat and the claimant used her for ordinary sailings. The claimant sued for £200, which was the
outstanding balance on the contract to hire the boat.
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Held: The contract was not discharged through frustration. The naval review taking place was not the
foundation of the contract. The claimant was entitled, therefore, to recover the £200 he was owed
under the contract.
The fact that the contract has become more difficult and more expensive to carry out will not excuse the
parties.
Tsakiroglou & Co Ltd v Noblee and Thori Gmbh 1961
In 1956 sellers agreed to deliver ground nuts from Port Sudan to buyers in Hamburg, shipment to take
place during November/December 1956. On 2 November the Suez Canal was closed to traffic. The
sellers failed to deliver and when sued for breach of contract, they argued that the contract had been
frustrated. It had not become impossible to carry out the contract: shipment could have been made via
the Cape of Good Hope- a longer and more expensive operation.
Held: This was not sufficient to discharge for frustration.
Davis Contractors Ltd v Fareham Urban District Council 1956
The claimant contractors agreed to build 78 houses in eight months for the defendant council. Owing to
post-war shortages of skilled labour and building materials, it took the contractors 22 months to
complete the houses at an additional cost of £17,651. The claimants argued that the contract was
frustrated because of the long delay caused by circumstances beyond their control. They should be able
to recover the full cost incurred on a quantum meruit basis.
Held: The contract was not discharged by frustration. The contractors could have foreseen the possibility
of shortages and taken it into account when the tendering for the work.
10.4.4 Circumstances where frustration will not apply

The doctrine of frustration will not apply in the following situations:
 When the parties have foreseen the likelihood of such an event occurring and have made express
provision for it in the contract.
 Where one of the parties is responsible for the frustrating event. This is known as ‘self induced’
frustration.
Maritime National Fish Ltd V Ocean Trawlers Ltd 1938
The appellants chartered a trawler which needed to be fitted with an otter trawl from the respondents. It
was illegal to operate with an otter trawl unless a licence had been obtained. The appellants applied for
five licences to cover four trawlers of their own and the trawler on charter. However, they were granted
only three licences. They decided to nominate their own trawlers for licences rather than the chartered
trawler.
Held: The contract was not frustrated. The defendants had decided quite deliberately not to nominate
the respondent’s trawler and were therefore responsible for the frustrating event.
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10.4.5 Consequences of frustration
A frustrating event has the effect of bringing the contract to an immediate end. The rights and liabilities
of the parties are often frozen at the moment of frustration. The rule was that money payable before
frustration remained payable and money paid before frustration could not be recovered. Any money
which did not become payable until after frustration ceased to be payable.
10.5 Breach
A breach of contract may occur in a number of ways. It may be an anticipatory or an actual breach.
10.5.1 Anticipatory breach

This is were a party states in advance that he does not intend to carry out his side of the contract or
puts himself in a position whereby he will be unable to perform. The injured party may sue immediately
for breach of contract or, alternatively, wait for the time for performance to arrive to see whether the
other party is prepared to carry out the contract.
Hochster v De la Tour 1853
The claimant was engaged by the defendant in April 1852 to act as courier for travel in Europe from 1
June 1852. On 11 May, the defendant wrote to the claimant to inform him that his services were no
longer required. The claimant started an action for breach of contract on 22 May.
Held: Although the date for performance had not yet arrived, it was held that the defendant’s letter
constituted a breach of actionable breach of contract.
It can dangerous to wait for time for performance. The injured party may lose the right to sue for breach
of contract if, in the meantime, the contract is discharged for frustration or illegality.
Avery v Bowden 1855
The defendant chartered the claimant’s ship, the Lebanon, and agreed to load her with cargo at Odessa
within 45 days. During this period, the defendant told the claimant on a number of occasions to sail the
ship away as it would not be possible to provide a cargo. The claimant kept the ship at Odessa hoping
that the defendant would carry out his side of the contract. Before the 45 days had expired, the Crimean
war broke out. Odessa became an enemy port and it would have been illegal to carry out the contract.
Held: Assuming that the defendant’s repeated statements amounted to an anticipatory breach, the
defendant could have accepted the breach and sued at once. However, by choosing to keep the contract
alive, he lost his right to sue because of the illegality.
10.5.2 Actual breach

One party may fail to perform his side of the bargain completely or he may fail to carry out one or some
of his obligations. Not every breach of contract has the effect of discharging the parties from their
contractual obligations. The terms of a contract may be divided into those terms which are important
(conditions) and the less important terms (warranties). A breach of condition does not automatically
terminate the contract. The injured party has a choice. He may wish to be discharged from the contract
or he may prefer to carry on with the contract and claim damages for breach. A breach of warranty only
entitles the injured party to sue for damages.
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Contracts may be discharged through performance, agreement, frustration and breach.
A party is said to be in breach of contract when, without lawful excuse, he does not perform his
contractual obligations precisely.
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11 Remedies under the law of contract

……………………
We lastly examine the remedies that a dissatisfied party to a contract can pursue.
……………………
11.1 Possible remedies

There are several remedies available to the injured party when a term of the contract has been broken.
Every breach of contract will give the injured party the common law right to recover damages (financial
compensation). Other remedies such as specific performance and an injunction may be granted at the
discretion of the court as part of its equitable jurisdiction.
In the business world it is quite common for the parties to agree in advance the damages that will be
payable in the event of a breach of contract. These are known as liquidated damages. If there is no prior
agreement as to the sum to be paid, the amount of damages is said to be unliquidated.
11.2 Liquidated damages

It makes commercial sense for the parties to establish at the outset of their relationship the financial
consequences of failing to live up to their bargain. Provided the parties have made a genuine attempt to
estimate the likely loss, the courts will accept the relevant figure as the damages payable. In practice
knowing the likely outcome of any legal action, the party at fault will simply pay out without argument.
Examples of liquidated damages are the charges imposed for cancelling a holiday. There is the
temptation for a party with the stronger bargaining power to try to impose a penalty clause, which is
really designed as a threat to secure performance. The distinction between liquidated damages is
illustrated by the following cases.
Dunlop Pneumatic Tyre Co Ltd v NewW Garage & Motor Co Ltd 1915
Dunlop supplied new tyres to New Garage under agreement by which, in return for a trade discount,
New Garage agreed to pay £5 by way of ‘liquidated damages’ for every item sold below list prices.
Held: Since the sum was not extravagant, it was a genuine attempt by the parties to estimate the
damage which price undercutting would cause Dunlop. The £5 was liquidated damages.
Ford Motor Co v Armstrong 1915
Armstrong, a retailer, agreed to pay £250 for each Ford car sold below the manufacture’s list price.
Held: The clause was void as a penalty.
If the court holds that the sum is liquidated damages, it will be enforced irrespective of whether the
actual loss is greater or smaller.
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Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd 1933
Widnes Foundry agreed to pay £20 for every week of delay in completing a plant for the Silk Co. The
work was completed 30 weeks late. The Silk Co. claimed that its actual losses amounted to nearly
£6,000.
Held: Widnes Foundry was only liable to £20 a week (ie 600) as agreed.
Murray v Leisure Bay Ltd 2005
Murray, a director of LeisurePlay, had a clause in his service contract which entitled him to payment of
a year’s gross salary if his contract was terminated without a year’s notice. Murray was given seven and
half weeks notice and he brought a claim for liquidated damages. Leisure Play argued that the clause
was a penalty clause and therefore unenforceable.
Held: It was not a penalty clause. In deciding such cases the courts should consider:
 To what breaches of contract the clause applies

 What amount is payable on breach
 What amount would be payable if the claim was brought under common law
 What were the parties’ reasons for agreeing the clause
 Whether the party who claims the clause is a penalty can show that it was imposed as a
deterrent and that it does not constitute a genuine pre-estimate loss.
11.3 Unliquidated damages

The aim of unliquidated damages is to put the injured party in the position he would have been in if the
contract had been carried out properly. Damages are designed to compensate for loss. If no loss has
been suffered, the court will only award nominal damages, which are a small sum to mark the fact that
there had been a breach of contract.
11.4 Guidelines for damages

The courts observe the following guidelines when awarding damages.
11.4.1 Elements of damages

The damage can include sums for financial loss, damage to property, personal injury and distress,
disappointment and upset caused to the claimant.
Jarvis v Swan Tours 1973
Jarvis a solicitor paid £63.45 for a two week winter sports holiday in Switzerland. The Swans Tours
Brochure promised a ‘house party’ atmosphere at the hotel, a bar which would open several evenings a
week and a host who spoke English. The holiday was a considerable disappointment. In the second
week, he was the only guest in the hotel and no one else could speak English. The bar was only open
one evening and the skiing was disappointing.
Held: The Court of Appeal awarded him £125 to compensate for the loss of entertainment and
enjoyment which he was promised.
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Exemplary or punitive damages, designed to punish the party in breach, are not normally awarded by
contract.
11.4.2 Irrecoverable losses

The injured party cannot necessarily recover damages for every kind of loss he has suffered.
The breach might have caused a chain reaction of events to occur. Clearly, there is a point beyond
which the damage becomes too remote from the original breach. The rules relating to remoteness of
damage were laid down in Hedley v Baxendale 1854, that the injured party may recover damages for:
 Loss which has resulted naturally and in the ordinary course of events from the defendant’s
breach
 Loss which, although not a natural consequence of the defendant’s breach, was in the minds of
the parties when the contract was made.
The practical application of these principles can be seen in the following cases.
Victoria Laundry (Windsor) v Newman industries Ltd 1949
The claimant company of launderers and dryers wished to expand its business and, for this purpose, had
ordered a new boiler from the defendants. The boiler was damaged during the course of its removal, and
as a result, there was a five month delay in delivery. The claimant claimed:
 Damages of E16 per week for the loss of profits it would have made on the planned expansion of
the laundry business
 Damages of E262 a week for loss of profits it would have made on extremely lucrative dyeing
contracts.
Held: The claimant was entitled to recover for the normal loss of profits on contracts, but it could not
recover for the especially profitable dyeing contracts of which the defendants were ignorant.
Simpson v London and North Western Rail Co Ltd 1876
Goods were to be sent to Newcastle for the exhibition at an agricultural show. The goods were marked
‘must be at Newcastle on Monday certain’. They failed to arrive in time.
Held: The defendants were liable for Simpson’s prospective loss of profit arising from of the special
instructions of the customer.
11.4.3 Level of damages

Provided the loss is not too remote, the next matter to consider is how much is payable by way of
damages.
The object is to put the injured party in the same position as if the contract had been performed. This is
sometimes described as providing compensation for loss of expectation. Expectation losses may include
loss of profit which would have been made but for the breach or the cost of achieving agreed
performance. In some situations, the claimant may prefer to recover the losses he has incurred in
reliance on the contract. Reliance also includes wasted expenditure. It seems that the claimant may
claim for reliance losses rather than expectation losses if he so chooses.
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Anglia Television v Reed 1971
The claimants engaged the defendant, a well known American actor, to play the lead in a film they were
making for television. At the last moment the defendant repudiated the contract and as the claimants
were unable to find a suitable replacement, the film was abandoned.
Held: The claimants did not attempt to claim for the loss of profits as it was not possible to say whether
the film would have been a success. However, they were successful in recovering their wasted
expenditure (on employing a director, scriptwriter and other actors, researching locations and so on),
even though some of the expenses had been incurred before the defendant entered into the contract.
Lord Denning explained the decision as follows:
’ It is plain that when Mr Reed entered into this contract, he must have known perfectly well that much
expenditure had been incurred on director’s fees and the like. He must have contemplated - or at any
rate, it is reasonably to be imputed to him - that if he broke his contract, all that expenditure would be
wasted, whether or not it was incurred before or after the contract.’
If the claimant has not suffered a loss as a result of the breach, the court will only award nominal
damages.
C & P Haulage v Middleton 1983
C& P had granted Mr Middleton a six months renewable licence to occupy a garage which he used to
carry on his business. Mr Middleton spent some money equipping the premises, but the terms of his
agreement prevented him from removing such equipment at the end of the licence. The parties
quarrelled and, as a result, Mr Middleton was unlawfully evicted from the garage 10 weeks before the
end of a six months period. Fortunately, Mr Middleton’s local council allowed him to use his own garage
for more than 10 weeks, which meant that he did not have to pay rent. He sued C& P for the cost of
equipping the premises.
Held: He was entitled to nominal damages only. The cost of equipping the garage would have been lost
even if the contract had been carried out as agreed. It is not the function of the courts to put the injured
party in a better financial position than if the contract had been properly performed.
Where the breach of contract consists of defective performance of a building contract, the courts have
sometimes based the award of damages on the difference between the value of the building contracted
for and the defective building, and sometimes on the cost of curing the defect.
Ruxley Electronics and Construction v Forsyth 1995
The claimant company agreed to build a swimming pool for Mr Forsyth. It was a term of the contract
that the pool should be 7ft deep end, to allow for safe diving. When the pool was built, however, it had
a maximum depth of 6ft and was only 6ft under the diving board. The trial judge held that, even though
the pool was not as deep as specified in the contract, there was no evidence that the value of the pool
had decreased because of the shortfall in the depth. The only way of curing the defect was to demolish
and build a new pool at the cost of £21,560.
Held: The judge doubted whether Mr Forsyth would build a new pool as it would not be reasonable to
do so. The judge awarded £2,500 for loss of amenity. The Court of Appeal reversed the decision of the
trial judge and awarded Mr Forsyth the full cost of achieving a cure, ie £21, 560. The House of Lords
reversed the decision of the Court of Appeal and reinstated the trial judge’s original decision. Their
lordships took the view that if the cost of cure was unreasonable, the measure of damages should be the
difference in value. Although the pool was probably no less valuable, Mr Forsyth was entitled to
compensation for his loss of satisfaction.
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11.4.4 Mitigation of loss
Once a breach of contract has occurred, the innocent party is under a duty to mitigate (minimize) his
loss. The injured party cannot stand back and allow the loss to get worse. A seller, whose goods have
been rejected, for example, must attempt to get the best possible price for them elsewhere. The
claimant will not be able to recover for that part of the loss which has resulted from his failure to
mitigate.
Brace v Calder 1895
The claimant was dismissed by his employers but offered immediate re-engagement on the same terms
and conditions as before. He effused the offer and instead sued to recover the salary he would have
received fro the remaining 19 months of his two-year contract.
Held: The claimant should have mitigated the loss by accepting the employer’s reasonable offer of re-
employment. He was entitled to nominal damages only.
The duty to mitigate any loss does not arise until there has been a breach of contract which the injured
party has accepted as a breach.
White and Carter (Councils) Ltd v McGregor 1961
The claimants were advertising agents who supplied local authorities with litter bins on which they
displayed advertisements. The defendant entered into a contract with the claimants to advertise his
garage in this way for a three-year period. Later the same day, however, the defendant cancelled the
contract. The claimants refused to accept the cancellation and proceeded to carry out the contract by
preparing advertising plates and attaching them to litter bins. The claimants sued for the full amount
due under the contract.
Held: The claim was upheld. The claimants were under no duty to mitigate their loss because they had
not accepted the defendant’s breach.
Where one party performs his part of the contract, for example by delivering goods, and the other party
refuses to pay, the claimant is for payment of the debt rather than an action for damages.
11.5 Equitable remedies

The remedy for a breach of contract is an award of damages at common law. There are some situations,
however, where damages would be neither adequate nor appropriate. Equity developed other forms of
relief to ensure that justice is done. The more important of these are specific performance and
injunctions.
11.6 Specific performance

A decree of specific performance is an order of the court requiring the party in breach to carry out his
contractual obligations. Failure to comply with the directions of the court means the defendant may face
penalties for contempt of court. Like all equitable remedies, the grant of specific performance is
discretionary. It may be withheld in the following circumstances:
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11.6.1 Adequacy of damages
An order for specific performance will not be made if damages are an adequate remedy. Most breaches
of the contract can be remedied by an award of monetary compensation. If it is a contract for the sale of
a unique item, however, no sum of money can compensate the disappointed buyer for his lost
opportunity. Then specific performance will be granted. Each piece of land is regarded as being unique
and thus the remedy is available for the sale of land.
11.6.2 Mutuality
Equity requires mutuality as regards its remedies. This means that both parties must be able to seek
specific performance. An adult cannot obtain such an order against a minor, so a minor cannot be
awarded specific performance either.
11.6.3 Supervision
An order will not be made unless the court can adequately supervise its enforcement. It is for this reason
that specific performance will not be awarded to enforce building contracts, because the court cannot
supervise on the day-to-day basis which would be necessary.
Similar principles apply to employment contracts.
Ryan v Mutual Tontine Westminster Chambers Association 1893
The landlord of a flat agreed to provide a resident porter who would undertake certain duties for
residents. A porter was appointed but he had another job as a chef at a nearby club, which meant he
was absent from the building for several hours each day. While he was away, his duties were performed
by various non-resident cleaners.
Held: The only remedy for the breach of the contract was an action in damages. Specific performance
would not be granted.
11.6.4 Discretion
The court may refuse to grant specific performance where it is felt that it would not be just and equitable
to grant it.
11.7 Injunction
This is an order from the court requiring the party at fault not to break the contract. Its main use is to
enforce the negative promises that can occasionally be found in employment contracts. The employee
may agree, for example, not to work in a similar capacity from a rival employer during the period of his
contract.
Warner Brothers v Nelson 1936
The film actress Bette Davis had agreed not to work as an actress for anyone else during the period of
her contract with Warner Brothers. In breach of this agreement, she left the USA and entered into a
contract with a third party in the UK.
Held: Warner Bros were entitled to an injunction to prevent the star from breaking the negative provision
in the contract.
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It should be noted that an injunction cannot be used as a back-door method of enforcing a contract of
employment for which specific performance is not available. Warner Brothers could not prevent Miss
Davis from working as an actress for anyone else. They could not have obtained a decree of specific
performance to force her to return to their studio.
11.8 Restitution
The law of restitution may provide a claimant with a remedy in situations where the defendant has
obtained an unjust benefit. The requirement to repay money does not arise because of a breach of a
legal duty, such as a breach of contract or a tort, but because the defendant has been unjustly enriched.
The liability is said to be quasi-contractual- as if from a contract - although in reality there is no liability
in contract.
An action for restitution may arise in the circumstances summarized below.
11.8.1 Quantum meruit

Instead of claiming a precise sum, the claimant may be able to sue on a quantum meruit for payment
for work he has actually done. A quantum meruit claim can arise either contractually or quasi
contractually in the following situations:
(a) Contractually: where the contract is for the supply of goods and services but the parties have not
fixed a sum to be paid.
(b) Quasi-contractually: where:
 The defendant has abandoned or refused to perform his part of the contract (Planche v
Colburn 1831)
 Work has been performed by the claimant and accepted by the defendant under a void
contract. In Craven- Ellis v Canons Ltd 1936 a managing director of a company was able
to recover a reasonable sum by way of remuneration for work he had done until it was
discovered that his appointment was invalid under the company’s articles.
 One party confers a benefit on the other with the intention on both sides that the benefit is
to be paid for even though a contract is not finally concluded.
11.8.2 Failure of consideration

If the claimant has paid money to the defendant in respect of a valid contract, and the defendant
completely fails to honour his part of the bargain, the claimant has a choice of remedies. He can bring a
claim for breach of contract and claim damages for breach or he can terminate the contract and sue in
quasi-contract to recover the money he has paid over, on the basis that there has been a total failure of
consideration.
11.8.3 Money paid under mistake

A claimant may recover money which has been paid over under a mistake of fact. A mistake of fact
would include, for example, errors in a restaurant bill because the waiter had made a mistake when
calculating all the items, or at the supermarket checkout when a cashier inadvertently scans an item
twice.
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EXAM ALERT
The contents of this long chapter could be examined in many different ways. Rights and liability under
contract, and termination and discharge of contracts are important topics. You could also be asked to
assess consideration given.
……………………
Damages are intended to restore the party who has suffered loss to the position he would have been
in had the contract been performed. The two tests applied to a claim for damages are remoteness of
damage and measure of damages.
Other remedies include action for the price, a quantum meruit claim, an order for specific
performance and an injunction.
……………………
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Chapter Roundup
 A valid contract is a legally-binding agreement, formed by the mutual consent of two parties.
 The three essential elements of a contract are offer and acceptance, consideration and intention to enter
into legal relations.
 Agreement to a contract is usually evidenced by offer and acceptance. An offer is a definite promise to
be bound on specific terms and must be distinguished from the mere supply of information and an
invitation to treat.
 An offer may only be accepted while it is still open. In the absence of acceptance, an offer may be
terminated by rejection, counter-offer, lapse of time, revocation, failure of a condition or death.
 Acceptance must be an unqualified agreement to all the terms of the offer. Acceptance is generally not
effective (and hence there is no contract) until communicated to the offeror, except where the postal rule
applies.
 Consideration is an essential part of most contracts. It is what each party brings to the contract.
 Consideration may be an act or a promise. It may not be past. It need not be adequate but it must be
sufficient.
 Business or commercial arrangements are generally assumed to be based on an intention to create legal
relations, whereas social and domestic arrangements are not.
 As a general rule a contract may be made in any form.
 Some persons have restricted capacity to enter into contracts. Minors cannot enter into contracts for
goods other than necessities. Those who lack mental capacity or who were intoxicated can avoid
contacts if they can show that they did not understand the nature of their actions and the other party
ought to have known about their disability.
 Statements made by the parties to a contract may be classified as terms or representations.
 As a general rule, the parties to a contract may include in the agreement whatever terms they choose
(freedom of contract).
 Terms clearly included in the contract are express terms. Terms may be implied by the courts, by statute
or by custom.
 Statements which are classified as contract terms may be further categorised as conditions or
warranties. A condition is a vital term going to the root of the contract, while a warranty is a term
subsidiary to the main purpose of a contract.
 Misrepresentations can be classified as fraudulent, negligent or innocent. Any misrepresentation results

in the contract being voidable by the injured party.
 Contracts may be discharged through performance, agreement, frustration and breach.
 A party is said to be in breach of contract when, without lawful excuse, he does not perform his
contractual obligations precisely.
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Quick Quiz
1 Give the name of a case in which an offer was made to the world at large.
2 How is the circulation of a price list categorised in the law of contract?
3 As a general rule silence cannot constitute acceptance. True/False?
4 A voidable contract is not a contract at all. True/False?
5 Past consideration as a general rule is not sufficient to make a promise binding. True/False?
6 Why is it important to distinguish between terms and representations?

1 Carlill v Carbolic Soap Company
2 Invitation to treat
3 True
4 False. Voidable contracts may be cancelled by one party but they may choose to continue the contract.
5 True. Past consideration is not valid consideration for a new contract.
6 Different remedies are available depending on whether a term is broken or a representation is untrue.
69
70
CONTRACTS UNDER THE SALE OF
GOODS ACT
This chapter follows up the last chapter by focusing on contracts that are subject to the terms of the
English Sales of Goods Act 1893. We shall examine how the Act has impacted upon various elements
of a contract.
chapter
3
syllabus
references
topic index
1 Definitions. conditions and warranties 3A

2 Transfer of property, risk and title 3B
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LEARNING OBJECTIVES
 Explain the significance of conditions and warranties in relation to the sale of goods
 Explain how the Sales of Goods Act governs the transfer of property, risk and title to goods
1 Definitions, conditions and warranties

……………………
We begin by looking at the terms of a contract, focusing particularly on the obligations of the seller.
……………………
1.1 Legal framework

The law that governs the Sale of goods in Zambia is the Sale of Goods Act of 1893. This is an English
statute which is applicable by virtue of English Law (Extent of Application) Act Chapter 11 of the Laws
of Zambia discussed in Chapter 1 of this manual. This Act is supplemented by common law.
The Sale of Goods Act provides a framework for the relationship between the buyer and seller. It covers
such matters as the rights and duties of the parties and their remedies in case of breach. However the
Act does not govern every aspect of a sale of goods contract. Many general principles of contract studied
in chapter 2 still apply. A valid contract for the sale of goods, just like any other contract, must possess
all the essential elements. The rules relating to offer and acceptance, intention, consideration etc are
largely untouched by the Act.
In addition the Act, in general, does not stop the parties from making their own tailor-made agreement.
In many cases the rules contained in the Act only apply where the parties have failed to make express
arrangements as to their obligations.
1.2 Contract of sale

A contract for the Sale of goods is defined under s1(1) of the Act as:
‘A contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a
money consideration called the price.’
The above definition is extremely important because only those contracts which fall within it will be
covered by the provisions of the Act. The definition can be used to help to distinguish a contract for the
sale of goods from other similar kinds of contracts in which goods change hands.
S1(1) covers two possibilities: a sale and an agreement to sell. Where ownership is transferred
immediately from the seller to the buyer, the contract is called a ‘sale’ (actual sale). Where the
ownership of the goods is to be transferred at a future time or subject to some condition to be fulfilled,
the contract is called an agreement to sell.
The essence of the transaction is the transfer of property in goods from the seller to the buyer. (Property
in this context means ownership of the goods). Goods include all tangible items of personal property
such as food, clothes or furniture. Land and money are excluded from the definition. The consideration
for the goods must be money, although a part exchange deal in which goods are exchanged for other
goods plus money will be covered by the Act because some money has exchanged hands.
1.3 Implied terms

As previously discussed, the parties generally have the freedom to arrange between themselves the
details of their contract. However the Act also automatically includes a number of conditions and
warranties in every contract fro the sale of goods. These are known as the implied terms and are covered
in s12-15 of the Act.
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1.4 Title
Title is provided for under s12 of the Act which provides as follows:
In a contract of sale, unless the circumstances of the contract are such as to show a different intention,
there is:
An implied condition on the part of the seller that in the case of a sale, he has the right to sell the
goods, and in the case of an agreement to sell, he will have the right to sell the goods at the time when
the property is to pass
An implied warranty that the buyer shall have and enjoy quite possession of the goods
An implied warranty that the goods shall be free from any charge or encumbrance in favour of any third
party not declared or made known to the buyer before or at the time when the contract is made.
If the seller cannot pass good title (rights of ownership) to the buyer, he will be liable for breach of a
condition. The buyer will not have good title to the goods. The buyer acquires a defective title to the
goods and must generally return the goods to the true owner.
Rowland v Divall 1923
Rowland bought a car from Divall for £334 and used it for four months. It later transpired that Divall
had bought the car from someone who had stolen it, and it had to be returned to the true owner.
Rowland sued Divall to recover the full purchase price that he had paid.
Held: Divall was in breach of s12. Rowland had paid £334 to become the owner of the car. Since he
had not received what he had contracted for, there was a total failure of consideration, entitling him to a
full refund.
S12 (2) implies to warranties into sale of goods contracts that:
(i) The goods are free from any charges or encumbrances (third party rights) not made known to the
buyer before the contract and
(ii) The buyer will enjoy quite possession of the goods.
Microbeads v Vinhurst Road Markings Ltd 1975
PART B: BUSINESS LAW // 3: Contracts under the sale of goods act

The buyer purchased road marking machines from the sellers. Shortly after the sale, another company
obtained a patent in respect of the machines. This company was seeking to enforce the patent against
the buyers for the purchase price. The buyers wished to include in their defence a breach of s12 (2).
Held: The buyers’ possession of the machines had been disturbed and therefore, it would be appropriate
to raise a breach of s. 12(2) as a defence to an action for the price when the case came to full
trial
S12 (3) provides for a situation where the seller is unsure about his title to goods. He can sell them on
the basis that he is transferring only such of ownership as he may have. If he does this, there is no
implied condition that he has the right to sell the goods. However the sale is subject to implied
warranties relating to freedom from third-party rights and quiet possession.
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1.5 Description
Where there is a contract for the sale of goods by description, there is an implied condition that the
goods will correspond with the description. S13 states:
Where there is a contract for the sale of goods by description there is an implied condition that the
goods shall correspond with the description; and if the sale be by sample as well as by description, it is
not sufficient that the bulk of the goods do not correspond with the sample if they correspond with the
description.
If the buyer does not see the goods before he buys them (eg from a mail order catalogue or through the
internet), there has clearly been a sale by description. Even where the buyer has seen the goods and
selected them himself, it may still be a sale by description, if he has relied to some extent on a
description.
Beale v Tailor 1967
The defendant advertised a car for sale as a 1961 Triumph Herald. The claimant inspected the car
before he bought it. He later discovered that the vehicle consisted of a rear half of a 1961 model Herald
which had been welded to the front half of the earlier model.
Held: The claimant was entitled to damages for breach of s13 even though he had seen and inspected
the car. He had relied to some extent on the description contained in the advertisement.
A sale by description has been defined as a sale where words are used to identify the goods sold.
Therefore a sale of future or unascertained goods is a sale by description. In Bowes v Shands Lord
Blackburn explained a sale by description in the following way:
‘If you contract to sell peas, you cannot oblige a party to take beans. If the description of the article
tendered is different in any respect, it is not the article bargained and the other party is not bound to
take it.’
If the buyer has forgotten about the description by the time he buys the goods or does not believe what
he has been told and checks the details for himself, he may lose the protection of s.13 because he has
not relied on the description.
Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd 1990
The defendant sold a painting which turned out to be a fake. The defendant believed that the painting
was by Munter, an artist of the German Expressionist School because he had seen it attributed to
Munter in an auction catalogue. He described the painting as a Munter during negotiations with the
claimant, although he made it clear that he knew nothing about Munter’s work and lacked expertise in
German Expressionist painting. The claimant, who was lacking in relevant expertise, inspected the
painting and decided that it was authentic. He agreed to buy it. The painting was described in the
defendant’s invoice as a Munter. When the claimant discovered that the painting was a fake, he sued
under s 13 to recover the purchase price.
Held: The defendant had made it clear that his attribution could not be relied upon and that the
claimant should have exercised his own judgment. A contract will not be a sale by description merely
because the seller has issued some statement about the goods. The buyer must show that the
description influenced the decision to buy. The claimant was unable to show this and his action failed.
The description of the property may cover such matters as size, quantity, weight, ingredients, origin or
even how they are to be packed. The slightest departure from the specifications will entitle the buyer to
reject the goods for breach of a condition of the contract.
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Re Moore &Co and Landauer & Co 1921
The claimants agreed to supply 3,000 tins of Australian canned fruit, packed in cases containing 30 tins
each. When the goods were delivered, it was discovered that half of the consignment was packed in
cases containing 24 tins. Although the correct quantity had been delivered, the defendants decided to
reject the whole consignment.
Held: This was a sale by description under s13. Since the goods did not correspond with that
description, the defendants were entitled to repudiate the contract.
A seller may ensure that the transaction is not a sale by description, by including such phrases as
‘Bought as seen’ or ‘sold as seen’ in the contract.
1.6 Quality and fitness

The maxim caveat emptor or buyer be aware, was the primary principle in the sphere of the sale of
goods as it was and still is in the sale of land. The Act provides in s14 that except as provided by the
Act, there is no implied condition or warranty as to quality or fitness for any particular purpose of goods
supplied under a contract of sale. The section reads:
Subject to the provisions of this Act and any statute in that behalf, there is no implied warranty or
condition as to the quality or fitness for any particular purpose of goods supplied under a contract of
sale, except as follows:
(1) Where the buyer expressly or by implication makes known to the seller the particular purpose for
which the goods are required, so as to show that the buyer relies on the seller’s skill and
judgment, and the goods are of a description which it is the seller’s business to supply (whether
he be the manufacturer or not) there is an implied condition that the goods shall be reasonably
fit for the purpose , provided that in case of a contract for the sale of a specified article under its
patent or trade name, there is no implied condition as to its fitness for any particular purpose.
(2) Where goods are bought by description from a seller who deals in goods of that description
(whether he be the manufacturer or not) there is an implied condition that the goods shall be of
merchantable quality; provided that if that if the buyer has examined the goods there shall be no
implied conditions as regards defects which that examination ought to have revealed.
(3) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed
by the usage of trade

(4) An express warranty or condition does not negative a warrant or condition implied by this Act
unless inconsistent therewith.
There are many exceptions to the general rule that the buyer must be aware of in S14 of the Act. It
implies these exceptions in contracts of sale of goods as follows
 An implied condition as to merchantable quality

 An implied condition of fitness for purpose
 Conditions and warranties implied by usage
 A condition of freedom from latent defects on a sale by sample.
Where the seller sells goods in the course of a business, there is an implied condition that the goods are
of merchantable quality except that there is no such condition:
(a) As regards defects specifically drawn to the buyers attention before the contract is made
(b) If the buyer examines the goods before the contract is made, as regards defects which that
examination ought to reveal.
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For the buyer to rely on the provisions of s.14 (1) he must have made known to the seller expressly or
by implication the particular purpose for which the goods are required. Where the goods are used for
one purpose only or where the purpose for which the goods are required is obvious, the law implies that
no further indication is required.
Priest v Last 1903
The plaintiff bought a hot water bottle from a shop. The bottle burst when hot water was poured into it.
Held: A hot water bottle is required for a particular purpose within provisions of s14 because it has one
purpose only, and the buyer could only require it for that purpose.
Grant v Australian Mills 1936
The Plaintiff bought underpants manufactured by the defendants and contracted dermatitis after wearing
it.
Held: The court, upholding the decision in Priest v Last held that:
‘There is no need to specify in terms the particular purpose for which the buyer requires the goods,
which is nonetheless the particular purpose within the meaning of the section because it is the only
purpose for which any one would ordinarily want the goods.’
Difficulties will arise where the good can be used for a variety of purposes, or has a wide range of
purposes. In such circumstances, the buyer would be obliged to indicate the particular one of these
purposes for which he requires the goods.
DTC Industries Ltd v Jimfat Nigeria Ltd 1975
The defendants agreed orally to purchase from the plaintiff’s thirteen tons of the coil wire said to be of
the quality of 16 British Wire Gauge (BWG). The defendants did not expressly indicate to the plaintiff
sellers the particular purpose for which the wire coil were required.
Held: The wire coils supplied by the plaintiff were capable of being used for a variety of purposes. There
was no evidence that the plaintiffs were informed of the particular purpose for which the defendants
relied on their skill or judgment. The Court therefore held that the provisions of the sub-section were
inapplicable.
Where the buyer did not indicate the particular purpose within the known range, for which the goods
may be required, the seller would be entitled to assume that the goods are suitable for all the
foreseeable applications within the range.
Ashington Piggeries Ltd v Christopher Hill Ltd 1927
The subject matter of the contract was herring meal which would be used for feeding to animals or as a
fertilizer. In this instance, the sellers were aware that the meal was required for feeding animals but did
not know specifically that it was required for mink. The meal proved to be unsuitable for mink.
Held: Once the seller was aware that the meal would be used for animal feed, it was reasonably
foreseeable that it might be used for feeding to mink and the suppliers were therefore liable under the
subsection. The requirements of the subsection were satisfied by showing that herring meal was often
used as a feed for mink.
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The particular purpose may be communicated to the seller either by the buyer himself, his agent or a
credit broker who sold the goods to the seller. If the seller was aware of the particular purpose for which
the goods were required either by past transactions, impliedly from the nature of the goods themselves
or from the circumstances surrounding the negotiations of the contract, no further express intimation is
necessary
Goods are said to be of merchantable quality if they are fit for the purpose for which goods of that kind
are commonly bought.
Rodgers & another v Parish (Scarborough) Ltd & Another 1987
A Range Rover car sold as new by the defendant car dealers for E16, 000 had a defective oil seals, a
noisy gear box, a misfiring engine and rusty bodywork due to poor storage. The buyer sued the seller for
breach of contract, arguing that the vehicle was not merchantable. The seller argued that if the vehicle
was capable of being driven from one point to another on public roads or whatever surfaces, it must be
necessarily merchantable. It was argued further that as all defects could be repaired under the
manufacturer’s warranty, the vehicle was merchantable.
Held: The car was not merchantable. The fact that the defects could readily be repaired did not prevent
the goods from being unmerchantable.
The implied condition as to merchantability does not apply where the buyer has examined the goods as
regards defects which such examination ought to have revealed.
Thornett & Fer v Beer & Sons 1919
A buyer of glue carried out an examination of the outside of the barrels of glue. The seller had given the
buyer an opportunity for a more thorough examination though the buyer did not take it. Had the buyer
carried out a thorough examination by looking inside the barrels, the defects complained of would have
been discovered.
Held: The proviso contained in s14 (2) applied and no condition of merchantability applied under the
circumstances. Under the proviso, it was not sufficient that the buyer had the opportunity to examine
the goods, he must have examined them.

The implied condition as to merchantable quality is not confined only to the goods actually sold. It also
applies to defective packaging.
Where goods are sold by the seller in the course of a business and the buyer expressly or by implication,
makes known to the seller any purpose for which the goods are being bought, there is an implied
condition that the goods being bought are reasonably fit for that purpose, whether or not that is a
purpose for which such goods are commonly supplied.
Furthermore, the buyer must show that he relied on the sellers’ skill or judgment. The courts have
readily implied reliance and have held that partial reliance is sufficient.
Bristol Tramways v Fiat Motors 1910
The plaintiff ordered seven buses for burdensome passenger work in heavy traffic in Bristol, a hilly city.
The buses proved not to be robust enough and had to be reconstructed.
Held: The buses were not fit for the particular purposes stated by the plaintiff.
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The implied conditions as to merchantability are excluded if:
 Any defects are brought specifically to the buyer’s attention before, or at the time, the contract is
made.
 The buyer examines the goods before the contract is made.
1.7 Implied conditions as to sample

S15 deals with sale by sample. It provides as follows:
(1) A contract is a contract of sale by sample where there is a term in the contract, express or
implied, to that effect
(2) In the case of a contract for sale by sample:
(a) There is an implied condition that the bulk shall correspond with the sample in quality
(b) There is an implied condition that the buyer shall have a reasonable opportunity of
comparing the bulk with the sample
(c) There is an implied condition that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable examination of the sample.
A sample is simply a specimen, a model pattern, a likeness etc. It represents a statement, albeit in non-
verbal form, about the subject matter of the contract. A contract of sale by sample is where there is a
term in the contract, express or implied to that effect. Whether or not a sale is one by sample is
dependent on the intention of the parties, as expressed in their contract.
Drummond v Van Ingen 1887
The cloth delivered corresponded in every way with the sample. A latent defect however caused the
garments made out of the cloth to split at the seams under moderate strain. The buyer sued, arguing
that the cloth was not fit for the purpose. The sellers contended that as the cloth corresponded with the
sample, they were not in breach of any implied term of the contract.
Held: It was held that the fact that the cloth supplied was equal to sample did not in any way exonerate
the sellers from liability since the defects were not made discoverable by any reasonable examination of
the sample. Examination of the sample does not operate to exclude the warranty that goods will be fit
for the purpose.
The implied condition that the bulk shall correspond with the sample in a way states the obvious. To
perform the contract, the seller must deliver goods in accordance with the terms of the contract. In fact
the implied condition that the bulk shall correspond with the sample is effectively equivalent of the
implied condition in s13 that the goods will correspond with their description. That correspondence
must be exact, subject to de minimis variations. If the goods do not correspond, it is no defence for the
seller to argue that they could easily be made to correspond.
E & S Ruben v Faire Brothers & Co Ltd 1949
The sellers agreed with the buyers that the sellers would supply a quantity of ‘Linatex’ a kind of
vulcanized rubber in 41 ft. rolls. 5 ft. wide, in accordance with a small sample. The sample provided
was flat and soft, but the rubber delivered was crinkly and folded, though these defects could easily be
remedied by warming.
Held: The goods had been sold by description. The sellers were in breach of s15 of the Sale of Goods
Act 1893, for they were not in accordance with the sample, though they could be made compliant with
the description through a very simple process.
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The implied condition that the buyer should be allowed a reasonable opportunity to compare the bulk
with the sample does more than restate the buyer’s general right to examine the goods sold before
acceptance as provided for in s34 of the Act. The buyer will therefore not be obliged to accept unless he
has been given a reasonable opportunity to examine the goods. Reasonable opportunity means affording
the buyer all the necessary facilities and cooperation to satisfy himself.
By s15 (2) (c) of the Act, the goods must be free any defect which might render them unmerchantable,
which a reasonable examination of the sample would not reveal.
Godley v Perry 1960
A retailer bought from a wholesaler a quantity of toy catapults, the sale being by sample. One of the toy
catapults was sold to a small boy who injured his eye when it broke to pieces because of some inherent
defect in it. The retailer was held liable to the boy. He then sought to be indemnified by the wholesaler.
The defect in the catapult would not have been apparent on reasonable examination of the sample, and
had not in fact been discovered when the retailer pulled back the elastic catapult.
Held: The wholesaler was liable for breach of s15 (2) of the Sale of Goods Act, 1893. Pulling back the
elastic was the only test that could reasonably be expected of a potential buyer.
……………………
The implications of the Sale of Goods Act include the seller having the right to pass on title, that the
goods correspond with the description given, that the goods are of merchantable quality and that the
goods are fi for purpose.
……………………
2 Transfer of property, risk and title

……………………
This second section deals with the important formality of transfer of title, considering when it
happens and when it might be invalid.
……………………
2.1 Property

The essence of a contract for the sale of goods is the transfer of ownership of the goods from the seller
to the buyer.
It is important to ascertain exactly when the property in goods passes from the seller to the buyer for the
following reasons:
 If the goods are accidentally destroyed, it is necessary to know who bears the loss. S20 provides
that risk normally passes with ownership.
 If either the seller or buyer becomes bankrupt or in the case of a company goes into liquidation, it
is necessary to discover who owns the goods.
 The remedy of an unpaid seller against a buyer will depend on whether ownership has been
transferred. If property has passed to the buyer, he can be sued for the price of the goods. If the
property has not passed to the buyer, the seller can only sue for non-acceptance
The rules relating to the transfer of ownership depend on whether the goods are classified as specific
goods or unascertained goods.
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2.2 Specific goods
Specific goods are ‘goods identified and agreed on at the time the contract of sale is made’. This
includes contracts such as purchasing groceries from a supermarket or buying a sheepskin coat from a
market trader.
The property in the specific goods passes when the parties intend it to pass. To ascertain the intention of
the parties, ‘regard shall be had to the terms of the contract, the conduct of the parties and the
circumstances of the case’. If the parties do not indicate, expressly or impliedly, when they want
ownership to pass, S18 sets out the various rules to ascertain their presumed intention.
Rule 1
Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property
in the goods passes to the buyer when the contract is made. It is immaterial whether the time of
payment or the time of delivery or both, be postponed. This means that a buyer can become the owner
of the goods even though he has not paid for them yet and they are still in the seller’s possession.
Tarling v Baxter 1827
A haystack was sold, but before the buyer had taken it away, it was burned down.
Held: The buyer was still liable to pay the price because he became the owner of the haystack when
the contract was made. It was immaterial that he had not yet taken delivery of the goods.
Rule 2
Where there is a contract for the sale of specific goods and the seller is bound to do something to the
goods for the purpose of putting them into a deliverable state. The property does not pass until the thing
is done and the buyer has notice that it has been done.
Where the seller agrees to alter the goods in some way for the buyer, ownership will pass when the
alterations are completed and the buyer has been informed.
Rule 3
Where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to
weigh, measure, test or do some other act or thing with reference to the goods for the purpose of
ascertaining the price, the property does not pass until the act or thing is done and the buyer has notice
that it has been done. If for example, you agree to buy a particular bag of potatoes, at a price of K50,
000, you will not become the owner of the potatoes until the seller has weighed the bag and informed
you of the price payable. If, however, it is agreed that the buyer will do the weighing, measuring or
testing, ownership of the goods will pass in accordance with rule 1 ie when the contract is made.
Rule 4
When the goods are delivered to the buyer on approval or on sale or return, the property in the goods
passes to the buyer:
(a) When he signifies his approval or acceptance to the seller or does any other act adopting the
transaction.
(b) If he does not signify his approval or acceptance to the seller but retains the goods without giving
to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed
for the return of the goods, on the expiration of that time, and, if no time has been fixed, on the
expiration of a reasonable time.
Property in goods delivered on approval will pass under part (a) of this rule, either when the buyer
informs the seller that he wishes to buy them or he ‘adopts’ the transaction, for example by re-selling the
goods. Part (b) is illustrated by the following case.
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Elphick v Barnes 1880
The seller handed a horse over to a prospective buyer on approval for eight days. Unfortunately the
horse died on the third day.
Held: Ownership of the horse had not passed to the buyer and therefore the seller would have to bear
the loss.
2.3 Unascertained goods

Unascertained goods are those goods which are not identified and agreed on when the contract is made.
For example an order for 10cwt of coal to be delivered in three days time involves unascertained goods.
It is impossible to identify which specific lumps of coal lying in the coal merchant’s yard will make up
the order. As soon as the coal is set aside to fulfil this order, the goods are said to be ascertained.
In a sale of unascertained goods, the property passes to the buyer only when the goods have been
ascertained. If the parties then fail to mention when they intend ownership to pass, s 18 rule 5 will
apply.
Rule 5(1) states that where there is a contract for the sale of unascertained or future goods by
description, and goods of that description and in a deliverable state are unconditionally appropriated to
the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the
seller, the property in the goods then passes to the buyer. The assent may be express or implied and
may be given either before or after the appropriation is made.
Goods are unconditionally appropriated to the contract when they are separated from the bulk and
earmarked for a particular buyer. Delivery to a carrier will amount to an ‘appropriation ‘if the buyer’s
goods can be clearly identified.
Healy v Howlett & Sons 1917
The claimant agreed to sell 20 boxes of mackerel to the defendant. He dispatched 190 boxes of
mackerel by rail for delivery to various customers, but the boxes were not labelled for particular
customers. Employees of the railway company were entrusted with the task of allocating the correct
number of boxes to each destination. The train was delayed and the fish deteriorated before 20 boxes
could be set aside for the defendant.

Held: The property in the goods had not passed to the buyer because the defendant‘s boxes had not
been appropriated to the contract.
2.4 Reserving a right of disposal

The seller’s overriding concern is to ensure that he receives payment in full for his goods. Clearly, this
presents no problem to a retailer. A retailer can insist on cash or near cash (ie by a cheque guaranteed
with a cheque card or by a recognized credit card) before he releases the goods. Sellers in the business
world are however expected to do business on credit terms. If ownership of the goods passes to the
buyer before he pays for them and he subsequently becomes bankrupt or, in the case of a company,
goes into liquidation, the seller will be treated as an ordinary trade creditor. As such, the seller is
unlikely to recover what he is owed. He can protect himself from these considerable risks by stating that
the property in the goods shall not pass to the buyer until the contract price has been paid. S 19
provides that where the seller has reserved the right of disposal of the goods until some condition is
fulfilled; ownership of the goods will not pass to the buyer until that condition is met. The inclusion of
such a reservation of title clause in the contract of sale will enable a seller to retrieve his goods and
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resell them if the buyer becomes bankrupt or goes into receivership or liquidation before paying for
them.
The position becomes more complicated in the following situations:
 Where the buyer has resold the goods
 Where the buyer has mixed them with other goods during a manufacturing process and then sold
the manufactured product
Clearly, the seller cannot simply reclaim ‘his’ goods. However, he may be able to protect himself in
relation to resale of the goods by including a carefully worded clause in the contract, allowing him to
trace the goods and claim the proceeds of sale. These terms are known as the Romalpa clauses, after
the name of the case in which they achieved prominence.
Aluminium Industrie Vaassan BV v Romalpa Aluminium Ltd 1976
AIV, a Dutch company, sold aluminium foil to RA, an English company. A clause in the contract
provided that:
(1) Ownership of the foil would not pass to RA until it was paid for
(2) If the foil became mixed with other items during a manufacturing process, AIV would become the
owner of the finished product and property would not pass until RA had paid for the foil.
(3) Unmixed foil and finished products should be stored separately
(4) RA was authorized to sell the finished product on condition that AIV was entitled to the proceeds
of the sale. RA became insolvent and a receiver was appointed.
Held: AIV was entitled to recover a quantity of unmixed foil and the proceeds of the resale of some
unmixed foil.
2.5 Transfer of risk

The general rule is that risk of accidental loss or destruction passes with ownership. Thus s20 provides
that, unless otherwise agreed, the goods remain at the sellers’ risk until the property in them is
transferred to the buyer. However when the property in them is transferred to the buyer, the goods are at
the buyer’s risk whether delivery has been made or not.
Where delivery has been delayed through the fault of either the seller or buyer, the goods are at the risk
of the party at fault in respect of any loss which might not have occurred but for the fault.
Demby, Hamilton & Co Ltd V Barden 1949
The buyer neglected to take delivery of consignments of apple juice which the seller had prepared and
stored in casks. As a result of the delay, the juice went off and had to be thrown away. The seller sued
for the price of the goods sold and delivered.
Held: The buyer was liable. Under s 20(2) the goods were at the buyer’s risk because he was
responsible for the delay.
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2.6 Transfer of title
2.6.1 Sale by a person who is not the owner
As a general rule, a buyer cannot acquire ownership from someone who himself has neither ownership
nor the owner’s authority to sell. This rule which is known as the nemo dat rule from the phrase nemo
dat quod non habet - no one can give what he has not got - is included in s21 which reads:
‘Where goods are sold by a person who is not their owner, and who does not sell them under the
authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller
had.’
In these circumstances, the buyer will be required to return the goods to their true owner. The buyer’s
only remedy is to sue the person who sold him the item for breach of s12. In most of these cases,
however, the seller is a rogue who disappears before the buyer can take action against him. The
unsuspecting buyer is left to bear the full brunt of the seller’s misdeeds. It is not surprising therefore,
that exceptions to the nemo dat rule have developed.
2.6.2 Estoppel
If the true owner by his conduct allows the innocent buyer to believe that the seller has the right to sell
the goods, ownership of the goods will pass to the buyer because the true owner will be prevented
(stopped) from denying that the seller had a right to sell.
Eastern Distributors Ltd v Goldring 1957
Murphy was the owner of a van. He wanted to buy a car from Coker, a dealer, but he could not raise
enough money for a deposit. Murphy and Coker then devised a scheme to generate the necessary
finance. Coker would pretend that he owned the van. He would then sell the van and the car to finance
the company which would let both vehicles on hire purchase deposits. Unfortunately, the finance
company accepted the proposal for the van but turned the car down. Unknown to Murphy, Coker
proceeded to sell the van to the finance company.
Held: The finance company had become the owner of the van because the original owner (Murphy) by
his conduct has allowed the buyer (the finance company) to believe that the seller (Coker) had a right to
sell the goods.

2.6.3 Agency
The law of agency applies to contract for the sale of goods. An agent who sells goods on his principal’s
instructions passes a good title to the buyer because he is selling the goods with the authority and
consent of the owner. The buyer may even acquire a good title to the goods where the agent has
exceeded his actual authority, if the agent was acting within the scope of his apparent or ostensible
authority and the buyer was unaware of the agent’s lack of authority.
2.6.4 Sale under common law or statutory power

Certain persons have the power under common law or statute to sell goods that belong to another. A
pawnbroker, for example, has the right to sell the goods which have been pledged with him, where the
loan has not been repaid. The purchaser will acquire a good title to the goods.
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2.6.5 Sale by a person with voidable title
A person may obtain possession of goods under a contract which is void (e.g. for mistake). A void
contract is, in fact, no contract at all. A purchaser in these circumstances does not acquire title to the
goods and therefore cannot pass good title on to anyone else. The original owner will be able to maintain
an action in the tort of conversion to recover the goods or their value from a third party who bought then
in good faith.
A person may also acquire goods under a voidable contract. A voidable contract is valid unless and until
it is avoided. S23 provides as follows:
‘Where goods are resold before the contract has been avoided, the buyer acquires good title to them
provided he buys them in good faith and without notice of the sellers defect of title.’
If the original owner acts quickly to rescind the contract and then the goods are resold, the seller may be
prevented from passing a good title to a purchaser.
2.6.6 Sale by seller in position of goods

Where a seller sells goods but remains in possession of them, or any documents of title relating to them,
any resale to a second buyer who actually takes physical delivery of the goods or the documents of title
will pass a good title to the second buyer. The disappointed first buyer may sue the seller for non
delivery of the goods.
2.6.7 Resale by buyer in possession of goods with consent of seller

S25 provides as follows:
‘Where a person who has bought or agreed to buy goods obtains possession of the goods with the
consent of the seller, any resale to a person who takes the goods in good faith and without notice of the
rights of the original seller, has the same effect as if the person making the delivery or transfer were a
mercantile agent in possession of the goods… with the consent of the owner.’
This exception to the nemo dat rule is illustrated in the following case.
Newtons of Wembley Ltd v Williams 1964
The claimants sold a car to a rogue, who paid for it by a cheque which he later dishonoured. The
claimants took immediate steps to rescind their contract with the rogue by informing the police. Some
time later, the rogue resold the car in Warren Street in London, a well established street market in used
cars. The buyer then sold the car to the defendant.
Held: The defendant acquired a good title to the car. When the rogue sold the car in Warren Street, he
was a buyer in possession with the owner’s consent and he acted in the same way as a mercantile agent
(or dealer) would have done. He passed a good title to the purchaser, who in turn passed title to the
defendant.
S25 does not operate so as to make good a defective title, that is where the goods are stolen.
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National Employers Mutual Insurance Association Ltd v Jones 1987
Thieves stole H’s car. H successfully claimed for her loss under her car insurance policy. The thieves
sold the car to L who sold it to T, who sold it to A (a dealer), who sold it to M (a dealer) who finally sold
it to Jones. The insurer sought to recover the car from Jones.
Held: Jones had not acquired a good title to the car by virtue of s25. If a person buys a car from a thief
and then resells it, he is not a seller within the terms of the section because the transaction with the
thief was not a contract of sale. A resale to a third party in these circumstances cannot cure a defective
title.
……………………
Transfer of title of specific goods takes place when the buyer and seller deem it to happen. Transfer
of title of unascertained goods only takes place when the goods are identified.
The risk of accidental loss or destruction passes with ownership.
In general a buyer cannot acquire ownership from someone who is not the owner or who does not
have a valid right to sell. However there are a number of exceptions to this rule.
……………………
EXAM ALERT
Questions will often focus on rights under the Act or on breaches.
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Chapter Roundup
 The implications of the Sale of Goods Act include the seller having the right to pass on title, that the
goods correspond with the description given, that the goods are of merchantable quality and that the
goods are fi for purpose.
 Transfer of title of specific goods takes place when the buyer and seller deem it to happen. Transfer of
title of unascertained goods only takes place when the goods are identified.
 The risk of accidental loss or destruction passes with ownership.
 In general a buyer cannot acquire ownership from someone who is not the owner or who does not have
a valid right to sell. However there are a number of exceptions to this rule.
Quick Quiz
1 What condition is implied when a contract for the sale of goods includes a description?
2 Under the Act there are implied conditions of merchantable quality and fitness for purpose. True/False?
3 For specific goods, when does the transfer of ownership between buyer and seller take place?

1 The goods will correspond with the description.
2 True, although fitness for purpose may depend on the buyer making known to the seller the purpose for
which the goods will be used.
3 When the parties deem it to take place.
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EMPLOYMENT LAW
We begin our study of employment law by examining the distinction between the employed and self-
employed. This distinction is very important as it has implications regarding employee rights and
liabilities.
The chapter continues by examining the contents of an employment contract. Like any other contract it
may include express and implied terms.
chapter
An area of particular concern to an employer may be the extent to which he could be liable for the acts
of his employees. We go into detail about this important topic of vicarious liability.
Lastly ending an employment contract can be traumatic for all involved and can result in legal action.
Both employers and employees must know their rights and obligations to minimise the risk of such an
action.
syllabus
references
topic index
1 Contract of service and contract for services 4A

2 Types of employment contract 4B
3 Vicarious liability of employers 4C
4 Dismissal and redundancy 4D
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LEARNING OBJECTIVES
 Distinguish between a contract of service and a contract for services
 Describe the different types of employment contract
 Discuss the concept of vicarious liability
 Distinguish between different types of dismissal
 Explain the meaning of redundancy
1 Contract of service and contract for services

……………………
We begin by looking at the distinction between a contract of service and a contract for services,
which is at the heart of employment law.
……………………
1.1 Employment contracts

It is important from the outset to understand the distinction between a contract of services and a
contract for service. A contract of service involves the relationship that exists between a master and
servant, while a contract for services involves the master and an independent contractor.
1.2 Contract of service

A contract of service creates the relationship of employer and employee between the parties. An
employee provides labour for his or her employer in return for wages. The employer exercises control
over the way in which an employee carries out his or her work. In trying to make a distinction between
the two types of contracts, a contract of service has often been said to contain the following features as
stated by Lord Tankerton in Short v JW Henderson Ltd 1964:
‘There are four indications of a contract of services:
(a) The master’s power of selection of his servant

(b) The payment of wages or other remuneration
(c) The master’s right to control the method of doing the work,
(d) The master’s right of suspension or dismissal.’
It has however been said that this does not carry the matter further because the first and last and
perhaps the second are merely indications of the existence of a contract rather than of a particular kind
of contract which is a contract of service.
In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance 1968 the
Judge held that for a contract of service to exist three conditions must be fulfilled;
 The servant agrees that in consideration of a service for his master
 He agrees, expressly or impliedly, that in the performance of that service he will be subject to
another’s control in a sufficient degree to make that other master
 The other provisions of the contract are consistent with its being a contract of service.
A contract where a person employed is required to provide all necessary equipment and materials at his
expense is inconsistent with a contract of service.
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1.3 Contract for services
In a contract for services, for example a self-employed person is engaged under a contract for services.
The self employed individual is an independent contractor agreeing to do work or provide services as and
when he or she wishes, and enjoys considerable independence from the person who employs him or
her. Thus a chauffeur has a contract of service whereas a taxi driver transports passengers under a
contract for services.
However the distinction is still not completely clear. Control will no doubt always have to considered,
although it can no longer be regarded as the sole determining factor. Other factors which may be of
importance are such matters as whether he hires his own helpers, what degree of financial risk he takes,
what degree of responsibility for investment and management he has, and whether and how far he has
an opportunity of profiting from sound management in the performance of his task.
1.4 Importance of the distinction

It is important to distinguish a contract of service from a contract for the following reasons:
 Under the principle of vicarious liability, an employer is liable, for example, for the damage
caused to another by his employee’s negligent act while that employee is acting in the course of
his employment, that is doing his job and not otherwise. An employer is not responsible for the
acts of his independent contractor.
 The rights and remedies provided under employment legislation such as the Employment Act
chapter 268 of the Laws of Zambia are available to an employee but not all of them are available
to the self employed.
……………………
It is important to distinguish between a contract of service (employment) and a contract for services
(independent contractor). Each type of contract has different rules for taxation, protection of contract
and vicarious liability.
A contract of service is distinguished from a contract for services usually because the parties express
the agreement to be one of service.
……………………
2 Types of employment contract

……………………
We move on to look at different types of employment contract.
……………………
2.1 Oral contracts

PART B: BUSINESS LAW // 4: Employment law
The Employment Act under Part iv provides for Oral contracts. All contracts of service other than those
that are required by the Act or any other law to be in writing may be made orally. S18 provides for
presumptions as regards the periods of oral contracts in the absence of any agreement by the parties.
The period of the contract shall be calculated with reference to when wages are calculated. S20
provides for the termination of an oral contract by giving notice. Twenty-four hours notice is required for
a contract that is for a period of less than a week. Fourteen days notice is required for a contract that is
a daily contract under which by agreement or custom, wages are payable not at the end of the day, but
at intervals not exceeding one month. Thirty days notice is required for a contract which is for a period
of one week or more.
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2.2 Written contracts
Part v of the Employment Act provides for written contracts of service. S28 lists the types of contracts of
service that are required to be in writing as being those contracts that:
 Are made for a period of six months or more
 Are of foreign service
 Require personal performance of some specific work which cannot be reasonably be expected to
be completed within six months
S29 requires that written contracts be properly attested or signed by both the employer and the
employee.
S30 provides for the contents of a written contract of service in order for it to be considered valid and
attested by a proper officer. The following should be included in a written contract:
 The name of the employer and the employee

 The name of the business or the undertaking in which the employee is to be employed
 The place of engagement and where applicable
 The place of origin of the employee
 Any other particulars necessary for identification
S31 provides that a written contract of service shall not be binding on the family of an employee. S35
forbids the transfer of a written contract of service from employer to the other without the prior consent
of the employee and without the proper officer having endorsed it.
The differences between oral and written contracts were emphasised in the following case:
Barclays Bank Zambia v Zambia Union of Financial institutions and Allied Workers
The complainant and the respondent had referred a collective dispute to the Industrial and Labour
Relations Court pursuant to section78 (1) (a) of the Industrial and Labour Relations Act on a compulsory
redundancy scheme entered into by the two parties.
The Court decided that apart from those aspects already agreed upon between the bank and the union
during their negotiations in 2003, the appropriate cash sum payable on redundancy in this case should
be 4 months salary for each year served or 4.7 multiplied by current salary whichever was greater. The
court further ordered that the requirement of section 268 of the Employment Act be followed in effecting
the separation.
The Respondent appealed. One of the grounds of appeal was that the trial court erred in law and fact by
misdirecting itself by applying the provisions of Section 26B of the Employment Act as the section is
only applicable to oral contracts.
Held: The appeal succeeded. The Court stated on the provisions regarding oral and written contracts in
the Employment Act, Section 16 provides that that the provisions of this part shall apply to oral
contracts. Section 26B of the Act contains detailed provisions on termination by redundancy. In enacting
this provision Parliament intended to safeguard the interests of employees who were employed on oral
contracts of service which by nature would not have any provision for termination of employment by way
of redundancy. In this case the court below was supposed to settle a collective dispute arising from a
compulsory redundancy scheme which had been evidenced in writing and which had set out in detail
the rights and obligations of the parties to the agreement. The court below was therefore in error in
relying on the provisions of Section 26B of the Employment Act which did not apply to the case before
it.
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……………………
Contracts of employment may be oral or written. Written contracts are required if the contract is for
six months or more; is of foreign service; requires personal performance of specific work which
cannot expect to be completed within six months.
……………………
3 Vicarious liability of employers

……………………
We next examine the circumstances where the employer may be held liable for an employee’s
actions.
……………………
3.1 Application of vicarious liability

Vicarious liability is where an employer is liable for damage caused to another by his employee while the
employee was carrying out his work (or while he was in the course of employment as it is called). The
principle applies whether the injury was to an outsider or to a fellow employee. The employer is liable
even though he was not in any way at fault and this rule which seems at first sight to be unfair to the
employer is based upon law and policy.
So far as the law is concerned, the employer and employee are regarded as associated parties in the
business in which both are engaged. If the amount of work increases so that the owner of a business
cannot do it all with his own hands, he is in law responsible for the damage done by those hands he
employs as he would be for damage done by his own.
The aim of the law is to provide the injured person with a defendant who is likely to be able to pay any
damages which the court may award. An employer and the business generally profit from their
employees’ work. It is not unreasonable that the employer must compensate those who are injured by
employees. The employer will normally insure against the risk of liability and the cost of that insurance
is factored into the price at which the goods or services of the business are sold. Thus in the end the
injured person is compensated by those members of the public who buy the goods or services.
An employee who actually caused the injury is always liable personally along with the employer.
However the prime defendant is the employer, because he has either insurance or other funds which the
employee probably does not have.
3.2 The course of employment

Whether an employee was not acting in the course of employment when he brought about the injured
person for which the injured person wants to make the employer liable is matter for the court to decide
in each case. The decision is sometimes a difficult one to make. However the following analysis of the
cases gives some idea of the way in which the courts have dealt with this most important aspect of the
employer’s liability.
GDC Hauliers Zambia Limited v Trans-Carriers Ltd 2001
The second defendant was driving the first defendant’s truck when he swerved into the plaintiff’s
Mercedes truck and trailer travelling in the same direction in a botched attempt at overtaking. The first
defendant sought to avoid all liability by pleading that the second defendant who was employed as a
clerk was not authorised to drive the truck and was neither engaged on the business of the employer nor
in the course of his employment when he was involved in the accident that night.
Held: The first defendant was found to be vicariously liable for the indisputable negligence of the second
defendant:
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‘When there is credible evidence that an employee was actually authorised to perform tasks such as driving
fellow workers – which would ordinarily not be associated with his designation or job title, such evidence
cannot be ignored and it will support a finding of vicarious liability if the worker was engaged on his
employer’s business. It is not true that only a person specifically employed as a driver can attach vicarious
liability from a driving accident in the course of employment or while engaged on the employers’
business.’.
3.3 Acts outside contractual duties

If the employee is engaged on a private matter, the employer will not be liable for injuries caused by the
employee during this time.
Britt v Galmoye and Nevill 1928
Nevill was employed by Galmoye as a van driver, Nevill wanted to take a friend to the theatre after work
and Galmoye lent Nevill his private motor vehicle for this purpose. Nevill, by negligence, injured Britt
and Britt’s action against Galmoye was based upon vicarious liability so that it necessary to deal with
the matter in course of employment.
Held: The court decided that as the journey was not on Galmoye’s business and Galmoye was not in
control, and so he was not liable for Nevill’s act.
Britt’s case is a rather obvious example of an act outside of the contract of service. However, sometimes
the court is called upon to make a more difficult decision. In particular an employee does not make his
employer liable by doing some act which is of benefit to the employer during the course of what is
basically an outside activity.
Rayner v Mitchell 1877
A van man employed by a brewer took, without permission, a van from his employer’s stables in order to
deliver a child’s coffin to the home of a relative. While he was returning the van to the stables he picked
up some empty beer barrels and was afterwards involved in an accident which injured Rayner. Rayner
sued the van man’s employer.
Held: The employer was not liable. The journey itself was unauthorized. It was not converted into an
authorized journey merely because the employee performed some small act for the benefit of his
employer during the course of it.
3.4 Unauthorised ways of performing contractual duties

The employer may be liable even if the employee was acting improperly if the act was part of his
contractual duties.
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Century Insurance Co v Northern Ireland Road Transport Board 1942
The driver of a petrol tanker was engaged in transferring petrol to an underground tank when he lit a
cigarette and threw the march to the floor. This caused a fire and an explosion which did great damage.
The question of the liability of the Board, his employer, for that damage arose.
Held: The employer was liable for the driver’s negligence. His negligence was not independent of the
contract of service but was a negligent way of discharging his actual duties under that contract of
service.
In the case of Industrial Gases Limited v Waraf Transport Limited and Mussah Mogeehaid 1997 it was
held that:
‘as long as the wrong is committed by the employee in the course of his employment, the general rule is
that the employer will be vicariously liable.’
It does not matter how the employee performed his duties. As long as such performance is within the
course of the employees’ employment, the employer will be held vicariously liable.
3.5 Acts forbidden by the employer

Just because an employer has told his employee not to do a particular act does not always excuse the
employer from vicarious liability if the employee causes damage when doing the forbidden act. There are
two types of cases.
3.5.1 Act itself is forbidden
Joseph Rand Ltd v Craig 1919
The defendants’ employees were taking rubbish from a site and depositing it on the defendant’s dump.
They were working on a bonus scheme related to the number of loads per day which they dumped. The
defendants had strictly forbidden their employees to tip the rubbish elsewhere than on the authorized
dump. However, some of the employees deposited their loads on the claimants’ property which was
nearer. The defendants were sued on the basis that they were vicariously liable in trespass, the
claimants arguing that the employees had general authority to cart and tip the rubbish.
Held: The defendants were not liable. The employees were to cart the rubbish from one definite place to
another definite place. Dumping the rubbish on to the claimant’s premises was a totally wrongful act not
directly arising out of the duties that they were employed to perform.
Rose v Plenty 1976
Leslie Rose aged 13, liked helping Mr Plenty, a milkman employed to deliver the milk. Cooperative
Retail Services Ltd, who employed Mr Plenty expressly, forbade their milkmen to take boys on their
floats or to get boys to help them deliver the milk. On one occasion, while helping, Leslie was sitting in
the front of the float when his leg caught under the wheel. The accident was caused partly by Mr
Plenty’s negligence.
Held: Mr Plenty had been acting in the course of his employment, and so his employers were liable to
compensate Leslie Rose for his injuries.
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There is really quite a difference in the facts of this case and those in Rand. Leslie Rose’s presence on
the milk float was a reason connected with the employment and this seems to be why the court decided
as it did.
3.5.2 Way act is to be done is restricted

Where the employer’s instruction relates only to the way in which the contractual duty is to be done.
Obviously, perhaps, an employer cannot avoid liability by saying to his employees: ‘Do your job in such
a way as not to injure anyone.’
Limpus v London General Omnibus Co 1862
The claimant’s bus was overturned when the driver of the defendants’ bus drove across it so as to be
first at a bus stop to take all the passengers who were waiting. The defendants’ driver admitted that the
act was intentional and arose out of bad feeling between the two drivers. The defendants had issued
strict instructions to their drivers that they were not to obstruct other omnibuses.
Held: The defendants were liable. Their driver acting within the scope of his employment at the time of
the collision, and it did not matter that the defendants had expressly forbidden him to act as he did.
3.6 Fraudulent acts by employees

Formerly the courts would not make an employer liable for the fraudulent acts of his employee.
Gradually, however, they began to accept that the employer could be liable. First in cases where the
employee’s fraud was committed for the employer’s benefit, and later even in cases where the fraud was
carried out by the employee entirely for his own ends, as this case shows.
Lloyd v Grace and Co, Smith 1912
Smith was a Liverpool solicitor and Lloyd was a widow who owned two properties Lloyd went to see
Smith’s managing clerk, Sandles, for advice. He told her to sell properties and call in the mortgages, and
reinvest the proceeds. At his request she signed two deeds which unknown to her, transferred the
properties and the mortgage to him. Sandles then mortgaged the properties, transferred the other
mortgages for money and paid a private debt with the proceeds.
Held: The firm of solicitors was vicariously liable for Sandles’ fraudulent acts. An employer could be
vicariously liable for a tort committed by an employee entirely for his own ends.
3.7 Criminal acts by employees

An employer may be vicariously liable for a criminal act by his employee. The criminal act may be
regarded as in the course of employment so that the employer will be liable at civil law for any loss or
damage caused by the employee’s criminal act.
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Morris v C W Martin & Sons Ltd 1965
The claimant sent a mink stole to a furrier for the purpose of cleaning. With the claimant’s consent the
furrier gave it to the defendants to clean. While it was in the possession of the defendants the fur was
stolen by a person called Morrissey, who had been employed by the defendants for a few weeks only,
though they had no grounds to suspect that he was dishonest. The claimant sued the defendants for
damages for the tort of conversion.
Held: The county court judge held that the act of Morrissey, who had removed the stole by wrapping it
around his body, was beyond the scope of his employment. The Court of Appeal, however, decided that
the defendants were liable to the claimant because Morrissey had been entrusted with the stole in the
course of his employment.
The above rule applies only circumstances where the employee is entrusted with, or put in charge of the
goods, by his employer.
The fraudulent or criminal act must be committed as part of the employment, that is an act within the
scope of employment. In Heasman’s v Clarity Cleaning 1987 the Court of Appeal decided that the
defendants were not liable when their employee, who was sent to the claimants’ premises to clean
phones, made unauthorised calls on them to the value of £ 1,400. He was employed to clean phones
not to use them
3.8 Ultra vires rule

Where the employer is a corporation, there are further difficulties as regards the corporation’s vicarious
liability because the act which the employee does when he causes injury may be beyond the
corporation’s powers, or ultra vires, ie beyond the scope of what its constitution says it can do. It is
necessary to distinguish acts of employees which are within the company’s powers (intra vires) and
outside its powers (ultra vires).
3.8.1 Intra vires activities

If an employee of a corporation injures someone by negligence while acting in the course of his
employment in an intra vires activity, then the corporation is liable. Although it has been said that any
wrongful act committed on behalf of a corporation must be ultra vires since the corporation has no
authority in its constitution to commit wrongful acts, this view has not been accepted by the courts.
Therefore a corporation can have liability in law without capacity in law.
A corporation is liable therefore under the rule of vicarious liability for injuries caused by its employees
on intra vires activities. Thus a bus company which is obviously, authorised by its memorandum to run
buses, will be liable if an employee injures a pedestrian while driving a bus along its routes.
3.8.2 Ultra vires activities

A corporation will not be liable if one of its employees gets involved in an act which is ultra vires the
corporation unless he has express authority from management to perform the act.
Poulton v London & South Western Railway Company 1867
The claimant was arrested by a station master for non payment of carriage in respect of his horse. The
defendants who were the employers of the station master had power to detain passengers for non-
payment of their own fare, but for no other reason.
Held: Since there was no express authorization of the arrest by the defendants, the station master was
acting outside the scope of his employment and the defendants were not liable for the wrongful arrest.
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……………………
An employer is liable for the damage caused by its employers during the course of the employee’s
employment.
……………………
4 Dismissal and redundancy

……………………
Lastly we examine various ways in which employees can lose their jobs, and the consequences if
these are illegitimate.
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4.1 Dismissal
Dismissal gives a picture of wrong doing on the part of the dismissed employee because of its punitive
connotations. Where the employer dismisses an employee, he terminates the contract summarily
without notice on grounds of misconduct, negligence or incompetence. If such grounds are justified, the
employee forfeits the right to any notice whatsoever and to a number of other benefits. However because
of the punitive connections, the law has provided that a reason or disciplinary cause must always
support a dismissal and the employee must be given the right to exculpate himself. If an employer does
not comply with these conditions, it may amount to wrongful dismissal and be subject to a legal
challenge in the courts of law. Dismissal may be wrongful or unfair.
4.2 Wrongful dismissal

This is from common law. It is dismissal that is contrary to the terms of employment. It is the form
rather than the merits of the dismissal that is considered when examining an allegation of wrongful
dismissal. Therefore the question is not why, but how, the dismissal was effected, for example, where
an employer fails to give the requisite notice. In this instance, a contract of employment will have a
provision for the termination of the employment contract with the employee by the employer by giving
the required notice or payment of money in lieu of notice. If the employer dismisses the employee
without giving him due notice or by giving less than the required notice, the employee may challenge
such dismissal on the basis of lack of sufficient notice.
The remedy for wrongful dismissal is an award of damages calculated on the basis of what the employee
would have received had the required notice been given.
Another example of wrongful dismissal is one that involves procedural error. This happens where the
right procedure in effecting a dismissal has not been followed. In this instance, the employee may
challenge the procedure taken by the employer and will ask the court to declare the whole dismissal null
and void. The employee in this instance may be entitled to damages and ‘reinstatement’. However when
the court declares a procedure a nullity, it is not the same as ordering a reinstatement as properly
understood. What the court is in effect saying is that there was no dismissal at all whereas with
reinstatement the court is saying that there was a dismissal but the employee should be taken back on
the basis of the previous contract of service.
A declaration of procedural nullity does not prevent an employer from commencing the procedure of
dismissal all over again and ensuring that this time around the dismissal is properly done and thus avoid
further challenge.
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Contract Haulage Limited v Mumbuwa Kamayoyo 1982
The respondent was a clerk in the employ of the appellant, a road haulage contractor. In June 1976,
the respondent having been granted twenty-four days’ leave was arrested by the police in connection
with a charge of murder. When he did not return from leave, the appellant company wrote a letter to
him notifying him that he was suspended from employment. Subsequently, a Mr Mbuzi, a senior
Supplies Officer for the appellant, wrote a letter on 14 September 1976, in which the respondent’s
services were terminated with effect from 7 August 1976, the day on which the respondent was
supposed to resume duties. The respondent instituted an action against the appellant claiming a
declaration that the dismissal was null and void. The trial judge made the declaration and the appellant
appealed to the Supreme Court.
Held: The Supreme Court held that, the question to be decided in the case was whether the contract
between the appellant and the respondent was a pure master and servant contract, or whether, in view
of the fact that the appellant was a parastatal organization, it should be bound in any way by the rules
which relate to statutory authorities. The question of whether or not dismissal is in breach of contract or
null and void is one of jurisdiction. Where there is a statute which specifically provides that an employee
may only be dismissed if certain procedures are carried out, it can properly be argued that an improper
dismissal is ultra vires. In the same way where there is statutory authority for a certain procedure
relating to dismissal, failure to give an employee an opportunity to answer charges against him or indeed
any other unfairness may be said to be contrary to natural justice to the extent that the dismissal under
such circumstances would be null and void. This was not a case for invoking any provisions of the
disciplinary code, but one for termination by notice under section 23 of the Joint Industrial Council
Agreement. It was nothing more than a pure master and servant relationship between the parties. Thus
any breach of the terms of the contract between the appellant and the respondent as to the mode of
termination could give rise only to damages. The contract provided that the respondent should be given
a month’s notice but was not given such notice and his contract was therefore improperly terminated.
He was entitled to the usual damages which arise from the situation that is to say, the respondent was
entitled to thirty days’ salary in lieu of notice.
Zambia National Provident Fund v Yekweniya Mbiniwa Chirwa 1986
The Supreme Court referring to the above cited case of Contract Haulage v Mumbuwa Kamayoyo stated
as follows,
‘ in that case we did not take into consideration the situation which would arise where despite a failure
to comply with a certain procedure before taking disciplinary action, no injustice resulted, but apart from
this we can confirm that the judgment states that the law as it relates to a dismissal being ultra vires
and in consequence, null and void. Where the procedural requirements before disciplinary action are not
statutory but merely form part of the conditions of service in the contract between the parties, a failure
to follow such procedure would be breach of contract and could possibly give rise to a claim for
damages for wrongful dismissal but would not make such dismissal null and void. In this case at
present, although the appellant is a parastatal organization its conditions of service are not statutory and
in the circumstances no declaration could be made that the dismissal was null and void for failure to
comply with the procedure.’
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4.3 Unfair dismissal
In contrast to wrongful dismissal, unfair dismissal is a creation of statute. It looks at the merits of the
dismissal as opposed to the form as in the case of wrongful dismissal. In unfair dismissal the courts look
at the reasons for the dismissal to determine whether the dismissal was justified or not. Under Zambian
law any dismissal that falls within s108 of the Industrial and Labour Relations Act. The section states as
follows:
(1) No employer shall terminate the services of an employee or impose any other penalties or
disadvantage on ant employee, on grounds of race, sex, marital status, religion, political opinion
or affiliation, tribal extraction or social status of the employee
(2) Any employee who has reasonable cause to believe that the employees’ services have been
terminated or that the employee has suffered any other penalty or disadvantage, or prospective
employee who has reasonable cause to believe that the employee has been discriminated
against, on any grounds set out in subsection (1) may, within thirty days of the occurrence which
gives rise to such relief lay complaint before the Court: provided that the Court may extend the
thirty day period for a further three months after the date on which the complainant had
exhausted the administrative channels available to him.
The Court shall, if it finds in favour of the complainant:
(a) Grant to the complainant damages or compensation for loss of employment;
(b) Make an order for re-employment or reinstatement in accordance with the gravity of the
circumstances of the case.
Henry Million Mulenga v Refined Oil Products 1985
The complainant’s brother lost a child on 15 October 1982, whereupon he asked for permission from
the respondents to go and make burial arrangements. The respondents refused. On Monday 18 October
1982, the complainant once again sought permission after signing leave forms. However, it was not
possible fro the complainant to go on 18 October 1982, and so he requested to go on 19 October 1982
instead. A work mate by the name of Siame spent a night at the funeral. On 19 November 1982, he
received a letter terminating his services on the ground that he was serving his last warning. The
complaint was brought to the Industrial Relations Court under s114 (2) of the Industrial Relations Act.
The complaint was that the decision by the respondent to terminate his services, as technician was
discriminatory as it was done because of his social status. For redress the complainant asked the Court
to nullify the respondent’s decision and to reinstate him to his former post and to pay him all his dues.
Held: In coming to its decision, the Supreme Court had to consider the question whether the evidence
before the Court showed that the complainant was inhumanly treated by the respondents refusing to
grant him leave to attend a funeral and when they had granted him leave to go and then subsequently
dismissed because of his going on that leave to attend the funeral. The Court found that the complainant
was unfairly treated, especially that he was punished for the mistake which his friend Mr Siame made
independently of the complainant. The Court ordered re-employment as opposed to reinstatement
considering the period between his dismissal and the date of judgment and no dues.
4.4 Summary dismissal

At common law the employer is required to give notice of termination to his employee. However the law
has always allowed opinion that in some cases the employee’s conduct justifies dismissal without
notice. Should the situation arise the employer will not be in breach of contract. Such dismissals are
known as summary or instant dismissals. Where an employer summarily dismisses an employee, it is
required to follow the procedure outlined in s25 of the Employment Act Chapter 268 of the Laws of
Zambia which states:
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‘Where an employer dismisses an employee summarily and without due notice, such employer must
within four days of the dismissal deliver to a Labour Officer in the district in which the employee was
working, a written report of the circumstances leading to and the reasons for such dismissal’.
In practice however, employers normally do not comply with this requirement of the law which seeks to
safeguard the employee’s interests. They do not report summary dismissals to the Labour Office.
The law has always regarded dishonesty within the employment as gross misconduct justifying summary
dismissal.
Sinclair v Neighbour 1967
A manager took money from the till and left an IOU. He intended to replace the money, but his employer
regarded his actions as dishonesty and instantly dismissed him.
Held: His dismissal was held to be lawful.
While notice need not be given, nor cash-in-lieu of notice paid when an employer summarily dismisses
an employee, the employer must still pay him wages and working allowances (and obviously his leave
entitlements) up to the date of his dismissal under Section 26. The reason for this is that these are
retrospective, for work already completed and allowances etc already earned in law. Regardless of the
reason for his sudden departure, the employee has worked and accrued allowances and leave. These
entitlements are not cancelled by subsequent transgressions, no matter how serious.
Where an employer wants to terminate an employee’s services on the basis of poor conduct or
performance, he must give the employee a chance to defend himself against the charges raised against
him (s26A).
ZCF Finance Services Limited v Happy Edubert Phiri 2001
The Respondent Company employed the respondent as General Manager. As a consequence of an audit
query, the respondent was first of all given disciplinary charges on 18 November 1994. On 30
November 1994, the respondent exculpated himself. The appellant company nonetheless summarily
dismissed him basing the dismissal on the audit report. According to the letter of dismissal, the
appellant company’s Board of Directors concluded that the respondent was guilty of gross negligence.
The respondent sued his former employers and sought a declaration that his purported dismissal was
wrongful and therefore null and void and for an order that he be reinstated to his position as General
Manager of the appellant company.
Alternatively he applied for an order that he be paid his full retirement package up to a period as and
when he should have retired plus interest at current bank rate until full payment, costs, and any further
or other relief as the Court would deem fair and equitable. The High Court found the dismissal to have
been unlawful and entered judgment for the respondent and awarded damages for the wrongful
dismissal plus interest. The company appealed to the Supreme Court against the judgment.
Held: The Supreme Court held that when all the evidence was examined, the conclusion was
unavoidable that the plaintiff’s conduct was far below the standard expected from the Chief Executive.
Although on the face of it the rules of natural justice were not complied with, however looking at the
details of an exculpatory letter, written by the plaintiff, the conclusion was that there was observance of
the rules of natural justice. The evidence showed some reckless decisions by the plaintiff, decisions
which did not take into account the interest of the defendant company and decisions that lacked
economic calculation resulting in the company incurring staggering losses. Therefore the Supreme Court
was entitled to overturn the findings of the lower court and accept the Board’s decision to dismiss the
plaintiff.
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Pamdozi Hotel v Godwin Mbewe 1987
The appellant, a hotel, employed the respondent as a waiter and coffee shop supervisor. The terms and
conditions of the employment were set out in a document known as a collective agreement, made
between the hotel and the Catering Association Workers Union of Zambia. Both the appellant and the
respondent were bound by the Agreement. On 23 March 1982, a Prime Minister’s cocktail party was
held at the hotel at which the hotel alleged that the employee was found drunk on duty and on 29
March 1982, the respondent was summarily dismissed. He issued a writ claiming that he was
wrongfully dismissed because he had not been drunk as alleged, and asking for a declaration that the
dismissal was null and void. The hotel in its defence alleged that the respondent was drunk on duty.
Held: The High Court found that that under the Collective Agreement dismissal could only occur after a
final written warning for a previous breach as no warning had been given, the summary dismissal was
unlawful. It was against this judgment that the appellant appealed to the Supreme Court. The Supreme
Court held that the state of drunkenness to justify the dismissal of any hotel employee is not the same
as the state which renders a person incapable of having proper control of a motor vehicle. The
agreement under which the waiter was employed indicated that it is sufficient to justify summary
dismissal if there was drunkenness as evidenced by the supervisor and one witness. If there is evidence
of such opinions, the decision of the employer to dismiss cannot be questioned unless there is evidence
of malice or if no reasonable person could form such an opinion. In this case there was evidence of such
opinions. The provision referring to the opinion of the supervisor and one witness obviates the necessity
for medical examination, and, in this connection, the bona fide opinion of the supervisor and the witness
as to drunkenness is sufficient to support the order for summary dismissal. There was no evidence of
mala fides in this case and thus the appeal was allowed.
4.5 Constructive dismissal

This happens where the employer makes the working environment so uncomfortable for the employee
that it is impossible for the employee to continue working. The employee is left with no alternative but to
tender his resignation. The resignation has been caused by the employer’s behaviour. Thus constructive
dismissal occurs when an employee, apparently on his own volition, terminates his contract of
employment by resigning but the real reason for that action is that he is protesting against
management‘s behaviour.
Faidecy Mithi Lungu v Lonrho Zambia Ltd 2000
The appellant was employed in a secretarial position in the respondent company in 1982, becoming
executive secretary to the Executive Chairman, then one Mr Tom Mtine. A new board dismissed her and
she sued the company in the High Court. The court ordered reinstatement and directed that there be no
loss of status. Her position had since been abolished together with that of Executive Chairman. The
company implemented the reinstatement by giving her lower secretarial jobs, but without loss of salary.
Finally she was transferred to a subsidiary company where she ended up doing a typist’s work. She
finally resigned and commenced proceedings for constructive dismissal.
Held: The lower court found that there was no constructive dismissal on the facts and thus she
appealed to the Supreme Court. The Supreme Court dismissed the appeal on the ground that the
appellant knew when she was returning to the company that her position had been abolished. The
Supreme Court also followed the principle that it should be careful about upsetting the findings of fact
made by a trial judge who has seen and heard the witnesses at first hand unless there is a good reason
for doing so. The trial judge had found that the appellant had a poor attitude and appeared to consider
some of her superiors as her inferiors.
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4.6 Redundancy
Redundancy arises where an employer intends to stop carrying on his business, or is reducing employee
numbers because of poor business or to guarantee that the business remains a viable entity. The aim of
a redundancy payment is not to cushion a person over a period of unemployment, but rather to
recognize an employee’s stake in his job. This means that it is irrelevant if the employee has another job
to go to once he has been made redundant. He is still entitled to a redundancy payment. In addition, the
employees’ stake increases the longer he has worked for the employer and as such his payment
increases with age and years of service. A redundancy payment is calculated in the same way as the
basic award in unfair dismissal. Under Zambian Law Redundancy is provided for under s26 B of the
Employment Act:
(1) The contract of service of an employee shall be deemed to have been terminated by reason of
redundancy if the termination is wholly or in part due to:
(a) the employer ceasing or intending to cease to carry on the business by virtue of which the
employee was engaged; or
(b) the business ceasing or reducing the requirement for the employees to carry out work of a
particular kind in the place where the employee was engaged and the business remains a
viable going concern.
(2) Whenever an employer intends to terminate a contract of employment for reasons of redundancy,
the employer shall:
(a) provide notice of not less than thirty days to the representative of the employee on the
impending redundancies and inform the representative on the number of employees to be
affected and the period within which the termination is intended to be carried out;
(b) afford the representatives of the employee an opportunity for consultations on-
(i) the measures to be taken to minimise the terminations and the adverse effects on
the employees;
(ii) the measures to be taken to mitigate the adverse effects on the employees
concerned including finding alternative employment for the affected employees;
(c) not less than sixty days prior to effecting the termination, notify the proper officer of the
impending terminations by reason of redundancy and submit to that officer information on:
(i) the reasons for the termination by redundancy;

(ii) the number of categories of employees likely to be affected;
(iii) the period within which the redundancies are to be affected; and
(iv) the nature of the redundancy package.
(3) An employee whose contract of service has been terminated by reason of redundancy shall:
(a) be entitled to such redundancy payment as agreed by the parties or as determined by the
Minister, whichever is the greater; and
(b) be paid the redundancy benefits not later than the last day of duty of the employee:
Provided that where an employer is unable to pay the redundancy benefits on the last day
of duty of the employee, the employer shall continue to pay the employee full wages until
the redundancy benefits are paid.
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(4) The provisions of this section shall not apply to:
(a) an employer who ceases to carry on business by reason of bankruptcy or compulsory

liquidation;
(b) a casual employee;
(c) an employee engaged for a fixed term and the redundancy coincides with the expiration of
that term;
(d) an employee on probation; or
(e) an employee who has been offered alternative employment and who has unreasonably
refused the offer.
Samuel Manga and Others v ZCCM Ltd 2001
The evidence showed that benefits payable under redundancy and early retirement were the same in
accordance with the Collective Agreement and the appellants had been paid redundancy benefits.
Held: Employment can be terminated by either redundancy or early retirement and that an employee
gets the terminal benefits as provided under the method under which the employment has been
terminated and not under
both.
……………………
Wrongful dismissal is dismissal contrary to the terms of employment. Generally the only effective
remedy available to a wrongfully dismissed employee is a claim for damages based on loss of
earnings.
Unfair dismissal is defined by statute. The courts are obliged to consider the merits of the dismissal.
Summary dismissal (dismissal without notice) may be justified in certain circumstances, for example
dishonesty.
Constructive dismissal is when an employee’s decision to leave has been provoked by the behaviour
of management.
Dismissal is caused by redundancy when the employer has ceased to carry on the business in which
the employee has been employed for or the business no longer needs employees to carry out the
work. In these circumstances, dismissal is presumed by the courts to be by redundancy unless
otherwise stated.
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EXAM ALERT
The distinction at the start of this chapter between a contract of service and a contract for services is an
important influence on other parts of this chapter, so questions will expect you to be able to define the
difference.
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Chapter Roundup
 It is important to distinguish between a contract of service (employment) and a contract for services
(independent contractor). Each type of contract has different rules for taxation, protection of contract and
vicarious liability.
 A contract of service is distinguished from a contract for services usually because the parties express the
agreement to be one of service.
 Contracts of employment may be oral or written. Written contracts are required if the contract is for six
months or more; is of foreign service; requires personal performance of specific work which cannot
expect to be completed within six months.
 An employer is liable for the damage caused by its employers during the course of the employee’s
employment.
 Wrongful dismissal is dismissal contrary to the terms of employment. Generally the only effective remedy
available to a wrongfully dismissed employee is a claim for damages based on loss of earnings.
 Unfair dismissal is defined by statute. The courts are obliged to consider the merits of the dismissal.
 Summary dismissal (dismissal without notice) may be justified in certain circumstances, for example
dishonesty.
 Constructive dismissal is when an employee’s decision to leave has been provoked by the behaviour of
management.
 Dismissal is caused by redundancy when the employer has ceased to carry on the business in which the
employee has been employed for or the business no longer needs employees to carry out the work. In
these circumstances, dismissal is presumed by the courts to be by redundancy unless otherwise stated.
Quick Quiz
1 A contract of service involves a master and an independent contractor. True/False?
2 What are the four features of a contract of service, as defined in the Short v J W Henderson case?
3 Contracts of employment must always be in writing. True/False?
4 Can an employer be held vicariously liable for the criminal act of an employee?
5 Fill in the blank. .... dismissal is dismissal contrary to the terms of employment. PART B: BUSINESS LAW // 4: Employment law
103
1 False. A contract for services involves a master and an independent contractor. A contract of service
exists between a master and a servant.
2 The master’s power of selection; the payment of remuneration; the master’s right to control the method
of doing the work; the master’s right of suspension or dismissal.
3 False. Legislation allows for the possibility of oral contracts.
4 It is possible that the employer could be held liable in the civil courts.
5 Wrongful
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AGENCY LAW
In this chapter we examine how an agency relationship arises and how the agent’s authority is
acquired and defined. Agency is the foundation of most business relatiosnships where more than one
person engages in commerce.
Agents are employed by principals to perform tasks which the principals cannot or do not wish to
perform themselves. This is often because the principal does not have the time or expertise to carry out
the tasks.
chapter
When parties enter into an agency arrangement, the principal gives a measure of authority to the agent
to carry out tasks on his behalf. We shall examine the extent and limits of that authority.
We shall also look at the rights and duties of principals and agents in relation to each other and finish
by examining how an agency relationship may be terminated.
syllabus
references
topic index
1 The agent/principal relationship 5A

2 Authority of agents 5B
3 Duties and rights of agents 5C
4 Termination of agency 5D
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LEARNING OBJECTIVES
 Describe the role of an agent
 Explain how the agency relationship is established
 Discuss the authority of an agent
 Analyse the rights and duties of an agent and a principal
 Describe how an agency relationship can be terminated
1 The agent/principal relationship

……………………
We start by looking at the relationship of principal and agent, which is at the heart of agency.
……………………
1.1 Agent and principal

An agent is a person who negotiates and concludes commercial or business transactions on behalf of
another called the principal. Examples include insurance brokers, estate agents, auctioneers, travel
agents.
It is an established principle of law that a person cannot acquire rights or duties under a contract unless
he or she is a party to that contract (privity of contract). However, if a contract is concluded by an agent
on behalf of his principal, the acts of the agent are treated as if they are the acts of his principal. The
principal steps into the shoes of his agent and becomes a party to the contract through his agent. In law,
agents are recognized as having the power to affect the legal rights, liabilities and relationships of the
principal.
Cavmont Merchant Bank v Amaka Agricultural Holdings 2001
The Supreme Court held that where an agent in making the contract discloses both the interest and the
names of the principal on whose behalf he purports to make a contract, the agent as a general rule is
not liable to the other contracting party.
Apart from having the power to affect the legal rights, liabilities and relationships of the principal, the
agent may also affect the legal position of his principal in other ways. He may for example dispose of
the principal’s property in order to transfer ownership to a third party. He may acquire property on his
principal’s behalf. Sometimes the actions of the agent may make the principal criminally liable.
1.2 Examples of agents

The law recognises the following as agents even though they do not bear the title of agent.
1.2.1 Company directors and other company officials

Being an artificial person, a company has to act through human agents. Then authority to act as
company agents is vested in the board of directors. This authority may be delegated to one or more
executive directors by the articles of the company to allow him to manage the day-to-day operations of
the company.
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1.2.2 Partners
As a partnership has no separate legal identity from its members, every partner in a firm is an agent of
the firm as well as all other partners for the purpose of the business of the firm. Thus, a partner who
performs an act for the purpose of carrying out the business of the firm binds the firm as well as the
other partners.
1.2.3 Employees
Employees may be agents whether they are working under a contract of service or acting as an
independent contractor working under a contract for services. A shop assistant is the agent of the shop
owner for the purposes of making a contract of sale for the owner. He has the authority to make
statements about goods that are binding on the shop owner, his employer.
1.2.4 Professionals
A professional acting on behalf of clients may be the agent of those clients. For example a lawyer
conducting litigation is his client’s agent and may have authority to settle the case. That settlement will
bind the client. Thus the lawyer, not the client, normally signs a consent judgment. Similarly, an
accountant’s agreement or statement to the taxation authority will bind his client in accordance with
agency principles.
……………………
Agency is a relationship that exists between two legal persons, the principal and the agent, in which
the function of the agent is to form a contract between the principal and a third party.
……………………
2 Authority of agents
……………………
An agent has various types of authority that provide the power to bind his principal.
……………………
2.1 Agents’ power to bind principal

The law recognizes that an agent has the power to bind his principal in the following situations:
(a) Where the principal gives prior consent to the agent’s actions. Here the agent has actual
authority.
(b) Where the principal is held to have implicitly consented. Here the agent has implied authority.
(c) Where the agent acts without the principal’s consent but the principal is estopped from denying
the agent’s authority. Here the agent has apparent authority.
PART B : BUSINESS LAW // 5: Agency law
(d) Where the agent acts without the principal’s consent but the law deems that the principal has
consented. This includes an agent of necessity (for example a truck driver sells perishable goods
when his truck breaks down).
(e) Where the agent acts without the principal’s prior consent but the principal gives retrospective
consent by way of ratification.
As the relationship between the agent and his principal is based on consent, actual authority is of
paramount importance. An agent is only entitled to be paid if he acts within his actual authority. If he
acts outside his authority he may be liable to his principal. The relationship between the principal and a
third party depends on the agent’s power to bind his principal. However, what is of concern to the third
party is the agent’s apparent authority as this is what he relies on in the ordinary course of events. The
distinction between actual and apparent authority was explained by Diplock LJ in the following case.
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Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964
K and H carried on business as property developers through a company which they owned in equal
shares. Each appointed another director, making four in all. H lived abroad and the business of the
company was left entirely under the control of K. As a director K had no actual or apparent authority to
enter into contracts as agent of the company, but he did make contracts as if he were a managing
director without authority to do so. The other directors were aware of these activities but had not
authorised them. The claimants sued the company for work done on K's instructions.
Held: There had been a representation by the company through its board of directors that K was the
authorised agent of the company. The board had authority to make such contracts and also had power
to delegate authority to K by appointing him to be Managing Director. Although there had been no actual
delegation to K, the company had by its acquiescence led the claimants to believe that K was an
authorised agent and the claimants had relied on it. The company was bound by the contract made by K
under the principle of 'holding out' (or estoppel). The company was estopped from denying (that is, not
permitted to deny) that K was its agent although K had no actual authority from the company.
2.2 Types of authority

As explained above, an agent may operate under a number of different types of authority.
2.2.1 Express authority

Express agreement may be made orally, in writing or by deed. In general, if an agent is appointed to
execute a deed his appointment is by deed called a power of attorney.
2.2.2 Implied authority

This arises where, although a particular action is not sanctioned by express agreement between the
principal and the agent, the principal is nevertheless taken to have implicitly consented to the action or
transaction in question.
Garnac Grain Co v HMF Faure and Fairclough 1967
The House of Lords stated:
‘The relationship of principal and agent can only be established by the consent of the principal and
agent. They will be taken to have consented if they have agreed to what amounts at law as a
relationship even if they do not recognize it themselves and even if they have professed to disclaim it. An
agent who has express authority to carry out a particular task may also have additional authority to do
certain acts incidental to his authorised task For instance, an agent authorised to sell the principal’s
property has implied incidental authority to sign a contract of sale.
2.2.3 Apparent authority

A person may be bound by the acts of another done on his behalf without his consent or even in breach
of an express prohibition if his words or conduct create the impression that he has authorised the other
person to act on his behalf. This is described at law as ‘apparent agency or authority” or “ostensible
agency or authority’.
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Apparent authority can be inferred in the following situations:
(a) X is appointed to act as Y’s Managing Director. Y expressly places a limitation on X that he can
only enter into a contract with a third party worth more than K 50m if he first gets the approval
of the Board of directors. X then orders goods worth K 100m from a third party who is unaware
of the limitation of X’s actual authority. Here X has apparent authority to buy the goods and Y is
bound by the contract.
(b) X is appointed to act as Y’s agent but his agency is terminated. Thereafter X continues to act and
enters into a contract with a third parry who is unaware of the termination. Y is bound as the
principal (discussed in section 4 below).
(c) X is never appointed to act as an agent but Y allows him to act as if he were or leads a third
party to believe that X is Y’s agent. Y will be bound to a third party in transactions entered into by
X on his behalf and within the scope of his agency.
It is also argued that a wife has authority to pledge the credit of her husband for necessities (or vice
versa). This is inaccurate for two reasons
(a) The rule applies also to non-married couples who are cohabiting
(b) Cohabitation does not give rise to automatic authority but to a rebuttable presumption that the
husband gave his wife such authority. The husband can deny he gave authority to the wife by
rebutting the presumption by showing that his wife is adequately supplied with necessities, his
wife is provided with an adequate allowance, or his wife has been forbidden to pledge his credit.
However, some argue that social conditions now make it old fashioned to suggest that actual or
apparent authority should not arise between husband and wife.
2.2.4 Agent of necessity

A person who acts in an emergency e.g. to preserve the property or interest of another may be treated as
an agent of necessity. His actions will be deemed to have been authorised even if no actual authority is
given.
Like apparent authority, an agency of necessity can arise even in the absence of consent from the
principal. An agency of necessity only arises in extreme circumstances where there is actual and definite
commercial necessity for the agent’s actions. The following conditions must be satisfied for an agency of
necessity to exist:
 There must be an emergency - something unforeseen.
 It must be practically impossible to get instructions from the principal.
 The agent must act bona fide in the interest of the principal rather than to advance his own
interests. He must not take advantage of the principal.
 The agent must act reasonably in the circumstances.
An agency of necessity may apply in a situation of carriage of goods by sea. It is universally accepted
that a captain of a ship may take such action in relation to the ship, and/or its cargo in an emergency,
as he deems appropriate for the purpose of preservation. He may sell or pledge the cargo to raise capital
to repair the ship or he may incur expenses on behalf of the owners in order to preserve the cargo. He
may also throw overboard (jettison) part of the cargo in the case of extreme danger in order to lighten
the ship. In respect of perishable goods or livestock, an agent of necessity may also apply to cases of
goods carried by land.
Agency of necessity creates privity of contract between the principal and the third party e.g. when the
agent arranges for a third party to store the goods of the principal. An agent can also rely on the
necessity either to provide him with a defence to a claim from the principal for wrongful interference
with his property or as a basis for claiming expenses that he has incurred in preserving the principal’s
property.
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2.3 Ratification of agent’s actions
Notwithstanding any absence of authority, a principal can nevertheless adopt the agent’s acts done in
his name without his authority by ratifying them, unless the acts are to his detriment. The requirements
for effective ratification are as follows.
2.3.1 Done in principal’s name

The principal can only ratify acts done in his name, that is the agent must have represented himself to
have authority and not to have acted in his own name.
Keighley Maxted and Co v Durant 1901
A principal authorised an agent to buy wheat at a given price in the joint names of the principal and the
agent. Having failed to purchase wheat at that price, the agent bought wheat in his own name at a
higher price. The principal, although being dissatisfied with his act, apparently ratified the wheat
purchase agreement at a higher price but failed to take delivery of the wheat. The seller then sued the
principal arguing that the sale contract had been ratified.
Held: The action could not succeed because the agent’s act was unauthorised. Since the principal’s
identity had not been disclosed to the seller, the principal could not ratify and consequently was not
liable on the contract.
2.3.2 Principal exists

The principal must have been in existence at the time of the agent’s actions done on his behalf. This
requirement may cause problems for promoters of companies who enter into contracts before the
company is incorporated and they cannot be ratified after incorporation. Promoters making pre-
incorporation contracts are personally liable unless there is agreement to the effect that the company,
once incorporated, shall be substituted for the promoters.
2.3.3 Competence of principal

The principal can only ratify a contract/transaction if he is competent to make it at the time of the
agent’s actions and at the time of ratification. For example a minor cannot effectively ratify a contract
after attaining majority if the contract would not have bound him when he was a minor. Similarly a
company cannot ratify a contract that is ultra vires its articles of association.
2.3.4 Time
Ratification must take place within a reasonable time
2.3.5 Complete contract

The principal must ratify the contract in its entirety.
2.3.6 Communication
The principal must communicate ratification to the third party clearly.
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2.4 Method of ratification
A principal may expressly or impliedly ratify an agent’s actions. He may impliedly do so by any act that
clearly shows his intention to ratify, for example if he starts legal proceedings to enforce the contract
with a third party which the agent entered into on his behalf.
Bedford Insurance Co Ltd v instituto de Resseguros do Brasil 1985
The insurance company, Bedford Insurance, authorised brokers to issue marine insurance subject to
certain limits. Insurance legislation provides that no person could carry out marine insurance business
without authority and it is an offence to carry on an unauthorised marine insurance business beyond the
limits imposed by an agent’s principal. Upon discovering this position in 1983, Bedford Insurance
purported to ratify the broker’s acts so that they could recover from their indemnifiers.
Held: The effect of the insurance statutes was to render the policies void ab initio. Being illegal the
broker’s acts could not be ratified by Bedford Insurance.
2.5 Effect of ratification

When a principal ratifies a contract made in his own name, the effect is as if the agent had been
authorised at the time of his actions. Therefore if the agent made a contract with a third party on behalf
of the principal, a privity of contract will exist between the third party and the principal. At the same
time the relationship of principal and agent will also exist.
When the principal ratifies the agent’s actions, the agent is not liable for exceeding his authority and
may be entitled to the rights of an agent (for example remuneration). Similarly, a third party cannot have
a claim against the agent for breach of warranty of authority. Ratification may also have retroactive
effect on the third party in that if he makes an offer to the agent that the agent accepts on behalf of the
principal who subsequently ratifies it, the third party is bound, even if he purports to withdraw his offer
before ratification. Ratification will only be effective if it takes place within a reasonable time.
Ratification will not be effective where third parties have acquired property rights, which would be
adversely affected by ratification.
……………………
If an agent acts within the limits of his authority, any contract he makes on his principal’s behalf is
binding on both the principal and the third party.
The extent of an agent’s authority may be express, implied or apparent.
An agent’s apparent authority may be greater than his express or implied authority. This occurs when
a principal holds it out to be so to a third party, who relied on the representation and altered his
position as a result.
A principal may later ratify the acts of an agent retrospectively.
……………………
3 Duties and rights of agents

……………………
We next look at the duties an agent has towards his principal and the rights he is allowed to enforce.
……………………
3.1 Duties of agents

Whether there is a contract between the principal or not, the law imposes a number of duties on an
agent .
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3.2 Duty to obey instructions
An agent is under a general duty to obey his principal’s instructions. He is contractually obliged to
perform the duties he has undertaken to do under the contract. If he breaches or fails to perform these
obligations, he is liable for breach of contract. A contractual agent is under a duty to obey the
instructions of his principal given during the course of agency, but is not obliged to obey instructions
which require him to act illegally. Moreover, the duty of a professional agent to obey instructions may
also be limited by the rules of professional conduct. The agent’s duty of obedience also means he must
not exceed his authority. This applies to both contractual and gratuitous agencies.
Ireland v Livingstone 1872
The principal Livingstone, wrote to the agent, Ireland, in Mauritius authorizing him to purchase and send
some 500 tons of sugar adding: ’50 tons more or less of no moment, if it enables you to get a suitable
vessel’.
The instructions to the agent were ambiguous as they could be interpreted in tow ways. Either a bulk
shipment was to be sent in one ship or two or more ships were to be used. The agent understood the
instructions in the second sense and sent a consignment of 400 tons, with an intention of shipping a
further 60 tons when available at a later date. The principal refused to take delivery of the shipment and
wrote to cancel any further order. The agent thereupon sued for breach of contract.
Held: As the instructions given could be interpreted in two ways, it was not unreasonable for the agent
to use one of those two meanings. In the circumstances the agent acted reasonably and the principal
was bound to take the cargo.
3.3 Duty to exercise reasonable care

An agent owes his principal the duty of reasonable care in executing his authority. The standard of care
required is what is reasonable in the circumstances. This will depend on the facts of each case. If an
agent holds himself out to be a member of a profession, he will be expected to show the standard of
skill and care expected of a reasonably competent member of that profession in addition even a
gratuitous agent owes a duty of reasonable skill and care to the principal.
Chaudhry v Prabhakar 1988
The principal, who had recently passed her driving test, wanted to buy a car. Being inexperienced
asked the agent, a friend, to find a suitable car and specified that it should not have been involved in an
accident. The agent, who was not a mechanic, and acted gratuitously, found and recommended a one
year old VW Golf car being sold by a firm of panel beaters and paint sprayers. The principal bought the
car but later discovered that it had been badly damaged in an accident. She sued and the agent sought
to rely on old cases as to the standard of care of gratuitous agents.
Held: The standard of care of any agent is such as is reasonable in all the circumstances. In deciding
what care is reasonable, the court will take into account the fact if the agent was paid or not, the degree
of skill possessed or claimed by the agent, and the degree of reliance placed on the agent by the
principal. On the facts of this case, the agent had failed to exercise reasonable skill and was held to be
liable.
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Keppel v Wheeler 1927
The principal Keppel instructed the agent (Wheeler), an estate agent, to find a purchaser for his block of
flats. A prospective purchaser made an offer to purchase the property at E6, 150. The agent duly
communicated this offer to the principal, who accepted it ‘subject to contract’. A few days later the
agent received an offer of E6, 750 but did not pass on this information to the principal.
Held: This failure to communicate was a breach of duty to show proper skill and care, and the agent
was liable in damages.
3.4 Fiduciary duties

An agent has extensive powers to affect the principal’s legal position and the principal must place trust
in the agent. Thus the law regards the relationship between the agent and his principal as being one of a
fiduciary nature. It therefore imposes certain obligations on the agent so that the principal can be
protected against abuse of an agent’s powers to bind him to a third party. These duties can be equated
to those of trustees and directors of a company.
3.4.1 Duty to avoid a conflict of interest

A person who has fiduciary duties to perform shall not be allowed to enter into engagements in which he
has/can have conflicting personal interests or interests which may conflict with the interests of his
principal. Arising from this rule, an agent instructed by his principal to buy property who sells his own
property to the principal will be in breach of his fiduciary duty.
Shah v Attorney General of Uganda 1969
The plaintiff, under an agreement between the government and himself, undertook to introduce a
financier to enter into an agreement with the government to finance development projects. The plaintiff
was to receive a sum of £6,500 as commission to be paid in two instalments. He duly introduced a
financier in the shape of a company in which he was a shareholder. The agreement later fell through on
account of change in regime. Having paid the first instalment, the government refused to pay the second
and last instalment claiming inter alia that the plaintiff, being a shareholder in the financier company
had made a secret profit to which he was not entitled.
Held: An agent that makes a secret profit must account to his principal for it and that the offending
transaction cannot bind the principal. If therefore the plaintiff as agent for the Kabaka government was
acting in a fiduciary capacity, he is not entitled to receive any other commission which he may have
received from the financier company. However, the plaintiff was not an agent for the government except
in a descriptive sense and the government was not his principal. He entered into a contract with it, but
his acts were not binding on it. The plaintiff was thus not in breach of any covenant with the
government.
However in another case an agent appointed to buy a yacht bought it himself and then resold it to the
principal for a profit. The agent had to pay the profit to the principal.
Similarly, an agent instructed to sell the principal’s property and buys it himself will also be in breach of
his fiduciary duty. In both situations there is the obvious potential for conflict of interest as the seller’s
interest is to get the highest possible price while that of the buyer is to pay as little as possible. Whether
the agent acted fairly and paid a fair price is irrelevant. The agent is in breach of his fiduciary duty
unless there is full disclosure to the principal of all the relevant facts and the principal consents to the
transaction. The duty to avoid a conflict of interest may continue even after the end of the agency if a
confidential relationship is created by the agency continues or if it gives the agent a special position of
dominance over the principal and the transaction is connected with that relationship.
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McPherson v Watt 1873
An agent will still be in breach of duty even if he deals with the principal through a third party. Here the
agent was instructed to sell property but arranged for his brother to buy it for him. When the principal
discovered, he refused to complete.
Held: The court refused to order specific performance because of the agent’s breach of duty. Where an
agent deals with his principal in breach of this duty, the principal may rescind the contract.
Many professional associations have enshrined rules against conflict of interest in their codes of conduct.
3.4.2 Duty not to make a secret profit

An agent is under a duty not to make a secret profit out of the transactions that he enters into on behalf
of his principal. It is irrelevant that:
 The agent acted in good faith
 The principal suffered no loss
 The agent made a profit that the principal could not have made or that the principal actually
benefited from the agent’s actions
The liability arises from the mere fact the profit was made. This duty also applies to unpaid or gratuitous
agents. An agent who makes a profit will be in breach of the duty unless all of the circumstances are
disclosed to the principal and the principal consents to the agent retaining the profit. Where the duty is
breached by the agent he may be required by the principal to account for the secret profit.
3.4.3 Duty not to take a bribe

A bribe is a form of secret profit. Where an agent deals with a third party on the principal’s behalf, a
bribe is any payment made by the third party to the agent, the third party knowing that the agent is the
agent of the principal and the payment is kept secret from the principal. When an agent makes a secret
profit, the principal has recourse to the following remedies:
 Dismiss the agent without notice
 Refuse to pay any commission due to the agent or recover commission paid to the agent prior to
the discovery of the bribe
 Rescind the contract with the third party
 Claim the money i.e. the bribe from either the third party or the agent
In addition, a bribe can also give rise to criminal liability under the Corrupt Practices Act.
3.5 Duty to account

In the same way that an agent may not make a secret profit from the use of the principal’s property, an
agent is also under a duty to keep his own property separate from that of his principal. An agent who
receives money for the principal must pay it to the principal once it is demanded. The agent must also
keep full and accurate books of account for all transactions entered into on behalf of the principal. When
the agency is terminated, the agent must deliver up to the principal any books, accounts, and other
documents given to him by the principal or which were prepared for use in the course of the agency
relationship unless he is entitled to exercise a lien over them for example if he has not been paid.
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3.6 Duty not to delegate
Debussche v Alt 1878
Debussche, an owner of a ship, engaged an agent to sell the ship at a minimum price of $90,000, at
any of the ports where it happened to be in its travels. With the consent of the owner of the ship, the
agent engaged the defendant, Alt(sub-agent), in Japan to sell the ship. After efforts to find a buyer, Alt
bought the ship himself for $90,000. He later resold the ship in Japan for $160,000. Debussche then
sued Alt claiming that Alt was his agent and was therefore under a duty to account for any secret profit
made.
Held: An agent cannot as a general rule delegate his duties to a sub-agent. In certain circumstances,
however, a right to delegate may be implied from the circumstances surrounding the transaction such as
usage of the trade, the conduct of the parties or in the event of anticipated emergencies. In this case
since the ship was expected to move from one port to another, both parties contemplated that a sub-
agent would be appointed in any of those ports. When Alt sold the ship there existed a relationship of
principal and agent between Debussche and Alt. Alt was therefore obliged to account for the secret profit
that he made.
3.7 Rights of agent

The agency relationship also allows the agent a number of rights.
3.8 Right to remuneration

An agent will only be entitled to remuneration if that has been agreed with the principal. However, even
if there is no express agreement that the agent should be paid for his services, the court may imply a
term giving him a right to remuneration. Such a right will probably be implied where the agent is acting
in the course of a profession or business. It will be more readily implied where the agent has performed
his services. It is rare that an agent acting in a commercial context will agree to act gratuitously. The
right to payment will be implied on the same basis on which terms are generally implied into contracts.
Thus, no term can be implied where that would contradict the express terms of the contract.
Where it is agreed that the agent should be paid but the amount of remuneration is not agreed, or where
a right of payment is implied, the agent will be entitled to a reasonable sum for his services assessed on
a quantum meruit basis.
Way v Latilla 1878
The appellant alleged that he had made an agreement with the respondent that the appellant should
obtain and send to the respondent information relating to the gold mines and concessions in West
Africa, and the appellant should introduce concessions for acquisition by the respondent. The
respondent would protect the appellant’s interests in respect of concessions acquired and give the
appellant the customary or reasonable share in the same. The respondent should also pay to the
appellant a reasonable sum in respect of information and reports. The appellant claimed damages and
other relief on the ground that the respondent had broken the agreement in that he had failed to give the
appellant a share in respect of certain concessions obtained by the appellant. The profits on the sale of
the concessions amounted to about E1,000,000. The appellant also contended that, if he was entitled
to be paid by the respondent only upon quantum meruit, the court, in ascertaining the amount to be
paid, was entitled and bound to have regard to such matters as the parties themselves considered
reasonable and usual, namely, what profit was in fact made on the sale. The court’s jurisdiction was not
limited to fixing a fee. The respondent contended that there was no evidence of any contract, that there
was no agreement sufficiently certain or definite to be enforceable, and that the amount of profit made
on the resale was not a proper basis for assessing the amount due.
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Held: The court held that there was no concluded contract between the parties as to the amount of the
share or interest that the appellant was to receive and it was impossible for the court to conclude the
contract for them. There was however, a contract of employment between the parties which clearly
indicated that the work was not to be done gratuitously. The appellant was therefore entitled to
reasonable remuneration on the implied contract to pay him a quantum meruit. On the evidence of the
parties themselves, the basis of remuneration by fee should be rejected. In fixing the remuneration
services, the court was entitled to pay regard to the previous conversation of the parties. In the
circumstances the appellant was entitled to the sum of E 5,000 as reasonable remuneration, calculated
on the basis of some reasonable participation.
3.9 Right of indemnity and set-off

All agents, whether acting under a contract of agency or not are entitled to be reimbursed and
indemnified against expenses incurred in the course of performing duties. Where the agency is defined
by a contract, the indemnity will be an express or implied term of the contract. Where there is no
contract, the agent will still be entitled to indemnify, but the basis will be restitutionary. A non-
contractual agent is only entitled to be indemnified against expenditure necessarily incurred on the
principal’s behalf and cannot claim reimbursement for payments the principal would not have been
obliged to make. Generally indemnity covers expenses incurred while the agent was acting within the
scope of his authority. An unauthorised agent will be entitled to indemnity if his actions are ratified or
where the requirements for agency of necessity are satisfied.
……………………
An agent’s duties include the duties to obey instructions, exercise reasonable care, not to delegate
and also a number of fiduciary duties.
An agent’s rights include the right to remuneration and the right of indemnity and set-off.
……………………
4 Termination of agency
……………………
We finish the chapter by looking at how the agency relationship comes to an end.
……………………
4.1 Methods of termination

The relationship between principal and agent depends on consent. If withdrawn, the agency will
automatically end and the agent’s actual authority to bind the principal will also end. An agency
relationship may be terminated in the following ways:
(a) By mutual consent between the agent and the principal.
(b) By either party unilaterally withdrawing consent.
(c) By the end of a time period. An agent may have been appointed for a fixed period of time or for a
specific task or set of tasks. Once the time elapses or the task(s) is/are completed the agency will
terminate.
(d) By operation of law for example if the performance of the agency relationship becomes illegal (for
example one party becomes the citizen of an alien enemy) or impossible (where it will be ended
by the agency contract being frustrated). Death of either party will also terminate the agency and
any contract made between them. If an agent becomes insane, the relationship is automatically
terminated. The bankruptcy of either the agent or the principal will also end the agency.
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4.2 Numbered head
The agent may continue to have apparent authority even if actual authority has been terminated if the
principal’s conduct is such as to suggest to a third party that the agent continues to have authority. Until
the principal brings the termination of the agent’s authority to the notice of a third party, the agent may
continue to have apparent authority on the strength of the principal’s representation.
Drew v Nunn 1879
Here the principal became insane but his wife, who was his agent, continued to act in his name. When
he recovered from his insanity he tried to disclaim liability for acts done by his wife during his
insanity/incapacity.
Held: The agent, that is his wife, had apparent authority and therefore he was bound.
However, where an agent’s actual authority is terminated by the principal’s death or bankruptcy the
agent will automatically cease to have apparent authority.
If an agent continues to act after his authority has been terminated, he may incur personal liability for
breach of implied warranty of authority. Sometimes an agent may suffer a potential risk when his
authority is terminated automatically without his knowledge.
Yonge v Toynbee 1910
Solicitors were acting in litigation for a client who, unknown to them, became mentally incapacitated so
that the agency was considered to be terminated. However, they continued to litigate for the client.
Held: The solicitors were liable for their breach of warrant of authority and were ordered to pay the costs
of the other litigant.
……………………
Agency is terminated by agreement or by operation of law (death, insanity, insolvency).
……………………
EXAM ALERT
Important issues for exam purposes in this chapter include the principal-agent relationship and the extent
to which the agent can bind the principal.
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Chapter Roundup
 Agency is a relationship that exists between two legal persons, the principal and the agent, in which the
function of the agent is to form a contract between the principal and a third party.
 If an agent acts within the limits of his authority, any contract he makes on his principal’s behalf is
binding on both the principal and the third party.
 The extent of an agent’s authority may be express, implied or apparent.
 An agent’s apparent authority may be greater than his express or implied authority. This occurs when a
principal holds it out to be so to a third party, who relied on the representation and altered his position
as a result.
 A principal may later ratify the acts of an agent retrospectively.
 An agent’s duties include the duties to obey instructions, exercise reasonable care, not to delegate and
also a number of fiduciary duties.
 An agent’s rights include the right to remuneration and the right to indemnity and set-off.
 Agency is terminated by agreement or by operation of law (death, insanity, insolvency).
Quick Quiz
1 What is apparent authority?
2 A principal may in certain circumstances ratify the acts of an agent retrospectively. True/False?
3 Give three examples of fiduciary duties of agents.

1 The authority that a principal represents to other persons that he has given to an agent.
2 True
3 Duty to avoid a conflict of interest; Duty not to make a secret profit; Duty not to take a bribe
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THE LAW OF TORTS
In this chapter we introduce the law of torts. Torts are wrongful acts against an individual, a company
or their property that gives rise to a civil liability against the person who committed them.
You need to understand the nature of torts and to explain the factors that must be present for claims to
succeed. By focusing on the rules and their related cases, you will be able to apply them to any case
given to you in an exam question.
chapter
Section 3 focuses on the concept of professional negligence. Professionals such as accountants and
lawyers are likely to have a contractual relationship with their clients that gives them protection if they
are negligent. For accountants, other people such as shareholders may also rely on their work, but
have no contractual relationship. Case law has developed over the years to determine what duty of care
is owed to shareholders and others.
syllabus
references
topic index
1 Liability in tort 6A
2 Negligence 6B
3 Professional negligence 6C
4 Defences in tort 6D
5 Remedies in tort 6D
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LEARNING OBJECTIVES
 Define what a tort is
 Describe examples of different types of torts
 Discuss the duty of care and negligence
 Discuss possible defences to actions in tort
 Describe remedies for torts that have been proved
 Analyse the duty of care of professionals
1 Liability in tort
……………………
We start off by looking at how a claim in tort can arise.
……………………
1.1 Definition of tort

Tortious liability arises from the breach, through harmful conduct, of a duty primarily fixed by law. This
duty is towards persons generally and its breach is redressable by an action for unliquidated damages.
A tort is a civil wrong. Unlike the obligations voluntarily accepted by the parties to a contract, a tort
consists of the breach of a duty imposed by the law. The law of tort seeks to provide a legal remedy for
the victims of certain forms of harmful conduct. Duties are owed to a wide range of persons and are not
dependent on the existence of a contractual relationship. Although this area of law is often referred to as
the law of tort, in reality a number of distinct areas of tortious liability have been developed to protect
people from the many forms of wrongful conduct which may occur in modern society
1.2 Examples of tort

Examples of the kinds of harmful conduct against which the law provides protection include:
 Interference with a person’s ownership or possession of land or personal property, for example
the torts of trespass to land and trespass to goods
 Injury to business or personal reputation, for example the tort of defamation
 Interference with a person’s use and enjoyment of land, for example the tort of nuisance
 Trespass to the person, including battery, assault and false imprisonment
 Deceit and injurious falsehood, making false statements about the claimant
 Negligence (discussed further below)
Personal injury and death, for example torts of deceit, passing-off, inducement of breach of contract of
conspiracy.
1.3 General principles of tort

Each tort is governed by its own special rules covering such matters as the basis of liability, defences
and remedies. General principles relating to these issues are set out below.
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1.4 Basis of liability
Liability in tort is essentially ‘fault-based’. This means that a claimant must prove that the defendant
acted intentionally or negligently and was, therefore, blameworthy. The defendant’s reasons or motive
for committing a wrongful act are generally not relevant to liability in tort. However, the presence of
malice is relevant to some torts. Malice is an essential ingredient of some torts, for example conspiracy
requires proof of an intention to injure the claimant rather than to promote the defendant’s legitimate
interests. Malice may also make an otherwise reasonable act unreasonable so as to establish liability, for
example the tort of nuisance. Proof of malice can defeat certain defences, for example qualified privilege
will not protect a defendant who acted maliciously.
There are two situations where tortious liability may be imposed despite the defendant not being at fault.
1.4.1 Torts of strict liability

These are torts where the claimant can recover compensation for loss or damage without having to prove
fault or intention on the part of the defendant. Part I of the Consumer Protection Act 1987, for example,
provides that a manufacturer is strictly liable for injuries caused by his defective products. The rule in
Rylands v Fletcher and breach of statutory duty are further examples of torts imposing strict liability.
1.4.2 Vicarious liability

In certain situations one person may be held liable for the torts of another. This type of liability is known
as vicarious liability. An employer, for example, is vicariously liable for the torts of his employees
committed during the course of their employment. Vicarious liability may also arise between partners
and, as we have seen earlier, between a principal and agent. There are various justifications for the
principles of vicarious liability:
 Liability is incurred by the person best able financially to meet any award of damages (usually
because the risk is covered by insurance)
 The claimant is given an additional defendant to sue, who is more likely to be able to satisfy any
judgment
 Harm may be prevented by imposing liability on the person in control of the activity
 The claimant is provided with a defendant in cases where it is impossible to establish precisely
who was responsible within a particular organization for the wrongful conduct..
1.5 Proof of damage

The law of tort is concerned with providing a remedy for certain forms of wrongful conduct. In most
torts, the claimant must prove that he has suffered some damage, for example personal injury or
damage to his property, in order to establish liability. However, the fact that the claimant has suffered
damage is not sufficient on its own to establish liability. The claimant must also prove that the damage
PART B: BUSINESS LAW // 6: The law of torts
was caused by the defendant’s infringement of a right vested in the claimant which is recognised by the
law. For example, the construction of an out-of-town shopping centre may result in a loss of trade for
town centre shops. However as the law does not provide a right to protection from consumption,
affected shopkeepers will not have a remedy, no matter how severe their losses.
Although proof of damage is an essential component of most torts, some rights are regarded as so
important that the law will provide a remedy even though the claimant has not suffered any damage.
These torts are said to be ‘actionable’ per se (actionable in itself) and the most important examples are
libel and trespass. Nominal damages can be recovered in respect of these errors even though no loss has
occurred.
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1.6 Causation
Liability in tort is dependent on making a connection between the defendant’s wrongful conduct and the
damage suffered by the claimant. If the damage was caused by some other factor, the defendant will
escape liability. The factual cause of the damage is established by applying the ‘but for’ test, would the
damage have occurred ‘but for’ the defendant’s tortuous conduct. An example of the application of this
test in the context of a claim in negligence is given below.
Barnett v Chelsea and Kensington Hospital Management Committee 1969
Mr. Barnett, a nightwatchman, attended the defendant’s hospital in the early hours of the morning
complaining of vomiting. The casualty doctor failed to examine him but instead sent a message that Mr.
Barnett should see his own GP in the morning if he was still unwell. Mr. Barnett died five hours later
from arsenic poisoning.
Held: Although the hospital was negligent in failing to examine Mr. Barnett, the failure to take
reasonable care was not the cause of his death. The evidence was that, even if Mr. Barnett had been
examined, correctly diagnosed and treated, he would have died anyway.
Even if a claimant can establish a causal connection between the defendant’s tortuous conduct and he
cannot necessarily recover his loss. The damage may be too remote a consequence of the defendant’s
actions and, therefore, not the cause in law. The test for remoteness in tort derives from the decision of
the Privy Council in a case known as the Wagon Mound case.
Overseas Tankship(UK) Ltd v Morts Cock and Engineering Co Ltd (Wagon Mound)1981
The defendants were the charters of a ship called the Wagon Mound. As a result of the carelessness of
the defendant’ s servants, a quantity of furnace oil was spilled in Sydney harbour. The oil was carried
towards the claimant’s wharf where welding operations were being carried out. After receiving expert
advice that the oil would not ignite on water, welding continued. However, a few days later the oil
ignited when hot metal fell onto a piece of cotton waste floating in the oil. The resulting fire caused
extensive damage to the claimant’s wharf.
Held: Reasonable foreseeability was the proper test of remoteness of damage in tort. The court would
have awarded damages for oil damage that was a reasonably foreseeable consequence of the
defendant’s negligence. However, it was not reasonably foreseeable that the oil would ignite in the
circumstances which occurred and, therefore, damage caused by the fire was not recoverable.
Damage may be too remote if the chain of causation is broken by a new, unforeseen, act of a third
person. Such an event is referred to as a novus actus interveniens – a new act intervening – and its
effect is to relieve the defendant of the liability for the claimant’s loss.
Cob v Great Western Railway 1894
The defendant railway had allowed a railway carriage to become overcrowded. The claimant was jostled
and robbed of £89. The claimant sued the defendant to recover his loss.
Held: The loss was too remote as the actions of the thief were a novus actus interveniens, which broke
the chain of causation.
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The law gives various rights to persons. When such a right is infringed, the wrongdoer is liable in
tort.
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2 Negligence
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Much of the law of tort is concerned with claims for negligence, so we now examine this area in
detail.
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2.1 The tort of negligence

The tort of negligence is concerned with certain kinds of careless conduct which cause damage or loss to
others. The foundations of the modern law of negligence were laid down is one of the best known
English cases.
Donoghue v Stevenson 1932
Mrs Donoghue and a friend visited a Café in Paisley run by Mr Minchella. The friend bought a bottle of
ginger beer for Mrs Donoghue , which was made of black opaque glass, and poured some of the ginger
beer into the tumbler. Unsuspecting, Mrs Donoghue drank the contents, but, when her friend refilled the
tumbler, the remains of a decomposing snail floated out. Mrs Donoghue suffered shock and severe
gastro-enteritis as a result. She could not sue Mr Minchella for her injuries because she had not bought
the ginger beer herself. She therefore brought an action against the manufacturer of the ginger beer,
Stevenson, arguing that he had been negligent.
Held: The House of Lords held that, provided Mrs Donoghue could prove her allegations, she would be
entitled to succeed. We will never know whether there was, in fact, a snail in the bottle because the
case was settled out of court for £100
2.2 Conditions for a successful negligence claim

In order to establish negligence, a claimant must prove that:
 The defendant owed him a legal duty of care

 The defendant was in breach of this duty
 The claimant suffered injury or loss as a result of the breach
All three elements are essential for a successful negligence claim.
2.3 Duty of care

It is important to know in what circumstances one person will owe a duty of care to another. In the
Donoghue v Stevenson case, Lord Atkin formulated a general test for determining the existence of a duty
of care which could be applied to most situations. His statement of general principle which was to
become to be known as the neighbour principle is as follows:
‘You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be
likely to injure your neighbour. Who then in law is my neighbour? The answers seems to be persons who
are 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 or omissions which are called in question.’
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Lord Atkin’s statement of the requirements for duty of care to exist involved two main elements,
reasonable foresight and proximity. A duty of care would be imposed if the damage was reasonably
foreseeable and the relationship between the parties was sufficiently close (proximate). The flexible
nature of the neighbour principle enabled the courts to recognise the existence of a duty of care in a
variety of situations unless there were policy reasons for excluding it
2.4 Breach of duty

After establishing the existence of a duty of care, the claimant must show that this duty has been broken
by the defendant. The test for deciding whether there has been a breach of duty is whether the
defendant has failed to do what a reasonable person would have done or has done what a reasonable
person would not have done. Whether the defendant’s conduct amounts to a breach of duty depends on
all the circumstances of the case. The court will consider a range of factors including:
 The likelihood that the damage or injury will be incurred

 The seriousness of any damage or injury
 The cost and ease of taking precautions
 The social need for the activity
It is normally the responsibility of the claimant to show that the defendant did not act reasonably, that is
the burden of proof lies with the claimant. If the claimant is unable to present appropriate evidence, his
case will fail. However, there are some situations where the only or most likely explanation of an
accident is that the defendant was negligent. If this is the case, the claimant may claim res ipsa loquitur
- the facts speak for themselves. This has the effect of placing the burden of proof on the defendant who
must show either how the accident occurred or that he has not been negligent. Two conditions must be
satisfied for res ipsa loquitur to come into play:
 The event which caused the accident must have been within the defendant’s control
 The accident must be of such a nature that it would not have occurred if proper care had been
taken by the defendant
Cassidy v Ministry of Health 1951
The claimant went into hospital for treatment of two stiff fingers. When he left the hospital he had four
stiff fingers with a useless hand.
Held: The defendant was liable for the injuries. Res ipsa loquitur could be applied to assist the claimant
in establishing his case. Lord Denning took the view that the claimant was entitled to say: I went into
the hospital to be cured of two stiff fingers. I have come out with four stiff fingers and my hand is
useless. That should not have happened if due care had been used. Explain it if you can.
2.5 Damage
Finally, the claimant must show he has suffered some damage, that it has been caused by the
defendant’s breach of duty and is not too remote a consequence of it.
Michael Chiluya Sata MP v Zambia Bottlers Ltd 2003
The appellant claimed for damages for personal injuries and consequential loss and damage caused by
the negligence and/or breach of statutory duty by the respondent in the manufacture and bottling of one
bottle of sprite beverage. The facts were that the appellant bought a case of sprite from an outlet known
as Melissa Supermarket for K12,000 on 3 June, 1998. The sprite was manufactured by the respondent
company involved. When the bottle was about to be opened, it was found to contain a dead cockroach.
Neither the appellant nor any of his children opened the bottle or drunk its contents. On seeing the
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cockroach in the bottle, the appellant alleged that he and his children fell sick and went to see a private
medical practitioner who treated them for nausea.
Held: The trial judge took the view that as the appellant and his children did not consume the
adulterated drink and did not suffer injury there from, the claim could not succeed. This verdict was
upheld on appeal:
‘Negligence is only actionable if actual damage is proved. There is no right of action for nominal
damages. There was no injury or damages caused to the appellant by the adulterated drink as he did not
consume any part of it.’
The kinds of damage which will give rise to an action in negligence are:
 Death
 Personal injury
 Nervous shock
 Damage to property
 In limited circumstances, financial loss
Continental Restaurant and Casino Limited v Arida Mercy Chulu 2000
The respondent who was a magistrate was on 22 July 1998, together with other magistrates, invited for
lunch by the Chief Administrator for Polo Grill, a restaurant run and owned by the appellant company.
While at the restaurant, the plaintiff was served with some mushroom soup. While the respondent was
taking her soup, she felt something hard and rough in her mouth, she noticed that what she in fact
thought was a piece of mushroom was in fact a cockroach with its legs and wings intact. The
respondent thereafter, failed to continue with her lunch. The respondent subsequently sued the
appellant company for damages. The learned trial judge found for the respondent and awarded her a
sum of K85 million as damages plus costs. The appellant company appealed.
Held: It was held that the basis of awarding damages is to vindicate the injury suffered by the plaintiff
and no damages will be awarded if no proper evidence of medical nature is produced. The appeal was
allowed.
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Negligence is the most important modern tort. To succeed in an action for negligence the claimant
must prove that the defendant had a duty of care to avoid causing injury, damage or loss; there was
a breach of that duty by the defendant; in consequence the claimant suffered injury, damage or loss.
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3 Professional negligence
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The area of professional negligence is obviously of great interest to accountants, and it also impacts
upon other professionals as well.
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3.1 Concept of professional negligence

The law of negligence has an important application to the provision of services. It opens up a remedy to
those who are strangers to the contract for services but nevertheless have suffered a loss as a result of
the contractor’s negligence. Thus, the principle established in Donoghue v Stevenson applies not just to
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manufacturers but also to repairers who carry out their work carelessly. If a person is contracted to
maintain and repair a lift, for example, he owes a legal duty, quite separate from his contractual
obligations, to those using the lift to exercise reasonable care in his work
Liability for physical injury is well established. However what is the position of a person whose job
involves giving professional advice?
The courts have developed the Donoghue v Stevenson principle to encompass negligent statements
which cause financial loss. Professional groups such as solicitors, accountants, bankers and surveyors
are examples of such professionals.
In the past, it was generally accepted that in the absence of fraud, liability for making careless
statements which caused financial loss depended on the existence of a contractual or fiduciary
relationship between the parties. If the statement was made fraudulently, the injured party could recover
damages for the tort of deceit.
Candler v Crane, Christmas & Co 1951
The defendants, a firm of accountants, prepared a company’s balance sheet and accounts, knowing that
they were going to be used by the managing director to persuade the claimant, Candler, to invest money
in the company. Relying on the accounts, the claimant invested E22,000, which he lost when the
company was wound up a year later. The claimant sued the defendants for negligence, alleging that the
accounts had been prepared carelessly and did not represent the true statement of the company’s
affairs.
Held: The defendants were not liable to the claimant because in the absence of any contractual or
fiduciary relationship, they did not owe a duty of care.
However the holding in the above case was overturned twelve years later
Hedley Byrne & Co v Heller and Partners Ltd 1963
Hedley Byrne was a firm of advertising agents and Easipower Ltd was one of its clients. Before placing
an advertising contract on behalf of Easipower in circumstances which involved giving credit, Hedley
instituted inquiries about Easipower’s creditworthiness. Hedley asked its own bank, the National
Provincial Bank Ltd, to obtain a reference from Easipower’s bankers, Heller and Partners. Heller’s
reference which was headed ‘without responsibility on the part of the bank or its officials’ stated that
Easipower was ‘a respectably constituted company considered good for its ordinary business
engagements’. Relying on this satisfactory reply, Hedley executed advertising contracts for Easipower,
but lost £17,000 when Easipower went into liquidation. Hedley sued Heller and Partners for the
amount of the financial loss suffered as a result of the negligent preparation of the bankers’ reference.
Held: Heller and Partners were protected by the disclaimer of liability. The House of Lords then
considered what the legal position would have been if the disclaimer had not been used. They all agreed
that there could be liability for negligent misstatements causing financial loss, even in the absence of a
contractual or fiduciary relationship.
In the Hedley Byrne case, the court recognized a new type of liability. They indicated that damages
could be received for careless statements. However they were careful to place limits on the litigation that
could arise from this. The rules that the existence of a duty of care in respect of negligent misstatements
was dependant on ‘special relationships’ between the parties. The relationship was described in the
following terms.
‘If someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for
the assistance of another person who relies on such skill, a duty of care will arise. Furthermore, it can
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apply in a sphere in which a person is so placed that others could reasonably rely on his judgment or his
skill, or on his ability to make careful inquiry. If that person takes it upon himself to give information or
advice to, or allows his information or advice to be passed on to, another person who, as he knows or
should know, will place reliance on it, then a duty of care will arise.’
They made it clear that a duty of care in respect of a negligent misstatement would only be owed to
persons who the maker of the statement knows will rely on it and where the maker of the statement
knows of the use to which it will be put. The duty of care would not extend to those who the maker of
the statement might not foresee would rely on the statement. Although the Hedley Byrne case involved a
banker, it is clear that the rule applies equally to advice given by other professionals, for example,
lawyers, accountants and valuers.
3.2 Lawyers
The liability of a legal adviser used to depend on the nature of the work he was engaged on. The
decision of the House of Lords in Rondel v Worsley 1967 established that a barrister owed no duty of
care to clients for whom he acted as advocate. However, in Arthur Hall and Co v Simons 2000, the
House of Lords decided that the immunity from liability for the negligent conduct of a case in court as
set out in Rondel v Worsley and later cases could no longer be justified.
Case Ross v Caunters 1979
Mr Ross was an intended beneficiary under a will drawn up on the testator’s behalf by Caunters, a firm
of solicitors. Caunters failed to advise the testator that the attestation by a beneficiary’s spouse
invalidates the gift. Mr Ross witnessed the will, and when the testator died the legacy to Mrs Ross was
declared invalid.
Held: A solicitor owes a duty of care not just to his client, in this case the testator, but also to third
parties, such as Mrs Ross who were intended benefit from his work. Mrs Ross succeeded in her action.
White v Jones 1995
A father quarrelled with his two daughters and cut them out of his will. A few months later the father
changed his mind and instructed his solicitor to change his will and to give each of his daughters
E9,000. The father died two months later before the solicitor had completed the changes to the will.
The daughters did not receive the intended legacy because of the solicitor’s delay in carrying out their
father’s instructions.
Held: The daughters succeeded in their action against the solicitor even though they had not relied on
the solicitor’s skill.
Industrial Finance Company Limited v Jaques and Partners 1981
This case dealt with the issue of liability of lawyers for professional negligence. The facts of the case
were that on the 31 March, 1975 the plaintiff and Kentwood of Kitwe signed a contract for the sale of
assets. In the course of the contract after both parties had complied with the terms a misunderstanding
between them arose. In consequence of the misunderstanding the plaintiff stopped payment of a cheque
dated 30 September, 1975, payable to Kentwood for the amount of K85,997.92. As a result of this
action taken by the management of IFC Kentwood issued a writ against IFC claiming for K83,997.92 in
respect of the cheque dated 30 September, 1975.
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Held: Where a lawyer has instructions, he has a professional duty to protect his client so that where it is
shown that the advocate has failed to exercise his duty to the cost of his client, the lawyer must make
good and pay for that damage.’
3.3 Accountants and auditors

The extent of an accountant’s liability to non-clients was the subject of the judgment in the Candler
Crane, Christmas & Co case. In this case Lord Denning was of the opinion that a duty of care was owed
only to third parties of whom they had knowledge. It did not extend to strangers. The Hedley Byrne case
broadened the scope of liability to include persons of whom the accountants had no prior knowledge.
Caparo Industries plc v Dickman 1990
Caparo, which already held shares in Fidelity plc, acquired more shares in the company and later made
a takeover bid on the strength of accounts prepared by the defendant auditors. Caparo alleged that the
accounts were inaccurate in that they showed a pre- tax profit of E1.3 million when there had been a
loss of E400,000. Caparo claimed that, if they had known the true situation, they would not have made
a bid at the price they did and may not have made a bid at all. They argued that they were owed a duty
of care as new investors and as existing shareholders, who in reliance on the accounts had bought more
shares.
Held: No duty was owed by auditors to members of the public in general who might invest in a
company in reliance on published accounts. Although it was foreseeable that the accounts might be
used by members of the public contemplating investing in the company, foreseeability alone was not
sufficient to create liability. If it were otherwise, auditors might face liability. The purpose of preparing
audited accounts under the Companies is to provide shareholders with certain information so that they
can exercise their rights in respect of the company, that is voting at company meetings. The auditors did
not owe a duty of care to individual shareholders, such as Caparo (which used the information for a
quite different purpose) but to shareholders as a body. The auditors were therefore not liable.
A more recent case highlighted the need for a cautious approach and careful evaluation of the
circumstances when giving financial advice, possibly with the need to issue a disclaimer.
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ADT Ltd v BDO Binder Hamlyn 1995
Binder Hamlyn was the joint auditor of BSG. In October 1989, BSG's audited accounts for the year to
30 June 1989 were published. Binder Hamlyn signed off the audit as showing a true and fair view of
BSG's position. ADT was thinking of buying BSG and, as a potential buyer, sought Binder Hamlyn's
confirmation of the audited results. In January 1990, the Binder Hamlyn audit partner attended a
meeting with a director of ADT. This meeting was described by the judge as the 'final hurdle' before ADT
finalised its bid for BSG. At the meeting, the audit partner specifically confirmed that he 'stood by' the
audit of October 1989. ADT proceeded to purchase BSG for £105m. It was subsequently alleged that
BSG's true value was only £40m. ADT therefore sued Binder Hamlyn for the difference, £65m plus
interest.
Held: Binder Hamlyn assumed a responsibility for the statement that the audited accounts showed a
true and fair view of BSG which ADT relied on to its detriment. Since the underlying audit work had
been carried out negligently, Binder Hamlyn was held liable for £65m. The courts expect a higher
standard of care from accountants when giving advice on company acquisitions since the losses can be
so much greater.
This situation was different from Caparo since the court was specifically concerned with the purpose of
the statement made at the meeting. Did Binder Hamlyn assume any responsibility as a result of the
partner's comments? The court decided that it did. The court did not need to consider the question of
duty to individual shareholders, because Caparo had already decided that there was none.
Following the ADT case, another case tested the court's interpretation.
NRG v Bacon and Woodrow and Ernst and Young 1996
NRG alleged that the defendants had failed to suggest the possibility that certain companies it was
targeting might suffer huge reinsurance losses. They had also failed to assess properly whether these
losses could be protected against, because defective actuarial methods had been used. As a result, it
overpaid for these companies by £255m.
Held: The judge observed that accountants owe a higher standard of care when advising on company
purchases, because the potential losses are so much greater, following ADT. However, applying this
higher standard of care to the facts, it was decided that NRG had received the advice that any
competent professional would have given, because the complex nature of the losses that the companies
were exposed to were not fully understood at the time. In addition, the use of defective actuarial
methods had not led directly to the losses, because NRG would have bought the companies anyway.
There have been some other important clarifications of the law affecting accountants' liability in the area
of responsibility towards non-clients.
Barings plc v Coopers & Lybrand 1997
Barings collapsed in 1995 after loss-making trading by the general manager of its Singapore subsidiary,
BFS. BFS was audited by the defendant's Singapore firm, which provided Barings directors with
consolidation schedules and a copy of the BFS audit report. The defendant tried to argue that there was
no duty of care owed to Barings, only to BFS.
Held: A duty of care was owed to Barings, as the defendants must have known that their audit report
and consolidation schedules would be relied upon at group level.
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It is important to note that the law relating to the duty of care owed by professionals, such as
accountants and auditors is still being developed.
3.4 Valuers and Surveyors

The scope of liability for negligent statements by valuers and surveyors was considered in the following
cases.
Yianni v Edwin Evans & Son 1981
The claimants agreed to buy a house for E15,000 with the aid of a E12,000 mortgage form the Halifax
Building Society. The Building Society instructed the defendants, a firm of surveyors and valuers, to
value the house for them. Although the claimants had to pay for the valuation, the contract was actually
between the building society and the valuers. The building society made it clear that it did not accept
responsibility for the valuers’ report and that prospective purchasers were advised to have an
independent survey carried out. The defendants’ valuation report indicated that the house was sufficient
security for E12,000 mortgage. After the claimants had purchased the property, they discovered
structural defects which would cost E 18,000 to put right.
Held: The claimants successfully sued the defendants for negligence. Despite the standard building
society warning, only 10-15 percent of the purchasers have independent surveys carried out. It was
reasonable therefore, that the defendants should have the claimants in contemplation as persons who
were likely to rely on their valuation. The relationship between the parties gave rise to a duty of care.
Accordingly, the valuers were held liable.
Smith v Eric S Bush and Harris v Wyre Forest District Council 1989
In a twin appeal, the House of Lords had to consider the scope of the valuers’ and surveyor’s liability for
negligence and the effectiveness of any disclaimer of liability. The facts of the two cases were similar. In
the Harris case, the claimants, Mr and Mrs Harris, were a young couple buying their first house. They
applied to the council for a mortgage. They filled in an application and paid E22 for a valuation to be
carried out. The application form contained a disclaimer which stated that the valuation was confidential
and intended solely for the benefit of the council. No responsibility was accepted for the value and
condition of the house. Applicants were advised to obtain their own survey. The council instructed its
own in-house surveyor to inspect the property. He valued the house at the asking price and
recommended a mortgage subject to minor conditions. When the claimants tried to sell the house three
years later, they discovered that it was subject to settlement and, as a result, the property was
unsaleable.
Held: The House of Lords found in favour of the claimants and awarded them E 12,000. Their lordships
held that a valuer owes a duty to purchasers to exercise reasonable care in carrying out a valuation.
Furthermore, the disclaimer contained in the application form was ineffective under the Unfair Contract
Terms 1977 since it did not satisfy the requirements of reasonableness. It was not fair and reasonable
for the valuers to impose purchasers the risk of loss arising as a result of their incompetence or
carelessness for the following reasons:
(a) The parties were not of equal bargaining strength (the disclaimer was imposed on the claimants
and they had no real power to object)
(b) It was not reasonably practicable for the claimants to have obtained their own survey report (they
were first time buyers who could not easily afford to pay twice for the same service)
(c) The task undertaken by the surveyor was not particularly difficult and it was reasonable to
expect a valuer to take responsibility for the fairly elementary degree of skill and care involved
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(d) Surveyors will carry insurance. If they are denied the opportunity of excluding their liability,
insurance premiums will rise and increased costs will be passed on to house purchasers in higher
fees. It was fairer that the risk be distributed among all house purchasers by a modest increase in
fees rather than the whole risk falling on one unlucky purchaser
3.5 Medical practitioners

Medical practitioners also owe a duty of care to their patients. As professionals they have to exercise
their duties according to the ordinary skill of a competent person exercising that particular art.
Rosemary Bwalya v Zambia Consolidated Copper Mines, Malcolm Watson Hospital et al
Rosemary Bwalya claimed for damages for professional negligence on the grounds that THE BTL
operation performed by the respondents had failed causing the appellant to have a miscarriage. The
appellant further claimed for an order for medical care during and after pregnancy. These claims were
dismissed in the High Court.
Held: The standard of care demanded of medical practitioners is the standard of the ordinary skilled
man exercising and professing to have that special skill. A medical practitioner need not profess the
highest expert skill. It is sufficient that he exercises the ordinary skill of a competent person exercising
that particular art. The art is judged in the light of the practitioner’s speciality. In determining whether
the defendant practitioner has fallen below the required standard of care, the law looks to responsible
medical opinion. A practitioner who acts in conformity with an accepted, approved and current practice
is not negligent. The standard that was required in the performance of a BTL operation was that of the
ordinary skilled doctor exercising that skill. Whatever caused the failure of the BTL operation, the
evidence did not suggest that the failure was a result of professional negligence. The appeal was
dismissed.
Ndola Central Hospital Board of Management v Alfred and Priscilla Kaluba 1997
On 8 October 1995 the mother, the second plaintiff in the case, gave birth to a healthy baby boy in the
defendant's hospital. On account of certain complications, the mother had to undergo an operation and
to be hospitalised. The baby boy was kept by the defendant in a special baby care Nursery Unit to
which access was limited so that only the nursing staff specifically assigned to the unit and mothers
who had babies there were allowed into the unit. The authorised nurses would take the babies to their
mothers for breast feeding and return them to the unit. On 10 October, 1995 at about 16:40 hours, the
nurse in charge of the special unit discovered that someone unknown had stolen the child. Efforts by the
defendant's security officers and the Zambia Police failed to locate the baby. The parents were
devastated. When it was clear that the child would not be located, they sued in negligence to recover
damages for the nervous shock and distress arising from the disappearance of the baby. The High Court
awarded a sum of 40 million Kwacha to console the parents for the loss of the child.
Held: On appeal to the Supreme Court:
‘It is clear that instead of compensating the parents for the severe and lingering traumatic shock, they
were to be compensated or “consoled” for the actual loss of the baby. We do not believe that a value
can be placed on the baby nor that this was a proper approach to damages for shock. In recognising
that the parents suffered shock, the court recognises that each one of them suffered injury, though not of
the physical type. It is therefore for the shock that (damages are payable) and not for the loss of a baby.
No amount of money could ever compensate for loss of a child. We do not accept Mr. Chilandu’s
submissions that there was aggravation or such conduct by the defendant that the damages had to be
punitive. We consider the award to have been made on a wrong principle and to have been, in any
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event, inordinately high. However, the circumstances leave no room for doubting but that this was a
serious case of unimaginable proportions. We must emphasize that the damages are for the shock
suffered and not the loss of the child. We consider a global award of K10 (ten) million Kwacha as
appropriate for the shock suffered as a result of the defendant negligently losing the parent’s baby.’
……………………
Professional individuals and organisations have a special relationship with their clients and those
that rely on their work. This is because they act in an expert capacity.
The Caparo case is fundamental to understanding professional negligence. It was decided that
auditors do not owe a duty of care to the public at large or to shareholders increasing their stakes in
the company.
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4 Defences in tort
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This section deals with possible defences in tort, primarily again against claims for negligence.
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4.1 General defences

There are several defences that are available generally to a defendant facing an action in tort. These are:
 Consent
 Contributory negligence
 Statutory or common law justification
 Necessity
 Illegality
4.2 Consent
Consent, or assumption of risk as it is sometimes known, is a complete defence to an action in tort.
Consent may arise either from an express agreement to run the risk of injury or may be implied from the
claimant’s conduct. An example of express agreement is where a patient signs a consent form before an
operation. If this formality was not carried out, the surgeon could be sued for trespass to the person
(battery). Implied consent is often referred to as volenti non fit injuria (no harm is done to one who is
willing). Participants in a boxing match, for example, are deemed to have consented to the intentional
infliction of harm which would otherwise amount to a trespass. The defence of consent was of greater
importance in the 19th century when it was used by employers to defend actions by employees for
injuries suffered during the course of employment, caused by the employer’s negligence. However, the
significance of the defence in employment cases diminished greatly as a result of the decision of the
House of Lords:
Smith v Baker and Sons 1891
Their Lordships held that an employee who continued working despite knowing that he ran the risk of
injury from stones failing from an overhead crane was not volenti. Consent cannot be inferred from
knowledge of the risk. It must also be shown that the claimant freely and voluntarily accepted the risk.
Therefore to establish the defence, the defendant must prove that the claimant not only had full
knowledge of the risk but also freely consented to run the risk.
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Morris v Murray 1990
The claimant and defendant had engaged in a prolonged drinking session before taking a flight in a light
aircraft piloted by the defendant. The plane crashed, the defendant pilot was killed and the claimant
was seriously injured.
Held: The claimant’s action against the deceased pilot’s estate was barred by volenti.
Nash v Maintenance And Installation Company, Zambia, Limited 1975
The plaintiff was employed as a pilot of the Zambia Airways Corporation. The defendant was an
engineering contractor engaged in carrying out excavations and installations at Ndola Airport. On 20
August, 1973, at about 1930 hours, the plaintiff in the course of employment walked from the airport
to the meteorological office at Ndola Airport when he fell into an unlit and unguarded ditch excavated by
the defendant in consequence whereof he sustained severe injuries and suffered loss and damage. The
defendant denied negligence and asserted that the plaintiff suffered damages caused wholly or in part by
the plaintiff's own negligence.
Held: With regard to the defence of volenti non fit injuria the Supreme Court held that
‘In considering a plea of volenti non fit injuria, knowledge of the risk is only one of the elements which
have to be taken into account, with the other circumstances in deciding whether the inference that the
plaintiff agreed to take the risk upon himself can be drawn. In order to succeed on the ground that the
maxim volenti non fit injuria is applicable the defendant must obtain a finding of fact that the plaintiff
freely and voluntarily with full knowledge of the nature and extent of the risk he ran impliedly agreed to
incur it.’
Conduct which might give rise to the defence of consent is also likely to involve contributory negligence
which is discussed below. The courts are now more likely to make a finding of contributory negligence
that has the effect of apportioning fault between the parties, rather than consent which is a complete
defence. The defence of consent is not normally available in what are known as ‘rescue cases’. These
are situations where a claimant is injured while attempting to rescue someone or something from a
dangerous situation caused by the defendant’s negligence. Provided the claimant’s actions are
reasonable in the circumstances, the defences of consent and contributory negligence will not apply.
Haynes v Harwood 1935
The claimant policeman was injured trying to stop runaway horses pulling a van along a crowded street.
The defendant had left the horses and van alone and a boy had caused them to bolt.
Held: The claimant could recover damages for his injuries. The defence of volenti and contributory
negligence did not apply.
Eagle Charalambous Transport Limited V Phiri 1994
On October 1988 the plaintiff and DW2, who were both employed by the defendant as lorry mate and
driver respectively, left Mufulira to deliver copper cathodes to Tazara Depot at Kapiri Mposhi. On the
way, a tyre burst, the truck overturned, and the plaintuiff sustained severe injuries in his left arm and
leg. In his statement of claim, he had evidence to support the allegation that the front left wheel of the
truck was worn out and the accident happened due to speed and bursting of the tyre. In the alternative,
he pleaded res ipsa loquitur. The defendant denied negligence and pleaded volenti non fit injuria.
133
The first court ruled in favour of the plaintiff. The defendant appealed against the findings of fact and
law, and the award of damages.
Held: The doctrine of res ipsa loquitur is no more than a rule of evidence affecting the shifting of the
burden of proof. It indicates that the plaintiff has no affirmative evidence of negligence. It is
inappropriate for a plaintiff to assert and give particulars of negligence and at the same time or in the
alternative, rely on the doctrine. Furthermore the English authorities suggest that the defence of volenti
non fit injuria should be rarely applied in a master servant relationship. However here it was applicable
regardless of the relationship between the parties, provided, as in this case, the plaintiff was fully aware
of the nature of the risk involved and freely and voluntarily assumed that risk.
4.3 Contributory negligence

This defence arises where a person suffers damage as the result partly of his own fault and partly of the
fault of any other person or persons. If contributory negligence applies, a claim in respect of that damage
shall not be defeated by reason of the fault of the person suffering the damage. However the damages
shall be reduced to such an extent as the court thinks is just and equitable having regard to the
claimant’s share of the responsibility for the damage.
The effect of such a defence is that any award of damages may be reduced to the extent that the
claimant was to blame for the injury or loss. For example if the court assesses the claimant’ s loss as E
100,000 but finds that he was 25 per cent to blame for what happened, his damages will be reduced
by 25 per cent and he will receive E75,000 damages. Failure to wear a seat beat is an example of
contributory negligence and can result in a 25 per cent reduction if wearing the belt would have
prevented the injury.
4.4 Statutory or common law justification

A person may have a good defence to an action in tort if he can show that his acts are covered by
statutory authority. For example the Criminal Procedure Code Chapter 88 of the laws of Zambia sets out
police powers of arrest, entry and search. If these powers are exercised lawfully, the Act will provide a
good defence to an action in tort. Self defence and chastisement of a child by a parent are both defences
to the tort of trespass to the person, provided the force used is reasonable.
4.5 Necessity
If a person commits a tort but only from preventing a greater harm from occurring, he may be able to
raise the defence of necessity. The defendant must be able to show that there is an imminent threat of
the danger to person or property and that his actions were a reasonable response to the circumstances.
4.6 Illegality
It is a general principle of law that a person will not be able to maintain a cause of action if he has to
rely on conduct which is illegal or contrary to public policy.
Thackwell v Barclays Bank 1986
Thackwell brought an action against the bank for conversion of a cheque to which he claimed to be
entitled. The cheque represented the proceeds of fraud against a finance company in which Thackwell
had been a party.
Held: Thackwell’s claim was barred by illegality. It was contrary to public policy to allow him to enjoy
the proceeds of his fraud.
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……………………
The award to the claimant can be reduced if it is shown that he contributed to his injury. The
defendant can be exonerated if it can be proved that the claimant expressedly or impliedly consented
to the risk.
……………………
5 Remedies in tort
……………………
We now look at what remedies are available should an action in tort be successful.
……………………
5.1 Available remedies

The remedies which are generally available in respect of tortuous conduct are damages and an
injunction. Damages consist of a payment of money by the defendant to the claimant. Tort damages are
intended to be compensatory, that is the aim is to put the injured party in position he would have been
had he not sustained the wrong. In some situations the courts will award non-compensatory damages.
5.2 Nominal damages

These will be awarded in respect of torts which are actionable per se, for example trespass to land,
where the claimant cannot show that he has not suffered any loss.
5.3 Exemplary damages

These are designed to punish the defendant. They are only available in certain special cases, for
example where there is arbitrary, unconstitutional or oppressive action by government servants such as
false imprisonment.
5.4 Injunction
An injunction is a discretionary order of the court requiring the person to cease committing a tort. There
are different kinds of injunction:
 Interim injunction is a temporary order which can be granted pending a full trial of the action
 Quia timet injunction may be ordered before any damage is done as a preventative measure
 Prohibitory injunction will stop the defendant from committing a tort
 Mandatory injunction requires the defendant to take positive steps to stop a tort from being
committed.
If the defendant fails to obey an injunction, he or she will be in contempt of court and may be dealt with
by way of fine or imprisonment
.……………………
The main remedies in tort are damages and injunctions.
……………………
EXAM ALERT
Professional liability for negligence is a particularly examinable topic in this chapter, although negligence in
other circumstances is also a very likely topic.
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Chapter Roundup
 The law gives various rights to persons. When such a right is infringed, the wrongdoer is liable in tort.
 Negligence is the most important modern tort. To succeed in an action for negligence the claimant must
prove that the defendant had a duty of care to avoid causing injury, damage or loss; there was a breach
of that duty by the defendant; in consequence the claimant suffered injury, damage or loss.
 Professional individuals and organisations have a special relationship with their clients and those that
rely on their work. This is because they act in an expert capacity.
 The Caparo case is fundamental to understanding professional negligence. It was decided that auditors
do not owe a duty of care to the public at large or to shareholders increasing their stakes in the
company.
 The award to the claimant can be reduced if it is shown that he contributed to his injury. The defendant
can be exonerated if it can be proved that the claimant expressedly or impliedly consented to the risk.
 The main remedies in tort are damages and injunctions.
Quick Quiz
1 In tort no previous transaction or contractual relationship need exist. True/False?
2 The neighbour principle was established by which landmark case?
3 When the court applies the maxim res ipsa loquitur, it is held that the facts speak for themselves and
the defendant does not have to prove anything, since the burden of proof is on the claimant. True/False?
4 Briefly describe the defence of volenti non fit injuria.
5 The Caparo decision can be summarised as laying down that a public company’s auditors owe no duty
of care to the public at large who rely on the audit report when deciding whether to invest.

1 True
2 Donoghue v Stevenson 1932
3 False. The burden of proof under res ipsa loquitur is reversed. The defendant must prove that he was not
negligent.
4 The claimant expressedly or implicitly consents to the risk.
5 True. Auditors do not owe a duty of care to the public at large.
136
PART C: COMPANY LAW
137
138
FORMATION OF BUSINESS
ASSOCIATIONS
This chapter summarises the different types of business organisation that you may encounter in
Zambia. The later part of the chapter focuses on companies. We shall discuss partnerships in detail in
Chapter 8.
chapter
7
syllabus
references
topic index
1 Types of business organisation 7A

2 Types of companies 7A
3 Business names 7A
139
LEARNING OBJECTIVES
 Distinguish between sole traders, partnerships and companies
 Explain the meaning and consequences of limited liability
 Describe different types of company
 Explain the business names regulations
1 Types of business organisation

……………………
We start this chapter by looking at the different types of business organisation that you may
encounter.
……………………
1.1 Classification of organisations

Business associations in Zambia may be broadly classified into the following categories:
 Sole proprietorships
 Partnerships
 Cooperatives
 Companies limited by shares or guarantee
 Statutory corporations
1.2 Sole proprietorships

Sole proprietorships are also loosely (but erroneously) called “one-man companies”. They include
businesses such as retail trading, transport business (especially passenger transport), bottle stalls,
barbershops, tailoring shops and farms.
Although run commercially, sole proprietorships are normally conducted on a personal basis. They are
usually owned by an individual, who operates it with the assistance of family members.
Sole proprietorships are easy to form and they are operated very informally. While sole proprietorships
must comply with various laws, including tax laws and licensing legislation and must also comply with
the Registration of Business Names Act (discussed below).
The most significant disadvantage of a sole proprietorship is that it has no separate existence from its
owner. In the event of failure to pay the debts of the business the owner’s personal assets are at risk
from creditors, that is there is no limited liability. Similarly, the continuance of the business may be
placed in jeopardy when the owner dies. It has no perpetual succession.
1.3 Partnerships
Zambian law recognizes unincorporated business associations called partnerships. The law governing
partnerships in Zambia is the English Partnership Act of 1890. It applies in Zambia by virtue of the
English Law (Extent of Application) Act Chapter 11 of the Laws of Zambia. The statutory law on
partnerships in the Act is supplemented by judicial decisions and general common law principles.
Although it is possible to form a limited partnership in terms of the Limited Partnerships Act of 1907, in
practice no such partnerships exist in Zambia. When the limitation of liability is desired, it is preferable
for the association to be formed as a limited company under the Companies Act.
140
1.4 Cooperatives
A cooperative is a form of business association. The cooperative idea however is not a single idea but a
number of ideas and concepts. A cooperative is often conceived as a communal group of mutually
dependent individuals who come together for the purpose of exploiting their strength of numbers to
achieve a set economic goal. Cooperatives are often set up by persons seeking to improve their position
in areas such as agriculture and marketing. The current law governing cooperatives is the Cooperative
Societies Act No. 20 of 1998. It sets out provisions on formation, registration and organization.
1.5 Companies
There is no strict or technical definition of the word “company”. It may be defined as an association of
persons with a common purpose. S2 of the Companies Act Chapter 388 of the laws of Zambia
(hereinafter called the Act) defines ‘company’ as:
‘A company incorporated under this Act or an existing company.’
This is not a very useful definition.
In Tennant v Stanley 1906 Buckley J. defined the word ‘company’ as follows:
‘The word company has no strict technical meaning. It involves two ideas namely, first that the
association is of persons so numerous as not to be aptly described as a firm and secondly that the
consent of all the other members is not required for the transfer of a member’s interest.’
In Darmouth v Warword 4 Wheat (US) Marshall C.J. defined a company as
‘A person, artificial, invisible, intangible and existing only in the contemplation of the law being a mere
creature of the law. It possesses only those properties which the charter of its creation confers upon it,
either expressly or incidental to its existence.’
In Zambia, a registered company is one formed and registered under the Companies Act Chapter 388 of
the Laws of Zambia of 1994. The definition also includes existing companies that were formed before
this Act. A company comes into existence at a definite point in time. A company is deemed to come into
existence when it is registered under the Act, that is when its name is entered into the Companies’
register meant for the purpose under the Act and the Registrar of Companies issues a Certificate of
Incorporation to it. This certificate is in a prescribed form and states that the company is on, and from
the date specified in the certificate, incorporated.
Registered companies are governed by the provisions of the Companies Act and by the rules made there
under as well as by the articles of the company itself. S13 of the Act lists the types of Company that can
be incorporated under the Act as:
PART C: COMPANY LAW // 7: Formation of business associations

 Public companies, and
 Private companies, which can be:
 Limited by shares,
 Limited by guarantee
 Unlimited companies
……………………
In a sole tradership, there is no legal distinction between the individual and the business. The
individual may be liable for the debts of the business.
Partners are jointly liable for all partnership debts that result from contracts that the partners have
made which bind the firm.
A registered company is a company formed and registered under the Zambian Companies Act.
……………………
141
2 Types of companies
……………………
The second section of this chapter looks at companies in more detail.
……………………
2.1 Limited companies

A limited company is one where the liability of the members is limited. The members are liable to a
limited amount and beyond that limit they cannot be called upon to contribute to the liabilities of the
company. Thus, assuming that in the event of winding up of a company the assets are not sufficient to
pay the liabilities, then the private property of the shareholders cannot be attached or forfeited to pay
the company’s liabilities.
A private company limited by shares or by guarantee is obliged under the Companies Act to include the
word “limited” in its name as provided under s37(1) of the Act, while a public limited company must
have “Plc” at the end of its name.
2.2 Companies limited by shares

The vast majority of limited liability companies are companies limited by shares. Such companies must
have a share capital. A company limited by shares is one where the liability of its members i.e. its
shareholders, is limited to the unpaid amount (if any) on the shares held by them. In s 17(3) and 266
(1) of the Act members of the company who still owe money for the shares that they have, will be
called upon to contribute in the event that the company is wound up and its assets are not sufficient to
discharge its liabilities. This liability of the members can also be enforced both when the company is in
normal existence. A company limited by shares can be private or public.
2.3 Companies limited by guarantee

This is provided for in s19 of the Act. The liability of the members here is limited to the amount the
members agree to contribute to the company in the event that the company is wound up. Each
subscriber to an application for incorporation of a company limited by guarantee is required to sign a
declaration guaranteeing that amount they will pay in the event that the company winds up.
The guaranteed amount may differ from member to member or it may be fixed by the articles. The
liability of the members can only be enforced during the winding up of the company as members cannot
be called upon to pay their guaranteed amounts during the operation of the company.
While in some jurisdictions, companies limited by guarantee may or may not have share capital; in
Zambia such companies have no share capital. This means that such companies do not receive their
initial capital from their members. Their sources of initial capital include grants, subscriptions,
endowments etc.
S19(5) of the Act prohibits companies limited by guarantee from carrying on business for purposes of
making a profit for members or anyone concerned with their promotion or management. It is for this
reason that companies limited by guarantee are confined almost exclusively to charitable and
philanthropic causes. A company limited by guarantee can never be a public company. Under s39 of the
Act, the Registrar may, on application from such a company, allow it to dispense with the word
“limited” in its name. In practice this provision is often invoked.
2.4 Unlimited companies

An unlimited company is a company having no limit at all on the liability of its members who are
personally liable for the company’s debts and liabilities. If, when winding up, the assets are not
sufficient to discharge the liabilities then the personal property of the members can be attacked for the
142
purpose of settling the company’s obligations. However there is still privity of contract and separate legal
identity. Creditors cannot go after the property of members during the normal business of the company.
Unlimited companies are provided for in section 20 of the Act. The Act directs that such companies
must have a share capital. From the definition of a private company in section 2 of the Act, it is obvious
that an unlimited company can never be a public company.
According to Section 20(3) of the Act when an unlimited company is wound up, the members are liable
to contribute without limit, but not when the company is operating as a going concern. While section 37
of the Act imposes an obligation on all limited companies to use “Limited” as part of their name, there is
no equivalent provision in respect of an unlimited company to add the word “Unlimited” after its name.
2.5 Public companies

S14 states that a public company shall:
 Have share capital
 Specify in its articles the rights, privileges, restrictions and conditions relating to each class of
share and the authority given to directors in relation to determining to which shares these apply
 Have shares ranking equally except for class rights
 Contain the requirement for members to contribute the amount unpaid on their shares if the
company is wound up
 Not include any restrictions on the right to transfer shares, apart from shares on which there is
unpaid liability and some restrictions relating to directors’ shares
S15 provides that a public company shall not do business unless it has obtained a certificate from the
Registrar. To obtain this certificate, the directors must make a statutory declaration that the nominal
value of allotted share capital is not less than the authorised minimum (1 million kwacha).
If a public company does business without obtaining a Registrar’s certificate, the directors are liable to a
fine, and if the situation persists, joint and several liability.
……………………
Companies can be classified as public companies (limited by shares) or private companies (limited
by shares or guarantee, or unlimited).
……………………
3 Business names
……………………
In this section we look at the rules governing the names businesses in Zambia can use.
……………………
3.1 Business names regulations

The Registration of Business Names Act Chapter 389 of the Laws of Zambia directs that any person,
firm or corporation carrying on business under any name other than the true Christian name and
surname of the owner must register under the Act. This requirement for registration captures individuals,
firms corporations and partnerships. Section 3 reads:
Subject to the provisions of this Act:
(a) Every firm having a place of business in Zambia and carrying on business under a business name
which does not consist of the true surnames of all partners who are individuals and the corporate
names of all partners who are corporations without any addition other than the true Christian
names of individual partners or initials of such Christian names;
143
(b) Every individual having a place of business in Zambia and carrying on business under a business
name which does not consist of his true surname without any addition other than his true
Christian names or the initials thereof;
(c) Every individual or firm having a place of business in Zambia, who, or a member of which, has
either before or after the commencement of this Act changed his name, except in the case of a
woman in consequence of marriage;
shall be registered in the manner directed by this Act. Provided that:
(i) where two or more individual partners have the same surname, the addition of an "s" at
the end of that surname shall not of itself render registration necessary
(ii) where the business is carried on by a trustee in bankruptcy or a receiver or manager

appointed by any court, registration shall not be necessary
(iii) a purchase or acquisition of property by two or more persons as joint tenants or tenants in
common is not of itself to be deemed carrying on a business, whether or not the owners
share any profits arising from the sale thereof.
3.2 Procedures for registration

The procedure for registration of a business name is straightforward. The person/firm required to register
under the Act must deliver to the Registrar of Business Names a completed application form, which is
prescribed under the Act together with the application fee. The application forms for registering a
business name are obtained from the Registrar of Business Names at PACRA. The form used must be
the one obtained from the Registrar’s office for a fee. The Registrar will not accept a computer generated
application form.
In terms of the registration of business names, corporations, firms and individuals will be required to
complete different forms. The particulars required under these forms include:
 The proposed business name
 The general nature of the business
 The present Christian and surnames of the person (if an individual) or those of the partners (if a
firm) or corporate name (if a corporation)
 The age of the individual/partners as the case may be
 The commencement date of the business
The Registration of Business Names Regulations 1998 introduced a requirement for filing of annual
returns for any entity registered under the Regulations.
……………………
Businesses registered in Zambia must comply with the Registration of Business Names Act.
……………………
EXAM ALERT
Questions on the contents of this chapter will often ask for comparisons of the different entities discussed.
144
Chapter Roundup
 In a sole tradership, there is no legal distinction between the individual and the business. The individual
may be liable for the debts of the business.
 Partners are jointly liable for all partnership debts that result from contracts that the partners have made
which bind the firm.
 A registered company is a company formed and registered under the Zambian Companies Act.
 Companies can be classified as public companies (limited by shares) or private companies (limited by
shares or guarantee, or unlimited).
 Businesses registered in Zambia must comply with the Registration of Business Names Act.
Quick Quiz
1 Businesses in the form of sole traders are legally distinct from their owners. True/False?
2 Complete the following sentence. For a company limited by guarantee, the liability of the members is
limited to.......
3 Members of an unlimited company can only become liable for the debts of the company when it is
wound up. True/False?

1 False. Sole trader businesses are not legally distinct from their owners.
2 The amount members agree to contribute to the company in the event that it is wound up.
3 True
145
146
PARTNERSHIPS
Partnerships are a common form of business organisation and are commonly used for small businesses
and some professional businesses, for example accountants.
Partnerships are a group of individuals who have an agency relationship with each other. We shall look
at how partnerships are formed and later terminated, and how relationships with other partners and
with third parties work.
chapter
8
syllabus
references
topic index
1 Partnerships 8A
2 Types of partner 8A
3 The partnership deed 8B
4 Rights of partners 8C
5 Duties and authority of partners 8C
6 Dissolution of partnerships 8D
7 Limited partnerships 8E
147
LEARNING OBJECTIVES
 Explain how partnerships are established
 Describe the main features of partnership agreements
 Analyse the rights and duties of partners in relation to each other
 Describe the ways in which partnerships come to an end
 Describe the main features of limited liability partnerships
1 Partnerships
……………………
We start off by looking at how partnerships are formed and the differences between partnerships and
limited companies.
……………………
1.1 What is a partnership?

S2 of the Partnership Act of 1890 (hereinafter called the Act) defines a partnership as a
‘relation which subsists between persons carrying on a business in common with a view of profit’.
A relation between members of a company is excluded from this definition. According to s1(3) of the
Act, ‘persons who enter into partnership with each other are collectively called a firm’.
Three things must exist for an organisation to be a partnership:
 It must be a business.
 The business must be carried on in common between two or more partners.
 Persons carrying on the business must do so for profit and unless the profit is shared, the
partnership relationship cannot exist.
1.2 Formation of partnerships

Persons wishing to form a partnership must have the necessary capacity. A limited company may be a
partner so long as it is not ultra vires its articles. A minor may be a partner but he may repudiate the
partnership agreement while still a minor or within a reasonable after attaining his majority. However, a
minor is not liable for partnership debts incurred during his minority.
1.3 Illegal partnerships

An illegal partnership is a partnership formed for a purpose that is contrary to public policy or where it
cannot be carried on without breaking the law. Where a partnership is found to be illegal the court will
not recognise any rights of the partners between themselves. A partnership is automatically dissolved on
the happening of any event that makes it unlawful for the business of the firm to be carried on.
1.4 Distinction between partnerships and limited companies

1.4.1 Formation
A partnership is easier and cheaper to form and maintain. More expenses are incurred in incorporating a
company and filing annual returns.
148
1.4.2 Accounts
It is not necessary to publish partnership accounts. Company accounts are made public.
1.4.3 Debts
A partner is liable for the debts of the firm. A shareholder is not liable for the debts of the company once
his shares are fully paid up.
1.4.4 Property
Partners own a firm’s property in common. A company has separate legal identity/personality and owns
its own property in its own right.
1.4.5 Transfer of shares

The general rule is that without the consent of the other partners, a partner cannot transfer his share of
the partnership to another so enabling that other to become a partner. Shares in companies, particularly
in Plcs are freely transferable.
1.4.6 Agency
A partner can make a contract as an agent of the firm. Shareholders are not generally agents of the
company (directors are).
1.4.7 Death/bankruptcy
Death or bankruptcy dissolve a partnership unless there is agreement to the contrary. A company
continues even if a shareholder dies/become bankrupt.
……………………
Partnership is defined as ‘the relation which subsists between persons carrying on a business in
common with a view of profit.’ A partnership is not generally a separate legal person distinct from its
members; it is merely a relation between persons. Each partner (there must be at least two) is
personally liable for the debts of the firm.
……………………
2 Types of partner
……………………
This section briefly explains the distinctions between different types of partners.
……………………
PART C: COMPANY LAW // 8: Partnerships
2.1 General partners

This is the usual type. Under s24 he has the right to take part in the management of the business
unless there is an agreement between himself and the other partners that he should not. For example,
the partnership agreement may say that some junior partners are not to order goods or sign cheques.
However, in spite of the restrictions of this kind, if a junior partner ordered goods on behalf of the firm,
though he had no authority to do so, the contract would be good and the seller could sue the partners
for the price if they did not pay. However, by ignoring the partnership agreement and making
unauthorised contracts in this way, the junior partner could give his co-partners grounds to dissolve the
firm, on the grounds that he was in breach of the partnership agreement, and exclude him from their
future business operations.
149
2.2 Dormant partners
The Act does not mention this type of partner. He is a partner who puts money (capital) into the firm but
takes no active part in the management of the business. If he does take part in management, he would
cease to be a dormant partner and become a general partner.
2.3 Salaried partners

Salaried partners are paid a salary just as an employee is with tax and national insurance being
deducted from it. They are not partners fro the purpose of dissolving the firm. If they want to leave they
do so by serving out their notice or getting paid instead.
However, because they often appear on the firm’s letterheading as partners, or on the list of partners,
they could be liable to pay the debts of the firm as a partner if the outsider has relied on their status as
such. Because of this, a salaried partner should get a full indemnity from the general partners in case he
is made to pay the firm’s debts or meet its liability to its clients. In practice this will not happen unless
the firm has not paid its debts or not satisfied its liability to clients. Liability as a partner is joint and
several so that if A is a full partner and B a salaried partner and the debt is E2, 000, either A or B could
be made to pay it all and then claim only a contribution which would often be one half, from the other
partner. Thus if B pays the E2,000, he is entitled to E1, 000 from A. However, if B gets an indemnity
from A, then if B has to pay the E2,000, he can recover all of it from A.
The issue of liability is no real problem for the salaried partner in the large firm which has insurance and
extensive assets, but the practice has spread to medium and small firms of for example, accountants
and solicitors where problems could arise in terms of partner liability.
2.4 Partners by holding out (estoppel)

The usual way in which this happens in practice is where a person allows his or her name to appear on
the firm’s letterheading or on the list of partners for inspection. It can also happen on the retirement of a
partner if the partner retiring does not have his name removed from the letterheading or list. Under s14
of the Act:
‘Everyone who by words, spoken or written, or by conduct, represents himself, or knowingly allows
himself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has,
because of that, given credit to the firm or advanced money to it.’
Thus although such a person is not truly a partner, he may be sued by a client or creditor who relied on
the fact he was a partner. However, to become a partner by holding out (or estoppels, as it is also
called), the person held out must know that he is being held out as a partner and if he knows it, it must
also be shown that he consents.
Tower Cabinet Co Ltd v Ingram 1949
In January 1946 Ingram and a person named Christmas began to carry on business in partnership as
household furnishers under the name of ‘ Merry’s’ at Silver Street, Edmonton London. The partnership
lasted until April 1947 when it was brought to an end by mutual agreement. After the dissolution of the
firm, Christmas continued to run ‘Merry’s’ and had new notepaper printed on which Ingram’s name did
not appear. In January 1948 Christmas was approached by a representative of Tower Cabinets and
eventually ordered some furniture from them. The order was confirmed on a letterheading which had
been in use before the original partnership was dissolved and Ingram’s name was on it, as well as that
of Christmas. Ingram had no knowledge of this and it was contrary to an agreement which had been
made between him and Christmas that the old letterhead was not to be used. Tower Cabinets obtained
a judgment for the price of the goods against Merry’s and then tried to enforce that judgment against
Ingram as a member of the firm.
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Held: The Court decided that since Ingram had not knowingly allowed himself to be represented as a
partner in Merry’s within s144 of the Partnership Act 1890, he was not liable as a partner by holding
out (or estoppels).
As the above case shows, a partner who has retired will not be liable if after retirement his name
appears on the firm’s letterheading if the other partners agree before he retires that the stock of old
letterheading will be destroyed or that his name will be crossed out. If old notepaper is used in spite of
the agreement, the ex-partner is not liable. There is no duty in law to stop people telling lies. However
something should be done to show lack of consent if it is known that the old letterheadiing is being
used. This could be for example, a recorded delivery letter to the continuing partners expressing dissent.
A partner who intends to work with the firm, perhaps part time, after retirement, can avoid the above
problems by describing himself on the firm’s letterheading as a ‘consultant’.
The person who holds himself out is liable to a client or creditor who has relied on him being a partner
under s14 of the Act. However, in Hudgell, Yeates & Co v Watson 1978, the court said that the true or
actual partners could also be liable to such a client or creditor if they themselves were responsible for
the holding out or knowingly allowed holding out to take place.
S14 of the Act provides that the continued use of a deceased partner’s name will not make his estate
that is the property he has left on death) liable for the debts of the firm.
It is worth noting that the ‘holding out’ provisions of s14 of the Act are applied by the Court when
making a salaried partner liable.
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Partnerships mainly consist of active, general partners who are remunerated by sharing in
partnership profits. Some partners however may be remunerated by a salary.
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3 The partnership deed

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The partnership deed or agreement governs the partnership’s existence and how it operates.
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3.1 Contents of partnership deed

The partnership deed or agreement should contain a number of clauses.
3.2 Nature of the business or practice

This must be clearly stated in the agreement to avoid the possibility of disputes as to what actually
constitutes the real business of the firm.
3.3 Name of the firm

The name used can be any name provided it complies with the requirements of the Registration of
Business Names Act Chapter 389. The physical address of the firm must be given when registering the
name so that people know it.
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3.4 Duration
The date that the partnership commences should be stated. This date may be before the date of the
agreement. The general rule is that a partnership only lasts as long as the will of the partners, unless a
definite term is expressed or implied in the agreement.
3.5 Capital of the firm

The agreement must state the capital of the firm and how the partners will subscribe for this.
3.6 Division of profits

All partners are entitled to share equally in the profits of the firm unless they agree otherwise.
3.7 Bank accounts and drawing of cheques

A partnership deed must specify into which bank account the firm’s money and income (cash/cheques)
will be deposited. It must also make provision as to the signatories to the bank account. Normally a
senior partner signs cheques or if the partners are all of equal rank, there must be provision that any or
two of the partners can sign.
3.8 Management
The partnership deed must state whether all the partners are entitled to take part in the management of
the firm or only some of them. In the absence of any provision, all partners are entitled to take part in
management. It is also important to specify that no one partner can enter into any contract worth more
than a specified amount and also cannot give credit to a debtor which is greater than a specified
amount. A clause stating the extent to which a partner can engage or dismiss an employee must be
provided.
3.9 Accounts
The deed must provide for the keeping of books of accounts as well as for preparing quarterly, half
yearly and annual accounts.
3.10 Retirement from the firm

There should be a clause that states that any partner can retire by giving notice to that effect.
3.11 Cessation on death or retirement

The deed can provide that death/retirement of a partner will not automatically end the partnership in
order that the firm’s goodwill is not lost. Partners can agree that the partnership should continue.
3.12 Restrictions on retiring partners

It is necessary to have a clause preventing a retiring partner from carrying on a competing business.
However, such a restriction can only be enforced if it is reasonable and this will depend on the
circumstances of each case. A covenant in restraint of trade imposed on a retiring partner is enforceable
where the covenant is a reasonable one.
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Whitehill v Bradford 1952
Four doctors carried on a partnership as general medical practitioners in Atherstone in Warwickshire in

the United Kingdom. The Partnership deed was dated February 9, 1945 and stated that a retiring
partner should be for 21 years prohibited from directly carrying on or being interested or concerned in
carrying on the profession of medicine, surgery, midwifery, or pharmacy or any branch thereof anywhere
within a radius of 10 miles of the parish church of Attherstone. In that year Bradford retired and
continued to practice in the district. The other partners applied for an injunction to restrain him from
doing so.
Held: The injunction would be granted. The restraint was reasonable in regard to its extent and its
radius.
3.13 Arbitration
An arbitration clause is essential so that any disputes are not settled by costly and public litigation that
may damage the firm’s business and the reputation of the partners is thus also protected.
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The partnership deed or agreement should define its business, capital, profit-sharing and
management arrangements, and also set out what happens when a partner leaves or retires from the
partnership.
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4 Rights of partners
……………………
S24 of the Partnership Act sets out the rights of partners subject to any express agreement between the
parties to the contrary.
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4.1 Capital and profits

All partners are entitled to share equally in the capital and profits of the business. Similarly, they must
also contribute equally towards any losses sustained.
4.2 Indemnity against liabilities

The firm must indemnify each partner in respect of payments made and personal liability incurred by
him in the ordinary and proper conduct of the business of the firm. This right to indemnity lies with
respect to necessary acts. It does not extend to mere voluntary ones that the partner who undertakes the
liability thinks may be advantageous to him (I.e. acts must be done in the interest of the firm.)
4.3 Advances to the firm

Partners who give advances to the firm in excess of the amount that they agreed to subscribe as capital
are entitled to interest from the date of the payment of the advance. S24(3) of the Act puts the interest
rate at 5% per annum but in practice this is varied. Reason: the advance is not an increase in capital
but a loan upon which interest is properly due.
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4.4 Interest on capital
Subject to any agreement between the partners, interest is not payable on the capital subscribed by any
partner before profits are ascertained.
4.5 Management of the firm

Every partner may take part in the management of the partnership business unless there is a contrary
agreement. The law implies that each partner shall attend to, and work in the business. If he fails to do
so, this may be ground for dissolution of the partnership. The court may alternatively order that such a
partner compensates the industrious partners for the extra trouble caused by his idleness. However
although the law infers that partners must attend to the business, the partnership deed may provide that
where there are junior and senior partners, the junior partners may be bound to attend to the business
but senior partners may not be obliged to do so. The partnership deed may also contain a clause
authorising each working partner to take a salary in addition to his share of the profits. This results in
working partners receiving more than partners who are not obliged to attend to the business of the firm.
4.6 Remuneration
Subject to any agreement to the contrary, no partner is entitled to remuneration for acting in the
partnership business. However if the firm is wound up after the death/retirement/insanity of one of the
partners, the fact that all the work is thrown on the other partners will necessitate some compensation
being paid to them out of the profits.
4.7 Introduction of new partners

No person may be brought into a partnership without the consent of all the other existing partners.
However, if the partnership deed provides that one or more partners shall have the option of introducing
new partners, either as his successor or otherwise, the other partners will be bound to accept his/their
nominee.
Byrne v Reid 1902
Under clause 9 of the Partnership deed a father had power to nominate his son as a partner. He did so,
but the other partners refused to admit him into the firm. Later a consent order was made by which they
gave an undertaking to execute all such deeds as might be necessary for him to be admitted. They did
not comply with the undertaking so the son applied to court to compel them to do so.
Held: The court held that they must do so. Even if there had been no such undertaking, the Court would
have given relief to the son, for, on his accepting the nomination, he became in equity a partner and
entitled to such relief as the Court was in the habit of granting to persons who stood in the relation of
partners.
Where a person has been duly nominated as a partner under a clause in the Partnership agreement and
the other partners refuse to admit him as partner, he can successfully get a court order compelling the
others to accept his nomination - although this will make working conditions difficult.
4.8 Differences on matters relating to partnership business

Subject to any contrary agreement, differences about ordinary matters connected with the partnership
business may be decided by a majority of the partners. However no change may be made in the nature
of the business without the consent of all of the partners.
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4.9 Partnership books
Books must be kept at the firm’s place of business. Every partner has the right to have access to any of
them if he so desires. This right may be exercised by a partner in person or through his agent provided
the agent undertakes not to use the information so acquired for any other purpose. S24(9) of the Act
gives the right to a partner to inspect and copy the partnership books. This right can also be exercised
by an agent of the partner. The right is not confined to the partner personally.
Bevan v Webb 1901
The sleeping partners in a brewery business were about to enter into a contract to sell their interests to
the managing partners. They therefore employed a valuer to inspect the books for them. However the
managing partners refused to allow him to do so, claiming that the right of inspection could only be
exercised by a partner personally. The sleeping partners applied for an injunction to compel the
managing partners to allow the valuer have access to the books.
Held: The injunction would be granted. The right of inspection could be delegated to an agent, assuming
that he was a person to whom no reasonable objection could be taken, and he was willing to undertake
not to use for any other purpose the information he acquired during the inspection of the books.
4.10 Expulsion of a partner

A majority of the partners cannot expel any partner unless there is a contrary agreement in the
partnership agreement. All partners must agree to expel a partner. Where a partnership deed states that
‘if a partner is guilty of misconduct, the others may expel him’, one partner acting alone cannot exercise
the power of expulsion, even though s61 of the Law of Property Act 1925 states that ‘the singular
includes the plural and vice versa’.
Re A Solicitor’s Arbitration 1962
Clause 31 of a partnership deed relating to a partnership consisting of three solicitors named Egerton,
Nicholas and Smeaton stated that “ if any partner shall commit or be guilty of any act of professional
misconduct... the other partners may by notice in writing given to him...expel him from the
partnership...’ Egerton served on the other two partners a notice to expel them from the partnership on
the grounds of their alleged misconduct. He claimed that the clause gave him this power because s61 of
the Law of Property Act 1925 stated that ‘in all deeds...unless the conduct otherwise provides...(c) the
singular includes the plural and vice versa.
Held: Egerton had no power to expel Nicholas or Smeaton except as a joint action with Smeaton or
Nicholas.
A notice of expulsion of a partner on the ground that he was guilty of a flagrant breach of his duties is
valid, even though no opportunity of explanation is given to him, provided that the other partners act in
good faith.
Green v Howell 1910
A clause in a partnership agreement stated that a partner, who was guilty of a flagrant breach of his
duties could be expelled by the other partner subject to an appeal to an arbitrator. The other partner
concerned, acting in good faith, served on him a notice of expulsion without giving him an opportunity of
explanation. The question was whether this constituted a valid notice.
Held: The notice was valid.
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4.11 Termination of a partnership
If there is no fixed termination date, any partner may terminate the partnership entered into between the
partners by for example. resigning and then the partnership will cease.
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Rights of partners under legislation include the right to share in profits and management, the right of
indemnity, the right to approve new partners and the right to terminate the partnership.
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5 Duties and authority of partners

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Along with rights, partners also have a number of duties to other partners laid down by legislation.
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5.1 Statutory duties

Sections 28 and 30 of the 1890 Act impose the following duties on partners.
5.2 Duty to render true accounts and full information

Where a partner sells his share in the partnership to another, the purchaser, who has greater knowledge
of the accounts than the vendor has, must disclose it. If he does not do so, the transaction is voidable.
Partners must give a true account and provide full information of all things affecting the firm to any other
partner or his legal representative.
Law v Law 1905
A partner sold his share in the partnership to another partner for E 21,000, but later found out that the
partnership assets consisted of mortgages and other securities, the existence of which had not been
disclosed to him by the other partner, who knew all about them. So the partner who had sold his share
asked for the agreement to be set aside.
Held: An order to this effect would have been made , but, on the facts, a settlement of the claim had
been made and the partner had elected to be bound by it, so the transaction would not in the
circumstances be set aside. The court stated that, in a transaction between co-partners for the sale by
one to the other of a share in the partnership business, there is a duty resting upon the purchaser who
knows, and is aware that he knows, more about the partnership accounts than the vendor, to ensure
that the vendor is in possession of all material facts with reference to the partnership assets. He must
not conceal what he alone knows. Unless such information has been furnished, the sale is voidable and
maybe set aside.
5.3 Accountability for private profits

By s29(1) of the Act:
‘Every partner must account to the firm for any benefit derived by him without the consent of the other
partners from any transaction concerning the partnership or from any use by him of partnership
property, name, or business connection’.
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There may be a situation where a partner uses his position to get a private agreement with the firm’s
customers in relation to goods dealt in by the firm and beneficial only to himself. In these circumstances
he must share the profits he makes with the other partners because he is abusing his position as a
partner for his own ends and to the detriment of the business.
Parthirana v Parthirana 1907
R. W Pathirana and A Pathirana were partners in the business of selling Caltex petrol from a service
station belonging to Caltex (Ceylon) Ltd. They had been appointed by Caltex as its agents. Difference
arose between them and on 10 September 1984 A Pathirana gave three months’ notice for the
dissolution of the partnership. On 21 September 1984, R. W Pathirana wrote to Caltex without his
partners’ knowledge or consent, and enclosed a copy of the notice of the dissolution of the partnership.
He asked for the name and style of the agency to b altered from 1 October to ‘R.W Pathirana ‘ instead of
the present style of ‘R.W Pathirana & A Pathirana’. R.W Pathirana then carried on the business on the
premises in his own name and did not account to his partner for his share of the profits. A Pathirana
claimed that a share was due to him by reason of s29(1) of the Partnership Act 1890.
Held: He was entitled to his share of the profits.
5.4 Accountability for profits from competing businesses

By s30 of the Act:
‘ if a partner , without the consent of the other partners, carries on business of the same nature as and
competing with that of the firm, he must account and pay over to the firm all profits made by him in
that business.’
A partner who carries on a business of the same nature as, and competing with that of, the firm without
the consent of the other partners must be accountable for, and pay to the firm, all profits made by him
in that business.
Trimble v Goldberg 1906
In 1902 Goldberg, Trimble and Bennet entered into partnership for the purpose of buying and then re-
selling certain properties belonging to Mr Hollard. They consisted of 5,500 shares in a company called
Sigma Syndicate, and of stands or plots of land in Johannesburg and elsewhere in South Africa. Trimble
went out to Johannesburg to see Hollard, and bought on behalf of the partnership all the property
belonging to Sigma Syndicate. Goldberg learnt of this purchase some time afterwards, and now brought
an action against Trimble claiming the benefit of the purchase.
Held: The action failed. The purchase of the plot was not within the scope of the partnership, nor was it
in rivalry with the partnership.
5.5 Authority of partners

In simple terms, a partner is the agent of the partnership and their co-partners. This means that some of
their acts bind the other partners, either because they have, or because they appear to have, authority.
The Partnership Act 1890 defines the authority of a partner to make contracts as follows.
‘Every partner is an agent of the firm and his other partners for the purpose of the business of the
partnership, and the acts of every partner who does any act for carrying on the usual way of business if
the kind carried on by the firm of which he is a member bind the firm and his partners, unless the
partner so acting has in fact no authority to act for the firm in the particular matter, and the person with
whom he is dealing either knows that he has no authority, or does not know or believe him to be a
partner.
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Where a partner pledges the credit of the firm for a purpose apparently not connected with the firm's
ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other
partners: but this section does not affect any personal liability incurred by an individual.
If it has been agreed between the partners that any restriction shall be placed on the power of any one
or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm
with respect to persons having notice of the agreement.’
The key point to note about authority of partners is that, other than when the partner has actual
authority, the authority often depends on the perception of the third party. If the third party genuinely
believes that the partner has authority, the partner is likely to bind the firm.
Partners are also jointly liable for crimes and torts committed by one of their number in the course of
business.
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Duties of partners include the duty to provide full information, the duty not to make secret profits and
the duty not to carry on a competing business.
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6 Dissolution of partnerships
……………………
This section looks at the various ways that partnerships can come to an end.
……………………
6.1 Methods of dissolution

A partnership is usually dissolved without the help of the court, though sometimes the court is used.
6.2 Non-judicial dissolution

Any of the following events will normally bring about dissolution of a partnership.
6.3 Ending of the period for which the partnership exists

S32 (a) states that a partnership for a fixed term is dissolved when the term expires. A partnership for
the joint lives of A, B and C ends on their death of A or B or C.
6.4 Achievement of purpose for which partnership formed

By reason of s32(b) of the Act, a partnership for a single undertaking is dissolved at the end of it.
Winsor v Schroeder 1979
S and W put an equal amount of cash to buy a house, improve it, and then sell it at a profit which was
divided equally.
Held: They were partners under s32(b) and that the partnership would end when the land was sold and
the profit, if any, divided.
If the firm continues in business after the period has expired, without any settlement of their affairs by
the partners, an agreement not to dissolve will be implied. Unless there is a new agreement to cover the
continuing partnership, it is a partnership at will. S27 of the Act applies to it so that the rights and
duties of the partners are the same as before the original partnership ended. However, since it has now
become a partnership at will, any partner can give notice to end it.
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6.5 Giving of notice
Under s32(c) of the Act, a partnership which is not entered into for a period of time or a particular
purpose can be dissolved by notice given by any partner, but not a limited partner. The notice must be
in writing if the partnership agreement is in form of a deed (s 26(2)). If not, oral notice will do. The
notice takes effect when all the partners knows of it or from any later date which the person is giving the
notice states as the date of dissolution (s32(c)). No particular period of notice is required. Withdrawal of
the notice requires the consent of all partners, otherwise the dissolution goes ahead and the court will, if
asked by a partner, order the other partners to wind up the firm with him.
The court said in Peyton v Mindham 1971 that it could and would declare a dissolution notice to be of
no effect if it was given in bad faith as for example where A and B dissolve a partnership with C by
notice in order to exclude C from valuable future contracts.
Dissolution by notice depends on what the partnership agreement says. If, the partnership agreement
says that the dissolution requires the mutual consent of the partners, s32 (c) does not apply.
Moss v Elphick 1910
Moss and Elphick were partners in a partnership for an undefined time. A clause in the partnership deed
stated that it could be terminated by mutual agreement only. Moss gave notice to Elphick of his
intention to dissolve the partnership.
Held: The notice was invalid, since the clause stated that the partnership could be terminated ‘by
mutual arrangement only. The Partnership Act 1890 s26(1) was inapplicable. Further, the partnership
was not dissolved by notice under s32 because the words of that section stated ‘subject to the
agreement between the partners’ and there was no such an agreement in the present case.
6.6 Death of partner

Under s33(1) of the Act, the death of a partner (but not a limited partner) dissolves the firm. The share
of the partner who has died goes to his personal representatives who are usually appointed by his will.
They have the rights of a partner in dissolution.
However partnership agreements usually provide that the firm shall continue after the death of a partner
so that the dissolution is only a technical one. A deceased partner’s share is paid out to his personal
representatives, although partnership agreements do sometimes provide for repayment of capital by
instalments, or by annuities, to a spouse or other dependant. Of course, there is bound to be a true
dissolution of a two-partner firm when one partner dies since if the other carries on business, it is as a
sole trader.
6.7 Bankruptcy of partner

By reason of s33(1) of the Act, the bankruptcy of a partner (not a limited partner) dissolves the firm.
The partnership agreement usually provides that the business shall continue under the non-bankrupt
partners, which means that the dissolution is again only a technical one, and the bankrupt partner’s
share is paid out to his trustee in bankruptcy. The agreement to continue the business must be made
before the partner becomes bankrupt.
6.8 Illegality
Under s34 of the Act, a partnership is in every case dissolved by illegality. There can be no contracting
out in the partnership agreement. There are two types of illegality:
 Where the business is unlawful, for example where the objects are unlawful
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Stevenson and Sons ltd v AG fur cartonnagen industrie 1918
The English company, Stevenson, was in partnership with a German company as a sole agent to sell the
German company’s goods. This would obviously involve the day to day trading with an enemy in
wartime and the partnership was therefore dissolved.
Everest v Williams 1725
This was a claim by one highwayman against another to recover his share of the profits derived from a
partnership covering activities as highwaymen.
Held: The claim was dismissed because the partnership was illegal, being to commit crime. The
‘partners’ were sentenced to be hanged.
 Where the partners cannot legally form a partnership to carry on what is otherwise a legal
business
Hudgwell, Yeats & Co v Watson 1918
In this case a firm of solicitors was regarded as dissolved when one partner had made himself
unqualified to practice as a solicitor by mistakenly failing to renew his annual practicing certificate.
6.9 Judicial dissolution

Dissolution by the court is necessary if there is a partnership for a fixed time or purpose and a partner
wants to dissolve a firm before the time has expired or the purpose has been achieved and there is
nothing in the partnership agreement that allows this to be done. There must be grounds for dissolution
which include the following.
6.10 Mental incapability

A petition may be presented on behalf of the partner who is incapacitated or by any of the other
partners.
6.11 Physical incapacity

This is a ground under s35(b) of the Act. The incapacity must be permanent.
Whitewell v Arthur 1865
A partner was paralysed for some months. He had recovered when the Court heard the petition and it
would not grant dissolution.
Partnership agreements often contain express clauses which allow dissolution after a stated period of
incapacity.
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Peyton v Mindham 1971
A clause allowing a fixed-term partnership to be dissolved after nine months’ incapacity was enforced.
S35(b) of the Act states that the incapacitated partner cannot petition. It is up to his co-partners to do
so, otherwise he continues as a partner.
6.12 Conduct prejudicial to the business

S35(c) of the Act provides for this. The conduct may relate to the business.
Essell v Hayward 1860
A solicitor misappropriated £8,000 of trust money in the course of his duties as a partner.
Held: This was a ground for dissolving a partnership for a fixed term, i.e. the joint lives of the partners.
It may also be conduct outside the partnership’s business. This will usually justify dissolution if it results
in a criminal conviction for fraud or dishonesty. Moral misconduct is not enough unless, in the view of
the court, it is likely to affect the business.
Snow v Milford 1868
One partner was alleged to have committed ‘massive adultery all over Exeter’.
Held: This was not regarded by the court as sufficient grounds for dissolution under s35 (c) of the Act.
There was no evidence that the adulterous conduct had affected the business of the partnership.
S35 (c) of the Act forbids a petition by the partner in default.
6.13 Wilful or persistent breach of the agreement

This is covered by s35 (d) of the Act. It includes for example, refusal to meet on business or keep
accounts, continued quarrelling and very serious internal disagreements. However, the conduct must be
serious. Thus occasional rudeness or bad temper would not suffice.
Wilful means a serious breach inflicting damage on the firm. Less serious breaches are enough if
persistent.
Cheesman v Price 1865

A partner failed 17 times to enter small amounts of money he had received in the firm’s books.
Held: The court ordered dissolution. The essential trust between the partners had gone.
S35(d) of the Act forbids a petition by the partner in default. No partner can force dissolution by his own
default.
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6.14 Business can only be carried on at a loss
This is provided for by s35 (e) of the Act. It is hardly surprising as grounds for dissolution in view of the
fact that partners are in business together with a view to profit, as s1 provides. Therefore they must
have a means to release themselves from lt. S35 (e) is not available if the losses are temporary.
Handyside v Campbell 1901
A sound business was losing money because a senior managing partner was ill. He asked the court for
dissolution.
Held: The court would not grant it. The other partners could manage the firm back to financial
prosperity. The court will not, however expect the partners to put in more capital.
6.15 Just and equitable

This is provided for under s35(f) of the Act. The court may dissolve a partnership if it is just and
equitable to do so. This section appears to give the court wide powers to hear petitions which could not
be made under the other five headings. In Harrison v Tennant 1856, a judicial dissolution was ordered
where a partner was involved in long and messy litigation which he refused to settle. A similar order was
made in Baring v Dix1786, where the objects of the firm could not be achieved. The partnership was to
further a patent device for spinning cotton which had wholly failed but Dix would not agree to
dissolution. The court dissolved the firm.
It appears from Re Yenidje Tobacco Co Ltd 1916 , a company dissolution based upon the fact that the
company was in reality a partnership, that deadlock between partners is sufficient grounds for
dissolution, even though the business is prospering.
Any partner may petition under this heading. The court is unlikely, however, to dissolve a firm on the
petition of a partner committing misconduct unless the other partners are doing so well.
……………………
Partnerships may be terminated by passing of time, termination of the underlying venture, death or
bankruptcy of a partner, illegality, notice agreement or by order of the court.
……………………
7 Limited partnerships
……………………
We finish this chapter by looking briefly at partnerships where some or all partners have limited
liability.
……………………
7.1 Rules affecting limited partnerships

The Limited Partnerships Act 1907 provides for the formation of limited partnerships in which one or
more of the partners has only limited liability for the firm’s debts. These partnerships are not common
because in most cases the objective of limited liability can be better achieved by incorporation as a
private company. However, they are used increasingly by institutional investors, such as insurance
companies and pension funds that are wholly or partially exempt from tax. These investors can, through
the medium of the limited partnership, invest jointly with other investors who are liable to tax without
losing their own tax-exempt status. Limited Partnerships are also used extensively by venture capitalists.
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A limited partnership is not a legal entity but can have an unlimited number of members. There must
also be one general partner whose liability for the debts of the firm is unlimited. A body corporate may
also be a limited partner. It is important to note that such partnerships are not provided for by law in
Zambia.
7.2 Rights and duties of limited liability partners

A limited partner has no power to bind the firm and may not take part in its management. If he does
manage the firm, he becomes liable for all the liabilities incurred by the firm during that period. He may
though give advice on management to the other partners without losing his limited liability and he may
also inspect the books.
The death, bankruptcy or mental incapacity of a limited partner does not dissolve the partnership A
limited partner cannot dissolve the partnership by notice
In addition, any question arising as to ordinary business matters may be decided by a majority of the
general partners and new partners can be introduced without the consent of the existing limited
partners.
7.3 Professional limited liability partnerships

Newer limited liability partnerships are designed mainly for the professional firms of lawyers and
accountants who have been liable to the full extent of their capital in the firm and personal property in
meeting claims for negligence even though full indemnity insurance is not normally available. However,
many may feel that registration and the filling of accounts for public inspection and other central
controls are not worth a measure of limited liability. These include trading partners who are not really at
risk of the major claims for damages faced by professional firms. This plus sheer inertia will mean that a
large number of unlimited partnerships will continue to exist.
……………………
The 1907 Act allows some partners to enjoy limited liability. In some countries legislation has
extended this right to allow partnerships to have limited liability and a separate legal personality
more usually associated with a limited company.
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EXAM ALERT
Questions on partnership will often focus on the partnership agreement, as it is central in determining the
relationships between partners.
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Chapter Roundup
 Partnership is defined as ‘the relation which subsists between persons carrying on a business in
common with a view of profit.’ A partnership is not generally a separate legal person distinct from its
members; it is merely a relation between persons. Each partner (there must be at least two) is
personally liable for the debts of the firm.
 Partnerships mainly consist of active, general partners who are remunerated by sharing in partnership
profits. Some partners however may be remunerated by a salary.
 The partnership deed or agreement should define its business, capital, profit-sharing and management
arrangements, and also set out what happens when a partner leaves or retires from the partnership.
 Rights of partners under legislation include the right to share in profits and management, the right of
indemnity, the right to approve new partners and the right to terminate the partnership.
 Duties of partners include the duty to provide full information, the duty not to make secret profits and
the duty not to carry on a competing business.
 Partnerships may be terminated by passing of time, termination of the underlying venture, death or
bankruptcy of a partner, illegality, notice agreement or by order of the court.
 The 1907 Act allows some partners to enjoy limited liability. In some countries legislation has extended
this right to allow partnerships to have limited liability and a separate legal personality more usually
associated with a limited company.
Quick Quiz
1 A partnership must have a written partnership agreement. True/False.
2 What are the three conditions necessary for a partnership to exist?
3 In a partnership each partner is an agent of the firm. True/False

1 False. A written agreement is not needed.
2 The entity must be a business; it must be carried on in common between two or more partners; persons
carrying on the business must do so for profit and must share the profits.
3 True.
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COMPANIES AND LEGAL
PERSONALITY
In this chapter we see how companies are used as business vehicles. The key difference between
companies and sole traders and partnerships is the concept of separate legal personality. This chapter
outlines this doctrine, and also discusses its implications (primarily limited liability for members) and
the exceptions to it (lifting the veil of incorporation).
chapter
9
syllabus
topic index
references
1 Attributes of incorporation 9
2 Lifting the corporate veil 9
3 Formation of a company 9
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LEARNING OBJECTIVES
 Discuss the consequences of separate legal personality
 Describe examples of situations where separate personality will be ignored
 Describe the procedures for forming and registering companies
 Explain the role and duties of company promoters
1 Attributes of incorporation
……………………
We start by looking at the consequences of a company being a separate legal entity.
……………………
1.1 Characteristics of companies

An incorporated company has several characteristics that give it advantages over unincorporated
business associations. These attributes set the company apart from other forms of business enterprise.
1.2 Separate legal personality

A company is regarded as a legal person with separate and distinct identity from its members. As an
artificial person a company will be entitled to deal with other persons, natural and artificial, in its own
name and in its own right. S 11 of the Companies Act states:
‘A company is deemed to come into existence on the date of incorporation from the date its name is
entered into the register and given a certificate of incorporation by the Registrar of Companies.’
Per s22 of the Act once incorporated:
‘A company has the rights, powers, capacity and privileges as an individual, subject to such limitations
as are inherent to its corporate nature and as may be prescribed by the Companies Act. ‘
Thus a member of the company cannot be held liable for the acts of the company nor can he/she claim
or enjoy the benefits due to the company.
Salomon v Salomon Co Ltd 1897
Salomon sold his leather business to a Company that he formed and was the principal shareholder for
which he was paid, in part, by a debenture on the company. Within a year the Company went bankrupt.
As a secured creditor, he was entitled to be paid first. Other creditors sued saying that Salomon and the
Co. were one and the same.
Held: Salomon and the Company were separate legal personalities and Salomon as a secured creditor
could be paid as a secured creditor first.
In Zambia the principle in Salomon v Salomon was applied in the case of Associated Chemicals Limited
v Hill And Delamain Zambia Limited And Ellis And Company (As A Law Firm) 1998 where it was held
that;
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‘It is wrong in principle to distinguish between old and new shareholders or between new and old
management or treat business transactions giving rise to the claim as one essentially between
individuals. A principle of the law which is now entrenched is that a company is a distinct legal person
different from its members or shareholders.’
The Supreme Court of Zambia also upheld the concept of separate corporate personality in ZCCM and
Ndola Lime Ltd. v Sikanyka and Others 2002:
‘The change of ownership of shares in a company cannot result in the corporate entity becoming a new
employer. The court emphasized the distinction between a company as a body corporate and the
shareholders in that company.’
Newton Silulands and Others v Foodcorp Products Ltd 2002
The appellants sought a declaration that there had been a change of employer without their consent
when all the shares in ZAMHORT Products were sold to Foodcorp Products Ltd. or when the name was
changed from the former to the latter. The workers contended that there had been a disadvantageous
change in their conditions of service that should be deemed to be a breach of their contract of
employment and therefore they were entitled to treat their contracts as repudiated.
Held: Ngulube CJ dismissing the appeal said:
‘Another argument advanced sought to assert that the change of the ownership of the shares brought
about a new employer. The court below, quite (correctly applied) the law which has long recognized
separateness of the corporate entity from those behind it, owning it and directing its affairs.’
A sale of shares to a new shareholder does not alter the corporate character in which the shares are
held.
1.3 Perpetual succession

Once incorporated, the company has perpetual succession. That means that the company has a
continuous existence and can outlive its original members. Continuity of the company does not depend
on the continuity of its shareholder. They may come and go but the company will live on. This however
does not suggest that once incorporated, a company will never come to an end. A company’s life comes
to an end up to when it is wound up or struck off the register in accordance with the Companies Act.
Where a shareholder of a company dies, the legal representative of the deceased shareholder becomes
entitled to the shares by transmission. (s71).
PART C: COMPANY LAW // 9: Companies and legal personality
1.4 Can own property in its own name

As a legal person, a company can own property in its own name, enjoy such property and dispose of it.
The property of the Company will not be considered as the joint property of the shareholders. It is for
this reason that it was held in Macaura v Northern Assurance Co. Ltd. 1925 that the shareholder had
no interest in the property of the company. In an unincorporated business association such as a
partnership, there will often be no clear distinction between the property of the firm and the private
property of the partners.
1.5 Limited liability

An important attribute of incorporation as a company is that the liability of the members is limited. This
is arguably the main advantage of incorporation. Limitation of liability is either by way of shares or by
guarantee. Where limited by shares, the liability of the members is limited to the amount unpaid if any
on the shares they hold. Where the company is limited by guarantee, the liability of the members is
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limited to such amount as the members have undertaken to contribute to the assets of the company in
the event it is wound up. S 19 provides that each subscriber for application for incorporation as a
company limited by guarantee must sign a declaration of guarantee specifying the amount he undertakes
to contribute to the assets of the company in the event it is wound up.
1.6 Transferability of shares

The shares of a company are freely transferable and can be sold and purchased in the share market.
This is another advantage over partnerships. Transferability is recognized by s57:
‘Share or other interest of a member of a company shall be personal estate and movable property
transferable by a written transfer in a manner prescribed by the articles of the company’
Thus, shares are personal and movable property and transferable as such. However, the articles of a
private company may impose restrictions on the transferability of shares after they have been issued.
Transfer may then only be done in accordance with conditions laid down in the articles (s16 and 65).
Transferability is an advantage both to the company and the shareholders. The stability of the company
is assured as the shareholder will not withdraw anything from his share capital. The shareholder
receives a marketable security which he can convert into liquid form as and when desired. This is turn
allows companies to raise large amounts of capital on the share markets.
1.7 Common seal

A company, being an artificial person, cannot sign its name on any document. A common seal of the
company is thus used in place of a signature. S195 states every company shall have a common seal
bearing the Company’s name and the words “common seal”. A rubber stamp may not satisfy the
requirements of s195.
1.8 Capacity to sue and be sued

A company, being an artificial person, cannot sign its name on any document. A common seal of the
company is thus used in place of a signature. S195 states every company shall have a common seal
bearing the Company’s name and the words “common seal”. A rubber stamp may not satisfy the
requirements of s195.
1.9 Registers
A company must keep registers of various aspects of its constitution. Members, directors and auditors
are entitled to access these registers. To enable the registers to be inspected easily, the company must
keep them at its registered office or its registered records office.
Register/copies of records Companies Act section
Register of members s48
Register of debentureholders s92
Register of charges s97
Minutes of company meetings s160
Register of directors and secretaries s224
Register of directors’ shares and debentures s225
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1.10 Company articles
The articles contain detailed rules and regulations setting out how the company is to be managed and
administered. S7 (6) states that the registered articles should be contained in a single document which
is divided into consecutively numbered paragraphs. Articles should contain rules on a number of areas,
the most important being summarised in the table below.
CONTENTS OF ARTICLES
Appointment and dismissal of directors Communication with members
Powers, responsibilities and liabilities of directors Class meetings
Directors' meetings Issue of shares
General meetings; calling, conduct and voting Transfer of shares
Members' rights Documents and records
Dividends Company secretary
1.10.1 Model articles

Rather than each company having to draft their own articles, and to allow companies to be set up
quickly and easily, the Act provides Standard articles that companies can adopt. The articles of a
company shall be deemed to have adopted the regulations of the Standard Articles unless otherwise
stated.
Companies are free to use any of the model articles that they wish to by registering them on
incorporation. Model articles can be amended by the members and therefore tailored to the specific
needs of the company.
Model articles are effectively a 'safety net' which allow directors and members to take decisions if the
company has failed to include suitable provisions in its registered articles or registered no articles at all.
1.10.2 Alteration of articles

Any company has a statutory power to alter its articles by special resolution (s8 (1)). The alteration will
be valid and binding on all members of the company. Copies of the amended articles must be sent to
the Registrar, within 21 days of the amendment, taking effect.

1.10.3 Making articles unalterable
There are devices by which some provisions of the company's constitution can be made unalterable
unless the member who wishes to prevent any alteration consents.
(a) The articles may give a member additional votes so that he can block a resolution to alter articles
on particular points (including the removal of his weighted voting rights from the articles):
Bushell v Faith 1970. However, to be effective, the articles must also limit the powers of
members to alter the articles that give extra votes.
(b) The articles may provide that when a meeting is held to vote on a proposed alteration of the
articles the quorum present must include the member concerned. They can then deny the
meeting a quorum by absenting themselves.
(c) Companies may 'entrench' provisions in its articles. This means specific provisions may only be
amended or removed if certain conditions are met which are more restrictive than a special
resolution such as agreement of all the members. However, such 'entrenched provisions' cannot
be drafted so that the articles can never be amended or removed.
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1.10.4 Restrictions on alteration
Even when it is possible to hold a meeting and pass a special resolution, alteration of the articles is
restricted by the following principles
(a) The alteration is void if it conflicts with the Companies Act or with general law.
(b) In various circumstances, such as to protect a minority, the court may order that an alteration be
made or, alternatively, that an existing article shall not be altered.
(c) An existing member may not be compelled by alteration of the articles to subscribe for additional
shares or to accept increased liability for the shares which they hold unless they have given their
consent.
(d) An alteration of the articles which varies the rights attached to a class of shares may only be made
if the correct rights variation procedure has been followed to obtain the consent of the class (s62).
(e) A person whose contract is contained in the articles cannot obtain an injunction to prevent the
articles being altered, but they may be entitled to damages for breach of contract: Southern
Foundries 1926 Ltd v Shirlaw 1940 . Alteration cannot take away rights already acquired by
performing the contract.
(f) An alteration may be void if the majority who approve it are not acting bona fide in what they
deem to be the interests of the company as a whole (see below).
The case law on the bona fide test is an effort to hold the balance between two principles:
(a) The majority are entitled to alter articles even though a minority considers that the alteration is
prejudicial to its interests.
(b) A minority is entitled to protection against an alteration which is intended to benefit the majority rather
than the company and which is unjustified discrimination against the minority.
Principle (b) tends to be restricted to cases where the majority seeks to expel the minority from the
company.
The most elaborate analysis of this subject was made by the Court of Appeal in the case of Greenhalgh v
Arderne Cinemas Ltd 1950. Two main propositions were laid down by Evershed MR.
(a) 'Bona fide for the benefit of the company as a whole' is a single test and also a subjective test
(what did the majority believe?). The court will not substitute its own view.
(b) 'The company as a whole' means, in this context, the general body of shareholders. The test is
whether every 'individual hypothetical member' would in the honest opinion of the majority
benefit from the alteration.
If the purpose is to benefit the company as a whole the alteration is valid even though it can be shown
that the minority does in fact suffer special detriment and that other members escape loss.
1.11 Articles as a contract

A company's constitution binds:
 Members to company
 Company to members
 Members to members
The company's constitution does not bind the company to third parties.
This principle applies only to rights and obligations which affect members in their capacity as members.
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Hickman v Kent or Romney Marsh Sheepbreeders Association 1905
The claimant (H) was in dispute with the company which had threatened to expel him from
membership. The articles provided that disputes between the company and its members should be
submitted to arbitration. H, in breach of that article, began an action in court against the company.
Held: The proceedings would be stayed since the dispute (which related to matters affecting H as a
member) must, in conformity with the articles, be submitted to arbitration.
The principle that only rights and obligations of members are covered applies when an outsider who is
also a member seeks to rely on the articles in support of a claim made as an outsider.
Eley v Positive Government Security Life Assurance Co Ltd 1876
E, a solicitor, drafted the original articles and included a provision that the company must always
employ him as its solicitor. E became a member of the company some months after its incorporation.
He later sued the company for breach of contract in not employing him as its solicitor.
Held: E could not rely on the article since it was a contract between the company and its members and
he was not asserting any claim as a member.
The members are able to compel the company to obey the articles: Pender v Lushington 1877.
1.11.1 Articles as a contract between members
The articles in effect are a contract made between (a) the company and (b) its members individually. It
can also impose a contract on the members in their dealings with each other.
Rayfield v Hands 1958
The articles required that (a) every director should be a shareholder and (b) the directors must purchase
the shares of any member who gave them notice of his wish to dispose of them. The directors, however,
denied that a member could enforce the obligation on them to acquire his shares.
Held: There was 'a contract ... between a member and member-directors in relation to their holdings of
the company's shares in its articles' and the directors were bound by it. PART C: COMPANY LAW // 9: Companies and legal personality
Articles and resolutions are usually drafted so that each stage is a dealing between the company and the
members, so that:
(a) A member who intends to transfer his shares must, if the articles so require, give notice of his
intention to the company.
(b) The company must then give notice to other members that they have an option to take up his
shares.
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1.11.2 Articles as a supplement to contracts
If an outsider makes a separate contract with the company and that contract contains no specific term
on a particular point but the constitution does, then the contract is deemed to incorporate the
constitution to that extent. One example is when services, say as a director, are provided under contract
without agreement as to remuneration: Re New British Iron Co, ex parte Beckwith 1898.
If a contract incorporates terms of the articles it is subject to the company's right to alter its articles:
Shuttleworth v Cox Bros & Co (Maidenhead) Ltd 1927. However a company's articles cannot be altered
to deprive another person of a right already earned, say for services rendered prior to the alteration.
……………………
A company has a legal personality separate from its owners (known as its members). It is a formal
arrangement, but its chief advantage is that members’ liability for the companies’ debts is typically
limited.
A company must keep registers of certain aspects of its constitution, including the registers of
members, charges and directors.
A company's constitution comprises the Articles of Association and any resolutions and agreements it
makes which affect the constitution.
The articles may be altered by a special resolution. The basic test is whether the alteration is for the
benefit of the company as a whole.
The articles constitute a contract between company and members, members and the company and
members and members.
The articles do not constitute a contract between the company and third parties, or members in a
capacity other than as members (the Eley case).
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2 Lifting the corporate veil

……………………
We next examine the circumstances where the courts may set aside the corporate veil.
……………………
2.1 Lifting the veil

This can be done in two ways:
 By the judiciary - it is difficult to be precise about the circumstances under which a judge will lift
the corporate veil but it is a tactic that a judge could use to counter fraud, sharp practice,
oppression and illegality.
 By statute – for example if the number of members falls below 2 for more than 6 months
 To prevent evasion of obligations (discussed below)
2.2 Lifting the veil to prevent evasion of obligations

A company may be identified with those who control it, for instance to determine its residence for tax
purposes. The courts may also ignore the distinction between a company and its members and managers if
the latter use that distinction to evade their existing legal obligations.
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Gilford Motor Co v Horne 1933
The defendant had been employed by the claimant company under a contract which forbade him to
solicit its customers after leaving its service. After the termination of his employment he formed a
company of which his wife and an employee were the sole directors and shareholders. However he
managed the company and through it evaded the covenant that prevented him from soliciting customers
of his former employer.
Held: An injunction requiring observance of the covenant would be made both against the defendant
and the company which he had formed as a 'a mere cloak or sham'.
2.2.1 Public interest

In time of war a company is not permitted to trade with 'enemy aliens'. The courts may draw aside the
veil if, despite a company being registered in the home country, it is suspected that it is controlled by
aliens: Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd 1917. The question of nationality
may also arise in peacetime, where it is convenient for a foreign entity to have a home country facade on
its operations.
Re FG Films 1953
An English company was formed by an American company to 'make' a film which would obtain certain
marketing and other advantages from being called a British film. Staff and finance were American and
there were neither premises nor employees in England. The film was produced in India.
Held: The British company was the American company's agent and so the film did not qualify as British.
Effectively, the corporate entity of the British company was swept away and it was exposed as a 'sham'
company.
2.2.2 Evasion of liabilities

The veil of may also be lifted where directors ignore the separate legal personality of two companies and
transfer assets from one to the other in disregard of their duties in order to avoid an existing liability.

Re H and Others 1996
The court was asked to rule that various companies within a group, together with the minority
shareholders, should be treated as one entity in order to restrain assets prior to trial.
Held: The order was granted. The court thought there was evidence that the companies had been used
for the fraudulent evasion of excise duty.
2.2.3 Evasion of taxation

Courts may lift the veil of incorporation where it is being used to conceal the nationality of the company.
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Unit Construction Co Ltd v Bullock 1960
Three companies, wholly owned by a UK company, were registered in Kenya. Although the companies'
constitutions required board meetings to be held in Kenya, all three were in fact managed entirely by the
holding company.
Held: The companies were resident in the UK and liable to UK tax. The Kenyan connection was a
sham, the question being not where they ought to have been managed, but where they were actually
managed.
2.2.4 Quasi-partnership
An application to wind up a company on the 'just and equitable' ground (discussed in Chapter 12) may
involve the court lifting the veil to reveal the company as a quasi-partnership. This may happen where
the company only has a few members, all of whom are actively involved in its affairs. Typically the
individuals have operated contentedly as a company for years but then fall out, and one or more of them
seek to remove the others.
The courts are willing in such cases to treat the central relationship between the directors as being that
of partners, and rule that it would be unfair therefore to allow the company to continue with only some
of its original members. This is illustrated by the case of Ebrahimi v Westbourne Galleries Ltd 1973.
……………………
Incorporation veils members from outsiders’ views, but the veil may be lifted in some circumstances
so creditors and others can seek redress directly from members. The value may be lifted by statute to
enforce the law, to prevent the evasion of obligations and in certain circumstances where companies
trade as a group.
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3 Formation of a company
……………………
We conclude this chapter by going through how companies are formed and the role of promoters in
their formation.
……………………
3.1 Role of promoters

Before a company is formed someone will have conceived the idea to form it alone or in association with
others. These individuals are the promoters. The term promoter is not defined in the Companies Act. It is
a term of business that sums up in one word a number of business operations by which a company is
brought into existence. A promoter is not an agent of the company as an agency relationship cannot be
formed before a principal is formed. Similarly a promoter is not a trustee.
The promoters will decide such matters as:
 The company name

 The kind of business the company will engage in
 If the company will be public or private
 If the company will be limited by shares or guarantee etc.
After deciding on these issues the promoter(s) will take steps to form the company.
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Promoters play an important role in company formation. For example they decide on the scope of the
business of the company and, if necessary, can negotiate the purchase of existing businesses or
property. They instruct lawyers, accountants to prepare the necessary incorporation documents and they
provide the necessary pre-incorporation expenses. For a public company promoters also arrange for the
preparation and publication of a prospectus.
Promoters may be an individual or a group/syndicate, or even a firm or other corporate body. A person
can be called a promoter even if they have taken only a minor role in the formation of the company.
However, not everyone involved in the formation of a company is a promoter. Persons acting in a
professional capacity, such as lawyers, accountants, engineers, are not promoters in the eyes of the law
unless such persons exceed their professional capacity and take a particular interest in the formation of
the company.
3.2 Legal position of promoters

Although not defined in the Companies Act, promoters are referred to in a number of sections of the
Companies Act. For example:
 S 129(2) (c) deals with civil liability for misstatements contained in a prospectus.
 S132 deals with the waiting period when an invitation is made to the public to acquire shares.
 Under s300 of the Act a promoter is one of the persons who may be summoned to court in the
process of winding up a company for purposes of enquiring if he has any assets of the company
or to supply any relevant information relating to the company.
The legal position of promoters vis a vis the company is concerned has developed considerably under
common law. The position is that the promoter stands in a fiduciary relationship with the company he
floats. He is neither an agent nor a trustee but the principles of the law of agency and trusteeship are
applied. He is not an agent because there is no principal. He is not a trustee as there is no trust in
existence
3.3 Status of promoters

Although the promoter is not an agent or a trustee, many of the principles of the law of agency and
trusteeship are extended to the promoter/company relationship. The promoter of a company is
accountable to it for all monies secretly received by the promoter, just as an agent is liable to his
principal for any secret profits. The same principles apply in relation to a trustee and the beneficiaries.
This fiduciary relationship between the promoter and the company he forms imposes on the promoter
the following specific duties.
3.3.1 Profits at company’s expense

The promoter may not directly or indirectly make any profit at the expense of the company without the
knowledge of the company. If he does so, he will be compelled to account for it. This means that the
company is entitled to any profit that the promoter makes during formation.
Gluckstein v Barnes 1900
A syndicate bought property for £140,000 and resold it to the company for £180,000 pounds.
Previously, the syndicate had bought charges in the property at a discount and after it bought the
property, the vendor paid these charges in full. The prospectus issued for the new company showed only
the £40,000 the syndicate made on the sale of the property to the company. No disclosure was made
of the £20,000 it made on the charges. However, the £40,000 was disclosed in a way that “excluded
profits made on interim investments”.
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Held: The promoters were liable to account to the company for the £20,000 made on the charges as
well as the £40,000.
3.3.2 Gain from sale of own property

Promoters are not allowed to derive gain from the sale of their own property to the company they float
unless all material facts are disclosed (there should be no conflict of interest). Where the promoter
contracts to sell his own property to the company without making full disclosure, then the company can
either repudiate the sale or affirm the contract and recover the profit made by the promoter. Note that it
is not the making of a profit that the law seeks to forbid but non-disclosure of this profit.
3.3.3 Taking advantage of position

The promoter must not make any unfair or unreasonable use of his position. He is under a duty to avoid
anything that may suggest undue influence or fraud.
3.3.4 Honesty and care

The promoter has a duty not only to be honest to the company and its shareholders but also to be
careful towards them as well. The promoters’ liability is imposed by both the common law and the
Companies Act.
3.4 Promoters’ liability

The liability of the promoter is imposed by both the common law and the Companies Act. It is important
to note that the rules under which a promoter will be liable for any secret profit made and for failure to
disclose are identical to the rules of the common law which impose liability on agents and trustees.
Although the Companies Act does not specifically define what a promoter is, a number of sections make
reference to the liability of a promoter in numerous sections:
 S129 (1) provides for the liability of promoter for misstatements or omissions in the prospectus
issued to the public.
 S119 and S136 make provisions relating to the public issue of shares and impose obligations
and liabilities on a promoter without necessarily referring to them by that name.
Breach by the promoter of these fiduciary duties entitles the company to pursue the remedies available
under normal contractual and tortious principles. Thus a company may rescind any contract on
discovery of any secret profit made by a promoter or it may claim damages. Under the Companies Act
both criminal and civil remedies are prescribed against any erring promoter. Promotion of public
companies is often done by professional promoters (accounting firms, finance houses etc.).
3.5 Remuneration of promoters

Promoters cannot claim remuneration as a matter of right. They can only do so for services they provide
where there is a contract to that effect. If there is no contract, the promoter is not even entitled to
recover expenses incurred in the incorporation of the company.
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Re Clinton’s Claim 1908
A group promoted a company and incurred expenses of 400 pounds in registration fess and stamp duty.
There was no contract entitling the promoters to recover these expenses. The company shortly went into
liquidation and the question was whether the group could be reimbursed their costs.
Held: The expenses were not recoverable.
The articles of a company generally empower the directors to pay the preliminary expenses out of
company funds. However, even in these circumstances there is, in law, still no binding contract between
the principal and the company. In practice the promoters will often be the first directors of the company
and so will ensure that they receive their remuneration anyway. Where a promoter is entitled to
remuneration, the mode of payment may be:
 A lump sum
 Issuance of shares to the promoter
 Payment of a commission
 Granting of discounts on shares
……………………
A promoter forms a company. A promoter must act with reasonable skill and care. If shares are to be
allotted, the promoter is the agent of the company, with an agent’s fiduciary duties.
A promoter has no automatic right to be reimbursed pre-incorporation expenses by the company,

although this may be expressly agreed.
Pre-incorporation contracts cannot be ratified by a company. A new contract on the same terms
must be expressly created.
……………………
EXAM ALERT
Questions on company formation will often focus on the role of the promoter and the potentially awkward
problems of pre-incorporation contracts.
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Chapter Roundup
 A company has a legal personality separate from its owners (known as its members). It is a formal
arrangement, but its chief advantage is that members’ liability for the companies’ debts is typically
limited.
 A company must keep registers of certain aspects of its constitution, including the registers of members,
charges and directors.
 A company's constitution comprises the Articles of Association and any resolutions and agreements it
makes which affect the constitution.
 The articles may be altered by a special resolution. The basic test is whether the alteration is for the
benefit of the company as a whole.
 The articles constitute a contract between company and members, members and the company and
members and members.
 The articles do not constitute a contract between the company and third parties, or members in a
capacity other than as members (the Eley case).
 Incorporation veils members from outsiders’ views, but the veil may be lifted in some circumstances so
creditors and others can seek redress directly from members. The value may be lifted by statute to
enforce the law, to prevent the evasion of obligations and in certain circumstances where companies
trade as a group.
 A promoter forms a company. A promoter must act with reasonable skill and care. If shares are to be
allotted, the promoter is the agent of the company, with an agent’s fiduciary duties.
 A promoter has no automatic right to be reimbursed pre-incorporation expenses by the company,

although this may be expressly agreed.
 Pre-incorporation contracts cannot be ratified by a company. A new contract on the same terms must be
expressly created.
Quick Quiz
1 What was the name of the case that originally demonstrated the principle of separate legal personality?
2 Fill in the blank. The principle of means that a company has a continuous existence and can outlive its
original members.
3 An accountant or solicitor acting in their professional capacity during the formation of a company may
be deemed a promoter. True/False?

1 Salomon v Salomon & Co Ltd 1897
2 Perpetual succession
3 False. A person acting in a professional capacity will not be deemed a promoter.
178
CAPITAL AND FINANCING OF
COMPANIES
This chapter discusses different types of capital. You should make sure that you do not confuse each
type as they are important for company law purposes.
We begin by looking at the nature of share capital. We then move on to consider borrowing and loan
capital. You should note that the interests and position of a lender is very different from that of a
shareholder.
chapter
Lastly we consider the concept of capital maintenance. No one can prevent an unsuccessful company
from losing its capital by trading at a loss. However whatever capital the company does have must be
held for the payment of the company’s debts and may not be returned to members except under
procedures that safeguard the interest of creditors. That is the price that members of a limited
company have to pay for the protection of limited liability.
10
syllabus
references
topic index
1 Share capital 10A

2 Loan capital 10B
3 Capital maintenance 10C
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LEARNING OBJECTIVES
 Distinguish between different types of capital
 Explain the differences between different classes of shares
 Explain companies’ borrowing powers
 Explain the concepts of capital maintenance and capital reduction
1 Share capital
……………………
We begin by looking at the most important source of funding for most companies, share capital.
……………………
1.1 Meaning of capital

Capital of a company which has shares is dealt with in Part IV of the Act. Capital is, in commercial
usage, the net worth or value of assets of a business, less its liabilities. In company law, the capital of a
company is the total amount which the shareholders of the company have contributed or are liable to
contribute as payment for their shares.
The terms borrowed capital and loan capital are sometimes used to denote funds raised by long term
loans for example debentures. However the word “capital” is used in these phrases merely for
accounting convenience and not in any legal sense. The word “capital” is also employed for accountancy
purposes when it is applied to the receipt and expenditure of cash in transactions of a capital nature as
distinct from current revenue transactions. Thus in business circles, reference is frequently made to
capital expenditure as referring to the purchase of non-current assets like plant, machinery, land,
furniture and buildings. Capital receipts include cash received on the issue of shares and debentures and
on the sale of capital assets such as non- current assets or the disposal of a branch or a subsidiary of
the company. It also refers to premiums received or discounts allowed on the issue of shares and
debentures.
1.2 Share capital terminology
1.2.1 Nominal capital

Nominal capital is the amount of capital registered with the Registrar of Companies. It is also known as
registered or authorised capital. It is the amount up to which the company may issue shares or stock.
1.2.2 Issued and unissued capital

Issued or allotted capital is that portion of the nominal capital that has been issued. If the whole of the
nominal capital has not been issued, the balance is what is known as the unissued capital.
1.2.3 Subscribed capital

Subscribed capital is the amount of issued capital that has been taken up that is subscribed for by
shareholders
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1.2.4 Called up and uncalled up capital
Called up capital is that portion of the subscribed capital that has been called up by the company. Any
balance of subscribed capital is known as uncalled capital.
1.2.5 Paid up and unpaid up capital

If the whole of the amount called up by the company has been paid by shareholders, this figure is
termed paid-up capital. If that is not so, the called up capital is divided into ‘paid up capital’ and
‘unpaid capital’.
1.2.6 Reserve capital

Reserve capital is capital which the company may resolve to call up only on liquidation. The capital of
the company may be divided into preference and ordinary shares.
1.2.7 Class rights

A company may at its option attach special rights to different shares regarding:
 Dividends
 Return of capital
 Voting
 The right to appoint or remove a director
Shares which have different rights from others are grouped together with other shares carrying identical
rights to form a class. The most common types of share capital with different rights are preference
shares and ordinary shares. There may also be ordinary shares with voting rights and ordinary shares
without voting rights.
S62 states that if the articles forbid or restrict variation of class rights, they can only be varied in
accordance with the written consent of all members of the class. If articles do not contain that provision,
then the written consent of ¾ of class members is required or a special resolution (75%) at a meeting of
shareholders of that class.
1.3 Share capital

Capital must first be issued in the form of shares which may, when fully-paid but not otherwise, be
converted into stock.
PART C: COMPANY LAW // 10: Capital and financing of companies

Shares do not have to be paid for by money, but can be paid for with assets such as equipment, tools
and machinery.
The capital of a company may comprise shares of one class only, known as ordinary shares, or just as
“shares”. The holder of each share is entitled to a proportionate part of profits and capital He possesses
the same voting rights as are applicable to every other share. If such shares are converted into stock of
one class only, dividends are distributed in relation to the nominal value of stock held by each stock
holder. Similarly, voting powers, if any, and capital rights are proportionate to the nominal value of stock
held. However many companies issue shares of two or more classes, each class having different rights
as to capital, dividends, and usually voting powers also.
1.4 Ordinary (equity) shares

These rank for dividend after the preference shares. Sometimes the terms of issue provide that the
preference shares shall have a right to claim repayment of capital before the ordinary shares if the
company is wound up.
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Ordinary shares therefore carry most risk. Generally, they have most of the voting rights in general
meetings and therefore control the company. It is common to provide that the preference shares shall
not have a vote at all unless their dividend is in arrears. Ordinary shares receive a fluctuating dividend,
which depends upon distributable profits left after the preference dividend has been paid.
1.5 Preference shares

These shares have the right to payment of a fixed dividend, for example, 10 per cent of the nominal
value, before any dividend is paid on the ordinary shares. However there is no right to receive such a
dividend unless the company has sufficient distributable profits to pay it. This is how preference shares
differ from loan capital. Interest on loan capital must be paid whether the company has distributable
profits or not. If it has no profits, it must be paid from capital as by a sale of assets or the raising of a
further loan.
Once the preference dividend has been paid in full, the preference shareholders have no right to share in
surplus profit with the ordinary shareholders unless, as is rare, the preference shares are participating
preference shares.
Preference shares may be cumulative or non cumulative. If they are cumulative and in any one year
there are insufficient profits to pay the preference dividend, it is carried forward and added to the
dividend for the following year. It is paid then if there are sufficient profits. For example, if John is the
holder of 100 preference shares of K 1.00 each, carrying a preference dividend of 10 per cent, then if in
year one the dividend cannot be paid, the K10 to which John is entitled is carried forward to year two
and if there are sufficient profits in that year John will receive K20. If the shares are non-cumulative,
John would not receive the K10 lost in year one, but only K10 for year two.
1.6 Redeemable shares

A company with a share capital may, if authorised by its articles, issue redeemable shares, whether
ordinary or preference. Private companies do not require prior authorisation in the articles. Redeemable
shares may be made redeemable between certain dates at the option of the company’s directors. The
holder thus knows that his shares cannot be redeemed before the earlier of the two dates, which is
usually a number of years after the issue of the shares. This is in order to give him an investment which
will last for a reasonable period. He also knows that the shares are bound to be redeemed by the later of
the two dates. However, there are no legal provisions requiring a company to fix the time of issue. A
company may wish to leave the date of redemption to be decided by the board when financially
convenient.
Redeemable shares may be issued only if there are in issue other shares which cannot be redeemed. It
is not therefore possible for a company to redeem all its share capital and end up with a board of
directors with no members. The shares must be cancelled after redemption. The company cannot hold
and trade in redeemed shares.
The power to issue redeemable equity shares is useful in the expansion of the small business. Outside
investors often like ordinary share capital with its greater potential returns in the way of dividend and
capital gain. However the smaller businessman may wish to buy them out after the business has
developed. He can do this by issuing redeemable ordinary shares. Redeemable preference shares are
less attractive to the speculative investor. They are safe but carry only a fixed dividend no matter how
high the profits.
1.7 Private company issue of shares

The allotment of shares in a private company is straightforward. The rule to remember is that private
companies cannot sell shares to the public. An application must be made to the directors directly. After
that shares are allotted and issued, and a return of allotment made to the Registrar, as for a public
company.
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1.7.1 Share premium account
An established company may be able to obtain consideration for new shares in excess of their nominal
value. The excess, called share premium, must be credited to a share premium account (s61).
The permitted uses of share premium are to pay:
 Fully paid shares under a bonus issue since this operation merely converts one form of fixed
capital (share premium) into another (share capital)
 Issue expenses and commission in respect of a new share issue
 Any premium due when redeemable shares or debentures are redeemed
1.8 Public issue of shares

This is covered by Part VI of the Act. A company may issue its shares or debentures to the public in
various ways. One way is directly offering them to the public. The other is doing so through selling to an
issuing house which then invites the public to subscribe to them for a commission. S119 states as
follows:
(1) In this part, an “invitation to the public” to acquire shares or debentures of a company means an
offer of, or invitation to make an offer for, shares or debentures of a company other than one:
(a) made to fifteen or fewer persons; or
(b) made –
(i) to fifty or fewer persons; or

(ii) holders, debenture holders or employees;
on the basis that a person who accepts the invitation may not renounce or assign the benefit of
any shares or debentures to be obtained thereunder in favour of any other person.
(2) For the purpose of this Part, the issue of any kind of application form for shares or debentures of
a company shall be deemed to be an invitation to acquire those shares and debentures.
S120 provides:
(1) Where a company allots or agrees to allot any of its shares or debentures to a person with a view
to the public’s being invited to acquire any of those shares or debentures, then, for the purposes
of this Act –
(a) an invitation to the public so made shall be deemed to be made by the company as well
as by the person who in fact made it; and
(b) a person who acquires any of the shares or debentures in response to the invitation shall

be deemed to be an allottee from the company of those shares or debentures.
(2) Where a company allots or agrees to allot any of its shares or debentures to a person and an
invitation to the public is made in respect to any of the shares or debentures –
(a) within six months after the allotment or agreement to allot;
or
(b) before the company has received the whole of the consideration in respect if the shares or
debentures;
it shall be presumed that the allotment or agreement to allot was made by the company with a view to
an invitation to the public being made in respect of those shares or debentures.
Thus a public company may invite members of the public who wish to derive an income from their
capital or achieve capital growth to invest in the company. The term public includes any section of the
public whether selected as members or debenture holder, as in Re: South of England Natural Gas and
Petroleum Co. Ltd 1911, where an offer of shares contained in a prospectus headed “For private
circulation only”, and three thousand copies of it sent only to shareholders in certain gas companies was
held to be an offer of shares to ‘the public’.
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1.9 Prospectus
The usual form of offer of securities to the public is by prospectus. The former Companies Act, defined
the term prospectus as:
‘any prospectus, notice, circular, advertisement or other invitation offering to the public for subscription
or purchase of any shares or debentures of a company’.
In other words a prospectus is an invitation by a company to the public, offering them the opportunity to
subscribe or purchase shares or debentures of the company. The invitation may take the form of a
notice, circular, newspaper advertisement or any other document containing an offer of shares or a
debenture for sale to the public.
Excluded from the prospectus requirement are those mentioned in s119 (1) being offers made to fifteen
or fewer people; or made to fifty or fewer persons or holders, debenture holders or employees.
There is no standard or prescribed form for a prospectus.
The Act requires a copy of every prospectus to be registered before it is issued. The copy must be signed
by every person named as a proposed director of the company or, if already incorporated, by each
director or his agent authorised in writing. The prospectus must also be dated. The date shown on the
prospectus is presumed to be the date of publication of the prospectus. Apart from these two statutory
formalities, every prospectus shall state on the face of it that a copy has been filed for registration.
The prospectus has no relevance to private companies incorporated in Zambia. It is implicitly prohibited
from inviting the public to subscribe for shares or debentures under s122 and 123.
It is not obligatory for a public company to issue a prospectus on or with reference to its formation.
Where it does issue a prospectus, it must be signed by every person who is named as a director or a
proposed director of the company or by his agent authorised in writing, in the form and containing the
particulars set out in Schedule 4 of the Act. Sometimes, the directors have knowingly made false
statements in a prospectus with intent to induce persons to become shareholders.. For such reasons it is
required that a prospectus or a statement in lieu of a prospectus must be complied with strictly and with
scrupulous accuracy
1.10 Contents of prospectus

S124 provides the contents of a prospectus:
(1) A prospectus shall not be lodged with the Registrar unless:
(a) it does not contain any untrue or misleading statement;
(b) it contains all information that prospective purchasers of the shares or debentures and
their advisors would reasonably expect to be provided in order to make a decision on
purchase; and
(c) either-
(i) it deals with the matters and provides the reports specified in the Fourth Schedule;
or
(ii) the invitation concerned is an invitation made only to existing members or

debenture holders of the company (whether or not an applicant for shares or
debentures will have the right to renounce in favour of other persons).
An expert may be consulted or instructed with regard to the issuing of a prospectus and its
content(s125). The term ‘expert’ includes an engineer, valuer, accountant, assayer, and any other
person whose profession or calling gives authority to a statement by the person on the subject matter
concerned.
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Where an expert is used, the prospectus must include a signed statement by the expert signifying
consent to the issuance of the prospectus and must be lodged with the Registrar. The Act also provides
for the withdrawal of the expert’s consent before publication of the prospectus. As an expert is a person
with special knowledge, members of the public may be induced to take up securities on reliance on the
expert statement. Thus if the expert’s statement was based on information provided by the directors,
managers or even workers of the company, which turns out to be false, incorrect or misleading, the
expert is required to withdraw his consent immediately and notify the Registrar to put a stop to the
issuing of the prospectus(s125(5)). If he does not, the expert shall be legally responsible for any loss or
damages suffered b those who rely on it.
1.11 Liability for prospectus

For the purpose of liability, no prospectus for company securities in a company or a proposed company
shall be registered unless it discloses and is signed by the people issuing it. Liability is based on:
(a) The names as directors or proposed directors of the company (s126(2) (a))
(b) Any other person making the invitation, or his or her agent, authorised in writing (s126(2) (b)).
The reference to an agent envisages an invitation to the public by the company or body corporate
in which case not fewer than two directors must sign, as well as a firm or partnership, in which
case not fewer than half the partners or their agents authorised in writing must sign on behalf of
the firm or partnership(s126(3)).
1.11.1 Civil liability

The duty is to make a true statement(s129(1)(a)), to state every material fact (s129(1)(b)) within their
knowledge and to state any of the particulars and set out any of the reports required by the Act. Any
breach of this provision puts liability on the people responsible for the prospectus to pay compensation
to any people who suffer loss by reason of the untrue statement or omission(s129(1) and (2)).
Thus there must be full disclosure in the prospectus of the securities offered, particulars of the
company’s business, or proposed business, the assets and financial standing, correct reflection of its
potential, and the correct names and addresses of the promoters, directors, creditors and auditors.
Failure to disclose any of the matters prescribed or to conform with any of the requirements of a
prospectus means that the directors or any other persons responsible for issuance of the prospectus may
incur personal liability, unless they successfully rely on the defences set out in the Act, such as that they
were not aware of the existence of any omitted fact, that non-compliance arose from an honest mistake
of fact or that they relied on a report made by an expert and they had reasonable ground to believe that
the information was true ad correct(s129(3)).

From the provisions of the Act referred to above neither a prospectus nor a statement in lieu applies to
private companies. It would not be proper to disclose all the stated details with relation to private
companies. The essence of being private is that the companies are free from intrusion into their affairs.
Publication of any such information would be tantamount to invasion of privacy.
1.11.2 Criminal liability

The Act provides for offence of misstatement or omission in a prospectus. S130 states:
(1) Where any prospectus, advertisement or circular published in relation to any invitation to the
public to acquire shares or debentures of a company contains any untrue statement or omits
truthfully to state any of the matters which, under this Act, it is required to state, any person who
authorised the publication of the prospectus, advertisement or circular shall be guilty of an
offence, and shall be liable on conviction to a fine not exceeding seven thousand monetary units
or to imprisonment for a period not exceeding seven years, or to both.
185
(2) It is a defence to a charge under subsection (1) that:
(a) the untrue or omitted statement was immaterial; or
(b) the person had reasonable ground to believe and did believe, up to the time of publication
of the prospectus, that the statement was true.
The director, manager, promoter or any other person accused of misstatements or omissions has the two
defences under subsection 3 2 (a) and (b). The accused must prove both the materiality and the
absence of reasonable belief. This is in contrast to the requirement under the law of evidence that puts
the onus of proof on the State.
1.11.3 Limitation of liability

The Act does not envisage an action against the company or person or persons who authorised the issue
of the prospectus. Action can only be brought against directors, managers and promoters and any other
who authorised the issue. Similarly, only people who rely on the misinformation or misrepresentations in
a prospectus to their detriment can bring action against the directors, managers and promoters. The
company that ratifies a pre-incorporation contract and ratifies the promoters’ actions bears the liability.
In the absence of ratification, the promoters would be personally liable.
1.11.4 Other reliefs and remedies

The Act has elaborate provisions for other reliefs and remedies regarding misstatements and omissions
in a prospectus. Nevertheless the Act still supports the position of an investor who subscribes for shares
on the faith of untrue statements.
1.12 Other publication requirements

A prospectus may be published in any language, with a translation in English in accordance with s49.
The Act requires the prospectus to state at the top of that document that a copy has been lodged with
the Registrar and that the Registrar assumes no responsibility as to its contents (s126(6)).
The copy is required to be accompanied by a statutory declaration by a director and secretary of the
company stating that the prospectus conforms to the Act (s126 (7)). Upon registering the prospectus,
the Registrar is required to issue a certificate stating that the prospectus has been registered.
1.13 Over-subscription
For over-subscription, s127 provides that:
(1) A company shall not accept or retain subscriptions to a debenture issue in excess of the amount
of the issue disclosed in the prospectus unless the prospectus specifies:
(a) That the company expressly reserves the right to accept or retain over-subscriptions; and
(b) A limit, expressed as a specific sum or money, on the amount of over-subscriptions that
may be accepted or retained, being an amount not exceeding twenty-five per centum
above the amount of the issue as disclosed in the prospectus.
(2) Subject to the Fourth Schedule, where a company specifies in a prospectus relating to a
debenture issue that it reserves the right to accept or retain over-subscriptions:
(a) The prospectus shall not contain any statement of, or reference to, the asset backing for
the issue, other than a statement or reference to the total tangible assets and the total
liabilities of the company and of its guarantor companies; and
(b) The prospectus shall contain a statement or reference to what the total assets and total
liabilities of the company would be if over-subscriptions to the limit specified in the
prospectus were accepted or retained.
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1.14 Allotments of shares
By s128:
(1) Where a prospectus states or implies that application has been or will be made for permission for
the shares or debentures offered in the prospectus to be listed for quotation on the official list of a
stock exchange, then, subject to subsection (8), no allotment of shares or debentures shall be
made on an application made pursuant to the prospectus except in accordance with this section.
(2) An allotment may be made:
(a) If the permission has been applied for in the form required by the stock exchange before
the third day on which the stock exchange is open after the date of issue of the
prospectus; or
(b) If the permission has been granted before the determination day.
(3) If, on the determination day, the conditions of subsection (2) are not satisfied, the company shall,
within fourteen days after the determination day, repay without interest any money received from
any applicant in pursuance of the prospectus.
(4) If the company fails to repay money in accordance with subsection (3), the directors shall, in
addition to the liability of the company but subject to subsection (5), be jointly and severally
liable to repay that money with interest at the ruling bank rate from the end of that period of
fourteen days.
(5) A director shall not be liable under subsection (4) if he proves that the default in the repayment
of the money was not due to any misconduct or negligence on his part.
(6) The company shall, for as long as the conditions of subsection (2) are not satisfied, keep in a
separate bank account all money received in pursuance of a prospectus.
(7) A condition purporting to require or bind an applicant for shares or debentures to waive
compliance with any requirement of this section shall be void.
(8) The Registrar may, on the application of the company made before the determination day, by
notice in the Gazette provide that this section shall not apply to the allotment of the shares or
debentures.
(9) For the purposes of this section, a statement in a prospectus to the effect that the articles comply
with, or have been drawn up so as to comply with, a condition imposed by a stock exchange
shall, unless the contrary intention appears, be deemed to imply that application has been, or
will be, made for permission for the shares or debentures offered by the prospectus to be listed
for quotation on the official list of the stock exchange.

(10) For the purposes of this section, where a stock exchange grants the permission subject to a
condition, the permission shall be deemed to be granted if and when the directors of the
company give to the stock exchange a written undertaking to comply with the condition.
(11) For the purposes of this section, the determination day is, subject to subsection (11), the day
forty-two days after the day of issue of the prospectus.
(12) If, before the day referred to in subsection (10), the stock exchange notifies the applicant for the
permission that a later day, being a day not more than three months after the day of issue of the
prospectus, will be the determination day, the determination day is that later day.
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……………………
The term capital is used in several senses in company legislation, to mean issued, allotted or called
up share capital or loan capital.
A share is a transferable form of property, carrying rights and obligations, by which the interest of a
member of a company limited by shares is measured.
If the constitution of a company states no differences between shares, it is assumed that they are
ordinary shares with parallel rights and obligations. There may however be other types, notably
preference shares and redeemable shares.
The most common right of preference shareholders is a prior right to receive a fixed dividend. This
right is not a right to compel payment of a dividend, but it is cumulative unless otherwise stated.
Normally preference shareholders cannot participate in a dividend over and above their fixed
dividend.
In issuing shares, a company must fix a price which is equal to or more than the nominal value of
shares. It may not allot shares at a discount to the nominal value.
If shares are issued at a premium, the excess must be credited to a share premium account.
Special rules apply to issues of shares to the public by public companies. These include specific
rules relating to the content of prospectuses.
……………………
2 Loan capital
……………………
As you will know from studies in other subjects, companies are often financed by a mix of share and
loan capital, and so we now move on to look at the legal issues affecting loan capital.
……………………
2.1 Borrowing
Trading companies have an implied power to borrow and charge their assets as security for a loan. That
also gives the lender a right to appoint, for example, a receiver to sell the company’s assets in order to
repay the loan if the company defaults on repaying it, or to run the business for a while in order to sell it
as a going concern.
Even so the company’s articles usually give an express power to borrow and details of the extent to
which the company can charge its assets as security. There are restrictions on borrowing that are placed
on newly formed public companies. Such companies cannot commence business or borrow until they
have received a certificate allowing them to do this from the Registrar of Companies.
2.2 Debentures and debenture stock

When a lender makes a loan to a company he will obviously require some evidence of that fact. There is
usually a written document in the form of a deed which is called a debenture, a term which has a Latin
word ‘owing’.
A single debenture evidences a loan from a person where the lender is in privity of contract with the
company and is a creditor to it. Its modern use is to secure a loan or over draft facility from a bank. In
this context it is the document in which the company charges in favour of the bank all its assets and
undertakings, thus giving the bank the right to appoint a receiver.
Debenture stock is also found where the loan is to come from the public, those who subscribe for the
debenture stock receiving a stock certificate rather like a share certificate. The company keeps a register
of debenture holders and the stock certificates can be transferred from one person to another in a similar
way to shares. However, unlike shares, which cannot be issued at a discount, debentures can be issued
at a discount.
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When debentures are issued for public subscription, the company enters into a trust deed with trustees
for the debenture holders. The trustee is often an insurance company. The trustee has charge over the
assets and the power to appoint a receiver on trust for the individual stock holders who are not in privity
of contract with the company. From a commercial point of view, this is necessary because the holders of
debenture stock may be widely dispersed and need some central authority, such as the trustees, to look
after their interests with the company.
A debenture is often secured by a fixed or floating charge but may be unsecured. A debenture may be
redeemable or irredeemable.
2.3 Charges
A charge secured over a company's assets gives to the creditor (called the 'chargee') a prior claim (over
other creditors) to payment of their debt out of those assets. Charges are of two kinds, fixed and floating.
2.3.1 Fixed charge

A fixed charge is a form of protection given to secured creditors relating to specific assets of a company.
The charge grants the holder the right of enforcement against the identified asset. Fixed (or specific)
charges attach to the relevant asset as soon as the charge is created. By its nature a fixed charge is best
suited to assets which the company is likely to retain for a long period. A mortgage is an example of a
fixed charge. (in the event of default in repayment or some other matter) so that the creditor may realise
the asset to meet the debt owed. Fixed charges rank first in order of priority in liquidation.
If the company disposes of the charged asset, it will either repay the secured debt out of the proceeds of
sale so that the charge is discharged at the time of sale, or pass the asset over to the purchaser still
subject to the charge.
2.3.2 Floating charge

A floating charge has been defined, in Re Yorkshire Woolcombers Association Ltd 1903 as:
(a) A charge on a class of assets of a company, present and future...
(b) Which class is, in the ordinary course of the company’s business, changing from time to time
(c) Until the holders enforce the charge, the company may carry on business and deal with the
assets charged
Floating charges do not attach to the relevant assets until the charge crystallises.

A floating charge is not restricted to assets such as receivables or inventory. A floating charge over 'the
undertaking and assets' of a company (the most common type) applies to future as well as to current
assets.
2.4 Contents of debenture trust deed

A debenture trust deed should include the following contents:
The appointment usually of a trustee for prospective debenture stockholders. The trustee is usually a
bank, insurance company or other institution but may be an individual.
The nominal amount of the debenture stock is defined, which is the maximum amount which may be
raised then or later. The date or period of repayment is specified, as is the rate of interest and half-yearly
interest payment dates.
If the debenture stock is secured the deed creates a charge or charges over the assets of the company.
The trustee is authorised to enforce the security in case of default and, in particular, to appoint a
receiver with suitable powers of management.
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The company enters into various covenants, for instance to keep its assets fully insured or to limit its
total borrowings; breach is a default by the company.
There may be elaborate provisions for transfer of stock and meetings of debenture stockholders.
……………………
Companies have an implied power to borrow for purposes incidental to their trade or business.
Loan capital comprises all the longer-term borrowing of a company. It is distinguished from share
capital by the fact that, at some point, borrowing must be repaid.
A debenture is a document stating the terms on which a company has borrowed money.
A charge over the asset of a company gives a creditor a prior claim over other creditors to payment of
their debt out of these assets. Charges may either be fixed, which attach to the relevant asset on
creation, or floating.
……………………
3 Capital maintenance
……………………
We end this chapter by looking at the rules on capital maintenance. These are meant to safeguard
creditors by ensuring that capital can only be returned to members in limited circumstances under
formal rules.
……………………
3.1 Rationalisation of share capital

The company’s capital structure can be rationalised by capitalising the sums in the share premium
account. It can also resort to its reserve fund for the same purpose. The company may decide to bring its
issued capital into line with the funds it is using in its business by issuing bonus shares to existing
shareholders to the value of the additional capital.
M Dalley & Co v Sims 1968
A company was run by the managing director ‘as if it were her own business’, with ‘no more than
perfunctory attention to the requirements of the articles or of the Companies Acts’. An issue of bonus
shares was proposed, for the implementation of which a resolution in general meeting to increase capital
was required. No notice of a general meeting was given, and no meeting was held. Proceeding as
though the capital had been increased, the company on the managing director’s instructions issued the
bonus shares and allotted them as a gift to one of its employees.
Held: The issue was invalid. Without valid increase in the amount of the company’s nominal capital,
there could not have been a valid bonus issue.
3.2 Reduction of share capital

Lastly, the company may decide to reduce its capital. However the Companies Act only authorises the
reduction of share capital in certain circumstances.
3.3 Purchase of own shares

A company may not purchase its own shares, as by doing so it will lose its own capital.
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Trevor v Whitworth 1887
A company having gone into liquidation, a former shareholder claimed from the company the balance of
the price of his shares which he had sold to the company before the liquidation and which were not
wholly paid for.
Held: The claim was dismissed. Lord Macnaughten said that a company is prohibited from purchasing
its own shares, except under certain stringent conditions. “When Parliament sanctions the doing of a
thing under certain conditions and with certain restrictions, it must be taken that the thing is prohibited
unless their prescribed conditions and restrictions are observed. It can reduce its capital if it is in excess
of the wants of the company, so long as this does not involve with diminution of any liability in respect
of unpaid capital, or the payment to any shareholder of any paid up capital. It follows that if the
operation be effected by payment of capital to any shareholder; all the prescribed conditions must be
followed.
The effect of allowing a company to purchase its own shares would be that the amount paid upon the
shares would be returned to the shareholders and if the company continued to hold the shares, be
permanently withdrawn from its trading capital.
Re Denver Hotel Co 1948
Lindley J. said if a transaction is really a purchase by the company of its own shares from one
shareholder only, then the court cannot sanction it. The capital might be in excess of the wants of the
company. But this should not be consumed to enable a company to prefer one shareholder to another of
the same class by buying up his shares.
The effect is that the company cannot become a member of itself. There is a distinction between the
situation when the directors redeem the shares of a holder and the shareholder surrenders shares in the
lien of forfeiture. The shareholder is relieved from future calls. He is not taking money out of the
company.
Even though a company cannot purchase its own shares or be a member to itself, shares or shares of its
members can be held by a trustee. The shares held by trustees are acquired by means other than
purchase. Kirby v Williams 1929 stated that shares transferred to trustees did not involve any
diminishing or reduction of the shares.

A company may purchase its own shares under a court order, for example where it is required to receive
oppressed minority shareholders. The Act authorises the court to order this purchase and allow the
company to continue.
3.4 Assisting purchase of own shares

A company cannot use its own capital to enable somebody else to purchase its own shares or make the
payment of capital to any shareholder.
Payment of capital to any shareholder is just as much reduction of share capital, and just as detrimental
to the interests of creditors as payment of the same amount among all the shareholders rateably. It is a
payment of capital, because the shareholders to whom the payment is made renounce in return the right
to participate in the joint stock of the company.
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British American Trustee and Finance Corporation Its (and reduced) v Couper 1894
A company carried on business in United Kingdom and the United States of America and a part of its
investments and some of its shareholders were in the States. Differences having arisen between the
directors in England and the American shareholders, it was agreed that the American shareholders
should take over the American investments upon the terms that the company should cease to carry on
business in America. The capital of the company should be reduced by the payment of the shares held
in America. A special resolution for carrying out this agreement was passed and confirmed. All the
creditors of the company had either been paid or assented to the arrangement.
Held: The arrangement was not ultra-vires the company, and should be sanctioned by the court.
3.5 Issuing shares at a discount

A company cannot issue shares at a discount.
Ooregum Gold Mining Company of India Ltd v Roper 1892
Lord Halsbury commented the company legislation then in force made:
‘one of the conditions of the limitation of liability that the memorandum of association shall contain the
amount of capital with which the company proposes to be registered, divided into shares of a certain
fixed amount. It seemed that the system thus created by which the shareholder’s liability is to be limited
by the amount unpaid upon his shares, renders it impossible for the company to depart from that
requirement, and by any expedient to arrange with their shareholders that they shall not be liable for the
amount unpaid on the shares.’
3.6 Returning share capital to shareholders

The company cannot return issued shares to shareholders except in a winding up.
Re Chartley-Whitfield Colliery Ltd
A coal mining company with 47 shareholders was nationalized under statute, which provided for the
vesting of its assets in the National Coal Board subject to payment of compensation, which would be
assessed by a tribunal. This was such a long process that it would take years for the shareholders to
receive compensation. However, the company upon losing its principal business had no intention of
being liquidated. It was going to start digging clay and manufacturing tiles, drain pipes, etc. The
company passed a special resolution as per its articles or memorandum to reduce its capital and pay off
the preferred shareholders. This is the preferred shareholders objected to, on the basis that the ordinary
shareholders would benefit particularly from the money the company would make by the reduced
activities.
Held: It is a recognised principle that the court, in confirming a reduction by the payment off of capital
surplus to a company’s needs, will require that those entitled to priority in a winding up are paid off first.
It is a recognised principle that the court, in confirming a reduction by the payment off of capital surplus
to a company’s needs, will require that those entitled to priority in a winding up are paid off first.
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3.7 Procedures for alteration of share capital
The liability of members of a limited company is limited to the nominal value of their shares. The
creditors of the company look to its capital for repayment of their debts. Hence a company wishing to
alter its capital must comply with the statutory requirements. This is provided for in Division 43 of part
IV of the Act. By section 74(1):
A company may, unless its articles provide otherwise, by special resolution alter its share capital as
stated in the certificate of share capital by doing any of the following:
(a) Increase its share capital by new shares of such an amount as it thinks expedient;
(b) Consolidate and divide all or any or its share capital into shares of a larger amount than it
existing shares;
(c) Convert all or any of its paid up shares into stock, and re-convert that stock into paid up shares of
any denomination;
(d) Subdivide its shares, or any of them, into shares or smaller amounts than is stated in the
certificate of share capital;
(e) Cancel shares which, at the date of the passing of the resolution, have not been allotted to any
person, and diminish the amount of its share capital by the amount of the shares so cancelled.
Where shares are subdivided under this section, the proportion between the amount paid and the
amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from
which the reduced share is derived.
A cancellation of un-allotted shares under this section shall be deemed not to be a reduction of share
capital for the purposes of this Act.
Where a company has made any alteration referred to in subsection (1), it shall within one month after
so doing lodge with the Registrar:
(a) A notice in the prescribed form specifying, as the case may be, the shares increased,
consolidated, divided, subdivided, converted, redeemed or cancelled or the stock reconverted;
(b) A copy of the resolution authorizing the alteration.
Where an alteration under this section alters a particular stated in the company’s certificate of share
capital, the Registrar shall issue a replacement certificate of share capital worded to meet the
circumstances of the case.
3.8 Procedures for reduction of share capital

A reduction of share capital diminishes creditors’ security. To protect the creditors, the Companies Act PART C: COMPANY LAW // 10: Capital and financing of companies
imposes conditions which the company must fulfil.
Any alteration of a company’s share capital can be made after a special resolution, and the special
resolution must be lodged with Registrar within twenty-one days of the special resolution. Reduction of
shares capital is specifically provided for by s76:
(1) Subject to confirmation by the court, a company may, if so authorised by its articles, by special
resolution reduce its share capital in any way, and in particular, without prejudice to the
generality of the foregoing power, may:
(a) extinguish or reduce the liability on any of its shares;
(b) either with or without extinguishing or reducing liability on any of its shares, cancel any
paid-up share capital which is in excess of the wants of the company; or
(c) either with or without extinguishing or reducing liability on any of its shares, pay off any
paid-up share capital which is in excess of the wants of the company;
and may, if and so far as is necessary, reduce the amount of its shares accordingly.
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(2) A special resolution under this section is in this Act referred to as ‘a resolution for reducing share
capital’.
S76 (1) of the Act therefore gives some of the methods by which a company may reduce its capital.
Various other ways are open to the company. It may reduce capital by returning company assets to
shareholders, by cancelling capital neither lost nor unrepresented by available assets, or by buying its
own shares.
A company’s articles therefore must authorise a reduction of its share capital. If a special resolution is
passed for that purpose, an application to court must be made for an order to that effect. A company
may wish to sell its assets or otherwise reduce capital in order to buy out a retiring member of the
company or pay a deceased member’s personal representatives his or her share of the capital.
Creditors may object to reduction even after the company has passed a special resolution to do so.
According to s77:
(1) If a company has passed a resolution for reducing share capital, it shall, within twenty-one days
after the making of the resolution, apply to the court for an order confirming the reduction.
(2) If the proposed reduction of share capital involves either diminution of liability in respect of
unpaid share capital or the payment to any shareholder of any paid-up share capital, subsection
(5) and (6) shall apply to the reduction unless the court directs otherwise.
(3) Every creditor of the company who at the date fixed by the court is entitled to any debt or claim
which, if that date were the commencement of the winding-up of the company, would entitle the
creditor to benefit from the distribution under the winding-up, shall be entitled to object to the
reduction.
(4) The court shall settle a list of creditors so entitled to object
(5) If a creditor entered on the list whose debt or claim is not discharged or has not been determined
does not consent to the reduction, the court may, if it thinks fit, dispense with the consent of that
creditor, on the company’s securing payment of his debt or claim by appropriating:
(a) the full amount of the debt or claim, if the company admits the full amount of the debt, or
claim, or, though not admitting it, is willing to provide for it; or
(b) an amount fixed by the court
A creditor who does not object to the reduction of capital must give consent to the reduction. The
company may, in the alterative, settle such a creditor’s debt, or ensure that the creditor’s debt is
secured.
3.9 Powers of court in reduction of share capital

The court has been given wide powers under the Act with regard to the reduction of the capital.
According to s78:
(1) The court, if satisfied with respect to every creditor of the company who is entitled to object to
the reduction, that:
(a) his consent to the reduction has been obtained;

(b) his debt or claim has been discharged or determined; or
(c) his debt or claim has been secured;
May make an order confirming the reduction on such terms and conditions as it thinks fit.
(2) The order may require the publication of a notice of the reduction in capital on the issue of the
replacement certificate of share capital under section seventy-nine.
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(3) Where the court makes any such order it may, if for any special reason it thinks it proper so to
do, make an order:
(a) directing that the company shall, during a period specified in the order, add to its name as
the last words thereof of the creditors of the company, whose debtors or claims will be
provable in a wind up, the right to object to a proposal reduction.
Any creditor is entitled to oppose the reduction of capital in the High Court. The company may agree to
pay off the creditor and extinguish his right to object. The court can only confirm a reduction if satisfied
that debts have been repaid or creditors have consented to the reduction.
Security may also be used to dissipate consent of creditors who may not consent, to make sure that the
company secures that reduction.
In so far as shareholders’ rights are concerned, the court supervises the winding up. The various classes
of shareholders, ordinary and preference have the rights which they would have in a winding up of a
company that is if the company was to be liquidated. If they have equal rights with regard to
distribution, then where there is a reduction because of the loss of assets, the loss falls upon the
shareholders equally.
If there are preference shareholders with preferential rights to be paid first when dividends are being
distributed, they have no such rights with respect of capital. In a reduction in the distribution of capital,
preferential rights are the same as those of ordinary shareholders. But in a winding up the loss must first
fall on the ordinary shareholders. Only after the paid up value of the ordinary shares have been
extinguished, will the preference shares be reduced. If the company capital is repaid because it is
surplus to the company’s needs, it must be returned to the preference shareholders who have priority.
If satisfied that every creditor has consented to the reduction or has had his debt discharged or secured,
in approving the reduction the court seeks to ensure that the class of reduction is fair and equitable.
3.10 Methods of reduction of capital

3.10.1 Extinguishing or reducing liability on unpaid shares
Reduction may be effected by extinguishing or reducing liability of the shareholders on the unpaid shares
in respect of their shares, for example on a nominal value of K5000 on a share, liability for the unpaid
K5000 may be reduced to K2000.
3.10.2 Cancelling share capital

Capital can be reduced by cancelling any paid up share capital which is lost or is unrepresented by

available assets, for example when the value of the net assets is less than the paid up capital because
the company has sustained a trading loss. In Re: Floating Dock Company v St Thomas Ltd 1895, the
court said:
‘Where a company intends to reduce its capital because it has had a loss of finance, it has to be proved
that there is a permanency in the loss i.e. there should be no likelihood of recovery. This takes into
account the danger that certain companies may allege they have had a loss, and thus claim a reduction
in capital.’
3.10.3 Paying off paid up share capital

By paying off any paid up share capital to the shareholder which is in excess of the needs of the
company. This may occur in cases where the company has sold part of its business undertaking and the
monies or shares received in that sale are distributed among its members.
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3.10.4 Payment in kind
Capital can be reduced by payment in kind. Rather than being paid in cash, capital is paid in the form
of shares or bonds. In Ex Parte Westburn Sugar Refineries (1962) the court held:
That whether the court will exercise its discretion and confirm the reduction depends on three questions:
 Whether the interests of creditors have been safeguarded

 Whether it is in the interest of shareholders
 Whether it is in the public interest
In a case where the capital has been repaid in kind, if the amount is more than what the shares would
have cost, this will not alter the value of the assets distributed.
The purpose of paying in kind may be to borrow capital on issued shares. This makes it easier to borrow
money with interest, and repay it by share capital, especially preference shares. Reduction of reserve
capital will have been created by a transfer of profits retained in the company, or may be added to by
the company resolving that the unpaid capital can only be paid at the time of winding up.
3.11 Payment of dividends

A dividend is paid out the company’s net profit. It is usually distributed or paid out to share holders in
proportion to their shareholdings. It is to reward in the form of a dividend that all those who invest in the
company.
The power to declare a dividend is given by the articles which often include the following rules.
 The company in general meeting may declare dividends.
 No dividend may exceed the amount recommended by the directors who have an implied power in
their discretion to set aside profits as reserves.
 The directors may declare such interim dividends as they consider justified.
 Dividends are normally declared payable on the paid up amount of share capital. For example a £1
share which is fully paid will carry entitlement to twice as much dividend as a £1 share 50p paid.
 A dividend may be paid otherwise than in cash.
 Dividends may be paid by cheque or warrant sent through the post to the shareholder at his
registered address. If shares are held jointly, payment of dividend is made to the first-named joint
holder on the register.
A dividend becomes a debt when it is declared and due for payment. A shareholder is not entitled to a
dividend unless it is declared in accordance with the procedure prescribed by the articles and the
declared date for payment has arrived. This is so even if the member holds preference shares carrying a
priority entitlement to receive a specified amount of dividend on a specified date in the year. The
directors may decide to withhold profits and cannot be compelled to recommend a dividend.
If the articles refer to 'payment' of dividends this means payment in cash. A power to pay dividends in
specie (otherwise than in cash) is not implied but may be expressly created. Scrip dividends are
dividends paid by the issue of additional shares. Any provision of the articles for the declaration and
payment of dividends is subject to the overriding rule that no dividend may be paid except out of profits
distributable by law.
3.11.1 Accumulated profits

S84 states that no dividend shall be payable to the shareholders of a company except out of the profits
arising or accumulated from the business of the company. The word accumulated means that any losses
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MANAGEMENT, ADMINISTRATION
AND GOVERNANCE OF COMPANIES
In this chapter we first look at the appointment and removal, and powers and duties of directors. The
extent of directors’ powers is defined by the articles. In essence directors act as agents of the company.
The different types of authority that a director can have (implied and actual) are important in this area.
We also consider the duties of directors and remedies for breach of their duties.
We then deal with the roles of other company officers, the secretary and the auditor.
chapter
We lastly consider the procedures by which companies are controlled by their shareholders, namely
general meetings and resolutions. These give members a measure of protection for their investment in
the company. A general meeting at which the annual accounts and auditors’ and directors’ reports are
laid must normally be held annually. This gives the members an opportunity to question directors
about their stewardship of the company.
11
syllabus
references
topic index
1 Directors 11A
2 Powers and duties of directors 11D
3 Officers of the company 11C
4 Meetings and resolutions 11B
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LEARNING OBJECTIVES
 Explain the role of directors
 Describe the ways in which directors are appointed and leave office
 Describe the powers of the board, the Chief Executive and individual directors to bind their company
 Explain the duties that directors owe to their companies
 Explain the duties and powers of a company secretary
 Explain the duties and powers of company auditors
 Describe the purposes of annual general meetings and other general meetings
 Describe the procedure for calling general meetings
 Distinguish between different types of resolution
1 Directors
……………………
We start by looking at the position of directors, the rules on their appointment and the authority they
have.
……………………
1.1 Role of directors

The management of the business of a company is entrusted to the directors. The Act defines a director
as
‘A person appointed by the company to direct and administer the business of the company, whether or
not he is called a director. “Directors” means the directors acting collectively as their decisions have to
be by resolution; and where a document is required to be signed by directors, the majority may sign it.’
Any person who holds himself or herself out, or knowingly allows himself or herself to be held out as a
director of the company, though not appointed director, shall be deemed to be a director and shall be
liable both civilly and criminally for acts and omissions of duty. If a company holds out a person; or
allows a person to hold himself out as a director of the company, knowing that the person is not a duly
appointed director, the company shall be guilty of an offence, and shall be liable to a fine. The definition
excludes anyone who gives advice to directors in a purely professional capacity.
The Act also provides that no limitation upon the authority of a director of a company shall be effective
against a person who does not have knowledge of the limitation unless, taking into account his
relationship with the company, he ought to have had such knowledge.
1.2 Role of chief executive

The term Chief Executive is not a legal term but one which describes the position of its holder in
commercial circles. Greater weight is attached to the acts taken or decisions made by the title holder
than by other directors. Jessel MR said various directors’ positions in Re Forest of Dean Coal Mining
Company 1878 that:
‘….it does not matter much what you call them so long as you understand what their true position is,
which is that they are really commercial men managing a trading concern for the benefit of themselves
and all other share holders in it.’
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1.3 Number of directors
Every company shall have at least two directors. If it carries on business for more than two months with
only one director; the company and each officer in default, shall be guilty of an offence, and shall be
liable on conviction to a fine. A company may however escape liability under this provision as any officer
who is held out as director without necessarily being appointed as such shall be deemed to be a
director, and shall be liable only for wrongful acts or omissions while performing duties in the business
of the company(s204).
1.4 Appointment of directors

The first directors of the company are those named in the application for incorporation(s206(1)). They
shall be deemed to have been appointed by the company upon its incorporation. Their term of office is
valid for one year or up to the first annual general meeting(s206(2)).
All matters about director’s appointments other than those relating to the first directors are to be
regulated by the Act unless the articles provide otherwise(s206(3)). The Act further provides that at all
annual general meetings held by the company, other than the first annual general meetings, one third of
directors shall retire(s206(5)), starting with those who have served longest(s206(6)).
While the Act requires a minimum of two directors, a company may increase this number to suit its
operations It also has authority to reduce the number of directors(s206(4)). A person who is appointed
to fill the position of a retiring director may be appointed by ordinary resolution(s206(7)). A retiring
director is eligible for reappointment(s206(8)). There is no restriction as to the number of times that a
director is reappointed. A director could therefore ‘remain’ in office for a long time, particularly one who
is a founder or has the most investment in the company.
If a director is not appointed to replace a retiring director, and the retiring director offers himself for re-
appointment and qualifies for re-appointment, the retiring director shall be deemed to have been re-
appointed. The only exceptions are when it is expressly resolved that the position shall not be filled in
order to decrease the number of directors or a resolution for re-appointment is put and lost(s206(9)).
The Act also provides for appointment of a director at any other time should there be fewer directors
than are provided for in accordance with the Act(s206(10)). The person so appointed shall remain in
PART C: COMPANY LAW // 11: Management, administration and governance of companies

office until the next annual general meeting, but shall not be taken into account in determining the
number of directors to retire(s206(11)). At that annual general meeting, the person shall be eligible for
re-appointment(s206(12)). Where a director’s office becomes vacant otherwise than by the one third
retirement scheme, the company may, by ordinary resolution, appoint a replacement who shall retire on
the day on which the person replaced would have retired(s206(13)).
1.5 Qualifications for appointment as director

S207 provides for qualification in a negative form:
A person shall not qualify for appointment, continue to holder the office of director if the person is::
 A body corporate
 An infant or any other person under legal disability
 Removed or restrained by court order on account of misconduct
 An undischarged bankrupt or adjudged bankrupt
It is a criminal act to contravene this provision and upon conviction the erring officer or director shall be
liable to a fine or to imprisonment for up to six months, or to both(s207(3)). The contravention does not,
however, invalidate any transaction entered into by the company(s207(6)).
The articles of a company may contain additional restrictions or qualifications regarding eligibility to be
appointed director.
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There are several important implications of this provision. It should ensure that companies put or keep
in office only reputable individuals with a clean record. Another company may not therefore be a
director. Minors, people with mental disabilities and other legal disability have in law, no capacity to
enter into binding contracts or to be responsible for their actions. They cannot be held liable for their
acts and omissions.
The Companies Act does not contain a requirement for directors to hold shares, presumably in order to
provide a complete separation of ‘proprietors’ and managers. However some companies’ articles require
that a person should own shares in the company in order to qualify for appointment as director. The
purpose is to ensure that they avoid transactions which would put their own money at risk. Where
articles do contain this provision, under the Companies Act the eligible people therefore are those who
have taken or within two months of appointment take ‘qualification shares.
The other important aspect from the appointment and qualification of a director is that such a person
must consent in writing(s207(5)). This provision protects the members and investor s more than the
directors themselves as it augments their sense of commitment to perform their duties with utmost good
faith.
1.6 Residential requirement

Another mandatory qualification is that at least one of the directors, or where a company has more than
2, more than half of the directors, including the managing director, and at least one executive director,
where these exist, shall be resident in Zambia(s208(1)). If this provision is contravened, for more than
two months, this shall constitute a ground for winding up(s208(2)).
This provision serves the purpose of empowering indigenous Zambians to participate in business. It
ensures that a Zambian is involved in a foreign company operating in Zambia for security reasons and
/or reasons of an economic nature making it necessary for an indigenous person to hold high office in a
foreign company.
1.7 Vacation of office

This may arise from causes such as death, appointment of liquidator, a disqualification, resignation,
retirement or removal. In the case of resignation, s210 provides:
(1) A director may resign his office by notice in writing to the company.
(2) In addition to the other circumstances specified in this Act, an office of director shall become
vacant if the director:
(a) is absent from meetings of the directors held during a period of six months, without the
consent of the directors;
(b) holds any office of profit under the company, except that of managing director or principal
executive officer, without the consent of the company by ordinary resolution; or
(c) is directly or indirectly interested in any contract or proposed contract with the company
and fails to declare his interest as required by this Act.
(3) The articles of a company may provide for the termination or vacation of office in circumstances
additional to those specified in this Act.
In the case of absence from meetings, he/she will only be disqualified if his/her absence was voluntary.
In Re London and Northern Bank, Macks Claim it was held that a director who lived in Belfast and was
ill and therefore unable to travel to London to attend meetings had not vacated the office.
Being removed as a director does not deprive him/her of any compensation or damages payable to
him/her in respect of the termination of his/her appointment as director, or of any appointment, for
example as Managing Director, terminating with that as director. Nothing in the section derogates from
any power of removal of the director which may exist apart from the section (s175(6)). The director
must however mitigate the damages as far as possible.
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Hutchful v H K Biney 1971
H, variously described as Managing Director and General Manager of second defendant company was
removed in purported exercise of powers granted under the articles which authorized the Governing
Director, inter alia “to remove any director, however appointed , and at any time.” There was never an
express contract with H as Managing Director or General Manager.
Held: While H K Biney could, as Governing Director, remove the appellant in accordance with Article
12(a) of the Articles of Association of the company, he could not do so as the General Manager as he
purported to have done, for such power was ultra vires the General Manager.
1.8 Directors’ remuneration

Directors have a right to be remunerated for performing their duties as managers of the company and for
carrying the burden and responsibility of running the company. The remuneration is determined by the
company by ordinary resolution(s206(14)). The remuneration shall accrue from day to day(s206(15)).
The company may also by ordinary resolution resolve to pay travelling allowances, sitting allowances,
and other expenses properly incurred by directors in the course of, or in connection with, the business of
the company(s206(16)).
1.9 Directors’ report

S176 requires directors to include as part of the annual accounts a report with respect to the company’s
affairs. This should include the amount paid as dividends and the amount proposed to be taken to
reserves.
1.9.1 Changes in business

The report should deal with any changes that occurred in the financial year in:

 The nature of the business of the company or its subsidiaries
 The classes of business in which the company has an interest
The report should also disclose:
 The principal activities of the company and its subsidiaries

 Any changes in activities during the year
 Particulars of important events that have occurred during the year
 Indications of likely future developments
 Indications of research and development activities
1.9.2 Directors
The report should include the name of anyone who was a director during the financial year.
1.9.3 Assets
The directors’ report should give details of:
 Any significant changes in the company’s fixed assets or the fixed assets of a subsidiary during
the year
 Any significant differences between the balance sheet and market values of interests in land
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1.9.4 Share and debenture issues
If the company has issued shares or debentures during the year, the report should include:
 The reasons for making the issue and the classes of shares issued
 In respect of each class of shares and debentures, the number issued and the consideration
received
1.9.5 Other disclosures

Other disclosures required in the directors’ report include:
 Measures taken to secure the health and safety of employees and others who may be affected by
employees’ activities
 Information about the turnover and profit of substantially different classes of business
 Average number of employees and staff costs
 Details of gifts and donations
 Particulars of exports
……………………
Any person who occupies the position of director is treated as such, the test being one of function.
The method of appointing directors, along with their rotation and cooption is controlled by the
articles.
A director may vacate office as a director due to resignation; not standing for re-election; death;
dissolution of the company; removal; disqualification.
The powers of directors are defined by the articles. Directors have a duty to exercise their powers in
what they honestly believe to be the best interests of the company and for the purposes for which
the powers are given.
The Chief Executive or Managing Director has apparent authority to make business contracts on
behalf of the company. Their actual authority is whatever the board gives them.
……………………
2 Powers and duties of directors

……………………
We now move on to examine the powers and duties that directors have in law.
……………………
2.1 Powers of directors

Under S215 directors have the power to manage the business and exercise all powers that are not
required by the Companies Act or by its articles to be exercised by the company by resolution. Unless
the articles state otherwise it will be assumed that directors have the power to borrow money, appoint
an attorney and sign cheques and other negotiable instruments.
When the directors clearly have the necessary powers to act, their decision may be challenged if they
exercise the power in the wrong way. They must exercise their powers:
 In what they honestly believe to be the interests of the company: Re Smith v Fawcett Ltd 1942
 For a proper purpose, being the purpose for which the power is given: Bamford v Bamford 1969.
There is a division of power between the board of directors who manage the business and the members
who as owners take the major policy decisions at general meetings. How, then, do the owners seek to
'control' the people in charge of their property?
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 The members appoint the directors and may remove them from office under s 168, or by other
means.
 The members can, by altering the articles (special resolution needed), re-allocate powers between
the board and the general meeting.
 Articles may allow the members to pass a special resolution ordering the directors to act (or
refrain from acting) in a particular way. Such special resolutions cannot invalidate anything the
directors have already done.
Remember that directors are not agents of the members. They cannot be instructed by the members in
general meeting as to how they should exercise their powers. The directors' powers are derived from the
company as a whole and are to be exercised by the directors as they think best in the interests of the
company.
2.2 Directors’ duties

A company’s business is managed by its directors. In executing these duties, directors are required to
comply with the statutory provisions, common law rules and other regulations that affect their office in
order to avoid being in conflict or their actions being rendered unethical. Both statutory law and the
common law make provision for the rules that govern directors in the performance of their duties in
order to adhere to corporate governance and ethical issues.
Directors must observe good faith towards shareholders. Directors who use their powers to obtain
benefit for themselves at the expense of the shareholders, without informing them of the fact, cannot
retain those benefits, and must account for them to the company. However where the directors have
acted wrongly, provided the acts are not ultra vires, the acts can be ratified by the company.
2.3 Position of directors

Directors have been described as trustees and as agents. But it does not matter what they are called for
as Jessel MR observed in Re Forest of Dean Coal Mining Co:
‘their true position ….is that they are merely commercial men managing a trading concern for the

benefit of themselves and all other shareholders in it. As directors, they are in a position of trustees,
because it is to the directors that the whole business of the company is entrusted, all the monies paid
for the business of the company.’
2.3.1 Directors as trustees

As trustees, directors control the company’s property to be applied for the purposes specified and in the
interest of the company. They are trustees of their powers and must exercise them bona fide and not for
the benefit of the company and for their own interest.
Piercy v S Mills Ltd
There were two directors and they had power to issue shares. Although the company did not need to
issue new shares, the directors issued new shares to themselves and some of their supporters to ensure
that they could control the company and thus by their majority votes prevent the appointment of three
new directors provided for in the articles. The appointment of these new directors would have made the
two existing directors a minority on the board.
Held: The allotment of shares was not in the interest of the general body of shareholders but in the
personal interest of the two directors and, therefore, void.
The Directors are trustees for the company and not for the individual shareholders, nor for the third
parties who have contracted with the company.
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2.3.2 Directors as agents
Directors may for certain reasons be described as the organ of the company. They are also in some
circumstances agents of the company by whom it acts. When they act within the scope of their authority
and on behalf of the company, they, like other agents, incur no personal liability. However if they exceed
their authority, they may become liable for breach of warranty.
2.4 Fiduciary duties

The primary duty of directors is the management of the affairs of the company. They are managers
rather than servants of the company and owe a fiduciary duty to the company, first, to exercise their
powers bona fide for the purpose for which the are conferred and for the benefit of the company as a
whole and, secondly, not to put themselves in a position in which their duties may conflict with their
personal interests.
2.5 Duty not to have a conflict of interest

Directors, as trustees or agents, must account to the company for any profits made by virtue of their
office. Usually directors come into possession of an opportunity or information which should be used for
the company’s benefit, but which they use for their own benefit and make a profit. A “director must not,
without the consent of the company make any profit of his position in the company, beyond his agreed
remuneration.”
The director is precluded from dealing on behalf of the company with himself and from entering into
arrangements in which he has a personal interest conflicting, or may conflict, with the interest of those
whom he has a fiduciary duty to protect unless the company affirms or adopts his acts, provided that
such affirmation or adoption is not brought about by unfair or improper means.
If in breach of this duty a director enriches himself unjustly, he cannot keep the money, and the
company may bring an action to recover the amount involved. Similarly, a director cannot, without the
consent of the company, accept from a promoter any gift either during or after the promotion.
Regal (Hastings) Ltd v Gulliver 1942
Regal (Hastings) Ltd owned a cinema. The directors decided to acquire two other cinemas with a view
to the sale of the undertaking of the company as a going concern. For this purpose they formed a
subsidiary company (‘Amalgamated’) with a capital of ₤5,000 in ₤1 shares. The owner of the two
cinemas offered them a lease but required a personal guarantee of the rent by the directors unless the
paid-up capital of the subsidiary company was ₤5 000. As the directors wished to avoid giving the
guarantee, Regal (Hastings) subscribed for 2,000 shares in the subsidiary at par and the remaining
3,000 shares were taken at par by the directors and their friends, Regal (Hastings) being unable to take
more than 2 000 shares. Ultimately the sale of the three cinemas was carried through by the sale of all
the shares in the company and the subsidiary. The shares in ‘Amalgamated’ which had been taken by
the directors were sold by them at a profit of ₤2 16s 1d per share.
Held: Regal successfully sued them for the profit, even though the directors were also acting in the
interests of Regal. The judge, Lord Russell, commented:
‘They may be liable to account for the profits which they have made, if while standing in a fiduciary
relationship to Regal, they have by reason and in course of that fiduciary relationship made a profit. . . .
The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to
account for that profit, in no way depends on fraud, or absence of bona fides. The liability arises from
the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest
and well-intentioned, cannot escape the risk of being called upon to account. . . My Lords, I have no
hesitation in coming to the conclusion, upon the facts of this case, that these shares, when acquired by
the directors, were acquired by reason and only by reason of the fact that they were directors of Regal,
and in the course of their execution of that office. The directors standing in a fiduciary relationship to
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Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason
and only by reason of the fact that they were directors of Regal and in the course of the execution of that
office, are accountable for the profits which they have made out of them.’
Industrial Developments Consultants Ltd v Cooley 1972
The defendant, an architect, had been managing director of the plaintiff company, which offered
comprehensive construction services, such as engineering, architecture and project management
services. Following his appointment, the defendant had sought to obtain design and supervision
contracts for the plaintiff company from the Eastern Gas Board in connection with four depots the latter
planned to build. The Eastern Gas Board indicated to the defendant that they were not prepared to do
business with the plaintiff company but that they were prepared to engage the defendant personally.
Thereupon, the defendant resigned his appointment with the plaintiff company, on the pretext of ill-
health, and accepted the work from the Eastern Gas Board.
Held: The defendant was liable to account to the plaintiff company for all benefits accruing under the
contract with the Eastern Gas Board. The judge commented:
‘The first matter that has to be considered is whether or not the defendant was in a fiduciary relationship
with his principals, the plaintiffs. The defendant had one capacity and one capacity only in which he
was carrying on business at that time. That capacity was as managing director of the plaintiffs.
Information which came to him while he was managing director and which was of concern to the
plaintiffs and was relevant for the plaintiffs to know, was information which it was his duty to pass on to
the plaintiffs because between himself and plaintiffs a fiduciary relationship existed.
It is an overriding principle of equity that a man must not be allowed to put himself in a position in
which his fiduciary duty and interests conflict.’
2.6 Duty of skill and care

That directors have a common law duty of care and skill was established in the following case.
Re City Equitable Fire and Insurance Co Ltd 1925
An investigation of a company’s affairs in the course of winding-up disclosed a shortage in the funds of
over ₤1 200 000. This shortage was due mainly to the deliberate fraud of the managing director,
Bevan, for which he was convicted and sentenced. The liquidator sought to make the other directors, all
of whom had acted honestly through out, liable for negligence.
Held: The directors were not liable. This case is famous for the proposition by Romer J that:
‘A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably
be expected from a person of his knowledge and experience’.
In dealing with the duties of directors, the judge in the court a quo made the following remarks:
‘It is indeed impossible to describe the duty of directors in general terms, whether by way of analogy or
otherwise. The position of a director of a company carrying on a small retail business is very different
from that of a director of a railway company. The duties of a bank director may differ widely from those
of an insurance director, and the duties of a director of one insurance company may differ from those of
a director of another. In one company, for instance, matters may normally be attended to by the
manager or other members of the staff that in another company are attended to by the directors
themselves. The larger the business carried on by the company the more numerous, and the more
important, the matters that must of necessity be left to the managers, the accountants and the rest of
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the staff. The manner in which the work of the company is to be distributed between the board of
directors and the staff is in truth a business matter to be decided on business lines.
There are . . . one or two . . . general propositions that seem to be warranted by the reported cases:
(1) A director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience. A director of a life
insurance company, for instance, does not guarantee that he has the skill of an actuary or a
physician. In the words of Lindley MR; “if directors act within their powers, if they act with such
care as is reasonably to be expected from them, having regard to their knowledge and experience,
and if they act honestly for the benefit of the company they represent they discharge both their
equitable as well as their legal duty to the company’. It is perhaps only another way of stating
the same proposition to say that directors are not liable for mere errors of judgment.
(2) A director is not bound to give continuous attention to the affairs of his company. His duties are
of an intermittent nature to be performed at periodical board meetings, and of any committee of
the board upon which he happens to be placed. He is not, however, bound to attend all such
meetings though he ought to attend whenever, in the circumstances, he is reasonably able to do
so.
(3) In respect of all duties that, having regard to the exigencies of business, and the articles of
association, may properly be left to some other official, a director is, in the absence of grounds for
suspicion, justified in trusting that official to perform such duties honestly. . . A director who
signs a cheque that appears to be drawn for a legitimate purpose is not responsible for seeing
that the money is in fact required for that purpose or that it is subsequently applied for that
purpose, assuming, of course, that the cheque comes before him for signature in the regular way
having regard to the usual practice of the company. If this were not so, the business of a large
company could not be carried on.
2.7 Duty to act legally, honestly and within powers

Directors must exercise their powers bona fide – in good faith. Directors should not perform any act
which is ultra-vires the company, or illegal. They may suffer personal liability if the company should
suffer loss from such illegal acts. Directors must not pay dividends out of capital or they will be liable to
the company.
Coronation Syndicate Ltd v Lilienfeld and the New Fortuna 1903
The judge in this case commented:
‘It appears to me that there is a very great difference in principle between the case of a shareholder
binding himself by such a contract and the directors of the company undertaking such an obligation. The
shareholder is dealing with his own property, and is entitled to consider merely his own interests,
without regard to the interests of the other shareholders. But the directors are in fiduciary position, and
it is their duty to do what they consider will best serve the interests of the shareholders. If, therefore,
they have bound themselves by contract to do a certain thing, and thereafter have bona fide come to the
conclusion that it is not in the interests of the shareholders, that they should carry out their undertaking,
I do not think that the court would be justified in interfering with their discretion and compelling them to
do what they honestly believe would be detrimental to the interests of the shareholders. . . ‘
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2.8 Duty to exercise power for benefit of company
To be in the interest of the company, the exercise of the power must be intra vires. Where a decision of
the directors is bound to benefit some members while affecting others adversely, the directors will have
to consider what is fair between the two. Even a nominee director’s duty as director is to the company,
not to the person whose nominee he is. An agreement between him and that person cannot absolve him
for this duty.
2.9 Duty not to make secret profit

Directors are under a duty not to make secret profits by the use of their power without company’s
consent, they are liable to make good those profits to the company.
Boston Deep Sea Fishing Company v Ansell 1888
A director “A” of a company entered into a contract to build mineral boards on behalf of “B” company
and paid “A” a commission, but the commission was not disclosed to the company. A was also a
shareholder in the slip-building company, and c limited (where he was director) paid dividends and a
bonus to a particular shareholder who ….these fishing smacks, who emphasized it (C Limited) to supply
ice.“A” thought it fit to employ (C limited) to supply ice (“A” was also a shareholder in C limited) for B
limited. C limited aid a bonus to “A” the directors.
Held: “A” was under an obligation to B company to disclose …and the bonus which he earned by
reason of the company fact that the smacks were owned by the bonus he had to account for the bonus
and dividend to B company.
Without the consent of the company any profits made during the course of his business must be
accounted for. The board may except from duty to account by ratifying the act of the director.

Hogg v Cramphorn Ltd 1966
The directors had power under the articles to dispose the shares of the company to such persons, on
such persons and conditions and at such times as they might think fit. Someone offered to buy the
shares of the company. He wanted to control the company by getting the majority of the shares sold to
him. The directors in good faith believed that purchase of the shares by this prospective bidder would
not be in the interest of the company. They thus devised a scheme to forestall this bid. They issued new
shares to certain trustees to be held for the benefit of the employee of the company, and each share had
10 votes attached to it. One of the shareholders was an associate of the prospective bidder and
challenged the action.
Held: The issue of shares with multiple voting rights as such was ultra-vires the directors of the
company, even though they were made bona fide in the interests of the company. The purpose of the
issue was to ensure control of the company by the directors and their supporters. The effect was to
deprive the majority of the shareholders their constitutional power to have their views prevail in the
company, ie the majority of shareholders might not have been opposed to the sale to the bidder. The
power to issue shares – a fiduciary power must always be exercised in good faith. So the issue had to be
set aside by the court. It is always open for the company to ratify the acts of directors, by the general
meeting, but the shares issued under the scheme must not participate in the voting.
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2.10 Restrictions placed upon directors
2.10.1 Contract with company
The general rule is that director cannot make, or be interested in a contract with the company unless the
company affirms it. However this rule may be modified by the articles. S 218 permits a director to be
interested directly or indirectly in a contract with the company provided he or she declares the nature of
his or her interest. If he is interested in a proposed contract, the declaration must be made at the first
meeting of the directors at which the question of entering into the contract was first considered, and
where the director becomes interested after the contract is made, the declaration must be made at the
first meeting of the directors held after the director becomes so interested (s218 (5)). The declaration –
‘shall be a sufficient declaration of interest in relation to any contract so made unless, at the time the
question of confirming or entering into any contract is first taken into consideration by the company, the
extent of his interest in the body corporate or firm is greater than is stated in the declaration.’
Failure to give notice of the director’s interest will make the contract voidable at the instance of the
company, and the director shall be liable on conviction to a fine.
Cook v Deeks 1916
The stock of the Toronto Construction Co, a company carrying on the business of railway construction
contractors, was held in equal shares by Cook, GS Deeks, GM Deeks and TR Hinds, who also
constituted the board of directors. The company carried out several large construction contracts for the
Canadian Pacific Railway Co. When Messrs Deeks and Mr. Hinds learned that a new contract was
coming up, they obtained this contract in their own names, to the exclusion of the company and formed
a new company, the Dominion Construction Co to carry out the work. At a general meeting of
shareholders of the Toronto Construction Co resolutions were passed owing to the voting power of GS
Deeks, GM Deeks and TR Hinds, approving the sale of part of the plant of the Toronto Construction Co
to the Dominion Construction Co, and a declaration was made that the Toronto Construction Co had no
interest in the new contract with Canadian Pacific Railway Co.
Held: The benefit of the contract belonged properly to the Toronto Construction Co and that the directors
could not validly use their voting power as shareholders to vest it in themselves.
2.10.2 Voting by director interested in contract

The articles usually make provisions for this. For example, articles may provide as follows:
‘A director shall not vote in respect of any contract or arrangement in which he is interested, and if he
shall do so, his vote shall not be counted, nor shall he be counted in the quorum present at the
meeting.’
In the absence of provisions in the articles, s218(8) provides that:
Subject to this section and the articles, where a contract or arrangement in which a director is interested
is considered at a meeting:
(a) the director shall not be counted in the quorum required for that business; and
(b) the director shall not vote in respect of that business.
2.10.3 Loan to director

The Act prohibits loans by companies to director. A company cannot make a loan to a director of the
company or a director of its holding company, or enter into any guarantee or provide any security in
connection with a loan to a director (s219).
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S219 does not prohibit a company from making a loan to a related body corporate, or entering into a
guarantee or providing security in connection with a loan made by any other person to a related body
corporate. S219 also does not prohibit a company whose ordinary business includes the lending of
money from making a loan to, or entering into a guarantee or providing security in connection with, a
director provided the prior approval of the company has been given at a general meeting at which the
purposes of the expenditure and the amount of the loan, or the extent of the guarantee or security, were
disclosed. A company may also advance to a director of the company or of a related body corporate
funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the
purposes of enabling him properly to perform his duties as an officer or employee of the company. The
advance should not exceed one per cent of the assets of the company less the liabilities of the company
as shown in the last audited balance sheet of the company.
If a company does make an illegal loan, the company, and each officer in default, shall be liable to a
fine. The directors who authorised the making of the loan or the entering into the guarantee or the
providing of the security shall be jointly and severally liable to indemnify the company against any loss.
2.10.4 Payment to director for loss of office

It is unlawful for a company to pay a director compensation for loss of office or consideration in
connection with his retirement from office, unless particulars of the proposed payment and the amount
are disclosed to members of the company and the proposal approved by the company by an ordinary
resolution (s222(2 and 3). Disclosure must be to all members including those who have no right to
attend the meeting and vote while the payment is still being proposed. Where a payment is made in
contravention of the section, the amount received by the director is deemed to have been received in
trust for the company.
2.10.5 Disclosure of directors’ emoluments

In order to ensure that directors do not abuse their position for personal advantage as against other
shareholders, the former Companies Act required that the accounts be laid before the company in
general meeting showing the aggregate amount of:
 Emoluments of the directors and

 Pensions of directors or past directors; and
 Compensation to directors or past directors for loss of office
However the current Act does not have an equivalent provision.
2.11 Directors’ conduct towards members of the company

The following case illustrates the principles involved.
Percival v Wright 1902
Certain shareholders wrote to the secretary of the company asking if he knew anyone disposed to
purchase shares. Negotiations took place and eventually the chairman of the company and two other
directors purchased the shares of the plaintiffs at ₤12 10s per share. The plaintiffs subsequently
discovered that, prior to and during their own negotiations for sale, the chairman and the board had
been approached by a third party with a view to the purchase of the entire undertaking of the company
at prices which represented considerably over ₤12 10s per share. In the event the negotiations with the
take-over bidder proved abortive. The plaintiffs asked to have the sale of their shares to the chairman
and the other two directors set aside on the ground that the defendants as directors ought to have
disclosed the negotiations with the take-over bidder when treating for the purchase of the plaintiffs’
shares.
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Held: Their action was dismissed with costs. The judge acknowledged that:
‘Directors must dispose of their company’s shares on the best terms obtainable, and must not allot them
to themselves or their friends at a lower price in order to obtain a personal benefit. They must act bona
fide for the interests of the company.
However the plaintiffs’ contention in this case went far beyond this. The true rule is that a shareholder is
fixed with knowledge of all directors’ powers, and has no more reason to assume that they are not
negotiating a sale of the undertaking than to assume that they are not exercising any other power. . . .
The contrary view would place directors in a most invidious position, as they could not buy or sell shares
without disclosing negotiations, a premature disclosure of which might well be against the best interest
of the company . . . .There is no question of unfair dealing in this case. The directors did not approach
the shareholders with the view of obtaining their shares. The shareholders approached the directors, and
named the price at which they were desirous of selling. . . .’
2.12 Prohibition on insider dealing

In most regimes it is a criminal offence for directors and others to use inside information that they have
to gain from buying or selling shares in a stock market. Inside information has been defined as
information that is specific and precise, has not yet been made public, and if made public would have a
significant effect on the share price (it is price-sensitive information).
For directors, an obvious example would be using the advance knowledge they have of the company’s
results to make gains before the information is released to the market. Rules in many countries therefore
include prohibition in directors dealing in shares during a close period, defined as a specific period (60
days for example) before the publication of annual or period results.
As well as being a criminal offence, it is also an abuse of directors' roles as agents, a clear instance of
directors using the superior information they have for their benefit, rather than putting shareholders’
interests first. It also undermines the capital markets by deterring investors who do not have access to
privileged information and feel therefore that market distortions will result in insufficient returns for the
risks that they face.
Diamond v Oremuno 1969
The directors of a company, MAI, knowing that because of an increase in expenses, profits had fallen
drastically, sold their shares on the market at $28 a share, before the information was made public.
Subsequently the shares dropped to $1.
Held: By virtue of their common-law fiduciary duties, the directors were liable to the company for the
difference, although the company was not the party who had suffered the loss.
……………………
The duties owed by directors include the duties to act within their powers, promote the success of
the company, exercise independent judgement, exercise reasonable skill, care and diligence, avoid
conflicts of interest, not accept benefits from third parties and declare an interest in a proposed
transaction or arrangement.
……………………
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3 Officers of the company
……………………
This section looks at the position of other company officers, the company secretary and the auditor.
……………………
3.1 Managing director

The appointment of a managing director involves a delegation of the powers of the directors. The
directors cannot appoint a managing director unless the articles so provide or the company so
authorizes. The articles however, usually make provisions for such appointment.
The managing director usually has a contract of service with the company. Though his appointment may
be terminated, the company will be liable to damages if the removal is in breach of the contract of
service. Unlike other directors, he is a servant of the company for the purpose of preferential payment of
his salary in a winding-up of the company.
The managing director is usually given very wide implied or usual powers. It has been held that although
there is no inherent distinction between the different directors as to their duties and liabilities the
chairman of the board and the managing director may, by the articles of association and must, by their
special access to and connection with the detailed machinery of control, be expected to be better
informed than other directors on the affairs of the company.
Caddis v Holdsworth Company Ltd 1955
Caddis was appointed managing director of the defendant company. The service agreement provided
that he should perform the duties and exercise the powers in relation to business of the company and
the business of its existing subsidiary companies which might from time to time be assigned to or vested
in him by the directors. Later the directors resolved that Caddis should confine his attention to a
particular subsidiary company. He sued for damages for the breach of contract.
Held: This was not a breach of the service agreement, even though he was deprived of any managerial

functions in relation to the company employing him. This case illustrates that the managing director may
be appointed on terms that he shall only perform such duties as are from time to time assigned to him.
Shindaler v N Raincoat Limited 1960
S was appointed managing director of N Raincoat, a subsidiary of L. Company, for 10 years. The articles
of N provided that the managing director appointment should be automatically terminated if he ceased
to be a director or if the company in a general meeting resolved to terminate his appointment. M
company bought all the shares in L. Company. At a general meeting of N, resolutions were passed
removing S from office as director and terminating his service agreement. S sued for damages for
wrongful dismissal.
Held: S succeeded. It was an implied term of service agreement that N would do nothing of its own
motion to put an end to the state of circumstances which enabled S to continue as managing director.
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Re Richmond Gate Property Co Ltd 1964
The appellant was joint managing director of the respondent. The company’s articles stated:
‘A managing director shall receive such remuneration (whether by way of salary, commission or
participation in profits, or partly in on way and partly in another) as the directors may determine’.
After a short life the company went into a members’ voluntary liquidation. No remuneration for the
directors had been determined. The applicant lodged proof for ₤400 as remuneration due to him as
managing director either under contract or under a quantum meruit.
Held: The liquidator’s rejection of the claim was upheld by the court. The judge commented:
‘The effect of the articles, coupled with the fact that the applicant was a member of the company, is
that a contract exists between himself and the company for payment to him of remuneration as
managing director, and that remuneration is to be such amount ‘as the directors may determine’; in
other words, the managing director is at the mercy of the board, he gets what they determine to pay
him, and, if they do not determine to pay him anything, he does not get anything. That is his contract
with the company, and those are the terms on which he accepts office.
Since there is an express contract with the company in regard to the payment of remuneration, it seems
to me that any question of quantum meruit is automatically excluded.’
3.2 Company secretary

Similarly important in the management of the business of a company is the company secretary. Every
company must appoint a secretary. The secretary could be an individual or a body corporate, that is a
company or corporation. The position of secretary must be occupied by an individual resident, or a
company incorporated, in Zambia, and may be occupied by two or more persons who act jointly as the
secretary of the company. A company which operates for more than two months without a secretary
commits a crime and each officer in default shall be liable on conviction to a fine.
The position that a secretary holds in a company was discussed in the following case:
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd 1971
The secretary of the defendant company had fraudulently ordered ‘self –drive’ cars from the plaintiff, a
car hire company, on various dates, falsely stating that they were wanted by the defendant company for
business purposes. In fact the defendant company knew nothing about the transactions.
Held: Both the trial court and the Court of Appeal held that the defendant company was liable to the
plaintiffs for the amount of the hire. The judge, Lord Denning commented:
A company secretary is an officer of the company with extensive duties and responsibilities. This
appears not only in the modern Companies Acts, but also by the role which he plays in the day-to-day
business of companies. He is no longer a mere clerk. He regularly makes representations on behalf of
the company and enters into contracts on behalf which come which the day-to-day running of the
company’s business. He is certainly entitled to sign contracts connected with the administrative side of a
company’s affairs, such as employing staff, and ordering cars, and so forth. All such matters now come
within the ostensible authority of a company’s secretary.
The secretary is an officer of the company. His position is the same as that of a director in respect of
loans made to him by the company, provision in articles for relief or indemnity from liability, relief from
liability by the court under s 388 and the contents of the register of directors and secretaries.
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His removal is subject to his contract of service and the general principles of law in respect of servants.
The appointment of a receiver and manager and the making of an order for winding-up of the company
or the commencement of a voluntary winding-up will terminate his appointment as of other servants.
3.3 Duties of company secretary

In addition to his normal administrative duties, the secretary has special duties in respect of meetings,
books and returns and these are set out below.
3.3.1 Before the meeting

 Summon meetings at the instance of the board of directors by issuing notice to all those who are
entitled to receive them
 Prepare the agenda in consultation with the chairman
 Provide the chairman with particulars for, or prepare the outline of, any speech which he is to
deliver
 Get together all reports, documents and correspondence which are likely to be needed at the
meeting and to arrange them in the order of business as disclosed by the agenda
3.3.2 At the meeting

 Attend in good time and ensure that adequate arrangements are made for the meeting
 Bring the relevant documents
 When the meeting is declared open, read the notice convening the meeting
 Take notes at the meeting. Exact wording of resolutions should be taken down and confirmed, if
necessary
 Assist the chairman as and when necessary

3.3.3 After the meeting
 Write up the minutes
 Carry out any instructions given by the meeting, e.g. writing letters, dispatching reports,
registering transfers, delivering certificates, etc
 File any necessary returns, e.g. special extraordinary resolutions, annual list, and return of
allotments
 Send a copy of the minutes to every member or other persons entitled
3.3.4 Books
The secretary should ensure the proper keeping of the statutory and other books of the company, such
as the register and index of members, register of directors and secretaries, register of charges and
account books.
3.3.5 Returns
The secretary should file all necessary returns with the Registrar.
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3.4 Auditor
As you will have seen in Paper L4 Auditing an audit is a process which is concerned to establish and
confirm confidence in the accounting information yielded by the company’s records and systems so that
an opinion may be given upon the accounts which have been prepared by the company from those
records and systems. The audit is carried out primarily for the shareholders as a check upon the
directors’ stewardship, but it is obviously also of benefit to creditors and potential investors. The
Companies Act makes provision for the office of an auditor.
3.4.1 Appointment and removal of auditors

All companies except dormant and certain exempt private companies must appoint auditors. At each
general meeting at which accounts are laid, the members must appoint auditors who will hold office
until the conclusion of the next general meeting at which accounts in respect of an accounting reference
period are laid. As regards the first auditors, they may be appointed by the directors to hold office until
the conclusion of a general meeting at which accounts are laid. If the directors fail to make an
appointment the company in a general meeting may appoint the auditors. Casual vacancies may be
filled by the directors or by members in a general meeting.
The members of a company may remove the auditors before the expiration of their office. If this is done
the Registrar must be informed of the removal.
3.4.2 Remuneration of auditors

The remuneration of the auditors is fixed by the company in general meeting or in such a way as the
company in general meeting may determine. The company usually delegates the fixing of remuneration
to the directors. Where the auditor is appointed by the directors, his remuneration is fixed by the
directors or by the company as the case may be.
3.4.3 Duties of auditors

An auditor has two main legal duties:
 Audit the accounts of the company
 Report to the members of the company on the accounts laid before the company in general
meetings during his tenure of office. The auditor’s report must be open to inspection by any
member.
Re London and General Bank 1895
The greater part of the capital of the bank, which was being wound up had for some years been
advanced to four of the ‘Balfour” companies and a few special customers on securities which were
insufficient and difficult of realization. The auditors drew attention to the situation in a confidential
report to the directors stressing its gravity and saying “ we cannot conclude without expressing our
opinion unhesitatingly that no dividend should be paid this year’. The Chairman, Mr Balfour, persuaded
the auditors to strike this sentence out before the report was officially laid before the board of directors.
The certificate signed by the auditors and laid before the shareholders at the annual general meeting
stated that the ‘ value of the assets as shown on the balance sheet is dependent on realisation.’ As
originally drawn, it also said: ‘ And on this point we have reported specifically to the board.’ But again
Mr Balfour persuaded them to withdraw this statement by promising to mention this in his speech to
the shareholders which he did without drawing special attention to it. The directors declared a dividend
of 7 per cent.
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Held: The auditors had been guilty of misfeasance, and were liable to make good the amount of
dividend paid. It is the duty of an auditor to consider and report to the shareholders, whether the
balance sheet exhibits a correct view of the state of the company’s affairs, and the true financial position
at the time of the audit. He must take reasonable care to see that his certification is true. He must place
the necessary information before members and not merely indicate the means of acquiring it.
The court stated the following:
‘An auditor… is not an insurer; he does not guarantee that the books correctly show the true
position of the company’s affairs; he does not even guarantee that the balance sheet is accurate
according to the books of the company…But, he must be honest, that is he must not certify what
he does not believe to be true, and he must use reasonable care and skill before he believes that
what he certifies is true. What is reasonable care in any particular case must depend upon the
circumstances of the case.’ Theobald, the auditor, stated the true position to the directors, and if
he had done the same to the shareholders, would have been discharged.
Thus there is no duty upon an auditor to detect fraud but if suspicions are aroused the auditor has a
duty to investigate these suspicions.
……………………
Every company must have a company secretary, who is one of the officers of the company and may
be a director.
Every company must appoint appropriately qualified auditors. An audit is a check on the stewardship
of the directors.
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4 Meetings and resolutions

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We finish this chapter by looking at the rules governing meetings of companies and the different

types of resolution that are put at meetings.
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4.1 Company meetings

The procedure of a meeting of the company depends on the type of meeting being held. It may be a
meeting of all the shareholders or of a class of shareholders. Some meetings are mandatory while others
are left to the discretion of the company and they may be regulated by the decree or the articles or both.
There are three types of general meetings:
 Annual general meetings

 Extraordinary general meetings
 Class meetings
Barron v Potter 1914
According to the articles of association of the British Seagumite Co Ltd, the number of directors was to
be not less than two or more than ten. The articles also stated the quorum of directors was to be two,
unless otherwise fixed by the directors. Early in 1914 there were two directors only, Potter, the
chairman and managing director, and Barron. The conduct of the company’s business was at a standstill
as Barron refused to attend any board meeting with Potter. On 21 February Potter sent to Barron a
notice requesting him to attend a board meeting at the company’ office on 24 February. This notice,
however, was not received by Barron until a later date. Barron happened to arrive by train at Paddington
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Station on 23 February, and was met on the platform by Potter, who walked by his side along the
platform and said to him. ‘I want to see you, please’. Barron replied, ‘I have nothing to say to you’.
Potter then said, ‘I formally propose that we add the Reverend Charles Herbert, Mr William George
Walter Barnard, and Mr John Tolehurst Musgrave as additional directors to the board of the British
Seagumite Co Ltd. Do you agree or object?’ Barron replied, ‘I object and I object to say anything to you
at all’. Potter then said, ‘In my capacity as Chairman I give my casting vote in their favour and declare
them duly elected’. The company in general meeting then purported to appoint an additional director.
Held: There was no proper directors’ meeting, but since the board was in deadlock, the power could be
exercised by the members in general meeting. The judge commented;
‘In my opinion . . . there are no directors’ meeting at all for the reason that Canon Barron to the
knowledge of Mr Potter insisted all along that he would not attend any directors’ meeting with Mr Potter
or discuss the affairs of the company with him, and it is not enough that one of two directors should say
‘This is a directors’ meeting’ while the other says it is not. Of course if directors are willing to hold a
meeting they may do so under any circumstances, but one of them cannot be made to attend the board
or to convert a casual meeting into a board meeting. I must hold that the three additional directors
named by him were not validly appointed.
The question then arises, Was the resolution passed at the general meeting of the company a valid
appointment? The argument against the validity of the appointment is that the articles of association of
the company gave to the board of directors the power of appointing additional directors. (However) for
practical purpose there is no board of directors at all. The only directors are two persons, one of whom
refuses to act with the other, and the question is, What is to be done under these circumstances? . . . If
directors having certain powers are unable or unwilling to exercise them – are in fact a non-existent body
for the purpose - there must be some power in the company to do itself that which under other
circumstances would be otherwise done. The directors in the present case being unwilling to appoint
additional directors under the power conferred on them by the articles, in my opinion , the company in
general meeting has power to make the appointment. . . .’
4.2 Annual general meeting

The company’s annual general meeting must be held within three months of the end of each financial
year. If a company holds its first annual general meeting within 18 months of its incorporation, it need
not hold it in the year of its incorporation or in the following year.
If default is made in holding the annual general meeting, the Registrar may, on the application of any
member, call, or direct the calling of, a general meeting and give such directions as he thinks fit
including direction that one member of the company present in person or by proxy shall be deemed to
constitute a meeting. Failure to hold the annual general meeting in accordance with s138 (1) or to carry
out the directions to hold one under s138 (2) is punishable with a fine (s138 (3)). If the company is a
private company, the annual general meeting in relation to a financial year, other than the first financial
year, may be dispensed with if all the members of the company entitled to attend and vote at any
annual general meeting agree in writing before the end of the financial year. (s138(4)).
The business to be transacted at the annual general meeting is regulated by both the decree and the
articles. The business includes:
 The appointment of auditors and fixing of their remuneration

 The declaration of a dividend, if any
 The consideration of the accounts, balance sheets and the reports of the directors and auditors;
 The election of directors in place of those retiring.
 Special business, that is, any other business
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4.3 Extraordinary general meeting
This is provided for under s139 of the Act which states as follows:
(1) An extraordinary general meeting of a company may be convened in accordance with other
provisions of this Act, or:
(a) by the directors whenever they think fit; or

(b) if the articles so provide, by any other person in accordance with those provisions.
Any general meeting other than an annual general meeting is an extraordinary general meeting. Such
meetings are usually convened by the directors to deal with urgent matters, which cannot await the next
general meeting.
The Act under s141 provides that notwithstanding anything in its articles, the directors of the company
must, on requisition, convene a meeting. The requisition is to be made as follows:
(i) in the case of a company having a share capital, by members holding not less than one-tenth of
the paid up capital carrying voting rights at general meeting; or
(ii) in the case of a company having no share capital, by members representing not less than one-
tenth of the total voting rights of all members having a right to vote at general meetings.
The requisition must state the object of the meeting, be signed by the requisitionists and deposited at
the registered office of the company. If the directors do not within 21 days of the deposit of the
requisition call the meeting, the requisitonists, or any of them representing more than one half of the
total voting rights of all of them may, themselves, convene a meeting which must be held within three
months. Any reasonable expenses incurred by the requisitionists in convening the meeting shall be paid
by the company and deducted from any remuneration due to any of the directors in default.
Furthermore, unless the articles otherwise provide, any two or more members of the company holding
not less than one-tenth of the issued share capital, or if the company has no share capital, not less than
five per cent in number of members of the company, may call a meeting.
Finally, where it is impracticable, for any reason, to call or conduct a meeting of the company, the court
may, on its own motion, or on application of a director or a person entitled to vote at such meeting,
order a meeting to be called, held and conducted as the court may direct. The court may give such

ancillary or consequential directions as it deems fit, including the direction that one member of the
company present in person or by proxy shall be deemed to constitute a meeting.
Re El Sombrero Ltd 1958
Two out of three members of a company whose quorum was two deliberately refused to attend the
meeting. The third member gave special notice of his intention to move an ordinary resolution to remove
the directors at the next extraordinary meeting. He then applied to the court to call a meeting and direct
that one member should form a quorum.
Held: In the circumstance, the application should be granted.
The ancillary and consequential directions are, however, confined to those that will enable the meeting
to be held.
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Paul Iro v Robert Park and others
The first respondent, a director and shareholder of a company, applied for an order empowering the
applicant to call, hold and conduct a meeting of the company and for ancillary and consequential
directions empowering him to direct, manage and run the affairs of the company, to appoint additional
directors and to appoint auditors. It was alleged that the appellant director absconded with company
money and it had been impossible to get in touch with him owing to the civil war, that meetings could
not be held, and that the business of the company could not be effectively run.
Held: The trial court made the order sought but, on appeal, the Supreme Court held:
(i) While companies legislation empowers the court to make an order for the holding of the meeting,
it requires only that ancillary and consequential directions be given to enable the meeting to be
held
(ii) The consequential orders made were ultra vires the court and invalid in that they are matters for
the meeting to consider, and
(iii) The company ought to have been joined in the application
4.4 Class meeting

The meetings of classes of shareholders are provided for under s140 of the Act which reads as follows:
(1) Unless the articles provide otherwise, a meeting of members of a particular class may be
convened:
(a) by the directors whenever they think fit; or

(b) by two or more members of that class, holding, at the time that notice of the meeting is
sent out, not less than one-twentieth of the total voting rights of all the members having a
right to vote at meetings of that class.
The Act provides for the holding of a general meeting of holders of a class of shares for the purpose of
varying the rights attached to the class of shares. The regulations of the company as to its general
meetings apply to class meetings, but the quorum is two persons, at least, holding one third of the
issued shares of the class. If all the shares in the class are held by one person, he is entitled to do what
a meeting of that class could do under the articles.
4.5 Notice of general meetings

Proper notice of every general meeting must be given to members unless the articles otherwise provide.
Sufficient time must be allowed and the notice must be properly served.
The notice must contain the requisite information. The notice must specify:
 The place
 The day and hour of meeting
 In the case of special business, the general nature of that business
All business transacted at an extraordinary meeting is special business. With regard to the annual
general meeting, the declaration of a dividend, the consideration of the accounts, balance sheets and the
reports of the directors and auditors, the election of directors in the place of those retiring and the
appointment and the fixing of the remuneration of the auditors are all ordinary business. Any other
business is special business.
The notice convening a meeting at which any special business is to be transacted must state the nature
thereof, otherwise the notice is irregular and the special business cannot be discussed. For example, in
Baillie v Oriental Telephone Co. Ltd., it was held that notice of a resolution at an extraordinary general
meeting authorizing a director to retain certain remuneration without specifying the amount was
insufficient.
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The notice of a special resolution or of an extraordinary resolution must specify the intention to propose
the resolution as a special resolution or an extraordinary resolution. Every notice calling a meeting of a
company having a share capital must contain a prominent statement that a member entitled to attend
and vote is entitled to appoint a proxy or, where allowed, one or more proxies to attend and vote instead
of him, and that a proxy need not also be a member.
4.6 Length of notice

This is provided for under s143:
(1) Subject to this section, notice of a meeting of a company shall be given in writing served in
accordance with this Act on each person entitled to receive such notice and shall be given not
less than:
(a) twenty-one days, in the case of an annual general meeting;
(b) twenty-one days, in the case of a meeting at which a special resolution will be proposed;
or
(c) fourteen days, in any other case;
and not more than fifty days before the meeting is to be held.
(2) The articles may substitute for the minimum periods of notice provided in subsection (1) longer
periods, being periods of not more than thirty days.
(3) Where a meeting of the company is convened with a shorter period of notice than that required
under this section, full notice shall be deemed to have been given if it is so agreed:
(a) by all the members entitled to attend and vote at the meeting, in the case of a meeting
convened as the annual general meeting;
(b) by a majority in number of the members having a right to attend the meeting and vote on
the resolution concerned, being a majority holding not less than ninety-five per cent of the
total of such voting rights, in the case of a meeting convened as a meeting at which a
special resolution will be moved, and in relation to that resolution; and

(c) by a majority in number of the members having a right to attend and vote at the meeting,
being a majority holding not less than ninety-five per cent of the total of such voting rights,
in the case of any other meeting.
At common law, if all the members agree, a decision may be taken even though no formal meeting is
held. Thus in Parker and Cooper Ltd v Reading it was held that there is nothing in the authorities “to
prevent all co-operators from arranging to carry out an honest intra vires transaction entered into for the
benefit of the company, even if they do not meet together in one room or place, but all of them merely
discuss and agree to it one with another separately.’
The requisition of a general meeting must be signed by the requisitionists and deposited at the registered
office of the company not less than six weeks before the meeting where the requisition requires notice of
a resolution and one week in other cases. The requisitionists must also tender with the requisition a sum
reasonably sufficient to meet the company’s expenses on the circulation of the resolutions and
statements (s133 (4)). The company is, however, not bound to circulate the statement if, on application
of the company or other aggrieved person, the court is satisfied that the rights are being abused to
secure needless publicity for defamatory matter (s 133 (5)).
Sometimes, the directors have a new project to put before the meeting. In addition to the notice of
meeting, they may send a circular explaining the project. Members who oppose such projects may have
an opportunity under s133 to put across their own case in the form of counter circulars.
The circulars of the board must not misrepresent the fact or mislead the members, otherwise a
resolution passed as a result of such circulars may be set aside.
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4.7 Proceedings at meetings
All members of a company who hold shares carrying voting rights are entitled to attend and vote at
meetings of the company. Where a company is a member of another, the former may authorise some
person to represent it at the meeting of the latter and such representative is not a proxy but in the
position of a member.
The proceedings are largely regulated by the articles and the details of the conduct of the meeting are
decided by the meeting itself under the direction of the chairman, as the judge stated in the following
case.
National Dwellings Society v Sykes 1894
Chitty J:. ..’Unquestionably it is the duty of the chairman, and his function, to preserve order, and to
take care that the proceedings are conducted in a proper manner, and that the sense of the meeting is
properly ascertained with regard to any question which is properly before the meeting. But, in my
opinion, the power which has been contended for is not within the scope of the authority of the
chairman, namely to stop the meeting at his own will and pleasure. The meeting is called for the
particular purposes of the company. According to the constitution of the company, a certain officer has
to preside. He presides with reference to the business which is there to be transacted. In my opinion, he
cannot say, after that business has been opened, ‘l will have no more to do with it; . . . I declare the
meeting dissolve, and I leave the chair’. . . . The meeting by itself. . . can resolve to go on with the
business for which it has been convened, and appoint a chairman to conduct the business which the
other chairman, forgetful of his duty or violating his duty, has tried to stop because the proceedings
have taken a turn which he himself does not like.’
4.8 Voting rights

The following case is the authority on voting rights.
Pender v Lushington 1877
The chairman at a general meeting of a company in breach of the company’s articles rejected as invalid
certain votes which were cast. An action was brought by a shareholder whose vote was rejected, on
behalf of himself and all others who had voted with him, naming the company as co-plaintiff, against
the directors for an injunction to restrain them from acting on the footing of the votes being bad. Two of
the grounds on which their case was based were, that the policy which was supported by the assenting
shareholders was adverse to the interest of the company, and that their own votes had been improperly
rejected by the chairman.
Held: The court rejected the first ground but accepted the second one. The judge commented:
‘. . . In all cases of this kind, where men exercise their rights of property, they exercise their rights from
some motive adequate or inadequate, and I have always considered the law to be that those who have
the rights of property are entitled to exercise them whatever their motives may be for such exercise…
There is. . . no obligation on a shareholder of a company to give his vote merely with a view to what
other persons may consider the interest of the company at large. He has a right, if he thinks fit, to give
his vote from motives or promptings of what he considers his own individual interests. But there is
another ground on which the action may be maintained. This is an action by Mr Pender for himself. He
is a member of the company, and whether he votes with the majority or the minority he is entitled to
have his vote recorded - an individual right in respect of which he has a right to sue.’
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Any member of a company which has a share capital, provided they are entitled to attend and vote at a
general or class meeting of the company, has a statutory right (s151) to appoint an agent, called a
'proxy', to attend and vote for them. Subject to obeying the members’ instructions, the proxy shall have
all the rights and powers that the member has.
4.9 Quorum
The quorum is the minimum number of persons that must be present at a meeting before business can
be transacted. This is generally fixed by the Articles. Where the articles do not make any provisions, two
members in a private company and three in the case of a public company will form a quorum. It is
sufficient if the quorum is present at the beginning of the meeting even if it does not continue to the end.
However if the number is reduced to one, there will be no meeting since one person cannot in normal
circumstances constitute a meeting. In exceptional circumstances, however, one person may constitute
a meeting as where he holds all the shares in his class or where the Registrar or the court directs that a
meeting should be held by one person.
The quorum of members must be personally present unless the articles provided that they may be
present or by proxy. A person may be present at the meeting as two persons for the purpose of a
quorum. Thus he can be present as a shareholder and also as a trustee of some shares, which give him
the right to vote.
4.10 General meeting as company’s supreme body

The following case provides authority.
4.11 Resolutions
There are three different types of resolution, ordinary, extraordinary and
4.11.1 Ordinary resolution

An ordinary resolution is one passed by a bare majority of members present and voting at a general

meeting. Any business may be determined by such a resolution except where an extraordinary or special
resolution is required by legislation or by the articles. Examples of the use of an ordinary resolution are
to adopt the report and accounts of directors and to elect directors.
4.11.2 Extraordinary resolution

An extraordinary resolution is one passed by a majority of not less than three-fourths of such members,
as being entitled so to do, vote in person or, where proxies are allowed, by proxy. The resolution has to
be passed at a general meeting of which notice specifying the intention to propose the resolution as an
extraordinary has been duly given.
4.11.3 Special resolution

A special resolution requires a similar majority as is required for the passing of an extraordinary
resolution. It requires not less than twenty-one day’s notice, specifying the intention to propose the
resolution as a special resolution.
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……………………
Although the management of a company is in hands of the directors, the decisions which affect the
existence of the company, its structure and scope, are reserved for the members in general meeting.
There are two kinds of general meeting of members of a company, the annual general meeting
(AGM) and extraordinary general meetings at other times.
Class meetings are held where the interests of different groups of shareholders may be affected in
different ways.
A meeting can pass three types of resolution. Ordinary resolutions are carried by a simple majority
(more than 50%) of votes cast. Special and extraordinary resolutions require a 75% majority of votes
cast.
A meeting cannot make valid and binding decisions until it has been properly convened. The notice
should contain adequate information about the meeting and be sent to all members entitled to
receive it.
Company meetings need to be properly run if they are to be effective and within the law. The
meeting should usually be chaired by the chairman of the board of directors.
The quorum for meetings may be two or more. Proxies can attend speak or vote on behalf of
members..
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EXAM ALERT
Important knowledge for exam purposes in this chapter includes methods of appointing and dismissing
directors, and different types of meeting and resolutions.
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Chapter Roundup
 Any person who occupies the position of director is treated as such, the test being one of function.
 The method of appointing directors, along with their rotation and cooption is controlled by the articles.
 A director may vacate office as a director due to resignation; not standing for re-election; death;
dissolution of the company; removal ;disqualification.
 The powers of directors are defined by the articles. Directors have a duty to exercise their powers in
what they honestly believe to be the best interests of the company and for the purposes for which the
powers are given.
 The Chief Executive or Managing Director has apparent authority to make business contracts on behalf
of the company. Their actual authority is whatever the board gives them.
 The duties owed by directors include the duties to act within their powers, promote the success of the
company, exercise independent judgement, exercise reasonable skill, care and diligence, avoid conflicts
of interest, not accept benefits from third parties and declare an interest in a proposed transaction or
arrangement.
 Every company must have a company secretary, who is one of the officers of the company and may be a
director.
 Every company must appoint appropriately qualified auditors. An audit is a check on the stewardship of
the directors.
 Although the management of a company is in hands of the directors, the decisions which affect the
existence of the company, its structure and scope, are reserved for the members in general meeting.
 There are two kinds of general meeting of members of a company, the annual general meeting (AGM)
and extraordinary general meetings at other times.
 Class meetings are held where the interests of different groups of shareholders may be affected in
different ways.

 A meeting can pass three types of resolution. Ordinary resolutions are carried by a simple majority (more
than 50%) of votes cast. Special and extraordinary resolutions require a 75% majority of votes cast.
 A meeting cannot make valid and binding decisions until it has been properly convened. The notice
should contain adequate information about the meeting and be sent to all members entitled to receive it.
 Company meetings need to be properly run if they are to be effective and within the law. The meeting
should usually be chaired by the chairman of the board of directors.
 The quorum for meetings may be two or more. Proxies can attend speak or vote on behalf of members..
Quick Quiz
1 What is the extent of a Chief Executive’s actual authority?
2 What are the two principal ways by which members can control the activities of directors?
3 Describe the subjective test that directors must pass in order to meet their duty of care.
4 A company must hold its annual general meeting within six months of the end of its financial year.
True/False?
227
1 The Chief Executive’s actual authority is whatever the board gives him.
2 Appointing and removing directors in general meeting; reallocating powers by altering the articles
3 A director is expected to show the degree of skill, knowledge and expertise that he or she actually has.
4 False. The AGM must be held within three months of its financial year-end.
228
CORPORATE INSOLVENCY
Unfortunately many companies in difficulty cannot be saved, and the members and directors are forced
to stop operating the business through the company. Liquidation, sometimes called winding up, is
when a company is formally dissolved and ceases to exist.
There are various methods of achieving liquidation. Note though that a company does not have to be in
financial difficultly to be liquidated.
chapter
12
syllabus
references
topic index
1 Winding up 12A
2 Compulsory winding up 12A
3 Voluntary winding up 12A
4 Dissolution by striking off the register 12A
229
LEARNING OBJECTIVES
 Explain the meaning of compulsory winding up
 Describe the main procedures associated with compulsory winding up
 Explain the meaning of voluntary winding up
 Describe the main procedures associated with voluntary winding up
1 Winding up
……………………
We start by introducing the ways that a company can cease to exist.
……………………
1.1 Winding up a company

A company is an artificial person. It cannot die but it can cease to exist by being dissolved and struck off
the register of companies. The dissolution of a company, which is called winding up or liquidation, is
deemed to commerce at the time of the presentation of a petition for the winding up. It appears that
during the process leading up to winding up, the company still exists.
There are some statutory reasons for a company to be wound up. In Zambia the most prominent is when
the creditors or, indeed, the company itself seek to minimise loss by closing down the business and
selling all its assets. It is also possible to wind up a company or companies within a group with a view
to streamlining the operations of that group. Thus a company which has many subsidiaries, two of
which deal in the manufacture of trousers and zips respectively may wish to combine these two
operations with a view to increasing efficiency and reducing waste. In this case the directors of the group
may feel that one or both of the companies should have to be wound up and a new subsidiary
established. The winding up procedure may also be used to resolve a deadlock between the directors of
a company.
The resolution passed for the purpose of winding up a company, must be a special resolution. This
means that general meeting of which not less than twenty-one days’ notice is given must be convened.
1.2 Consequences of winding up

A winding up is deemed to commence at the time of the passing of the resolution authorising such
winding up. All transfers of share or stocks except transfers made to or with the sanction of the
liquidation, or any alteration in the status of the members of the company taking place after the passing
of the resolution to winding up are void. However, the company’s corporate state and its corporate
powers continue until the affairs of the company are wound up.
Upon winding up the property of the company must be applied in satisfaction of its liabilities, in the
legal order or their preference. They must then, unless it is otherwise provided by the regulations of the
company, be distributed among the members, according to their rights and interest in the company.
1.3 Types of winding up

Under the Companies Act there are three types of liquidation:
 Winding up by the Court (s270 – s303)

 Members’ voluntary winding up (s304 – s312)
 Creditors’ voluntary winding up (s313 – s317)
230
……………………
Liquidation is the dissolution or winding up of a company.
……………………
2 Compulsory winding up
……………………
We next look at the process of compulsory winding up, or winding up by the court.
……………………
2.1 Winding up by the court

A compulsory winding up or winding up by the court, is a winding up in which the directors of the
company do not feel able to make a statutory declaration that the company will be able to pay its debts
within approximately twelve months. It also occurs where such a statement has been made but the
company finds that it is unable to pay its debts within the stipulated time. If satisfied, the Court makes
an order to wind up the company.
2.2 Grounds for compulsory winding up

The grounds for a winding up by the Court are as follows:
(a) The company has by special resolution resolved that it be wound-up by the Court;
(b) The company does not commence its business within twelve months after its incorporation or
suspends its business for twelve months;
(c) The company is unable to pay its debts, that is:
 An amount is due from the company to any creditor and fails to pay the same within
twenty-one days of receipt of a written demand.
 If execution or other process is issued on a judgment, decree or order of any Court in
favour of a creditor of the company and the same is returned unsatisfied in whole or in
part.
 The company is (otherwise) unable to pay its debts as they fall due. It s important to note
that in determining whether a company is unable to pay its debts, the Court will take into
account the contingent and prospective liabilities of the company.
(d) The period, if any, fixed for the duration of the company by the articles expires of the event, if
any, occurs on the occurrence of which the articles provide that the company is to be dissolved;
(e) The number of members is reduced below two; or
(f) In the opinion of the Court, it is just and equitable that the company should be wound-up.
PART C : COMPANY LAW // 12: Corporate insolvency
(g) The Court may order the winding-up of a company on the petition of the Registrar of Companies
on the grounds specified in paragraph (b), (d), (e) or (f) above or on the ground that the company
has persistently failed to comply with any of the provisions of this Act.
2.3 Inability to pay debts

This is the most common ground for petition. The power of the court under(c) is discretionary and will
not be exercised unless it appears that the company has no intention of continuing its business. The
Companies Act stipulates the cases in which a company is to be deemed to be unable to pay its debts.
It must be proved “to the satisfaction of the court’’ that the company is unable to pay debts. The fact
that the petitioner has made repeated applications for payment, and that the company has neglected to
pay, provides strong evidence that it is unable to pay its debts. Virtually the only answer open to the
company is to show that the debt claimed is not owed by it, in which case a winding up petition is not
proper mode of enforcing it. Where the debt is undisputed the company cannot say it is able to pay its
231
debts but has chosen not to pay the particular debt. Where it is established that the company owes a
debt, but the precise amount of the debt is presently unknown, the court will make a winding up order
without requiring the creditor to quantity his debt precisely.
2.4 Default in holding the statutory meeting

Every company is required to hold a general meeting of its members within six months after the date at
which that company was entitled to commence business. This meeting is known as the statutory
meeting. Failure to hold this meeting makes the company liable to a penalty of up to ten kwacha a day
for every day after the expiration of six months until the meeting is held. Every director and manager
who knowingly authorises such default incurs a similar penalty to the company. Where a petition is
presented to the court for winding up under this clause, the court may, instead of directing that the
company be wound up, give directions for a meeting to be held or make such order as may be just.
2.5 Reduction of members below the legal minimum

This clause represents one logical consequence of the fact that a minimum of two persons is necessary
to constitute a private company and that a minimum of seven persons is required to form a public
company. Elsewhere in the Companies Act it is provided that if a company carries on business when the
number of its members has fallen below the legal minimum, for a period of six months after the number
has been so reduced, every person who is a member of the company and knows that it is carrying on
business with fewer members than the legal minimum, is liable for the payment of the whole debts of
company contracted during such time.
2.6 The just and equitable cause

In English law, this clause has been the cause of considerable litigation. Thus winding up orders have
been made on the grounds that:
 The substratum of the company was gone
 There was complete deadlock
 The petitioner was excluded from all participation in the business I
 In the case of a small private company, the company was in substance a partnership and the
facts would justify the dissolution of a partnership.
An important recent decision concerning the application of the “just and equitable” principle took place
in the following Zambian case:
Lusaka Meat Supplies Ltd and Others v Szeftel 1974
Lusaka Meat Supplies Limited had five shareholders. It was originally formed for the purpose of carrying
on a business carried on by the respondent who at the time owned the majority of shares. The
respondent and his wife spent the company’s money lavishly and hindered the progress of the business.
After these serious family differences, the appellants decided to exclude the respondent from further
participation in the running of the business or the handling of the company’s funds. The respondent then
brought an action that the company be wound up under the just and equitable clause.
Held: The trial judge found that it would be just and equitable to wind up the company.The decision
was reversed on appeal and the appeal was confirmed by the Supreme Court. The Supreme Court was
satisfied that when the company was first formed, it was intended that it should be the respondent’s
company and that the respondent treated it as such. The real question was whether the action of the
appellants in excluding the respondent from further participation in the business was necessitated by the
respondent’s misconduct. After reviewing the respondent’s conduct, the question was answered in the
affirmative. The Court went on to say that the company could continue and was indeed continuing to
carry on its affairs. The respondent was found to have been solely responsible for the situation, which
had arisen.
232
That a company may be wound up under the “just and equitable” clause where there is a complete
deadlock has been established for a long time. There was a tendency to think that a company would up
wound up under the “just and equitable” clause only if its structure was analogous to that a partnership.
But in 1973, the House of Lords ruled in Ebrahimi (A.P.) V Westbourne Galleries that the words “just
and equitable” enable the court to subject the exercise of legal rights to equitable considerations through
the force of the words themselves, and not because the company’s structure is in any way analogous to
a partnership.
2.7 Procedure for winding up by the court

A winding up by the Court dates back from the time of the presentation of the petition for winding up
except where there has already been a resolution to wind up voluntarily, when it dates from the date of
the resolution. This date is important for several reasons. Some immediate effects are that the receiver
becomes the provisional liquidator with full powers. A statement of affairs has to be submitted to the
receiver. The business of the company comes to an end except in so far as the courts decide that it is
necessary to carry it on for the beneficial winding up of the company.
Every petition must be advertised seven clear days before the hearing, once in the Gazette and once in
the local newspaper.
When the court hears the petition, it may dismiss it, adjourn the hearing conditionally or
unconditionally, or make any other order that thinks fit.
The Court is not bound to make an order for winding up at once when the circumstances would appear
to justify a direction that a petition should stand over for a time.
In a compulsory winding up, any disposition of the property of the company, any transfer of shares or
any alteration in the status of members after the commencement of the winding up is void unless Court
otherwise orders.
……………………
There are a number of grounds on which a court can decide to wind up a company. The most
common reason is when a creditor applies for a winding up on the grounds that the company is
unable to pay its debts.
……………………
3 Voluntary winding up
……………………
Voluntary winding up may be by members or creditors.
……………………
3.1 Procedures for voluntary winding up

The object of a voluntary winding up is to enable a company and its creditors to be free to settle their
affairs without having to seek the assistance of the Court. The Court is in the background to be referred
to if necessary.
A voluntary winding up does not necessarily imply that a company’s business is to cease entirely. Where
a reconstruction or an amalgamation is desired, a voluntary winding up is often necessary to put this
into effect.
The date of the resolution to wind up the company voluntarily is recognised as the official date of the
commencement of the winding up.
233
A resolution to wind up voluntarily does not mean that the company immediately ceases to exist. It still
maintains its personality and its powers until it is dissolved. A transfer of shares cannot be made without
the sanction of the liquidator. Any alteration in the status of members cannot be allowed after the
commencement of the winding up. A liquidator must be appointed and during the course of the winding
up, every invoice, order for goods, or business letter issued by the company or the liquidator must
contain a statement that the company is being wound up.
3.2 Creditors’ voluntary winding up

A creditors’ voluntary winding up occurs where the shareholders resolve to put the company into
liquidation but cannot make a declaration of solvency. In this case within 24 hours of the passing of the
resolution to wind up the company the shareholders must convene a meeting of the creditors. At this
meeting either the shareholders or the creditors appoint a liquidator.
3.3 Members’ voluntary winding up

A members’ voluntary winding up occurs where the shareholders of the company pass a resolution to
wind up the company and appoint a liquidator. In order for it to be a members’ voluntary winding up the
directors have to make the declaration of solvency confirming that the company will be able to pay all its
debts.
In a members’ voluntary winding up, the company must appoint one or more liquidators. This is usually
arranged at the same meeting, that is the extraordinary general meeting at which the resolution to wind
up is passed. It is customary to fix the remuneration of the liquidator or liquidators at the same time.
Who is appointed liquidator appears to be a matter purely for the company to decide.
Where several liquidators are appointed every power given by the Act may be exercised by such one or
more of them as may be determined at the time of their appointment, or in default of such
determination, by any number not less than two. The liquidators may exercise all powers given by the
Companies Act to the official liquidator. They may also exercise the powers given to the court of setting
the list of contributories.
3.4 Statutory declaration (Declaration of solvency)

When the company is considering the possibility of going into liquidation, it is customary for the
directors to have a meeting. If they, or if there are more than two directors, a majority of them, are of
the opinion that the company will be able to pay its debts in full within approximately twelve months,
they can make a statutory declaration. This states that they have made a full inquiry into the affairs of
the company and in their opinion it will be able to pay its debts in full within twelve months, or such
shorter period as they choose, and has gone into liquidation merely, for example, for purpose of
reconstruction or because the business of the company has ceased. In such cases, the creditors are not
consulted as their interests will not be adversely affected.
Any statutory declaration must be made within the five weeks preceding the date of passing of the
resolution to wind up the company and it must be delivered to the Registrar of Companies before that
date. Furthermore, it must include a statement of the company’s assets and liabilities at the last
practicable date before the making of the declaration.
The directors must exercise great care in making this declaration. If it is made without reasonable
grounds, any director concerned may be made liable to imprisonment or to a fine or to both. These
precautions are laid down in order to give members of the company greater control in a member’s
voluntary winding up and to prevent declarations of solvency being made recklessly.
When a Declaration of Solvency is made and filed with the Registrar, the winding up is then known as a
“Members’ Voluntary Winding Up”. If no such declaration is made, the liquidation is known as a
“Creditors’ Voluntary Winding Up.
234
3.5 Appointment of a liquidator
It is necessary to appoint a liquidator to wind up a company and distribute its assets. The meeting of the
company and the meeting of the creditors may nominate different persons to be liquidator. In such a
case, the nomination of the creditors will prevail. If no person is nominated by the creditors, then the
person chosen by the company will be liquidator. In the case of different persons being nominated
(when the creditor’s nominee receives the appointment), any director, member or creditor of the
company may within seven days of the nomination appeal to the court against the choice made.
S282 provides the Court with the power to appoint the liquidator or may give directions as to the
appointment of a liquidator. The liquidator is required to be named by the respective creditor petitioning
the Court. From the date of submission of the winding up petition and the delivery of the winding up
order a provisional liquidator can also be appointed by the court.
The Companies Act governs and prescribes the powers and duties of a liquidator (s289). The liquidator
is empowered to carry on the business of the company as far as it is necessary for the beneficial winding
up of the company. The main objective of the liquidator is to wind up all the affairs of the company and
pay all the creditors in full according to the class ranking of creditors as provided by the Companies Act.
In order to achieve this objective, the Companies Act provides that upon appointment, the liquidator
must take control of, or custody of, all property of the company (s286 and 310 (2)).
The Companies Act permits the liquidator to use his own discretion in the management of the affairs
and property of the company and the distribution of its assets (s290 (4)). Consequently, upon the
appointment of a liquidator, all of the powers of the directors cease and the liquidator has broad powers
to do ‘all that is necessary for winding-up the affairs of the company and distributing its assets’ to the
creditors (s289 (3) (l)).
The liquidator is empowered to manage all the affairs of the company in order to fulfil the objective of
paying all the creditors of the company and winding up the affairs of the company. The liquidator is
expected to perform his functions honestly. He is required to investigate and report if it appears that
there has been a fraud committed, or suppression or concealment of material facts by the officers of the
company or any past or present liquidator or officer, or that the company’s officers have acted recklessly
or dishonestly in relation to the affairs of the company (s358 and 359).
If there should be a vacancy in the office of liquidator through death, resignation, or otherwise, the
creditors may fill the vacancy except where the appointment was made by the court, when the court will
do so.
The dissolution of the company does not take place until the expiration of the three months after the
registration of the liquidator’s returns of the winding up and the holding of the final meeting.
……………………
A winding up is voluntary where the decision to wind up is taken by the company’s members.
In order to be classified as a members’ winding up, the directors must make a declaration of
solvency. The directors will face sanctions if they do not have reasonable grounds for making the
declaration.
Where there is no declaration of solvency, there is a creditors’ voluntary winding up.
……………………
235
4 Dissolution by striking off the register
……………………
Lastly we look at how a company can be dissolved by being removed from the register of companies.
……………………
4.1 Procedures for dissolution by striking off the register

S361 of the Companies Act provides a mechanism by which companies can be dissolved and struck off
the register of companies. In the event that the Registrar has reasonable cause to believe that a
company is not carrying on business or is not in operation, he may send to the company by registered
post a letter requesting confirmation. Should the Registrar not receive a satisfactory response from the
company within 1 month of the date of sending the letter he will publish a notice in the Zambian
Gazette, that at the expiration of three months from the date of the published notice, the company will
be dissolved unless cause is shown to the contrary.
Alternatively a company may, by ordinary resolution, request the Registrar to strike it off the register
upon lodging with the Registrar a copy of the resolution, summary of accounts, and a statutory
declaration of two or more directors showing what disposition the company has made of its assets and
that the company has no debts or liabilities. The Registrar shall cause to be published in the Gazette a
notice to the effect that at the expiration of three months from the date of that notice, unless cause is
shown to the contrary, the company will be dissolved.
The Registrar has the discretion to allow the strike off. As such the decision to strike off will depend on
the Registrar being satisfied before the strike off. If the strike off fails the company can still be wound up
by voluntary liquidation or by the court.
4.2 Benefits of dissolution by striking off the register

There are two benefits of having a company dissolved by this method.
4.2.1 Cost
It is less costly for the company. There will be no need for the company to engage in the lengthy and
costly procedures involved in having a company liquidated. The only issues to be attended to by the
Company are the statutory formalities described above. The company will only be liable to pay those
fees incurred by the Registrar in respect of the dissolution of the company under the section and also the
costs incurred by him in publishing notices in the Gazette.
4.2.2 Efficiency
It is time efficient. The procedure only takes approximately 4 months to conclude. The Registrar requires
the notice to be published for 3 months after which, unless cause to the contrary is shown, the name of
the company is struck off the register. This saves a lot of time as compared to the liquidation process
which may take a year to be concluded.
236
4.3 Safeguards in winding up
Some of the concerns that arise from dissolving a company by this method are as provided for under
s361(6). The liability, if any, of every officer and member of the company shall continue and may be
enforced as if the company had not been dissolved.
It is important to note that under s362, the dissolution of a company whether by Court order, voluntary
winding up, or by dissolution by the Registrar could be declared void by the court upon application of
any interested person including the company or the liquidator within 2 years of the initial dissolution. If
this happens, proceedings may be taken as though the company had not been dissolved. The court may
by order give such directions and make such provisions as it thinks just for placing the company and all
other persons in the same position as if the company had never been dissolved.
……………………
The Registrar can allow a company to be dissolved by being struck off the register. For some
companies this will be the least expensive and quickest method of dissolution.
……………………
EXAM ALERT
Questions will often focus on the different grounds for winding up.
237
Chapter Roundup
 Liquidation is the dissolution or winding up of a company.
 There are a number of grounds on which a court can decide to wind up a company. The most common
reason is when a creditor applies for a winding up on the grounds that the company is unable to pay its
debts.
 A winding up is voluntary where the decision to wind up is taken by the company’s members.
 In order to be classified as a members’ winding up, the directors must make a declaration of solvency.
The directors will face sanctions if they do not have reasonable grounds for making the declaration.
 Where there is no declaration of solvency, there is a creditors’ voluntary winding up
 The Registrar can allow a company to be dissolved by being struck off the register. For some companies
this will be the least expensive and quickest method of dissolution.
Quick Quiz
1 Complete the following definition. Liquidation means that a company must be ....... and its affairs
wound up.
2 A members’ voluntary liquidation is where the members decide to dissolve a healthy company.
True/False?
3 Which is the most common ground for compulsory liquidation?

1 Dissolved
2 True. Members can decide to wind up a healthy company.
3 Failure to pay debts
238

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PART A: THE ZAMBIAN LEGAL

1 The constitution of Zambia 1A

 Explain the role of legislation

 Explain the importance of case law and precedent

 Describe the structure and operation of the courts in Zambia

 Describe the significance of English law in the law of Zambia

 Distinguish between civil and criminal liability

1 The constitution of Zambia

1.2 The constitution as a primary source of law

Thomas Mumba v the People 1984

Christine Mulundika et al v the People 1995

PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

1.3 System of government

 The Legislature or Parliament

1.4 Amendment of constitution

2 The role of legislation

2.2 Interpretation of legislation

2.3 The context rule

PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

Attorney General v Steven Luguru 2001

2.5 The mischief rule

People v Shamwana and Others 1974

2.6 The literal rule

Mutale v Attorney General 1976

PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

2.7 The golden rule (interpretation to avoid absurdity)

Held: The Court stated:

 The presumption against the taking of property without compensation

3 The role of case law and the court structure

PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

‘The Judicature of the Republic shall consist of:

(a) the Supreme Court of Zambia;

3.3 High Court

3.4 Subordinate courts

3.5 Local courts

3.7 Small Claims Court

3.9 Importance of court hierarchy

PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

4 The role of English law

4.1 Common law

(ii) That the defendant must abstain from wrongdoing (injunction)

(iii) Alteration of a document to reflect the parties' true intentions (rectification)

(iv) Restoration of the pre-contract status quo (rescission)

4.3 Use of English law

Further s2 of the said Act provides as follows:

(a) the common law; and

(b) the doctrines of equity; and

PART A: THE ZAMBIAN LEGAL SYSTEM // 1: The Zambian legal system

5.1 International law

5.2 Customary international law

Zambia Sugar PLC v Fellow Nanzuluka 2001

6 Civil and criminal liability

In the civil liability of tort the sanction is unliquidated damages.

6.2 Criminal proceedings

6.3 Civil proceedings

 Pay the plaintiff money

2 How is the mischief rule applied?

3 Which court deals with claims not exceeding 15 million Kwacha?

Answers to Quick Quiz