Beginning Business Law

Beginning
Business Law
Whether you’re new to higher education, coming to legal study for the first time or just
wondering what Business Law is all about, Beginning Business Law is the ideal
introduction to help you hit the ground running. Starting with the basics and an overview
of each topic, it will help you come to terms with the structure, themes and issues of the
subject so that you can begin your Business Law module with confidence.
Adopting a clear and simple approach with legal vocabulary explained in a detailed
glossary, Chris Monaghan breaks the subject of Business Law down using practical,
everyday examples to make it understandable for anyone, whatever their background.
Diagrams and flowcharts simplify complex issues, important cases are identified and
explained and on-the- spot questions help you recognise potential issues or debates within
the law so that you can contribute in classes with confidence.
Beginning Business Law is an ideal first introduction to the subject for LLB, GDL or ILEX
students and especially international students, those enrolled on distance-learning courses
or on other degree programmes.
Chris Monaghan is Senior Lecturer in Law at Greenwich University.

Beginning the Law
A new introductory series designed to help you master the basics and progress with
confidence.
Beginning Constitutional Law, Nick Howard

Beginning Contract Law, Nicola Monaghan and Chris Monaghan
Beginning Criminal Law, Claudia Carr and Maureen Johnson
Beginning Equity and Trusts, Mohamed Ramjohn
Beginning Employment Law, James Marson
Beginning Evidence, Chanjit Singh Landa
Beginning Human Rights, Howard Davis
Beginning Family Law, Jonathan Herring
Beginning Business Law, Chris Monaghan
Beginning Land Law, Sarah King
Following in Spring 2015

Beginning Medical Law, Claudia Carr
www.routledge.com/cw/beginningthelaw
Beginning
Business Law
CHRIS MONAGHAN
First published 2015
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2015 Chris Monaghan
The right of Chris Monaghan to be identified as author of this work has

been asserted by him in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or

reproduced or utilised in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including photocopying
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or registered trademarks, and are used only for identification
and explanation without intent to infringe.
British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data has been requested.
ISBN: 978-1-138-77986-0 (hbk)

ISBN: 978-1-138-77987-7 (pbk)
ISBN: 978-1-315-77099-4 (ebk)
Typeset in Vectora
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Contents
Table of Cases ix
Table of Legislation xvii
Preface xxi
Guide to the Companion Website xxiii
1 Introduction to business law 1

Answering questions 2
Using the law 3
Resources 3
2 The English legal system 5

Learning objectives 5
Introduction 5
The United Kingdom’s legal systems 5
Sources of law 6
Court structure 10
Other jurisdictions in the United Kingdom 14
Other courts 15
Composition of the judiciary 16
Statutory interpretation 17
Doctrine of precedent 17
Ratio decidendi and obiter dicta 18
Legal profession 18
Summary 19
Further reading 20
3 Contract law 21
Five requirements for a legally enforceable contract 22
Vitiating factors 32
Privity of contract: who can enforce the contract? 35
Express or implied terms 36
Discharge of the contract 38
Remedies for breach of contract 41
Summary 41
Further reading 42
vi Beginning Business Law
4 Contracts for the sale of goods 43

Introduction 43
What is a contract for the sale of goods? 43
Sale of Goods Act 1979 46
Sale of goods distinguished from a contract for the supply of goods and services 47
Key issues 47
Key Provisions of the Sale of Goods Act 1979 49
Key clauses 59
International sales contracts 60
Summary 61
Further reading 61
5 Tort law 63
Introduction 63
Negligence 66
Trespass to the person 73
Private nuisance 73
Defamation 75
Occupiers’ liability 75
Passing off 76
Inducing a breach of contract 77
Defective product liability 78
Tort of conversion 78
Summary 79
Further reading 80
6 The law of agency 81

Introduction 81
What is meant by agency? 81
The parties to an agency contract 82
The formation of an agency relationship and the authority of the agent 83
Express actual authority 84
Implied actual authority 85
Apparent authority 87
Usual authority 94
Agency of necessity 96
Ratification 97
The disclosed and undisclosed principal 97
The relationship between the third party and the agent 99
The rights of the agent 100
Contents vii
The duties of the agent 100

The Commercial Agents (Council Directive) Regulations
1993/3053 102
Termination of the agency 103
Summary 103
Further reading 103
7 Employment law 105

Introduction 105
Employment status 106
The employment contract 112
Variation of the contract 113
Business transfers 113
Vicarious liability 113
Restrictive covenants 114
Working Time Regulations 1998 118
National Minimum Wage Act 1998 118
Parental rights 118
Mobility clauses 118
Bringing the contract to an end 119
Types of dismissal 120
Wrongful dismissal 122
Unfair dismissal 124
Redundancy 127
Calculating awards 128
Equality Act 2010 128
Prohibited conduct under the Equality Act 2010 130
Health and safety 134
Summary 135
Further reading 135
8 Unincorporated businesses 137

Introduction 137
Running a business as a sole trader 137
Running a business as an ordinary partnership 139
What happens to final assets when the partnership is
dissolved? 153
Limited partnerships 154
Summary 154
Further reading 155
viii Beginning Business Law
9 Incorporated businesses 157

Introduction 157
Limited Liability Partnership Act 2000 158
The Companies Act 2006 159
Types of companies 159
Setting up a company 159
Public access 163
Reporting requirements 164
Taxation 164
Separate legal personality 165
Distinction between a director and a shareholder 167
Shareholder liability 168
Piercing the veil of incorporation 169
Who runs a company? 174
Directors’ duties 176
Directors’ liability to third parties 180
Company Directors Disqualification Act 1986 181
Shareholders’ rights 181
Summary 183
Further reading 184
Index 185
Table of Cases
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 ....................................................... 102

Adams v Cape Industries Plc [1990] Ch 433 .......................................................................... 172
Adams v Lindsell (1818) 1 B & Ald 681 ..................................................................................... 26
Agricultural Sector (Wales) Bill Reference by the Attorney General for
England and Wales [2014] UKSC 43 .................................................................................... 6
Aldridge v Johnson (1857) 119 ER 1476 ................................................................................... 45
Aluminium Industrie Vaassen BV v Rompalpa Aluminium [1976] 1 WLR 676 ........................ 58
Amber Size and Chemical Co Ltd v Menzel [1913] 2 Ch 239 ................................................ 117
American Cyanamid Co v Ethicon Ltd (No. 1) [1975] AC 396 ................................................. 65
Anglia Television Ltd v Reed [1972] 1 QB 60 ............................................................................ 41
Anns v Merton LBC [1978] 1 AC 728 ........................................................................................ 67
Armagas Ltd v Mundogas SA (The Ocean Frost) [1986] AC 717 ............................................. 90
Aston Cantlow and Wilmcote with Billesley Parochial Church Council v
Wallbank [2004] 1 AC 546 ................................................................................................. 10
Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833 ............................ 34
Attorney General for Jersey v Holley [2005] UKPC 23 ............................................................. 16
Autoclenz Ltd v Belcher [2011] UKSC 41; [2011] ICR 1157 .............................................. 110–11
Baird Textile Holdings Ltd v Marks & Spencer Plc [2001] EWCA Civ 271 ............................... 49
Balfour v Balfour [1919] 2 KB 571 ............................................................................................. 31
Bank voor Handel en Scheepvaart NV Slatford [1953] 1 QB 248 .......................................... 107
Barnett v Chelsea and Kensington Hospital Management [1969] 1 QB 428 .......................... 71
Barton v Armstrong [1976] AC 104 .......................................................................................... 34
Bateman v Asda Stores Ltd [2010] IRLR 370 .......................................................................... 113
Bebington v Palmer (t/a Sturry News) [2010] UKEAT/0371/09/DM ...................................... 110
Bhullar v Bhullar [2003] EWCA Civ 424 .................................................................................. 178
Bisset v Wilkinson [1927] AC 177 ............................................................................................. 33
Boardman v Phipps [1967] 2 AC 46 ................................................................................ 102, 178
Bolton v Stone [1951] AC 850 ................................................................................................... 72
Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339 ............................. 102, 123
Brinkibon v Stahad Stahl und Staglwarenhandels GmbH [1983]
2 AC 34 ............................................................................................................................... 26
British Bank of the Middle East v Sun Life Assurance Co of Canada (UK)
[1983] 2 Lloyd’s Rep 9 ....................................................................................................... 90
British Home Stores Ltd v Burchell [1980] ICR 303 ................................................................ 126
Broadhurst v Broadhurst [2006] EWHC 2727 (Ch) ................................................................. 151
Butler Machine Tool Co v Ex-cell-o Corp England [1979] 1 WLR 401 ..................................... 48
Butterworth v Kingsway Motors Ltd [1954] 1 WLR 1286 ......................................................... 51
x Beginning Business Law
Caparo Industries Plc v Dickman [1990] 2 AC 605 ............................................................ 67, 71

Cargo ex Argos (No. 2) (1872–5) LR 4 A & E 13 ................................................................. 96, 97
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 .................................................................... 24
Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s
Rep 240 .............................................................................................................................. 56
Carmichael v National Power Plc [1999] 1 WLR 2042 ........................................................... 110
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 ............................ 31
Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 ..................................................................... 28
Chief Constable of Dumfries & Galloway v Adams [2009] ICR 1034 .................................... 129
Christie v Carmichael [2010] IRLR 1016 .................................................................................. 119
Collen v Wright (1857) 7 E & B 647 ........................................................................................... 99
Collins v Godefroy (1831) 1 B & Ad 950 ................................................................................... 29
Combe v Combe [1951] 2 KB 215 ............................................................................................. 31
Const v Harris (1824) Turn & R 495 ........................................................................................ 151
Cooper v National Westminster Bank Plc [2009] EWHC 3035 ................................................ 85
Costa v ENEL [1964] ECR 585 ..................................................................................................... 9
Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28;
[2004] 1 WLR 1846 ............................................................................................................. 92
Currie v Misa (1874–5) LR 10 Ex 153 ........................................................................................ 28
Customs and Excise Commissioners v Hare [1996] 2 All ER 391 ......................................... 173
D & F Estates Ltd v Church Commissioners for England [1989]

AC 177 ................................................................................................................................ 78
Davis Contractors v Fareham Urban DC [1956] AC 696 .................................................... 39, 59
Derry v Peek [1899] 14 App Cas 337 .................................................................................. 33, 69
Donoghue v Stevenson [1932] AC 562 ........................................................................... 66–7, 78
Doyle v Oldby (Ironmongers) Ltd [1969] 2 QB 158 ................................................................... 33
DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530 ......................................... 34
Duport Steels Ltd v Sirs [1980] 1 WLR 142 ................................................................................. 7
Dyster v Randall & Sons [1926] Ch 932 .................................................................................... 98
Earl of Oxford’s case (1615) 21 ER 485 ...................................................................................... 7

Ewing v Buttercup Margarine Co Ltd [1917] 2 Ch 1 .............................................................. 144
English v Thomas Sanderson Blinds Ltd [2008] EWCA Civ 1421 ........................................... 133
Entores Ltd v Miles Far East Corp [1955] 2 QB 327 ................................................................. 25
Esso Petroleum Co Ltd v Mardon [1976] QB 801 .................................................................... 33
European Asian Bank AG v Punjab & Sind Bank (No. 2) [1983] 1 WLR 642 ............................ 85
Express & Echo Publications Ltd v Tanton [1999] ICR 693 .............................................. 109–10
Faccenda Chicken Ltd v Fowler [1986] 3 WLR 288 ................................................................ 117

FC Shepherd & Co v Jerrom [1987] QB 301 ........................................................................... 123
Fennelly v Connex South Eastern Ltd [2001] IRLR 390 .......................................................... 113
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 ........................ 102
Table of Cases xi
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 ..................... 39
First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] Lloyd’s
Rep 194 .................................................................................................................. 90, 91, 92
Fisher v Bell [1961] 1 QB 394 .................................................................................................... 24
Fitch v Dawes [1921] 2 AC 158 ............................................................................................... 115
Foakes v Beer (1884) 9 App Cas 605 ....................................................................................... 30
Fowler v Hollins (1872) LR 7 QB 616 ......................................................................................... 79
Francotyp-Postalia Ltd v Whitehead [2011] EWHC 367 (Ch) ................................................. 115
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]
2 QB 480 ........................................................................................................... 88, 89–90, 92
Froom v Butcher [1976] QB 286 ............................................................................................... 66
FW Moore & Co Ltd v Landauer & Co [1921] 2 KB 519 ........................................................... 53
G Scammell Nephew Ltd v HC & JG Ouston [1941] AC 251 .................................................... 49

Gibson v Manchester City Council [1979] 1 WLR 294 .................................................... 18, 26–7
Gilford Motor Co Ltd v Horne [1933] Ch 935 .......................................................................... 173
Goldenfry Foods Ltd v Austin [2011] EWHC 137 (QB) ............................................................ 117
Goodwin v Patent Office [1999] ICR 302 ................................................................................ 129
Grainger Ltd v Nicholson [2010] 2 All ER 253 ......................................................................... 130
Grant v Australian Knitting Mills [1936] AC 85 ......................................................................... 53
Great Northern Railway Company v Swaffield (1873–4) LR 9 Ex 132 ............................... 96, 97
Griffiths v Peter Conway Ltd [1939] 1 All ER 685 ..................................................................... 53
Hadley v Baxendale (18540 9 Ex 341 ....................................................................................... 41

Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd
[1991] 1 QB 564 ................................................................................................................. 53
Hartley v Hymans [1920] 3 KB 475 ........................................................................................... 50
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 ................................... 33, 69, 70
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 ................................................. 84, 85, 86, 87
Henderson v Merrett Syndicates Ltd (No. 1) [1995] 2 AC 145 ................................................ 70
Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683 .............................................................. 39
Hillier v Barker Booth & Edward [2008] UKHL 8 ..................................................................... 101
Hippisley v Knee Bros [1905] 1 ............................................................................................... 102
Hodson v Hodson [2009] EWCA Civ 1042 .............................................................................. 140
Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (The Hongkong Fir)
[1962] 2 QB 2 ..................................................................................................................... 38
Hunter v Canary Wharf Ltd [1997] AC 655 ............................................................................... 73
Hyde v Wrench (1840) 49 ER 132 ............................................................................................. 25
Iceland Frozen Foods Ltd v Jones [1983] ICR 16 ................................................................... 125

IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811 ........................................ 70
Inco Europe v First Choice Distribution [2000] WLR 586 ......................................................... 17
Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 ................................... 178
xii Beginning Business Law
Industrie Chimiche Italia Centrale and Cerealifin SA v Alexander G

Tsavliris & Sons Maritime Co (The Choko Star) [1990] 1 Lloyd’s Rep 516 ...................... 87
Ireland v Livingston (1871–2) LR 5 HL 395 ................................................................................ 85
J v DLA Piper LLP UK [2010] ICR 1052 ..................................................................................... 130

Jack Allen (Sales and Service) Ltd v Smith [1999] IRLR 19 ..................................................... 114
James v Greenwich London Borough Council [2007] ICR 577 .............................................. 111
JEB Fasteners Ltd v Mark Bloom & Co [1983] 1 All ER 583 ..................................................... 33
Jerome v Bentley & Co [1952] 2 All ER 114 .............................................................................. 95
JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057 ............................................................... 148
Jones v F Sirl & Son (Furnishers) Ltd [1997] IRLR 493 ............................................................ 120
Jones v Lipman [1962] 1 WLR 832 .......................................................................................... 173
Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520 .................................................................. 68
Keighley, Maxsted & Co v Durrant [1901] AC 240 ................................................................... 98

Kelly v Cooper [1993] AC 205 ................................................................................. 100, 101, 102
Kelner v Baxter (1866–7) LR 2 CP 174 ...................................................................... 97, 160, 161
Kendall v Hamilton (1879) 4 App Cas ....................................................................................... 99
Khan v Miah [2000] 1 WLR 2133 ......................................................................................... 141–2
Korbetis v Transgrain Shipping BV [2005] EWHC (QB) 1345 .................................................... 26
Krell v Henry [1903] 2 KB 740 .................................................................................................... 39
Leigh & Sullivan Ltd v Aliakmon Shipping Co Ltd [1985] 2 AER 44 ......................................... 68
Lister v Hesley Hall Ltd [2001] UKHL 22 .................................................................................. 113
Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 ..................................................... 115
London Borough of Southwark v IBM UK Ltd [2011] EWHC (TCC) 549 ................................... 45
London Underground Ltd v Edwards (No. 2) [1999] ICR 494 ......................................... 131, 132
Lumley v Gye (1853) 2 E & B 216 .............................................................................................. 77
Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 ................................................................... 100
M Young Legal Associates Ltd v Zahid (A Firm) [2006] EWCA Civ 613 ................................. 140
Macaura v Northern Assurance Co Ltd [1925] AC 619 ......................................................... 170
MacFarlane v Glasgow City Council [2001] IRLR 7 ................................................................ 110
Malcolm v Lewisham LBC [2008] 1 AC 1399 .......................................................................... 132
Manchester Diocesan Council of Education v Commercial & General
Investments Ltd [1970] 1 WLR 241 .................................................................................... 25
Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 ............................. 109
May and Butcher Ltd v The King [1934] 2 KB 17 ...................................................................... 49
Meikle v Nottinghamshire County Council [2004] ICR 1 ........................................................ 120
Microbeads AF v Vinhurst Road Markings [1975] 1 WLR 218 ................................................. 52
Microsoft Corp v European Commission (T-167/08) [2012] 5 CMLR 15 ................................... 9
Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 .......................................................... 85
Miller v Jackson [1977] QB 966 ............................................................................................. 74–5
Table of Cases xiii
Moyhing v Barts & London NHS Trust [2006] IRLR 860 .......................................................... 131
Murphy v Brentwood DC [1991] 1 AC 398 ............................................................................... 78
Nadeem v Rafiq [2007] EWHC 2959 (Ch) ................................................................................ 146

Natal Land and Colonization Company Ltd v Pauline Colliery and Development
Syndicate Ltd [1904] AC 120 ........................................................................................... 161
New Falmouth Resorts Ltd v International Hotels Jamaica Ltd [2013] UKPC 11 .................... 97
Newcastle-under-Lyme Corporation v Wolstanton Ltd [1947] Ch 92 ..................................... 73
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 ....................... 114
OBG Ltd v Allan [2008] 1 AC 1 ............................................................................................ 77, 79

Olley v Marlborough Court Ltd [1949] 1 KB 532 ...................................................................... 54
Orr v Milton Keynes Council [2011] EWCA Civ 62 ................................................................. 126
Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335 ............................. 93
Overseas Tankship (UK) Ltd v Miller Steamship Co. Pty Ltd (The Wagon Mound)
[1967] 1 AC 617 .................................................................................................................. 72
Pacific SA v Food Corporation of India (The Winson) [1982] AC 939 ...................................... 97

Pao On v Lau Yiu Long [1980] AC 614 ...................................................................................... 29
Penn v Bristol & West Building Society [1997] 1 WLR 1356 .................................................... 99
Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch) ..................... 179
Pepper v Hart [1993] AC 593 .................................................................................................... 17
Petroleo Brasileiro SA v ENE Kos 1 Limited [2012] UKSC 17 ................................................... 97
Pharmaceutical Society of Great Britain v Boots Cash Chemist (Southern) Ltd
[1953] 1 QB 401 ................................................................................................................. 24
Pinnell’s Case (1601) 77 ER 237 ................................................................................................ 31
Popat v Shonchhatra [1997] 1 WLR 1367 ....................................................................... 145, 146
Poussard v Spiers & Pond (1876) 1 QBD 410 ........................................................................... 38
Practice Statement (HL: Judicial Precedent) [1966] 1 WLR 1234 ............................................ 18
Prest v Petrodel Resources Ltd [2012] EWCA Civ 1395 ................................................ 171, 173
Priest v Last [1903] 2 KB 148 .................................................................................................... 53
Protectacoat Firthglow Ltd v Szilagyi [2009] EWCA Civ 98 ........................................... 107, 111
Rama Corporation Ltd v Proved Tin & General Investments Ltd [1952] 2 QB 147 ................. 90
Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National
Insurance [1968] 2 QB 497 .................................................................................. 108–9, 109
Reckitt & Colman Products Ltd v Borden Inc (No. 3) [1990] 1 WLR 491 ................................. 76
Regal (Hastings) Ltd Gulliver [1967] 2 AC 134 ........................................................................ 178
Re Peachdart Ltd [1984] Ch 131 ............................................................................................... 58
Re Selectmove Ltd [1995] 1 WLR 474 ....................................................................................... 31
Re Wait [1927] 1 Ch 606 ............................................................................................................ 58
Rhodian River Shipping Co SA v Halla Maritime Corp (The Rhodian River and
The Rhodian Sailor) [1984] 1 Lloyd’s Rep 373 .................................................................. 95
xiv Beginning Business Law
Robinson v Kilvert (1889) 41 Ch D 88 ....................................................................................... 74

Rolls Royce Power Engineering Plc v Ricardo Consulting Engineers Ltd
[2003] EWHC 2871 (TCC) ................................................................................................... 99
Rose v Plenty [1976] 1 WLR 141 ............................................................................................. 113
Rosenbaum v Belson [1900] 2 Ch 267 ..................................................................................... 87
Rowland v Divall [1923] 2 KB 500 ....................................................................................... 50, 51
Royal Bank of Scotland v Etridge (No. 2) [2001] 4 All ER 449 .................................................. 35
Royscot Trust Ltd v Rogerson [1991] 3 WLR 57 ....................................................................... 33
R (Ullah) v Special Adjudicator [2004] 2 AC 323 ...................................................................... 15
Said v Butt [1920] 3 KB 497 ....................................................................................................... 98

Salomon v Salomon & Co Ltd [1897] AC 22 ............................................................... 166–7, 171
Secretary of State for the Home Department, ex p. Simms [2000] 2 AC 115 .......................... 8
SG v R Valuation Service Co v Boudrais [2008] EWHC 1340 (QB) ......................................... 120
Shogun Finance v Hudson [2004] 1 AC 919 ............................................................................. 34
Sims v Bond (1833) 5 B & Ad 389 ............................................................................................. 99
South Hetton Coal Company Ltd v North-Eastern News Association Ltd
[1894] 1 QB 133 ................................................................................................................. 75
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27 .............................. 68
St Albans City and DC v International Computer Ltd [1996] 4 All ER 481 .............................. 45
Standard Chartered Bank v Pakistan National Shipping Corp (No. 2)
[2002] UKHL 43 ................................................................................................................. 173
Stilk v Myrick (1809) 170 ER 1168 ............................................................................................. 29
Sturges v Bridgman (1879) 11 Ch D 852 .................................................................................. 74
Summers v Solomon (1857) 7 Ellis & Blackburn 879 ............................................................... 92
Sunday Times v United Kingdom (No. 2) (13166/87) (1992) 14 EHRR 229 .............................. 10
Sussex Partnership NHS Foundation Trust v Norris [2012] Eq LR 1068 ............................... 129
Sutcliffe v Hawker Siddley Aviation Ltd [1973] ICR 560 ......................................................... 120
Symbian Ltd v Christensen [2001] IRLR 77 ............................................................................. 120
Taylor v Caldwell (1863) 3 B & S 826 ........................................................................................ 39

Taylor v Robinson (1818) 8 Taunt 648 .................................................................................... 100
Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd (No. 1) [1968] 2 QB 545 ........................... 54
Tomlinson v Congleton BC [2004] 1 AC 46 .............................................................................. 72
Tweddle v Atkinson (1861) 1 B & S 393 .................................................................................... 35
Twycross v Grant (1877) 2 CPD 469 ....................................................................................... 160
Unique Mariner, The [1978] 1 Lloyd’s Rep 438 ........................................................................ 87

United Bank of Kuwait v Hammoud [1988] 1 WLR 1051 .................................................... 148–9
United Bank v Akhtar [1989] IRLR 507 .................................................................................... 119
United Biscuits (UK) Ltd v Asda Stores Ltd [1997] RPC 513 ..................................................... 76
Wallersteiner v Moir [1974] 1 WLR 991 .................................................................................. 172

Table of Cases xv
Wandsworth London Borough Council v D’Silva [1998] IRLR 193 ......................................... 113
Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317 ...................................... 55
Watteau v Fenwick [1893] 1 QB 346 ..................................................................................... 94–5
Way v Latilla [1937] 3 All ER 759 ............................................................................................. 100
Weight Watchers (UK) Ltd v Revenue and Customs Commissioners [2010]
UKFTT 54 (TC) ................................................................................................................... 110
Wheat v E Lacon Co Ltd [1966] AC 552 ................................................................................ 75–6
White & Carter (Councils) Ltd v McGregor [1962] AC 413 ....................................................... 41
William Hill Organisation Ltd v Tucker [1999] ICR 291 ........................................................... 119
Williams v Cawardine (1833) 4 B & Ad 621 .............................................................................. 24
Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 .................................................. 173
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 2 WLR 1153 .......................... 29, 30
Wilsons & Clyde Coal Co Ltd v English [1938] AC 57 ............................................................ 134
Withers LLP v Langbar International Ltd [2011] EWCA Civ 1419 ........................................... 100
Woolfson v Strathclyde Regional Council [1978] SLT 159 ..................................................... 172
Young v Bristol Aeroplane Co. [1944] KB 718 .......................................................................... 18

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Table of Legislation
STATUTES s.261(2) ............................................. 182

s.264 ................................................. 182
Bribery Act 2010 ...................................... 179 s.268(1) ............................................. 181
s.283(1) ............................................. 181
Companies Act 1862 ............................... 166 s.302 ................................................. 182
Companies Act 1985 ............................... 159 s.305 ................................................. 182
Companies Act 2006 ............... 138, 143, 159 s.542 ................................................. 183
s.3 ................................................... 159 s.544 ................................................. 183
s.21 ........................................... 174, 181 s.550 ................................................. 183
s.155 ................................................. 174 ss.994–6 ........................................... 182
s.168 ................................................. 182 s.1157 ............................................... 180
s.170(3) ............................................. 176 s.1192(2)(b) ....................................... 144
s.170(4) ............................................. 176 s.1192(3)(b) ....................................... 144
s.170(5) ............................................. 176 s.1197 ............................................... 144
s.171 ................................................. 176 s.1202(1) ........................................... 144
s.172 ......................................... 177, 182 s.1203(1) ........................................... 144
s.173 ................................................. 177 s.1203(2) and (3) ............................... 144
s.174 ................................................. 177 s.1204(1) ........................................... 144
s.174(2) ............................................. 177 ss.53–76 ........................................... 163
s.175 ................................................. 178 ss.90–6 ............................................. 159
s.175(2) ............................................. 178 ss.97–101 ......................................... 159
s.175(4) ............................................. 178 Company Directors Disqualification
s.175(4)(a) ................................. 178, 179 Act 1986 ................................... 181
s.175(4)(b) ......................................... 179 s.3 ................................................... 181
s.176 ................................................. 179 s.6 ................................................... 181
s.176(4) ............................................. 179 s.13 ................................................... 181
s.177 ................................................. 179 ss.2 and 5 ......................................... 181
s.179 ................................................. 176 Constitutional Reform Act 2005 ......... 10, 12
s.182 ................................................. 179 Consumer Protection Act 1987
s.183 ................................................. 179 s.5(2) ................................................... 78
s.190 ................................................. 182 Contracts (Rights of Third Parties)
s.191(2) ............................................. 182 Act 1999 ..................................... 59
s.197(3) ............................................. 181 s.1(3) ................................................... 36
s.250 ................................................. 174 Corporate Manslaughter and Corporate
s.251 ................................................. 174 Homicide Act 2007 ................... 166
s.251(2) ............................................. 174
s.260(1) ............................................. 182 Defamation Act 2013
s.260(3) ............................................. 182 s.1(1) ................................................... 75
xviii Beginning Business Law
s.1(2) ................................................... 75 Growth and Infrastructure Act

s.2 ..................................................... 75 2013 .................................. 106, 112
s.3 ..................................................... 75
Health and Safety at Work Act 1974 ...... 135
Employment Rights Act House of Lords Act 1999 ............................ 8
1996 Human Rights Act 1998 .............................. 9
s.1 ................................................... 112 s.2(1) ................................................... 15
s.1(2) ................................................. 112 s.6 ..................................................... 10
s.86(1) ............................................... 122
s.94 ................................................... 124 Insolvency Act 1986
s.97 ................................................... 124 ss.212–4 ........................................... 172
s.98 ................................................... 124
s.98(3) ............................................... 124 Law Reform (Frustrated Contracts)
s.108 ................................................. 124 Act 1943
s.119 ................................................. 126 s.1(2) ................................................... 39
s.123 ................................................. 127 s.1(3) ................................................... 40
s.124 ................................................. 127 Limitation Act 1980 ........................... 65, 124
s.135 ................................................. 127 s.2 65
s.139 ................................................. 127 s.11 ..................................................... 65
s.230(1) ............................................. 107 s.11A .................................................. 65
s.230(2) ..................................... 107, 112 s.14A .................................................. 65
Enterprise and Regulatory s.14B ................................................... 65
Reform Act 2013 ...................... 106 Limited Liability Partnership
Equality Act 2010 ............................... 128–34 Act 2000 ............................... 158–9
s.4 ................................................... 129 s.1(2) ................................................. 158
s.6 ........................................... 129, 131 s.2 ................................................... 158
s.10(1) ............................................... 130 s.2(1) ................................................. 158
s.10(2) ............................................... 130 s.2(2) ................................................. 158
s.13 ........................................... 131, 132 s.4(4) ................................................. 158
s.15 ........................................... 132, 133 s.5 ................................................... 158
s.19 ................................................... 131 Limited Partnership Act 1907 ................. 153
s.20 ................................................... 133 s.4(1) ................................................. 154
s.26 ................................................... 133 s.6(1) ................................................. 154
s.27 ................................................... 133 s.7 ................................................... 154
s.39 ................................................... 133 ss.8 and 8A ...................................... 154
s.40 ................................................... 133 s.8B ................................................... 154
Sch. 1 ........................................ 129, 130
Sch. 6 ................................................ 130 Misrepresentation Act 1967 ..................... 33
Sch. 9 ................................................ 133 s.2(1) ................................................... 33
European Communities Act 1972 .............. 9
National Minimum Wage Act
Government of Wales Acts 1998 1998 .......................................... 105
and 2006 ....................................... 6 s.31 ................................................... 118
Table of Legislation xix
Occupiers’ Liability Act 1957 .................... 75 Sale of Goods Act 1979 ...................... 44, 45,
s.2(1) ................................................... 76 ................................... 46, 48, 49–58
s.2(3) ................................................... 76 s.2(1) ................................. 43, 44, 45, 46
Occupiers Liability Act 1984 ..................... 76 s.3(2) ................................................... 31
s.4 .................................................... 43
Parliament Act 1911 .................................... 9 s.5 ......................................................46
Parliament Act 1949 .................................... 9 s.6 ......................................................56
Partnership Act 1890 ............. 139, 154, 158, s.6(1) ................................................... 45
................................................... 168 s.8(1) ................................................... 49
s.1(1) ................................. 140, 141, 143 s.8(2) ............................................. 49, 50
s.2 ................................................... 142 s.10(1) ................................................. 50
s.2(3) ................................................. 142 s.12(1) ..................................... 50, 51, 52
s.4 ................................................... 142 s.12(2)(a) ............................................. 51
s.5 ....................................... 146–7, 149 s.12(2)(b) ........................... 51, 52, 55, 79
s.8 ................................................... 149 s.13 ..................................................... 53
s.13(1) ................................................. 53
s.9 ................................................... 149
s.14(2) ........................................... 36, 53
s.14(1) ............................................... 149
s.14(3) ........................................... 53, 54
s.17(2) ............................................... 151
s.15 ..................................................... 54
s.17(3) ............................................... 151
s.15A .................................................. 54
s.19 ................................................... 143
s.16 ..................................................... 56
s.20(1) ............................................... 145
s.17 ................................................. 56–7
s.21 ................................................... 146
s.18 ............................................... 56, 57
s.24(1) ............................................... 145
s.19 ..................................................... 58
s.24(2) ............................................... 150
s.20(1) ................................................. 57
s.24(3) ............................................... 150
s.21 ..................................................... 58
s.24(5) ............................................... 145
s.25 ..................................................... 58
s.24(6) ............................................... 145
s.29 ..................................................... 58
s.24(7) ............................................... 152
s.34 ..................................................... 58
s.24(8) ............................................... 145 s.35 ..................................................... 58
s.24(9) ............................................... 151 s.41 ..................................................... 58
s.25 ................................................... 152 s.52 ..................................................... 58
s.26(1) ............................................... 152 s.55 ..................................................... 54
s.28 ................................................... 151 s.61(1) ................................................. 52
s.29(1) ............................................... 151 ss.13–15 ....................................... 54, 55
s.30 ................................................... 151 ss.23–25 ............................................. 58
s.32 ................................................... 152 ss.49–50 ............................................. 58
s.33(1) ............................................... 152 ss.51–53 ............................................. 58
s.34 ................................................... 152 Scotland Act 1998 ....................................... 6
s.35 ................................................... 152 Sex Discrimination Act 1975 ................... 132
s.36 ................................................... 152 Supply of Goods and Services Act
s.44 ................................................... 153 1982 ...................................... 45, 47
ss.10-12 ............................................ 149 Supreme Court of Judicature Act 1873 .... 11
Prosecution of Offences Act 1985 ........... 19 Supreme Court of Judicature Act 1875 .... 11
xx Beginning Business Law
Torts (Interference with Goods) Commercial Agents (Council Directive)

Act 1977 ............................... 58, 79 Regulations 1993
Trade Union and Labour Relations (SI 1993/3053) ........................... 102
(Consolidation) Act 1992 ........... 77 Companies (Model Articles)
Unfair Contract Terms Act Regulations 2008
1977 .............................. 54, 70, 101 (SI 2008/3229) ........................... 162
s.6(1) ................................................... 55
s.6(2) ................................................... 55 National Minimum Wage Regulations
s.6(3) ................................................... 55 1999 (SI 1999/584) .................... 110
s.11 ..................................................... 55
Sch. 2 .................................................. 55 Transfer of Undertakings (Protection
of Employment) (TUPE)
Regulations 2006
STATUTORY INSTRUMENTS (SI 2006/246) ............................. 113
Agency Workers Regulations Working Time Regulations 1998

2010 (SI 2010/93) ...................... 106 (SI 1998/1833) ........... 105, 110, 118
Preface
Business law is an exciting area of academic study: you will encounter a variety of
interesting areas of the law, such as employment law where you will learn how the courts
determine whether someone is an employee and thus has enhanced rights when
compared to workers, and how an employer can go about dismissing employees without
facing a claim for wrongful dismissal or unfair dismissal. Equally interesting is the law of
agency, where you will learn about how it is possible for an agent to enter into a contract
and bind their principal (the person on whose account they are entering into contracts with
third parties), even where the principal has expressly told the agent that he has no authority
to conclude contracts of this type. We shall see that the law of agency applies to all types of
businesses, including football clubs and even the film industry.
The key legal principles covered in this book are essential for those who wish to run a
business and to avoid the commons pitfalls such as mishandling a redundancy situation,
or permitting an agent to abuse her position by failing to keep an eye on what is going on.
Equally, those who are advising a business on legal matters must have a thorough
understanding of the law and how it relates to the needs of businesses. The aim of
Beginning Business Law is to provide you with an introduction to the key areas of law that
will help you in running or working for a business, or for those intending to have a career in
legal practice, where you are advising a business. Beginning Business Law is written for
students who are studying on non-law degrees and law students who are studying
business law and therefore it does not assume prior knowledge. At the end of each chapter
you will be directed to useful further reading to help you develop your understanding of
the key legal principles explored in the book.
I have been very fortunate to teach students who are genuinely interested in how the law
relates to business transactions and the legal implications of business decisions. It is hoped
that Beginning Business Law will help to make the law accessible to those students who are
studying business law for the first time.
I am grateful to my editors Fiona Briden and Damian Mitchell at Routledge for their
encouragement and support throughout the writing process. I would also like to thank my
project manager Amy Wheeler and copy-editor Jane Fieldsend for their assistance during
the production process. Finally, I would also like to thank my anonymous reviewers for their
helpful feedback on the text.
This book is dedicated to Sheila.
Any errors are entirely my own. The law is stated as it stood on 1 August 2014.
Chris Monaghan
Senior Lecturer in Law, University of Greenwich
Guide to the Companion Website
www.routledge.com/cw/beginningthelaw
Visit the Beginning the Law website to discover a comprehensive range of resources
designed to enhance your learning experience.
Answers to on-the-spot questions

The author’s suggested answers to the questions posed in the book.
Online glossary
Reinforce your legal vocabulary with our online glossary. You can find easy to remember
definitions of all key terms, listed by chapter for each title in the Beginning the Law series.
Chapter 1
Introduction to business law
Case law
Sources of
law
Statute law
English legal
system
Civil
Court
structure
Criminal
Formation of
the contract
Contract law Discharging a

contract
Contractual
Obligations clauses
Negligence
Tort law
Pure economic
loss
Duties of the
Business law
agent
Formation of
Law of agency
the agency
Agent’s
authority
Facilitating
business
Who is an
employee?
Employment Types of
law dismissal
Equality Act
2010
Soletrader
Unincorporated
businesses
Partnership
Types of
businesses
Public limited
company
Incorporated
businesses
Private limited
company
Figure 1.1 Overview of Beginning Business Law

2 Beginning Business Law
Beginning Business Law serves two purposes. The first is to introduce students who are
studying on non-law courses to how the law of England and Wales relates to business. The
second is to serve as an introduction to business law for law students who are studying this
as a distinct module. This book is not intended to be the final word on the different areas of
law explored in each chapter. Rather it is intended to introduce you to the key principles
and concepts. Each chapter contains an annotated further reading list and each of the
textbooks and articles listed there are intended to help you build upon your understanding
of the material covered in this book.
Throughout the book there are realistic scenarios and on-the-spot questions that are
designed to help you appreciate how the law relates to business transactions. In reality,
it is not easy to divide the different areas of law into distinct topics that can be
addressed in isolation, as in practice you may encounter an issue that involves the
consideration of a number of different areas of law. Imagine that Muneeba, Kingsford
and Sonya have set up a business. They manufacture and sell bespoke furniture and
employ Rhonson to deliver the furniture to their clients. Rhonson is supplied with a van
and while delivering furniture to their clients he crashes into a cyclist, thereby causing
the cyclist to break both her legs. Within this scenario there are a number of important
issues to consider:
• What type of business did Muneeba, Kingsford and Sonya establish? This is
important as, if the business is unincorporated (i.e. a partnership), then they would
be personally liable if the business is sued and could end up losing their own
personal assets (Chapters 8–10).
• There may be an issue of liability for late delivery of the furniture and other issues
arising under the Sale of Goods Act 1979 (Chapters 3 and 4).
• The court may hold that Rhonson has been negligent and therefore he may be
liable in tort (Chapter 5).
• The business, or Muneeba, Kingsford and Sonya personally, may be vicariously
liable for Rhonson’s negligence if the court holds that he is an employee
(Chapters 4 and 6).
• Rhonson could be dismissed for gross misconduct and other breaches of his
employment contract (Chapter 6).
ANSWERING QUESTIONS
Throughout your study of the law you will be asked by your lecturer to answer both
problem questions and essay questions. It is an important skill to be able to look at a set of
facts and to provide accurate legal advice that will enable you to write a legal opinion based
upon a given scenario. In each chapter of Beginning Business Law there are a number of
‘on-the-spot questions’ and these are designed to test and consolidate your understanding
Introduction to business law 3
of the law. To assist your comprehension of the material, it is useful to attempt these
questions in order to ensure that you have understood the law to which the question
relates.
When faced with a problem question you need to be able to first identify the issues, second
state the relevant law, third apply the law to the facts and finally provide a conclusion in
order to advise the fictional client. It is important that when you are advising a client that
your answer is based on the law and not just your own opinion.
USING THE LAW
In Chapter 2 we will look at the different sources of law that you will encounter in your
studies. The two that you will use most frequently are case law (or common law) and
statute law (Acts of Parliament). It is important that you make reference to the original
material rather than just relying on a brief summary from a textbook. We will look at how to
access these below.
RESOURCES
There are a number of online resources that can be used for free. These include
www.legislation.gov.uk which contains all relevant Acts of Parliament and the British and
Irish Legal Information Institute (www.bailii.org) which is a database of important legal
cases. You should start to regularly use these resources as this will assist you with your
studies.
Your university will subscribe to online legal databases such as Westlaw or Lexis Library.
These will give you access to cases, legislation and a number of different academic and
practitioner journals. If you are unsure of whether your university subscribes to these
databases you should contact your librarian who can advise you as to this. There are a
number of academic and practitioner journals that focus on business law. These journals
include the Journal of Business Law, the Company Lawyer and the Business Law Review.
You will also find it useful to refer to more general journals such as the Cambridge Law
Journal, the Law Quarterly Review and the Modern Law Review. You can access these
electronically, although older articles may sometimes only be available in hardcopy.
Chapter 2
The English legal system
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
• appreciate that there are a number of different legal systems in the United
Kingdom;
• define the sources of law in the English legal system;
• understand the operation of the court structure and the role served by each court
or tribunal;
• comprehend the different rules of statutory interpretation; and
• appreciate the meaning of key terms that will be encountered throughout the rest
of this book.
INTRODUCTION
This chapter will provide you with an introduction to the English and Welsh legal system.
Although commonly referred to as the English legal system, it does in fact also include Wales.
This chapter is intended to help you navigate the different areas of law featured in this book and
to provide you with some context as to how the legal system operates. If you are new to law,
you will no doubt be experiencing some of the terminology for the first time and, consequently,
it is useful to understand what exactly a particular term means. It is also extremely important to
appreciate the court structure and to understand how the courts interpret Acts of Parliament.
We will briefly consider some important issues as to whether judges make law, could a court
declare an Act of Parliament to be invalid if the Act is discriminatory, and what is the domestic
courts’ relationship with the European Union and the Council of Europe.
THE UNITED KINGDOM’S LEGAL SYSTEMS
The United Kingdom contains a number of different nations which have their own legal
systems. The Acts of Union 1707 which joined the Kingdoms of England and Scotland to
create Great Britain expressly preserved the two different legal systems. This means that
England and Wales, Northern Ireland and Scotland have their own courts and law. We shall
see that they share the Supreme Court as the highest appellate court for all civil appeals
and, with the exception of Scotland, all criminal appeals.
The United Kingdom’s Parliament is based in Westminster and it enacts law in the form of
an Act of Parliament. It is important to note that an Act of Parliament may apply across the
entire United Kingdom in full or part, i.e. certain provisions may only apply in England and
Wales and not in Northern Ireland and Scotland.
Two parliaments and two national assemblies
The previous Labour government which came to power in 1997 devolved power from
Westminster and held referendums in Scotland and Wales to ask the people living there
whether they wished for power to be devolved. The electorate supported devolving powers
and Parliament enacted legislation to achieve this. As a result of the Scotland Act 1998
there is now a Scottish Parliament at Holyrood, which has the power to enact legislation
under the powers devolved to it by the United Kingdom’s Parliament. The Government of
Wales Acts 1998 and 2006 have created the National Assembly of Wales and have given the
assembly law making powers. It is important to note that neither legislative body can
legislate beyond the powers given to it by Westminster. An example of this was the
Agricultural Sector (Wales) Bill that was enacted by the National Assembly of Wales and this
bill was referred to the Supreme Court by the Attorney-General, in order to determine
whether the bill was within the assembly’s legislative competence (Agricultural Sector
(Wales) Bill Reference by the Attorney General for England and Wales [2014] UKSC 43).
Northern Ireland has its own national assembly which is based at Stormont. It is important
to appreciate the United Kingdom is not a federal state. This is unlike the United States of
America where the United States’ constitution establishes the separation of power between
the federal and individual state governments. In the United Kingdom it is up to Parliament
as to the degree of power it devolves to regional parliaments or assemblies. However,
politically, as opposed to legally, once power has been devolved, it is very difficult to
revoke it.
SOURCES OF LAW
Throughout this book you will encounter a number of different sources of law. We will now
consider each source of law in turn.
The English legal system 7
The common law
The common law is otherwise known as case law. Students studying law in a common law
jurisdiction, as opposed to a civil law jurisdiction, will appreciate the importance of judicial
decisions as a significant source of law.
Development of the common law

The common law is a product of reforms to the legal system by monarchs such as Henry II,
who wished to assert royal authority after decades of civil war. The common law courts
were based at the Palace of Westminster and included the Court of Common Pleas, the
Court of Exchequer and the Court of King’s Bench. In addition to hearing cases at
Westminster, the judges would travel around the country and dispense justice. These
travelling courts were known as the assize.
From the late Middle Ages barristers were trained by the Inns of Court, which still exist in
London, and legal education took the shape of mooting and listening to legal arguments.
The common law was developed by judges such as Sir Edward Coke in the seventeenth
century and Lord Mansfield in the eighteenth century.
Where did equity come from?

You will notice that in Chapter 3 (which explores contract law) we will discuss both
common law and equitable remedies. Equity was developed as a solution to the formality
and rigidity of the common law. The Lord Chancellor, on behalf of the monarch, would
dispense justice where the claimant could not obtain a remedy in one of the common law
courts. This led to the development of the Court of Chancery. The common law judges
were jealous of the Court of Chancery, and in the Earl of Oxford’s case (1615) 21 ER 485 it
was held that where there was a conflict between common law and equity, equity would
prevail. We will see below that the two systems were merged in the late nineteenth
century.
Do judges make law?

Historically, much of the law was created by judges and examples of this include tort law
and contract law. Some judges have denied that the courts make law as this is seen as
usurping the role of Parliament. In Duport Steels Ltd v Sirs [1980] 1 WLR 142, Lord Diplock
stated that ‘Parliament makes the laws, the judiciary interpret them’ (at p. 157). However,
Lord Reid writing extra-judicially has observed that judges do make law and to say
otherwise is a fairy tale (see ‘The judge as lawmaker’ (1972) 12 Journal of the Society of
Public Teachers of Law 23). Today the majority of case law will concern statutory
interpretation. We will look at the different rules of statutory interpretation below.
Custom
In the past local custom was an important source of law. It is rarely used today.
Acts of Parliament
Parliament enacts primary legislation known as an Act of Parliament. This is statutory law
and is the superior law in the United Kingdom. According to the Doctrine of Parliamentary
Sovereignty no one, including the courts, may challenge the validity of an Act of Parliament.
Furthermore, there are no restrictions on the subject matter that Parliament may legislate
on. Parliament could choose to legislate to make it lawful to discriminate on the basis of
gender or race. This was a point expressed by Lord Hoffmann in Secretary of State for the
Home Department, Ex Parte Simms [2000] 2 AC 115:
Parliamentary sovereignty means that Parliament can, if it chooses, legislate

contrary to fundamental principles of human rights . . . The constraints upon its
exercise by Parliament are ultimately political, not legal. But the principle of
legality means that Parliament must squarely confront what it is doing and accept
the political cost.
The United Kingdom’s Parliament is bicameral. This means that Parliament is comprised of
two Houses of Parliament, which are the House of Commons and the House of Lords.
Parliament makes legislation through the powers of the Queen in Parliament and once
legislation has been approved by both Houses of Parliament the bill, as it is then known,
must receive royal assent in order for it to become an Act.
The people who sit in the House of Commons are known as Members of Parliament (MPs).
MPs are directly elected by the people living in constituencies through a method known as
first past the post. This means that a candidate who has the most votes, even if they do not
enjoy a majority of all the votes cast, will become that constituency’s MP.
None of the members of the House of Lords are democratically elected. Its members are
comprised of life peers, hereditary peers and Church of England bishops. The vast majority
of the hereditary peers were removed by the House of Lords Act 1999. The Coalition
government (which was formed from the Conservative and Liberal Democrat parties)
planned to reform the House of Lords during the 2010–2015 Parliament. However, the
attempt at introducing further reforms to the House of Lords was eventually abandoned.
A bill can be introduced in either House of Parliament. If a bill is introduced into the House
of Commons it will receive three readings before being sent up to the House of Lords,
where the bill will also receive three readings. The bill will be debated in each House and
amendments suggested. If the House of Lords rejects the bill and it is sent back to the
House of Commons, then ultimately the Parliament Acts 1911 and 1949 could be used to
bypass the House of Lords and send the bill to receive royal assent. Typically, the two
Houses will negotiate and the Lords will suggest amendments and these amendments will
be considered by the Commons. This process is known as Ping-Pong, as it demonstrates
the interaction between the two Houses.
An Act of Parliament can give a minister or a local authority the power to make laws known
as delegated or secondary legislation.
European Union law
The United Kingdom joined the European Union (previously the European Economic
Communities) in January 1973. Parliament needed to enact the European Communities Act
1972 in order for the United Kingdom to be able to give effect to its legal obligations as a
member of the European Union.
The membership of the European Union is important for businesses for a number of
reasons. UK businesses are able to enjoy free movement of goods across all 28 member
states, free movement of services, capital and people. The European Union has reduced
barriers to trade and has created new opportunities for businesses to take advantage of.
There are a number of sources of European Union law, which include regulations,
directives, the treaty articles, and the judgments of the Court of Justice of the European
Union (CJEU). Individuals and businesses are able to enforce the rights created by European
Union law in domestic courts. The CJEU created the principle that European Union law was
superior to the laws of the individual member states, where a particular law related to a
matter over which the European Union has competence (see Costa v ENEL [1964] ECR 585).
Much of what we look at in employment law is the result of European Union law (see
Chapter 7). Of relevance to businesses are the measures designed to prevent the formation
of cartels and the abuse of a dominant position. Large multinational corporations such as
Microsoft have been fined by the European Commission, which is the governing body of the
European Union, for abusing their dominant position (see Microsoft Corp v European
Commission (T-167/08) [2012] 5 CMLR 15).
Council of Europe
The United Kingdom was a founding member of the Council of Europe which is the
organisation responsible for the European Convention on Human Rights (ECHR). Much of
the ECHR was incorporated into domestic law by the Human Rights Act 1998 (HRA 1998).
The HRA 1998 was intended to permit individuals or businesses whose human rights had
been violated by a public authority to bring their claims in a domestic court, rather than
having to lodge an application with the European Court of Human Rights in Strasbourg. It is
important to note that a company can be a victim for the purposes of the ECHR (see
Sunday Times v United Kingdom (131666/87) (1992) 14 EHRR 229). The HRA 1998 was
intended to have a vertical effect which meant that claims could only be brought against a
public authority (s.6 HRA 1998). In Aston Cantlow and Wilmcote with Billesley Parochial
Church Council v Wallbank [2004] 1 AC 546, Lord Nicholls stated that there were two types
of public authority, core and hybrid. A core public authority would be the police. A hybrid
public authority would be a body which carries out a service of a public nature. This means
that a business could be regarded as a public authority where it was carrying out a service
such as running a prison or an immigration detention centre.
COURT STRUCTURE
It is worth noting that each of the legal systems within the United Kingdom has its own
court structure. We are concerned with the court structure for England and Wales. In
addition to the courts there are tribunals that are an important part of the legal system and
these include employment tribunals. The court structure in England and Wales is complex
and this is only intended to introduce you to the courts that you will encounter while
studying business law (see Figure 2.1).
As a result of the Constitutional Reform Act 2005, the head of the judiciary in England and
Wales is now the Lord Chief Justice. Previously, it had been the Lord Chancellor, who was
also a senior member of the government.
Supreme
Court
Court of Appeal
Court of Appeal
(Criminal
(Civil Division)
Division)
High Court County Employment Crown Magistrates’

of Justice Courts Appeal Tribunal Court Court
Employment
Tribunal
Figure 2.1 Introduction to the court structure in England and Wales

Private law (contract, tort, business disputes)
Depending on the complexity of the issue and the amount of damages sought, a claim in
private law will either be heard by the County Court or the High Court.
The High Court

The High Court has a number of specialist courts that will hear different types of disputes.
This will enable the judges to specialise and each court is governed by its own rules under
the Civil Procedure Rules 1998.
As we saw above, historically the common law and equity were distinct and a claimant
could only get an equitable remedy if they brought their case to the Court of Chancery.
Two important Acts of Parliament known as the Supreme Court of Judicature Acts 1873 and
1875 merged the two systems into the High Court of Justice. The Acts brought the common
law courts and the Court of Chancery together and in addition created a new court known
as the Probate, Divorce and Admiralty Division. Importantly, this reform means that both
common law and equitable remedies could be awarded by all courts. This is the system
that prevails today. Further reforms in 1880 created the Queen’s Bench Division of the High
Court. This amalgamated the common law courts.
Which division of the High Court will hear your dispute?

Chancery Division – for a claim involving intellectual property, bankruptcy, a business
dispute or a claim involving company law. This will be relevant to Chapters 8–10.
Queen’s Bench Division – for a claim involving negligence, personal injury, breach of
contract and non-payment of a debt. This will be relevant to Chapters 3–5.
Admiralty, Commercial and Mercantile Court – for a claim involving international

trade disputes, banking disputes, collision of ships, carriage of cargo and arbitration
disputes. This will be relevant to Chapter 4.
Technology and Construction Court – for a claim involving software disputes,

engineering disputes and building or construction disputes.
The case will be heard by a judge who will give judgment. There is no jury. Until recently, in
defamation cases there was a jury. This can be contrasted with the United States, where
popular television programmes regularly feature lawyers in civil trials that involve a jury.
A decision of the High Court can be appealed to the Civil Division of the Court of Appeal. In
exceptional circumstances it may be possible to bypass the Court of Appeal and appeal
directly to the Supreme Court. This procedure is known as leapfrogging.
Court of Appeal (Civil Division)

The judges who sit in the Court of Appeal are known as Lord Justices of Appeal and three
judges will hear an appeal. The court is presided over by the Master of the Rolls and this is
a very senior position. It is not uncommon for judges who have been members of the
highest appeal court, previously the Appellate Committee of the House of Lords and now
the Supreme Court, to return to the Court of Appeal as the Master of the Rolls. The classic
example is Lord Denning and more recent examples include Lord Neuberger and Lord
Dyson. The Court of Appeal is based in the Royal Courts of Justice and members of the
public are able to attend and watch proceedings.
Supreme Court
The Supreme Court was created by the Constitutional Reform Act 2005 and heard its first
case in October 2009. It replaced the Appellate Committee of the House of Lords which was
based in the Palace of Westminster. The judges were known as Lords of Appeal in Ordinary,
or colloquially as Law Lords, and were able to take part in parliamentary debates. This was
controversial and many people including a member of the court, Lord Steyn, believed that
this undermined the separation of powers. Today, those judges who sit in the Supreme
Court are known now as Justices of the Supreme Court. The Supreme Court is the final
court to which all civil cases from across the United Kingdom can be appealed. We will see
that it is possible to make an application to the European Court of Human Rights in
Strasbourg where there is an allegation that there has been a breach of human rights.
Key definition: The separation of powers
This is an important theory which states that the powers of law making, governing the
country and determining whether there has been a breach of the law must be carried
out by three distinct branches of government.
Criminal law
Court of Appeal
Crown Court or
Magistrates’ Court (Criminal Supreme Court
High Court
Division)
Figure 2.2 When a case is tried at the Magistrates’ Court

Court of Appeal
Crown Court (Criminal Division) Supreme Court
or High Court
Figure 2.3 When a case is tried at the Crown Court
All criminal cases start off at the Magistrates’ Court and depending on the seriousness of
the offence the defendant will either be tried at the Magistrates’ Court for minor criminal
offences or committed to the Crown Court for more serious offences (see Figures 2.2
and 2.3):
• Indictable only offences (i.e. murder) must be tried in the Crown Court.
• Triable either-way offences (i.e. fraud) can be tried in either the Crown Court or
the Magistrates’ Court.
• Summary only offences (i.e. battery) must be tried in the Magistrates’ Court.
Magistrates’ Court
There are two types of magistrates. The first type are lay magistrates who are volunteers
and have no legal training. They are assisted by a trained legal advisor who advises the
magistrates on the law. The second type are known as District Judges, who are qualified
lawyers of at least seven years’ practicing experience. Magistrates try over 90 per cent of
criminal cases (see ‘Court statistics quarterly April to June 2013: Ministry of Justice statistics
bulletin’, Ministry of Justice, 26 September 2013). Appeals against conviction and
sentencing decisions will be heard at the Crown Court. It will also be possible to appeal on
a point of law by way of case stated to the Queen’s Bench Division of the High Court.
Crown Court
At the Crown Court the trial is presided over by a judge. The judge will make decisions as to
the law. However, the jury, which is comprised of 12 members of the public, will make the
decision as to whether to convict or acquit the defendant. Although juries try only a small
minority of all criminal cases, in public consciousness it is the jury that is seen to epitomise
the criminal trial. It is possible to appeal against the decision of the Crown Court on a point of
law or the sentence imposed to the Criminal Division of the Court of Appeal. It will also be
possible to appeal on a point of law by way of case stated to the Queen’s Bench Division of
the High Court.
Court of Appeal (Criminal Division)

The Criminal Division of the Court of Appeal will hear appeals on points of law and
sentencing decisions.
Supreme Court
The Supreme Court will hear appeals from the Court of Appeal. It is the highest domestic
court for all criminal appeals from England and Wales, and Northern Ireland. Appeals can
only be heard from Scotland where this involves a devolution issue.
Employment law
In the United Kingdom there is a separate tribunal system and there are many different
types of specialist tribunals. Recently there have been significant reforms and this has
resulted in increased fees for those wishing to bring a claim against their employer.
Employment tribunal
An employee can bring a claim to the employment tribunal and the decision of the
employment tribunal can be appealed on a point of law to the Employment Appeal Tribunal.
Employment Appeal Tribunal

The decision can be appealed on a point of law to the Civil Division of the Court of Appeal.
Finally, the decision of the Court of Appeal can be appealed to the Supreme Court.
OTHER JURISDICTIONS IN THE UNITED KINGDOM
Northern Ireland
Northern Ireland has its own court structure and both civil and criminal appeals can be
heard by the United Kingdom Supreme Court.
Scotland
Only civil appeals and those criminal appeals involving devolution issues may be appealed
to the United Kingdom Supreme Court.
OTHER COURTS
Court of Justice of the European Union
Key definition: Court of Justice of the European Union
The superior court of the European Union.
Key definition: European Court of Human Rights
The court that determines whether there has been a violation of the European
Convention on Human Rights by a contracting state.
The Court of Justice of the European Union (CJEU) is the court that is tasked with ensuring
compliance with European Union law and providing the authoritative interpretation of EU
law. It is based in Luxemburg and its judges represent each of the member states. If there
is an issue relating to the interpretation of EU law the domestic court can make a
preliminary reference to the CJEU under Article 267 TFEU.
Confusingly, the court used to be known as the European Court of Justice and some
commentators referred to it as Luxemburg, which refers to where the court is based.
Somewhat confusingly, in light of the paragraph below, the court might be referred to by
media as the European Court.
European Court of Human Rights
The European Court of Human Rights (ECtHR) is based in Strasbourg and individuals and
businesses can bring claims against their own country where there as an allegation that
there has been a violation of the European Convention on Human Rights (ECHR). The ECtHR
cannot overrule a judgment of a domestic court such as the United Kingdom Supreme
Court. However, it can impose a monetary fine on the United Kingdom, but it has no power
to enforce this. The decisions of the ECtHR are an important source of law as under s.2(1)
of the HRA 1998 the domestic courts must take these into account. It has been the
practice of the House of Lords and Supreme Court to choose to follow the decisions of the
ECtHR as to the interpretation and extent of the ECHR (see the approach of Lord Bingham
in R (Ullah) v Special Adjudicator [2004] 2 AC 323).
Privy Council
The Judicial Committee of the Privy Council hears appeals from those countries where this
court is still the highest court of appeal. The number of countries to use the Privy Council is
decreasing. New Zealand only finally abolished the right to appeal a case to the Privy
Council in 2004, with the New Zealand Supreme Court having been established by the
Supreme Court Act 2003. Decisions of the Privy Council are persuasive as a legal authority,
and thus while not binding on English and Welsh courts, the Privy Council’s decisions are
very influential. One example of this is the case of Attorney General for Jersey v Holley
[2005] UKPC 23 which was heard by nine Lords of Appeal in Ordinary and reconsidered the
partial defence of provocation for murder. Throughout this book you will see how decisions
of the Privy Council have shaped the law.
COMPOSITION OF THE JUDICIARY
The judiciary is perceived as being out of touch with normal people and is characterised as
white, upper class and male. The composition of the judiciary is being addressed by the
body responsible for the appointment of judges, the Judicial Appointments Commission,
and there have been calls to introduce a quota system to ensure that there is more
diversity. The Deputy President of the Supreme Court, Baroness Hale of Richmond, who is
the only female Justice of the Supreme Court, has highlighted the need for greater diversity.
On-the-spot question
?
Newbury Ltd and Duxford Ltd enter into a contract, whereby Newbury Ltd agrees
to sell 4,000 sofas to Duxford Ltd in return for £1,200,000. When the sofas are
delivered to Duxford Ltd’s premise they are found to be water damaged. Duxford
Ltd wishes to sue Newbury Ltd for breach of contract.
Sonya works for Bill who is a sole trader. Last Monday Bill summoned Sonya to his
office and said that she was no longer needed and that as of today she no longer works
for him. Sonya was given no notice that she was going to be dismissed and argues
that the dismissal was for an unfair reason.
The Morning Headline is a national newspaper and its website has been shut down as
a result of Parliament enacting the Press Regulation Act (fictitious), which was
introduced in order to control the press. The Morning Headline is alleging that its right
under Article 10 of the ECHR to freedom of expression has been violated. Last week
the Supreme Court has ruled that the Press Regulation Act (fictitious) cannot be
challenged as it is an Act of Parliament. The Morning Headline wishes to appeal.
Which of the courts that we have discussed above would hear the claims brought by
Duxford Ltd, Sonya and The Morning Headline?
STATUTORY INTERPRETATION
The role of court is to interpret Acts of Parliament. It is essential that the courts do this in
order to apply the law as Parliament intended. There are a number of rules of statutory
interpretation. The literal rule is where a court will read the Act and apply it in accordance
with the ordinary meaning of the words used in the statute. A well-drafted Act of
Parliament should be capable of being read and interpreted clearly. However, there will be
times where the literal rule will not be of much assistance. This will be the case where the
literal interpretation of the statutory provision will produce a result that would be
considered absurd or inconsistent with the intention of Parliament. This would be where a
statutory provision has been poorly drafted or the provision, even if clearly drafted, would
lead to an absurd result that Parliament would never have intended. If this occurs, then the
courts will use the golden rule. The mischief rule is used to remedy a badly drafted
statutory provision and to give the statute the effect that Parliament had intended.
Therefore, the courts will read the statutory provision in light of what Parliament had
intended (see Inco Europe v First Choice Distribution [2000] WLR 586).
Since the decision of the House of Lords in Pepper v Hart [1993] AC 593, the courts have
been able to refer to Hansard, which is the record of parliamentary proceedings, in order to
ascertain what Parliament’s intention was when enacting a bill. Hansard is used where the
statutory provision is ‘ambiguous or obscure or leads to an absurdity’. The statement relied
upon in Hansard must be clear and needs to have been delivered by a minister or a
promoter of the bill.
DOCTRINE OF PRECEDENT
In English and Welsh law there is a hierarchy of courts and the courts use a doctrine of
precedent to determine which decisions are binding upon them. Decisions of the Supreme
Court (previously the House of Lords) are binding on all lower courts. Likewise, decisions of
the Court of Appeal are binding on all lower courts. This means that a court is bound by
decisions made by a higher court and must follow that court’s decision, unless it is possible
to distinguish this decision on the facts before it. The Practice Statement (HL: Judicial
Precedent) [1966] 1 WLR 1234 stated that the House of Lords was not bound by its own
previous decisions. This applies now to the Supreme Court. The Court of Appeal is bound
by its own previous decisions unless it can rely upon an exception (see Young v Bristol
Aeroplane Co. [1944] KB 718).
RATIO DECIDENDI AND OBITER DICTA
The actual decision in a case forms the ratio decidendi and it is this that is binding on lower
courts. Imagine that the Supreme Court in Monday v Tuesday (fictitious) held that in
circumstance X no damages were obtainable. The case was heard by five judges. This
decision was reached by four judges who all agreed that in circumstance X no damages
were obtainable. These four judges formed the majority, and it is their judgment that is
binding. Each judge in the majority gave an individual judgment and spoke at length about
the different circumstances where compensation might be obtainable. This would be obiter
dicta as this was a by the way comment and would be useful in the future should one of
these listed circumstances arise in the future. However, even then it would not be the ratio
decidendi. However, in our scenario one of the judges disagreed with the majority, and in
her dissenting judgment she argued that damages should be obtainable. This is known as a
dissenting opinion and would be obiter dicta. Judicial dissent is important as it allows for an
alternative approach to the law and judicial dissents have resulted in changes to the law,
especially if the dissenting judge was a member of the Court of Appeal, and upon appeal
the dissent is preferred to decision reached by the majority. An example of this is the
House of Lords’ decision in Gibson v Manchester City Council [1979] 1 WLR 294, where
their Lordships preferred the dissenting opinion in the Court of Appeal to the decision
reached by the majority (for an interesting discussion on judicial dissent see Lord Kerr,
‘Dissenting judgments – self indulgence or self sacrifice?’, available at
http://supremecourt.uk/docs/speech-121008.pdf).
LEGAL PROFESSION
The most common routes to becoming a lawyer are to undertake a law degree known as a
LLB, to complete the Graduate Diploma in Law after studying a non-law degree or to train
with ILEX. It is possible for a student who has studied a business degree to undertake the
Graduate Diploma in Law and then study on the same professional training courses as LLB
students.
Students wishing to train as solicitors must undertake the Legal Practice Course and then
complete a two-year training contract, whereas students who wish to train as a barrister
must undertake the Bar Professional Training Course and then complete a one year
pupillage.
In England and Wales there is a distinction between solicitors and barristers. Historically,
barristers represented clients in court and were instructed by solicitors who provided all
other legal services. In many countries there is no longer this distinction. Students studying
on the Bar Professional Training Course must be members of one of the four Inns of Court,
which are Middle Temple, Inner Temple, Lincoln’s Inn and Gray’s Inn. Practising barristers
must also be members of the Bar Council and the profession is regulated by the Bar
Standards Board. Solicitors are members of the Law Society and the profession is regulated
by the Solicitors Regulation Authority.
Key definition: Claimant
The person who is bringing a claim in civil law is known as the claimant. Previously,
such a person was known as a plaintiff.
Key definition: Defendant
The person who is defending the claim in civil law or who is accused of having
committed a criminal offence is known as the defendant.
Key definition: Victim
The person who has made an allegation that the defendant has breached the criminal
law and that they have suffered as a result is known as the victim.
Key definition: Prosecution
The Crown Prosecution Service (CPS) brings most criminal prosecutions. The CPS was
established in 1986 as a result of the Prosecution of Offences Act 1985. Prior to this
a prosecution would be brought by the police force where the offence was committed.
There are other bodies in the United Kingdom that have powers to prosecute, such
as the RSPCA.
SUMMARY
• There are a number of different sources of law in the English legal system.
• There is a different court structure for civil and criminal law.
• The courts use a number of different rules to interpret Acts of Parliament.
• It is important to distinguish between ratio decidendi and obiter dicta.
• The legal profession distinguishes between solicitors and barristers.
FURTHER READING
Berlins, M. and Dyer, C. The Law Machine, 5th edn (Penguin, 2000) – this is a very succinct and
highly readable introduction to the English legal system and the legal profession.
Darbyshire, P. Darbyshire on the English Legal System, 10th edn (Sweet & Maxwell, 2011) – refer
to this book for an authoritative and highly readable account of the English legal system.
Lord Kerr, ‘Dissenting judgments – self indulgence or self sacrifice?’ The Birkenhead Lecture, 8
October 2012, available at http://supremecourt.uk/docs/speech-121008.pdf) – refer to this
lecture for a judicial perspective on the role of dissenting judgments.
Slapper, G. How the Law Works, 3rd edn (Routledge, 2013) – refer to this book for an accessible
introduction to the English legal system.
Slapper, G. and Kelly, D. The English Legal System, 16th edn (Routledge, 2015) – this is an
extremely authoritative and comprehensive account of the English legal system.
Chapter 3
Contract law
LEARNING OBJECTIVES
• appreciate the requirements that are needed in order to have a legally

enforceable contract;
• understand the consequences for the contracting parties where there is
misrepresentation, mistake, duress, illegality and undue influence;
• comprehend how a contract can be discharged by performance, acceptance,
breach and frustration;
• demonstrate an awareness of the remedies that are available where a contract
has been breached.
Every business transaction will involve the use of a contract. Without a contract, a business
agreement will not be legally enforceable. This chapter is intended as an introduction to the
law of contract. It is essential that you understand the key concepts covered in this chapter.
To demonstrate how the law applies in practice we will consider how the law relates to
transactions entered into by Snow Ltd. Snow Ltd is based in York and specialises in building
loft extensions. Imagine that Snow Ltd wishes to contract with Murphy Ltd, in which case
the contract could be written or verbal. Both written and verbal contracts are equally valid.
However, in an event of a dispute, it will be easier to prove the terms of the contract if the
contract is written. When advising Snow Ltd this would be a point that you would make;
alternatively, if you were a director of Snow Ltd, you would appreciate the advantages of
recording the terms of the contract in writing.
In this chapter we will look at the requirements for a legally enforceable contract, the
factors that could make the contract invalid, the way the terms of the contract are
classified, how a contract can be discharged, and finally the remedies for breach of
contract.
FIVE REQUIREMENTS FOR A LEGALLY ENFORCEABLE

CONTRACT
Distinguish between
an offer and an invitation
to treat
Offer
Must be communicated
to the offeree
Must be on the same

terms as the offer
Acceptance
Must be communicated
to the offeree
Do we have a
contract?
Promises to pay more
Consideration
Promises to accept less
The parties must have

Capacity
the capacity to contract
Presumption that in
Intention to create family/domestic context
legal relations there is no intention
to create legal relations
Figure 3.1 Requirements needed to create a legally enforceable contract

Contract law 23
Offer
Key definition: Offeror
The offeror is the person who is making the offer.
Key definition: Offeree
The offeree is the person to whom the offer is made and who can choose whether
to accept it.
Key definition: Bilateral contract
This is where an offer (promise) is made in return for a promise, i.e. ‘I will give you
£50 in return for your mobile phone’.
Key definition: Unilateral contract
This is where an offer (promise) is made for the requested action to be performed by
anyone who the offer is communicated to, i.e. a poster on a tree that states that ‘I
have lost my cat and will give you £50 if you find her’.
The person making the offer is known as the offeror. The person to whom the offer is made
is known as the offeree. The offeror can make a bilateral offer, which is an offer to a
specific individual in return for a promise, or a unilateral offer, which is an offer made to the
world in return for an act to be performed. The offer must be clear and precise and capable
of being accepted. Any ambiguity will invalidate the offer as therefore it is incapable of
being objectively understood. This makes sense, as how could you possibly accept an offer
that was capable of multiple meanings and could not be objectively defined. The offer
needs to be communicated to the offeree. Once the offer is made to the offeree it can be
revoked by the offeror at any time before there is acceptance. The notice of revocation
must actually be communicated to the offeree before it can become effective.
It is important to distinguish between offers and invitations to treat. An invitation to treat is

where someone indicates a willingness to enter into a business transaction, but in doing
this they are not making an offer that can be accepted. Rather, the offer will be made at a
later time. Examples of invitations to treat include adverts, the display of goods in shops,
the display of goods in a shop window and goods advertised on a website. The distinction
between an offer and an invitation to treat is important for a number of reasons. First, if we
look at the decision in Fisher v Bell [1961] 1 QB 394, in that case the display of a flick-knife
in a shop window was held to amount to an invitation to treat. This was fortunate for the
shop owner, as it was a criminal offence to offer such a knife for sale. In Pharmaceutical
Society of Great Britain v Boots Cash Chemist (Southern) Ltd [1953] 1 QB 401 the court held
that the display of goods in the shop amounted to an invitation to treat. In this case had it
been held by the court to amount to an offer, then the shop would have committed an
offence, as it was illegal to offer up the goods for sale. Second, there is a concern that if
adverts were generally treated as offers, then the offeror might face a situation where she
is unable to meet the orders placed by all of the offerees.
However, it is possible for an advert to amount to an offer. This will be the case where the
advert requires the performance of an act, such as providing the required information (see
Williams v Carwardine [1833] 4 B & Ad 621). So long as the offer is sufficiently clear and
precise, and is capable of being accepted, then the advert will amount to an offer. An
example of this is Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
KEY CASE ANALYSIS: Carlill v Carbolic Smoke Ball Co [1893] 1

QB 256
Background
Carbolic Smoke Ball Co manufactured a product that was advertised as preventing a
user from catching influenza. The company promised that anyone who used its
product in the way that it prescribed and still caught influenza would receive £100.
The advert informed potential customers that the Carbolic Smoke Ball Co had set
aside funds at a bank to cover any payments.
Principle established
The Court of Appeal held that due to an advert offering £100 to anyone who
purchased the defendant’s product and used it in the prescribed manner, the
customer would be legally entitled to recover the money in the event that they
caught influenza. The Court of Appeal held that the advert amounted to a unilateral
contract and the offer had been made to the whole world. It was sufficiently precise
and the assurance that there was £1,000 held at a bank demonstrated an intention
to be bound. Despite the Carbolic Smoke Ball Co’s arguments, the advert was a mere
puff, and not an offer, regardless of the fact that it had been made to such a wide
audience.
Contract law 25
?
Do you think that the decision in Carlill v Carbolic Smoke Ball Co [1893] is correct?
What would have happened if 50,000 customers had accepted the offer by using
the product and all caught influenza?
Acceptance
The offeree’s acceptance must mirror the precise terms of the offer. If the offeree varies
the terms of the offer then this will be treated as a counter offer and the original offer will
no longer exist (Hyde v Wrench (1840) 49 ER 132). This means that the offeree will no longer
be able to accept the original offer. However, if the offeree is merely asking whether the
offeror would be willing to vary the terms, then this will be regarded as a request for further
information and will not invalidate the original offer.
Acceptance must be communicated to the offeror before it is effective. This means that
notice of the acceptance must reach the offeror (Entores Ltd v Miles Far East Corp [1955] 2
QB 327). Otherwise, how would the offeror know that her offer had been accepted? If the
offeror specifies a particular mode of acceptance and the offeree communicates her
acceptance via a different mode, then according to Manchester Diocesan Council of
Education v Commercial & General Investments Ltd [1970] 1 WLR 241, the acceptance will
be effective unless the offeror expressly ruled out other forms of communication and the
offeree’s chosen method of acceptance is no less advantageous to the offeror.
Example
Therefore, if Snow Ltd had offered to build Mrs Haralambous a loft extension for £30,000
and had given Mrs Haralambous seven days to accept its offer, it would be possible for
Snow Ltd to revoke its offer any time up until Mrs Haralambous accepts it. However, if Mrs
Haralambous informs Snow Ltd of her acceptance, then it is no longer possible for Snow
Ltd to revoke the offer.
There are two exceptions to the rule that notice of acceptance must reach the offeror. The
first exception is where there is a unilateral offer, such as occurred in Carlill. The offeror in
Carlill was held by the Court of Appeal to have waived the need for the offeree’s
acceptance to be communicated to the company. The performance of the requested act
amounted to acceptance. The second exception is where the acceptance is sent by post.
The postal rule states that acceptance takes place when the letter is posted and not when
it is actually received by the offeror (Adams v Lindsell (1818) 1 B & Ald 681). The postal rule
applies even when the letter is lost in the post and is never received by the offeror. Once
the letter is posted it is no longer possible for the offeror to revoke her offer. However, you
should note that the postal rule will not apply where the letter had been sent to the wrong
address (Korbetis v Transgrain Shipping BV [2005] EWHC 1345 (QB)). The postal rule only
applies to non-instantaneous forms of communication and not to instantaneous
communication such as telex (Entores Ltd and Brinkibon v Stahag Stahl und
Staglwarenhandels GmbH [1983] 2 AC 34), text messages or email (see Figure 3.2).
Offeror makes the offer on Monday
Offeree accepts the offer on

Tuesday via posting a letter
Offeree
Offeror
Letter never
arrives –
acceptance
is still valid
Offeror cannot revoke offer
Figure 3.2 The postal rule in operation
There must be an offer that can be accepted
KEY CASE ANALYSIS: Gibson v Manchester City Council [1979] 1

WLR 294
Background
A Conservative led city council had set up a scheme whereby council tenants could
purchase their council house. Literature was sent out to tenants and Mr Gibson, a
council tenant, responded and subsequently the parties engaged in correspondence
about the price of the house. However, the Labour party took control of the council
Contract law 27
and reversed the policy of selling council houses. The Court of Appeal in Gibson v
Manchester City Council [1978] 1 WLR 520 held that the conduct of the parties and
the correspondence had created a contract. Lord Denning MR had rejected the
approach of looking for a clear offer that contained all the finalised terms which only
then was capable of being accepted. His Lordship had argued that the court should
‘look at the correspondence as a whole and at the conduct of the parties and see
therefrom whether the parties have come to an agreement on everything that was
material’ (at p. 523). The Court of Appeal awarded the remedy of specific
performance, which meant that the council had to sell the house to Mr Gibson.
The council appealed to the House of Lords.
The House of Lords overruled the Court of Appeal’s decision and held that there was
no contract. The council had never made an offer that was capable of being
accepted in the course of the correspondence between it and Mr Gibson and,
subsequently, there could be no acceptance by Mr Gibson. The House of Lords
rejected the Court of Appeal’s approach and held that the conventional method
must be adopted in determining whether there had been a contract. Lord Diplock
held that:
I can see no reason in the instant case for departing from the conventional
approach of looking at the handful of documents relied upon as constituting
the contract sued upon and seeing whether upon their true construction
there is to be found in them a contractual offer by the corporation to sell
the house to Mr Gibson and an acceptance of that offer by Mr Gibson.
I venture to think that it was by departing from this conventional approach
that the majority of the Court of Appeal was led into error. (at p. 297)
?
Do you prefer the approach of the Court of Appeal or the House of Lords in Gibson
v Manchester City Council?
Consideration
Key definition: Promisor
The person who is promising to do or to provide something.
Key definition: Promisee
The person who wishes to enforce the promise and must provide consideration in
return for the promised act.
In order to have a valid contract there needs to be consideration. Before we look at the
legal definition of consideration, let us consider how it works in practice. Imagine that Snow
Ltd and Mrs Haralambous had agreed that Snow Ltd will build Mrs Haralambous’ loft
extension for £27,000. However, due to miscalculating the costs of materials, Snow Ltd now
informs Mrs Haralambous that she will need to pay an additional £9,000 in order for Snow
Ltd to complete the loft extension. Mrs Haralambous agrees to pay the additional £9,000.
It is important to consider whether there is a legally enforceable contract for the £27,000
and for the £9,000? In order to answer this question we will have to look at the legal
definition of consideration.
Where the promisor has made a promise, the promisee must provide something in return
in order to enforce the promise. Otherwise, the promisor has promised you a gift that will
be unenforceable should they renege on their promise, such as where a sibling promises to
buy you a ticket for a concert for your birthday and later reneges on their promise. You
might now be thinking whether such a promise should or should not be enforceable, but
while there might be a moral obligation to honour the promise, it should be remembered
that we are concerned with whether there is a legal obligation.
Consideration can be defined as the price for which the promise is bought. In Currie v Misa
(1874–75) LR 10 Ex 153 at 162, Lush J stated that ‘[a] valuable consideration, in the sense of
the law, may consist either in some right, interest, profit, or benefit accruing to the one
party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken
by the other’. We can see that consideration needs to be something of value in the eyes of
the law. This could be monetary or where the promise is refraining from doing something
that she has a legal right to do. Consideration need not be adequate; however, it must be
sufficient. If Henry were to offer George his computer for £1, then Henry cannot complain
when George presents £1 and demands the computer (see Chappell & Co Ltd v Nestle
Co Ltd [1960] AC 87). The £1 is hardly adequate, yet it is sufficient in the eyes of the law.
Contract law 29
Past consideration
In order to enforce the promise, the promisee must have provided consideration. If an act is
performed without the promise of payment in return, a subsequent promise of payment will
not be enforceable, as the earlier act occurred prior to the promise having been made.
Therefore, no consideration has been given in return for the promise to pay, as the earlier
act will be insufficient as it amounts to past consideration. It is important to note that there
is an exception known as implied assumpsit, which if it applies could make the promise to
pay enforceable. However, this will only be the case if, when the act was performed, both
parties had appreciated that it was not being informed for free (see Pao On v Lau Yiu Long
[1980] AC 614).
Existing legal duties
The performance of a legal duty will not amount to good consideration (Collins v Godefroy
(1831) 1 B & Ad 950). This is because the promisee must perform this legal duty regardless
of the promisor’s request.
Promises to pay more than originally agreed
Therefore, looking in the example above, Snow Ltd has promised to build the loft extension
and Mrs Haralambous is in return promising to pay £27,000. If Mrs Haralambous refused to
pay the £27,000, then Snow Ltd could enforce the contract as they have provided
consideration by agreeing to build the loft extension. However, what about the additional
£9,000? Mrs Haralambous has agreed to pay this money. It would appear that Mrs
Haralambous is not receiving anything in exchange from Snow Ltd. The construction of the
loft extension is an existing obligation, and so agreeing to perform this contractual
obligation in return for additional money will not amount to good consideration (Stilk v
Myrick (1809) 170 ER 1168). It would appear that if Mrs Haralambous refuses to pay the
additional £9,000, Snow Ltd would not be able to sue her for the money, as it has not
provided consideration.
We can see that difficulties arise where there is a promise to pay more. According to Stilk v
Myrick, a promise to pay more is not legally enforceable if the person seeking to enforce
the promise has not provided any consideration in return for the additional money.
However, the Court of Appeal in Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 2
WLR 1153 held that a promise to pay more could be enforceable where the party seeking to
enforce the additional payment has undertaken to perform the existing contractual
obligation and provided the promisor with a practical benefit.
KEY CASE ANALYSIS: Williams v Roffey Bros & Nicholls

(Contractors) Ltd [1990] 2 WLR 1153
Background
The defendant had the main contract to refurbish a block of flats and late completion
of the development would result in the defendant incurring a penalty. The defendant
entered into a contract with the claimant who was a subcontractor and would
provide carpentry services. Later on the claimant informed the defendant that it
could not perform its contractual obligations as it had undercharged when quoting
on the contract. The defendant agreed to pay additional money to the claimant and
the parties agreed to proceed on this basis. Subsequently, the defendant refused to
pay the additional sum and the claimant sought to recover the money.
The Court of Appeal held that the claimant could recover the additional money as by
continuing to perform his contractual obligations he had prevented the defendant
from being penalised for late completion; he had also agreed to a new method of
working and had prevented the defendant from having to find new carpenters. This
amounted to a practical benefit and therefore the claimant had provided
consideration and the promise to pay additional money was legally enforceable.
Snow Ltd might be able to recover the additional £9,000 from Mrs Haralambous only if they
could persuade a court that it has provided a practical benefit. A party will not be able to
rely on Williams v Roffey Bros & Nicholls (Contractors) Ltd where the request amounts to
economic duress. We will look at economic duress in more detail below.
Promises to accept less
Imagine that Snow Ltd has built a loft extension for Mr Jones for £24,000. Mr Jones was
made redundant from work and now cannot afford to pay the full amount. If Mr Jones
informs Snow Ltd that he could only afford to pay £15,000 and Snow Ltd promises to accept
this as full payment, then this would amount to a promise to accept less. At a later date
could Mr Jones prevent Snow Ltd from seeking to recover the additional £9,000? As a
matter of law the answer would be no, as Mr Jones has not provided any consideration to
support Snow Ltd’s promise to accept less. The leading House of Lords authority is Foakes
v Beer (1884) 9 App Cas 605, where a promise to accept less was held to be unenforceable
as no additional consideration had been provided. If, however, the debtor were to provide
Contract law 31
something of value in the eyes of the law in exchange for the promise, then that would
amount to consideration (see Pinnell’s Case (1601) 77 ER 237). Mr Jones would be unable to
rely upon the argument that his prompt payment might amount to a practical benefit, as in
Re Selectmove Ltd [1995] 1 WLR 474 it was held by the Court of Appeal that this did not
apply to promises to accept less.
Promissory estoppel
Equity is there to provide assistance when the law proves inadequate. We have seen that in
law a promise to pay less will not amount to good consideration. However, in equity a
promise to accept less could be used as a defence where the promisor who has agreed to
accept less is now seeking to recover the full amount. In Central London Property Trust Ltd
v High Trees House Ltd [1947] KB 130, Denning J revived promissory estoppel and held that
this could estop, or prevent, a person from seeking to recover money during the period that
reduced payments were made. For example, if you contract to hire a car for 52 weeks and
subsequently due to having been made redundant you cannot afford to pay the £250 a
week that you had originally agreed to pay, and the other party agrees to accept a lesser
amount during the period that you are looking for work, then you would have a defence in
equity, should the other attempt to recover the waived amount.
Denning LJ defined the requirements of promissory estoppel in Combe v Combe [1951] 2

KB 215 and was clear that it did not give rise to a cause of action ‘where none existed
before. It only prevents a party from insisting upon his strict legal rights, when it would be
unjust to allow him to enforce them, having regard to the dealings which have taken place
between the parties’ (at p. 219). It was designed to act as a shield to protect a party from
being sued for failing to comply with the terms of the original agreement.
Capacity
The fourth requirement needed for there to be a legally enforceable contract is that both
parties to the contract must have the capacity to contract. Children, those who are
mentally incapacitated and those who are intoxicated do not have the capacity to contract.
However, s.3(2) of the Sale of Goods Act 1979 states that where a person without capacity
purchases goods then he must pay a reasonable price for them.
Intention to create legal relations
The final requirement is that the parties to a contract must intend to create legal relations.
In Balfour v Balfour [1919] 2 KB 571 the court held that there was a presumption that where
a married couple enter into an agreement they do not intend to make a legally enforceable
contract. This applies to other agreements made in a domestic or family setting.

Conversely, there is a presumption that in a commercial agreement there is an intention to
create legal relations. Both presumptions can be rebutted.
?
Sarah, Snow Ltd’s managing director, has the authority to enter contracts on
behalf of Snow Ltd. Sarah is at a trade conference and has just delivered a paper
on modern business practice; as her paper went well, she decides to drink several
large glasses of wine to celebrate. After finishing the wine Sarah bumps into the manager
of a timber supplier who has a trade stand at the conference, and she agrees to
purchase £189,000 worth of timber on Snow Ltd’s behalf.
Discuss whether there is a legally binding contract.
VITIATING FACTORS
Key definition: Void
Where a contract is void it is treated as if it never existed.
Key definition: Voidable
Where a contract is voidable it will continue to exist unless the innocent party is able
to persuade the court to set the contract aside.
A contract can be invalid where there is a vitiating factor present. It is important to note
that depending on which factor is present the contract could be void, which is treated as if
it never existed, or voidable, which means that the party seeking to set the contract aside
must ask the court to avoid the contract. The court does not have to do this.
Contract law 33
Misrepresentation
A contract will be voidable where there has been a misrepresentation. The courts have the
discretion to award the equitable remedy of rescission, which will avoid the contract.
In order to have an actionable misrepresentation there needs to be a false statement of

fact or law. A trade or mere puff is not actionable as it is vague and does not amount to a
fact. Generally, a statement of opinion is not actionable (Bisset v Wilkinson [1927] AC 177).
However, if the maker of the statement of opinion is sufficiently knowledgeable then it
could amount to a statement of fact (Esso Petroleum Co Ltd v Mardon [1976] QB 801). The
statement must be material and have induced the claimant to enter into the contract. The
statement need not have been the sole inducement. In JEB Fasteners Ltd v Mark Bloom &
Co [1983] 1 All ER 583 Stephenson LJ observed:
[So] long as a misrepresentation plays a real and substantial part, though not by
itself a decisive part, in inducing a plaintiff to act, it is a cause of his loss and he
relies on it, no matter how strong or how many are the other matters which play
their part in inducing him to act.
There are three types of misrepresentation: fraudulent, negligent and innocent. In order to
establish that there is a fraudulent misrepresentation the claimant needs to prove that the
defendant’s statement was fraudulent. The tort of deceit, or fraud, is explored in Chapter 5
and the requirements needed to establish liability for deceit were reiterated in Derry v Peek
[1899] 14 App Cas 337). The advantage of establishing fraud is that the measure of damages
available is greater than for negligence, as there is no need to establish remoteness and it
does not matter if the defendant could not have foreseen the claimant’s consequential
losses (Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158). In tort law the defendant will be
liable for negligent statements under the tort of negligent misstatement, which was
established in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. However, the
Misrepresentation Act 1967 (MA 1967) provides an improvement on the cause of action
available in tort, as where there is an alleged negligent misrepresentation, the claimant
does not have the burden of proof of establishing that the statement was negligent, as it is
the defendant that must prove ‘that he had reasonable ground to believe and did believe
up to the time the contract was made the facts represented were true’ (s.2(2)). Additionally,
the measure of damages are the same as for fraud (Royscot Trust Ltd v Rogerson [1991] 3
WLR 57 and s.2(1) MA 1967).
The claimant may wish to rescind the contract. We must remember that rescission is an
equitable remedy and therefore it is awarded at the discretion of the court. Rescission will
not be awarded where one of the four bars is present: lapse of time, the impossibility of
returning the parties to their original positions, affirmation by the claimant and third party
rights.
Mistake
If there has been a mistake when contracting, then depending on the type of mistake that is
present, the contract could be void or voidable. Where there is common mistake the
contract is void. There needs to be a fundamental mistake such as the non-existence of the
subject matter of the contract. If one of the parties is aware that the other party is mistaken
as to the other party’s identity, or the terms of the contract, then this will amount to
unilateral mistake. This happens when a rogue pretends to be someone else and the other
party believes that they are contracting not with the rogue, but rather with the assumed
alias. With unilateral mistake the courts have drawn a distinction between where the parties
contract on a face to face basis, and when they have contracted at a distance. Where the
negotiations have taken place at a distance there will be no contract between the parties;
this is because the mistaken party had believed that they were contracting with the
assumed alias. On the other hand, when you contract on a face to face basis the law that
holds your intention is to contract with the person before you (see Shogun Finance v
Hudson [2004] 1 AC 919).
Illegality
Illegality is a vitiating factor and a contract could be void if the subject matter of the
contract was illegal.
Duress
Imagine that Snow Ltd is owned by two shareholders, Jonathan and Robbie who each have
a 50 per cent shareholding. Robbie wishes to purchase Jonathan’s shares and as Jonathan
is reluctant to sell, Robbie threatens to ensure that Jonathan will not live to enjoy the shares
if he does not sell them. Jonathan has been physically threatened and decides to sell the
shares to Robbie. Here Robbie has applied physical duress to Jonathan whose consent has
been coerced so that his free will has been overborn by the threats. Jonathan could
attempt to have the contract avoided as duress makes the contract voidable. This scenario
is similar to the case of Barton v Armstrong [1976] AC 104. However, it is possible for
duress to be economic in nature rather than just physical. The problem with establishing
that there has been economic duress is that businesses often try to negotiate from a
position of strength and therefore are keen to exploit the other party’s weaknesses. This
means that the court must distinguish between legitimate commercial pressure and
economic duress (Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833).
The requirements for establishing economic duress were reiterated by Dyson J in DSND
Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530. Dyson J held that there must be
illegitimate pressure and that the innocent party had no practical choice, and that this
pressure was a significant cause as to why he entered into the contract.
Contract law 35
?
Snow Ltd requires two tons of roof tiles for use on their 146 current loft
extensions. Kennington Ltd has a contract with Snow Ltd to supply the tiles and
informs Snow Ltd that unless they agree to enter into a contract to buy another
two tons of roof tiles, then Kennington Ltd may be unable to fulfil the current contract.
Snow Ltd reluctantly enters into the additional contract as they will be unable to find
an alternative supplier to meet their existing customer deadlines.
Discuss.
Undue influence
Where one of the parties to the contract unduly influences the other party as a
consequence of the relationship that exists between them, then this will make the contract
voidable. There will be actual undue influence where there is evidence that it occurred,
and there will be presumed undue influence either because of the nature of the parties’
relationship, or if on the facts there is a presumption that influence has been exerted.
The key cases that have considered the different categories of undue influence have arisen
from where a spouse agrees to allow their partner to borrow money from a bank and to
use the family home as security (see Royal Bank of Scotland v Etridge (No 2) [2001] 4 All
ER 449).
PRIVITY OF CONTRACT: WHO CAN ENFORCE THE

CONTRACT?
At common law only those who are parties to the contract are able to enforce the terms of
the contract (Tweddle v Atkinson (1861) 1 B & S 393). This makes sense as the parties are
agreeing to enter into a contract and will be bound to honour the terms that they both have
agreed. However, the doctrine of privity of contract has historically caused hardship to a
third party (especially if the contract was entered into to confer a benefit upon the third
party) and a number of exceptions were created. One exception is the undisclosed
principal, which we will explore in Chapter 6. This permits an agent to enter into a contract
on the principal’s behalf and at a later date the principal, whose existence is unknown to
the other party, can choose to intervene and enforce the terms of the contract. Another
exception is assignment. Assignment is where the parties are able to assign their
contractual obligations to third parties.
These are not the only exceptions that exist. A broader exception is the Contracts (Rights of
Third Parties) Act 1999, which confers the third parties with the right to enforce the terms
of a contract to which they are not a party. The Act stipulates that third parties may have
rights where the court refers to them by name, by class or where they match a particular
description (s.1(3)). It is important to note that the Act does not confer liability on third
parties; rather it just confers the right to enforce a benefit. In Chapter 4 we shall see how it
is usual for contracting parties to include a contractual clause that prevents the Act from
applying to a particular contract.
EXPRESS OR IMPLIED TERMS
Key definition: Express term
This is a term that the parties have agreed should be included in their contract.
Key definition: Implied term
This is a term that the parties have not agreed should apply and instead will apply to
the contract because of the common law, custom or an Act of Parliament.
A term is express where the parties have agreed on the term themselves and it is included
in their contract. A term is implied where it is included in the contract not by the parties’
own agreement but by implication. This occurs where an Act of Parliament, such as the
Sale of Goods Act 1979, implies terms into a contract that stipulate that the goods sold
must be of satisfactory quality (s.14(2)). The courts can imply a term in circumstances such
as where such a term is required to give business efficacy to the contract. Terms can also
be implied through custom and practice. In Chapter 4 we will look at how implied terms can
be excluded from a contract.
?
Snow Ltd has purchased a brand new lorry from Auto Lorry Ltd. The parties have
verbally agreed that:
Contract law 37
• the lorry is three years old;

• the lorry has only done 25,000 miles;
• the terms implied by the Sale of Goods Act 1979 do not apply to this
contract.
How would you describe these terms?
Classification of terms
It is really important that you appreciate how terms are classified, as the classification of
terms will be significant if a term is breached.
Conditions
A condition is a term that goes to the root of the contract. It is an important term of the
contract and if breached it will allow the innocent party to repudiate the contract and/or
claim damages. The parties can decide in a contract whether a particular term will be a
condition by defining the term as such or by describing it as being of the essence. If the
parties have not classified the term then the courts can determine whether the term will be
treated as a condition or a warranty.
Warranties
A warranty is a less important term of the contract and if breached will entitle the innocent
party to claim damages.
Innominate terms
Key definition: Innominate terms
This is a term that is not classified as either a condition or warranty and if the term is
breached, only then will the courts determine whether the breach has deprived the
innocent party of substantially the entire benefit of the contract. If it has deprived
the innocent party of substantially the entire benefit of the contract, then the courts
will classify this as a condition.
Traditionally, the courts have looked at the importance of the term in the contract before
classifying it as either a condition or a warranty (see Poussard v Spiers & Pond (1876) 1
QBD 410). This has required the court to look at whether the term goes to the root of the
contract. However, the Court of Appeal in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen
Kaisha Ltd (The Hongkong Fir) [1962] 2 QB 2 held that where a term was unclassified by the
parties then the court could treat the term as innominate. The courts would look at the
seriousness of the breach and not the initial importance of the term to the contract. If the
breach were to deprive the innocent party of substantially the entire benefit of the contract
then it would be classified as a condition.
DISCHARGE OF THE CONTRACT
A contract can be discharged in a number of ways. It is important that you understand how
these occur.
Performance
First, the contract can be discharged by performance. This is where the parties have
performed their contractual obligations as agreed.
Agreement
Second, the parties may choose to discharge the contract by agreement. This is the
voluntary waiver of any outstanding obligations that have yet to be fulfilled. This might
occur where Snow Ltd has contracted with Mrs Richards to build an extension, and
subsequently, due to Mrs Richard’s losing her job, they agree to discharge their obligations.
Frustration
Key definition: Frustration
A contract will be discharged where it is frustrated. At common law, frustration only

discharges contracts where it is no longer possible to perform the contract due to
impossibility, illegality or where the contract has become something that is radically
different from what the parties have undertaken in the contract.
Contract law 39
Third, a contract can be discharged by frustration. This is where the contractual obligations
cannot be performed due to impossibility or illegality, or have become something that is
radically different from what the parties have undertaken in the contract (see Davis
Contractors v Fareham Urban DC [1956] AC 696). If the contract is held to have been
frustrated, then the contract is treated as if it never occurred and the parties’ obligations
are discharged. Examples of what can amount to frustration include the destruction of the
subject matter of the contract (Taylor v Caldwell (1863) 3 B & S 826) or the frustration of
purpose, as this would render it impossible to perform your obligations. The outbreak of
war is an example of illegality preventing a contract from being performed, as the contract
if performed would involve trading with the enemy.
Where a party is seeking to discharge the contract on grounds of frustration it is important

to note that the reason why the contract is frustrated must not be self-induced: that party
must not be the cause of the frustrating event. The event must not have been foreseeable
at the time of contract, as otherwise the parties would have been aware of the likelihood of
it occurring.
Just because the contract has become more expensive to perform will not amount to
frustration. The coronation cases illustrate when the cancellation of an event will, or will
not, amount to frustration. King Edward VII was due to be crowned and before the
coronation took place the king became very ill. This triggered the cancellation of the
coronation and a subsequent naval review. In Krell v Henry [1903] 2 KB 740 a room had
been rented in order to watch the coronation procession and it was successfully argued
that the contract was frustrated due to the fact that purpose of the contract no longer
existed. This was because both parties understood that the room was specifically hired in
order to watch the coronation, rather than simply being a contract to hire a room. Following
the coronation there was to have been a royal review of the British fleet. The Royal Navy
had assembled off Herne Bay in Kent, and Hutton had contracted to hire a boat to view the
ships. The royal review was cancelled and Hutton sought to argue that the contract was
frustrated. In Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683 the Court of Appeal held
that the contract was not frustrated as the purpose of the contract was unaffected by the
cancellation, as the contract was just for the hire of a boat and it was still possible for
Hutton to hire the boat and visit the assembled fleet.
Prior to the enactment of the Law Reform (Frustrated Contracts) Act 1943 (LR(FC)A 1943),
any money that had been paid in advance was not recoverable unless there had been a
total failure of consideration (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd
[1943] AC 32). If there had not been a total of failure of consideration, then the money was
not recoverable. If there had been a total failure of consideration the party returning the
money could not make a deduction to cover her own expenses. Section 1(2) of the LR(FC)A
1943 changes this position and permits all money paid prior to the frustrating event to be
recovered and allows a deduction to be made to cover the other party’s expenses. The Act
also stated that any money due prior to the frustrating event was no longer payable.
Section 1(3) of the LR(FC)A 1943 permits the party who has provided a valuable benefit to
the other party to recover a sum representing the benefit, which will be determined by the
court.
?
London has won the bid to host a big sporting competition that will take place
next July. Amanda lives opposite the main venue and wishes to have a loft
extension so that she can invite her friends and family to watch some of the
events from her house. Based on the plans for the venue she should be able to have
a good view of many of the sporting events. Amanda contacts Snow Ltd and arranges
for a sales representative to visit her house. Amanda informs the sales representative
that she wishes to have a loft extension built in time for next January. Work will
commence in two months’ time. Seven weeks later Amanda finds out that London will
no longer be hosting the big sport competition and contacts Snow Ltd to inform them
that based on her knowledge of contract law the contract is now frustrated.
Is Amanda correct? Has the contract been discharged due to frustration?
Breach
Innocent party
Amounts to has a right to
Breach of a repudiate the
a repudiatory
condition contract, or to
breach
affirm the breach
Figure 3.3 Effect of a breach of a condition
The final way that a contract may be discharged is where one of the parties has committed a
repudiatory breach of the contract. Where a condition has been breached the innocent party
may choose to treat the breach as amounting to a repudiatory breach and this will discharge
the contract. The innocent party may still obtain damages from the defendant. Alternatively,
the innocent party may affirm the breach and thus choose to keep the contract alive (see
Figure 3.3). He may still obtain damages for the breach. Sometimes a party may inform the
other party that there will not be breach of contract before the breach occurs. This is known
Contract law 41
as an anticipatory breach. The innocent party may be able to affirm the breach and continue
with their own obligations and thus will be able to attempt to recover the full contractual
amount owed (see White & Carter (Councils) Ltd v McGregor [1962] AC 413).
REMEDIES FOR BREACH OF CONTRACT
In Chapter 2 we saw how the courts can award both common law and equitable remedies.
Where there is a breach of contract the innocent party, depending on how the term is
classified, may have a right to repudiate the contract. The usual remedy for breach of
contract is common law damages. The measure of damages is intended to protect the
claimant’s expectation interest, that is to seek to put the claimant in the financial position
that she would have been in had the defendant performed his contractual obligations.
However, the claimant could instead seek to recover her reliance interest, which would
recover any expenses incurred in performing her obligations. The courts may refuse to
permit the claimant to recover her expectation interest where it is impossible to say with
certainty just what the claimant’s financial position would have been had the contract been
performed. Where this occurs the courts may calculate damages according to the reliance
interest (see Anglia Television Ltd v Reed [1972] 1 QB 60).
The claimant must prove that the defendant caused her losses and that the damages
sought cannot be too remote and must be foreseeable (see Hadley v Baxendale (1854) 9 Ex
341). The claimant would also be expected to take reasonable steps to mitigate her losses,
such as by attempting to find an alternative supplier or contractor to undertake the work.
A number of equitable remedies are available such as injunctions and specific

performance. We will explore injunctions in Chapter 5 and by awarding an injunction the
courts are preventing a party from breaching their obligations. Specific performance is a
remedy that is rarely awarded as it compels performance of a contractual obligation and
the courts prefer to award damages where there has been a breach.
SUMMARY
• In order to have a contract there must be an offer that has been accepted, there
must be consideration, the parties must have intended to create legal relations
and also have the capacity to contract.
• A contract may be set aside for a number of reasons including misrepresentation
and mistake.
• The contract will be discharged where there has been performance, agreement,
breach or frustration.
• Where a term of the contract has been breached, the remedy that is available will
depend on the classification of the term.
FURTHER READING
Beatson, J., Burrows, A. and Cartwright, J. Anson’s Law of Contract, 29th edn (Oxford University
Press, 2010) – this is an authoritative text on contract law and provides academic
commentary on the key areas covered in this chapter.
McKendrick, E. Contract Law, 10th edn (Palgrave, 2013) – refer to this text for an accessible and
clear introduction to the key areas of contract law.
Monaghan, C. and Monaghan, N. Beginning Contract Law (Routledge, 2013) – this is an

introductory text and explores the key areas covered in this chapter in a succinct manner.
Stone, R. The Modern Law of Contract, 10th edn (Routledge, 2013) – this text provides additional
coverage of the material in this chapter.
Chapter 4
Contracts for the sale of goods
LEARNING OBJECTIVES
• appreciate what is meant by a contract for the sale of goods;

• understand the effect of the Sale of Goods Act 1979;
• comprehend the reason for including certain clauses in a contract; and
• demonstrate an awareness of the international dimensions of contract law.
INTRODUCTION
In Chapter 3 we explored the law of contract and considered how a contract is formed, the
remedies for breaching the contract and how it is discharged. In this chapter we will look at
how contracts are used by businesses and the purpose served by each of the clauses in
the contract (see Figure 4.1). We will focus on a contract for the sale of goods and this will
enable us to consider the key clauses in a commercial contract and the Sale of Goods Act
1979 (SGA 1979). The law that we shall consider in this chapter will be as applicable to a
small high street grocery chain, as it will be to a leading supermarket.
WHAT IS A CONTRACT FOR THE SALE OF GOODS?
In this chapter we will look at the various issues encountered by Kings Abbots Engineering
Ltd (KAE), which is a small business based in England that manufactures a range of grinding
machines for use in the motor industry. If KAE entered into a contract to sell 1,000 grinding
machines to Guildhall Motors Ltd (GML), then so long as the statutory requirements are met
under s.2(1) SGA 1979, this would be a contract for the sale of goods. These requirements
must be met regardless of whether the contract is made in writing, orally or implied by the
parties’ conduct (s.4 SGA 1979).
Passing of property,
goods and monetary
consideration
Key stipulations as
to quality and
description, etc.
Will the Sale of Goods
Act 1979 apply?
Parties’ respective
obligations
Remedies which are

available
Sale of Goods
Exclusion, entire
agreement and
Key clauses
retention of title
clauses
Choice of law and

jurisdiction
International
considerations
Key trade terms
Figure 4.1 Chapter overview
Key definition: Contract for the sale of goods
According to s.2(1) SGA 1979, ‘A contract of sale of goods is a contract by which the
seller transfers or agrees to transfer the property in goods to the buyer for a money
consideration, called the price.’
Contracts for the sale of goods 45
Looking at the definition above the first requirement that must be satisfied is that the
grinding machines are goods. It is necessary to consider the statutory definition of goods
under s.61(1), which states that goods include such things as ‘all personal chattels’. The
grinding machine would be a personal chattel. Interestingly, your pet dog and hamster
would also fall under the statutory definition of goods, as would crops grown by a farmer.
The second requirement is that KAE, as the seller in the contract with GML, must transfer or
will agree to transfer the property in the goods. Here, property does not mean the physical
delivery of the grinding machines, rather, it means something more than the mere physical
goods, as it relates to the legal title to the goods, i.e. ownership. Finally, the third
requirement that needs to be satisfied is that there must be monetary consideration. This is
the significant difference to other types of contracts where consideration can be non-
monetary, such as where the parties barter, i.e. exchange goods.
Points to consider about s.2(1) SGA 1979
1 Monetary consideration
A contract where the parties exchange goods via bartering is not a contract for the sale of
goods. Where the parties are exchanging goods but one party agrees to pay a sum to make
up the lower value of the goods that he is exchanging, then this contract could fall within the
s.2(1) definition. An example of this is the case of Aldridge v Johnson (1857) 119 ER 1476.
2 Goods?
However, it is often difficult to determine whether the SGA 1979 applies to certain types of
contracts. A contemporary issue is computer software. In St Albans City and DC v
International Computers Ltd [1996] 4 All ER 481, the Court of Appeal considered whether
computer software was a good for the purposes of the SGA 1979. In his judgment Glidewell
LJ observed that:
• if a disc that contains computer software is sold or hired then it would constitute a
good for the purposes of the SGA 1979 and the Supply of Goods and Services Act
1982. His Lordship drew an analogy with an instruction manual or a videotape
which contained these instructions;
• if the content of the disc was merely installed onto the computer by the company
supplying the software and was then taken away it would not be a good;
• the program (software) was held not to be a good within the statutory definition.
3 Passing of property
In London Borough of Southwark v IBM UK Ltd [2011] EWHC 549 (TCC) it was held that as
the software had been supplied under a licence there had not been a transfer of property
as required by s.2(1) SGA 1979. This meant that the court did not have to consider whether
the software was a good.
Future goods
It is important to note that had KAE entered into the contract of sale with GML and it had
not yet manufactured the grinding machines, then the goods would be classified as future
goods. It would still be a valid contract, known as an agreement to sell, notwithstanding the
fact that the goods do not exist at the time when the contract was entered into (s.5 SGA
1979).
SALE OF GOODS ACT 1979
The SGA 1979 applies to both business-to-business contracts, business-to-consumer

contracts, and finally to consumer-to-consumer contracts. In this chapter we will focus on
business-to-business contracts. However, it should be noted that different rules can apply
to each of the above contracts and so you must be careful to distinguish which type of
contract you are dealing with.
The SGA 1979 contains rules that govern a number of important aspects of the contract.
These include:
• stipulations relating to the time of payment, the requirement that the seller has a
right to transfer the legal title, the quality and description of the goods;
• where the goods have perished before, or after, the contract has been entered
into;
• the transfer of the property in the goods;
• the passing of the risk in the goods;
• the ability of the seller to transfer the physical goods to the buyer, while retaining
the title (property) in the goods;
• the rule that the seller cannot transfer good title if he does not have this himself;
• the remedies available to both the buyer and the seller in the event that the
contract has been breached;
• the rules relating to the delivery, acceptance and inspection of the goods.
We shall consider each of these in turn and as we do this we will look at some of the
common clauses that you will find in a commercial contract. These are known as
boilerplate clauses as they are common clauses that you would expect to see in a contract
of this type. This will enable you to see how these clauses relate to the legal rules.
SALE OF GOODS DISTINGUISHED FROM A CONTRACT FOR

THE SUPPLY OF GOODS AND SERVICES
Where you are contracting to obtain services and the goods will be supplied as incidental to
this contract, in that case the contract will not be for the sale of goods, rather it will be a
contract for the supply of goods and services and will be governed by the Supply of Goods
and Services Act 1982. Examples of this type of contract include a builder who builds a new
kitchen and as part of the contract price includes all appliances and white goods.
KEY ISSUES
However, before we proceed there are a number of key issues to consider.
Does English and Welsh law apply?
The first issue to consider is what the choice of law and the choice of jurisdiction will be.
Key definition: Choice of law
This means which country’s law will govern the contract. It is important as every country
will have its own law and the parties may not be familiar with another country’s law.
Where the parties are based within the European Union, the Rome II Regulation will
regulate which country’s law will apply.
Key definition: Choice of jurisdiction
This means which country’s courts will resolve the dispute. Where the parties are based
within the European Union, the Brussels I Regulation will regulate which country’s courts
will have jurisdiction.
The parties, subject to any rules to the contrary, will be able to determine which country’s
law will govern the contract. As KAE is a company based in England it will be familiar with
the law of England and Wales and therefore would prefer to have the contract governed by
this law. However, GML could be based in Scotland and thus it could prefer to have the
contract governed by the law of Scotland. The parties would need to negotiate as to which
law will govern the contract. Even if Scottish law were to govern the contract, then most of
the SGA 1979 would still apply. However, if GML wished to use French law to govern the
contract, then French law would apply, rather than the SGA 1979. A choice of jurisdiction
clause stipulates which country’s courts will resolve any dispute between the parties in the
event that there has been an alleged breach of contract.
Key concepts in agreeing which clauses apply
Key definition: Standard form contract
This type of contract contains the key terms and would be offered by a seller to all
buyers of its products. The buyer would then contract on the seller’s terms without
negotiating the terms on an individual basis.
Key definition: Battle of the forms
This is where both parties are determined to contract on their own standard form
contracts and try to make the other party accept their terms.
The parties’ bargaining positions will be important here. The party in the strongest
bargaining position will be able to determine whether the contract is pro-buyer or pro-
seller. While the parties do have freedom of contract and could agree any price they wished
for the goods, the common law and statute will regulate the validity of certain clauses. It is
common for the parties to contract using standard form contracts and such a contract will
be supplied by the party on whose terms the contract will be entered into. Parties will often
seek to contract on their own terms and they will attempt to force the other side to signify
acceptance of their terms. This is known as the battle of the forms and an example of this
is Butler Machine Tool Co v Ex-cell-o Corp (England) [1979] 1 WLR 401.
Key obligations and the importance of certainty
The contract should state the parties’ respective obligations. KAE’s contract with GML
would contain the following obligations:
• KAE will sell 1,000 grinding machines to GML;

• KAE will deliver the 1,000 grinding machines to GML’s premise on 5 August 2016;
• GML will purchase the 1,000 grinding machines and agrees to pay £52 per item;
• GML will pay KAE the entire contract price no later than 30 working days after the
1,000 grinding machines have been delivered to GML’s premises.
Clearly, these are not all the obligations but you will notice that we have encountered a
problem: KAE makes a number of different grinding machines and GML has six factories
across the United Kingdom. To avoid the contract being void for uncertainty the parties
would include a clause in their contract that would define the key terms. This interpretative
provision would ensure that the validity of the contract could not be challenged by a party
seeking to have the contract invalidated (see G Scammell Nephew Ltd v HC &JG Ouston
[1941] AC 251). In Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274 the
Court of Appeal held that a contract was void because there was no certainty as to the
quantity of goods to be purchased or the price to be paid for the goods.
But what would happen if the parties neglected to include a fixed price? This would not
affect the validity of contract so long as the parties had included a mechanism for
determining the price of the goods or it could be determined by their course of dealing
(s.8(1) SGA 1979). An example of this would be a contract to supply barrels of oil over a ten-
year period. As the price of oil fluctuates the parties would not set a fixed price, but would
instead include a method of calculating the monthly price payable at the date of payment.
The method of calculation must be objectively verifiable. If none of these were present in
the contract then as a general rule the contract would be void for uncertainty (see May and
Butcher Ltd v The King [1934] 2 KB 17). However, s.8(2) SGA 1979 states that in the absence
of a determinable price the buyer must pay a reasonable price.
?
KAE and GML’s contract states that the choice of law and choice of jurisdiction
will be the United Kingdom. The price of the grinding machine is omitted and
instead the parties have inserted a clause that states that ‘the price of each unit
will be determined by the parties at a future date’. GML agrees to purchase a number
of grinding machines on a monthly basis, over a period of time to be determined at a
later date.
Advise KAE as to whether there are any problems with the above contract.
KEY PROVISIONS OF THE SALE OF GOODS ACT 1979
We will now consider the key provisions of the Sale of Goods Act 1979.
Stipulations relating to the time of payment, legal title,

the quality and description of the goods.
Stipulations about time

The time of payment is not treated as being ‘of the essence of a contract of sale’ (s.10(1)
SGA 1979). This means that if the buyer does not pay on the agreed date then the seller will
be unable to claim that there has been a repudiatory breach of the contract.
Key definition: Of the essence
You will remember from Chapter 3 that there is a distinction between conditions and
warranties. The phrase ‘of the essence’ means that the term is to be treated as a
condition and will permit the innocent party to discharge the contract.
However, the parties are permitted to expressly state that time of payment is of the
essence. Other stipulations as to time will depend on the term of the contract (s.8(2)). In
Hartley v Hymans [1920] 3 KB 475 it was held that time of delivery is of the essence.
Stipulation as to title
It is important that KAE has the right to sell the goods to GML. Section 12(1) states that
there is an implied condition that the seller must have the right to sell the goods and this
means that the seller must have title to the goods (or permission to sell on behalf of the
title holder). In other words the seller must actually own the goods or be selling on behalf of
another person. As we discussed above, it is possible to contract to sell goods that you do
not yet own, but that you intend to acquire or manufacture in the future. Section 12(1) is a
condition and if it is breached the buyer can repudiate the contract. In the case of Rowland
v Divall [1923] 2 KB 500 the Court of Appeal held that the buyer of a car that had turned out
to be stolen could sue the seller and reclaim his purchase price, notwithstanding the fact
that he no longer had the car and could not return it to the seller.
It is interesting to consider the effect of breaching s.12 (1), which is demonstrated in the
Court of Appeal’s decision in Rowland v Divall [1923] 2 KB 500.
KEY CASE ANALYSIS: Rowland v Divall [1923] 2 K.B. 500
Background
The claimant had purchased a car from the defendant. He had used the car for a
number of months. However, it transpired that the car did not belong to the
defendant and the claimant was forced to return the car to its legal owner.
The claimant was able to recover the purchase price, despite being unable to return
the car to the defendant. This was because there had been a total failure of
consideration as the claimant had contract to purchase the legal title to the car and
had paid the purchase price in return for this. As the defendant could not transfer
legal title to him there had been no consideration.
Hire purchase R A K B
company
• Retained • Did not • Did not • Did not • Did not

legal title acquire legal acquire good acquire good acquire good
title title title title
• Sued K for
breach of s.
12(1) SGA
1979
Figure 4.2 Butterworth v Kingsway Motors Ltd [1954] 1 WLR 1286
A similar decision was reached in Butterworth v Kingsway Motors Ltd [1954] 1 WLR 1286
where a car was supplied on hire-credit to R who had then sold the car to A, despite the
fact that the hire-purchase company had legal title. Eventually, the car was purchased by K
(the defendant), who believed that it had acquired legal title. K subsequently sold the car to
B (the claimant). B found out that the car was still owned by the hire purchase company
and successfully repudiated the contract and demanded the return of the full purchase
price. Controversially, as there had been a total failure of consideration, B was entitled to a
full refund from K despite having used the car for nearly a year (see Figure 4.2).
Section 12(2)(a) and (b) are implied warranties and state that the goods are free from any
encumbrances and that the buyer will enjoy quiet possession of the goods. The implied
warranty that the buyer will enjoy quiet possession extends beyond the date of contract
and therefore if the seller had a right to sell the goods when the parties contracted, but if at
a later date something occurred that meant that the buyer would no longer have quiet
enjoyment of the goods, then in this example there would not be a breach of s.12(1).
However, there would be a breach of s.12(2)(b). This occurred in the case of Microbeads AF
v Vinhurst Road Markings [1975] 1 WLR 218 where road marking machines were sold to the
buyer and it later turned out that a third party had subsequently acquired the patent to a
similar machine.
Stipulation as to description
Specific Unascertained
goods goods
Goods which are identifiable
Bulk goods, manufactured
via serial number etc.,
goods and goods yet to be
identifiable at the time of
produced
contract or are unique
At time of contract the

At the time of contract the
goods are not
goods are unconditionally
unconditionally attached to
attached to the contract
the contract
Figure 4.3 Distinction between specific and unascertained goods
Key definition: Specific goods
A definition is provided by s.61(1) SGA 1979, which states ‘“specific goods” means goods
identified and agreed on at the time a contract of sale is made and includes an undivided
share, specified as a fraction or percentage, of goods identified and agreed on as aforesaid’.
Key definition: Unascertained goods
No definition is provided by the SGA 1979. Unascertained goods are those goods that
are not identifiable or agreed upon at the time of contract. An example of this would
be a contract to purchase 100,000 cans of tinned fruit. The manufacturer would be
able to supply any 100,000 cans that correspond to the contractual description.
According to s.13(1) SGA 1979 there is an implied condition in every contract that where
goods have been sold by description then the goods supplied must correspond with that
description. This requirement applies to both unascertained goods and specific goods and
covers goods that you have purchased prior to seeing them such as via mail order and also
to goods that you have viewed prior to the purchase (see Figure 4.3). In Grant v Australian
Knitting Mills Ltd [1936] AC 85, the Privy Council held that s.13 applied to goods purchased
from a shop counter. Under the perfect tender rule, the courts have permitted the buyer to
reject the goods where there is any inconsistency between the description and the actual
goods. An example of this is FW Moore & Co Ltd v Landauer & Co [1921] 2 KB 519 where
cans of tinned fruit were described as being in cases of 30 tins. Half the cases supplied only
contained 24 tins. Despite there being no difference in the market value of the goods
supplied, the buyer was entitled to reject all the goods supplied. Clearly, this is a harsh rule
as the buyer was not disadvantaged and used s.13 to escape contract. The courts have
limited the protection afforded by s.13 by asking whether the words used to describe the
goods had become an essential term of the contract. In Harlingdon and Leinster Enterprises
Ltd v Christopher Hull Fine Art Ltd [1991] 1 QB 564 the Court of Appeal held that there could
not be a sale by description where the parties had not intended that the buyer would rely
upon a description of a painting as being by Gabriele Münter.
Stipulation as to quality
There is an implied condition under s.14(2) that the goods supplied will be of satisfactory
quality. The goods must be suitable for their common purpose and the courts will take into
account a number of factors include age, price and safety to determine whether there had
been a breach of s.14(2). Section 14(2) will not give rise to liability where the goods are
suitable for a common purpose but are not suitable to the buyer’s undisclosed particular
purpose (see Griffiths v Peter Conway Ltd [1939] 1 All ER 685).
Stipulation as fitness for particular purpose

Section 14(3) states that where the buyer has expressly or impliedly made known to the
seller the particular purpose for which she requires the goods, then the goods supplied
must be suitable for that particular purpose (see Priest v Last [1903] 2 KB 148). It must be
reasonable for the buyer to rely on the seller’s skill and expertise. Section 14(3) is an
implied condition.
KEY CASE ANALYSIS: Teheran-Europe Co Ltd v ST Belton

(Tractors) Ltd (No 1) [1968] 2 QB 545
Background
The seller did not know that the compressors supplied under the contract to the
buyer were actually going to be used in Iran. An agent acting on behalf of the
undisclosed principal had purchased the goods. The compressors were not suitable
for use in Iran and the sellers were sued for breach of s.14(3).
The Court of Appeal held that there was no breach of s.14(3) because the buyer had
not relied upon the seller’s skill and judgment. This was because the buyer was
purchasing goods for its home market and the court said that buyer would know
more about this market than the seller possibly could.
Stipulation that the goods must conform to the sample

Section 15 is an implied condition and states that where goods are sold by sample the
goods must correspond with the quality of the sample.
Restrictions on ss.13–15
It is important to note that s.15A SGA 1979 restricts the buyer from treating a minor breach
of ss.13–15 that is so slight as a breach of a condition. Instead the breach is treated as a
breach of a warranty.
Exclusion clauses
The parties can agree to include a clause in the contract that will exclude the terms implied
under ss.13–15 (s.55 SGA 1979). This clause is known as an exclusion clause and is
regulated by the Unfair Contract Terms Act 1977 (UCTA 1977). An exclusion clause must be
incorporated into the contract, must cover the breach and be valid under UCTA 1977. The
clause can be incorporated by being included into the contract, by being brought to the
notice of the other party at the time of contract or by a course of dealing. In Olley v
Marlborough Court Ltd [1949] 1 KB 532, an exclusion clause was not incorporated as it had
only been brought to the other party’s attention after the contract had been entered into.
That particular clause had sought to exclude liability for damage or loss to guests’
belongings. The notice should have been at the check-in desk where the contract was
concluded and not just in the hotel bedroom. The clause must cover the breach and if it
does not then the defendant will be liable. A rule known as the contra proferentem rule
construes ambiguous clauses in favour of the party that the clause is being used against.
Finally, liability for breach of s.12 SGA 1979 cannot be excluded (s.6(1) UCTA 1977) and
ss.13–15 SGA 1979 cannot be excluded where the buyer is a consumer (s.6(2) UCTA 1977).
Sections 13–15 can only be excluded where the buyer is a business and then only if it is
reasonable to have included the exclusion clause (s.6(3) UCTA 1977). Reasonableness is
determined with reference to s.11 and schedule 2 of UCTA 1977. Where the parties are
businesses of equal bargaining power, there is a presumption that the clause will be
reasonable (see Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317).
Replacing the implied conditions with express warranties
Key definition: Implied terms
A term implied into a contract by custom and practice, the common law and by statute.
Key definition: Express terms
A term that the parties have expressly agreed. There can be express terms in both a
written and an oral contract.
Key definition: Conditions
An important term of the contract that if breached will permit the innocent party to
repudiate the contract (i.e. bring it to an end) and/or claim damages.
Key definition: Warranties
A less important term of the contract that if breached will only permit the innocent
party to claim damages.
The parties could agree in a business-to-business contract to replace the implied terms
with express warranties. These could replicate the protection offered by the SGA 1979
without permitting the buyer to reject the goods. Instead the contract could agree a range
of remedies.
Where the goods have perished before or after the

contract has been entered into
Imagine that KAE has contracted to sell a lorry (registration number 134567 YBN) to Fred’s
Second Hand Motors. Unbeknown to the parties, the lorry had perished in a fire two hours
before the contract was entered into. If this were to occur the contract would be void, as
s.6 SGA 1979 states that where the goods are specific goods, which the lorry clearly is as it
has an identifiable registration number and could not be substituted, the contract would
be void. The consequence of the contract being void is that the obligations to pay and
deliver the goods no longer exist. If the goods were unascertained goods (i.e. 1,000 grinding
machines) we would have to look at common law frustration to see whether the contract
could be discharged.
The transfer of property in the goods
As we have discussed above, property refers to legal title. The SGA 1979 established rules
about the passing of property from the seller to the buyer. This is important because if KAE
agreed to sell 1,000 grinding machines to GML on 1 May and payment was due on 1 June,
with delivery taking place on 16 June, what would happen if KAE became insolvent on 12
June? Could GML argue the grinding machines belonged to it or would GML only be an
unsecured creditor and could only recover (if possible) its purchase price? To answer these
questions we must consider the SGA 1979 and distinguish between specific and
unascertained goods:
1 As the grinding machines are manufactured goods and KAE has a choice as to
which of the thousands it produces to attach to the contract and deliver on 16
June, the goods would be classified as unascertained goods, as until delivery took
place there was no unconditional appropriation of the goods to the contract (see
Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240).
2 Section 16 SGA 1979 states that property in unascertained goods cannot pass until
the goods have become ascertained. Here, the passing of property would occur
on delivery.
3 If the contract was silent as to when property would pass then we would refer to
s.18 and the five rules that deal with this. Rule 5 states that property in
unascertained goods passes when they become unconditionally appropriated to
the contract.
4 This means that in the above scenario the property in the goods would remain
with KAE and GML would only have a right to recover its purchase price as an
unsecured creditor.
Had the goods been specific goods (i.e. a famous painting) then property in the goods can
pass at any time as it is clear which particular good is attached to the contract (s.17 SGA
1979). Where the contract is silent as to the passing of property in specific goods, s.18 Rule
1 states that property passes at the time the contract is made. This is regardless of whether
payment has been made or the goods have been delivered.
?
Lucy manufactures handmade ceramic plates and contracts to sell 100 blue plates
to Stuart on 1 June in return for an upfront payment of £1,300. The parties agree
that the property in the goods will pass at the time of contract. As Stuart is away
on holiday he agrees to collect the goods in two weeks’ time on 14 June. Between 3
and 9 June Lucy makes 300 blue plates and places 100 of the plates in a box marked
‘Stuart’. Lucy seals the box and places it in her shed. On 13 June Lucy is declared
bankrupt.
Advise Stuart as to whether he owns the 100 blue plates.
The passing of risk in the goods
If a party has the risk in the goods then they will be responsible if the goods are damaged
or stolen. If it is the seller then he will be in breach of contract if he cannot supply the
goods; alternatively, if it is the buyer who has the risk in the goods and has not yet paid the
contract price and the goods are damaged she must pay for the goods. Section 20(1) SGA
1979 states that the risk in the goods passes with property. It is possible to expressly state
in the contract when risk will pass.
The ability of the seller to transfer the physical goods

to the buyer, while retaining the title (property) in the
goods
Key definition: Retention of title clause
The seller will be permitted to retain title to the goods while transferring the physical
goods to the buyer. Title will pass to the buyer once he has paid the full purchase
price to the seller.
Section 19 SGA 1979 permits the seller to retain the right of disposal in the goods. This
allows the seller to retain the title (property) in the goods until certain conditions such as
payment have been met. If a retention of title clause is included in the contract the seller
will retain title to the goods and can deliver the goods to the buyer to sell and use in its
manufacturing processes (Aluminium Industrie Vaassen BV v Romalpa Aluminium [1976] 1
WLR 676). The buyer will not own the goods but is able to sell the goods to third parties
who will acquire good title (see s.25 SGA 1979). The buyer can also use the goods in her
manufacturing process. If this occurs and the goods are irretrievably incorporated into
another product then the seller will no longer have title (see Re Peachdart Ltd [1984] Ch
131). The courts have been reluctant to permit sellers to use increasingly elaborate
retention of title clauses and this is an area of law that requires careful consideration.
The rule that the seller cannot transfer good title if he

does not have good title
The nemo dat rule states that the seller can transfer good title to the buyer if he himself
does not have good title to the goods. This principle exists to protect the original owner of
the goods who can demand the goods back from the innocent buyer. Failure to return the
goods will give rise to liability under the tort of conversion (see Torts (Interference with
Goods) Act 1977). Section 21 SGA 1979 reiterates the nemo dat rule. There are a number of
exceptions to the nemo dat rule and three of these are included in the Act (see ss.23–25).
The nemo dat rule is regarded as harsh to the innocent purchaser who is unaware that the
goods that they are buying belong to someone other than the seller.
The remedies available to both the buyer and the seller
The buyer’s remedies for breach of contract are contained in ss.51–53 SGA 1979. The
power under s.52 to ask the court for specific performance is restrictive and is only
available against specific or ascertained goods (Re Wait [1927] 1 Ch 606). The seller has
personal remedies against the buyer for breach of contract under ss.49–50 and remedies
against the goods. For example, if the seller is unpaid she can exercise a lien over the
goods (s.41).
Delivery, acceptance and inspection of the goods
The SGA 1979 contains rules about how the contract is to be performed. In the absence of
an indication to the contrary, the place of delivery is the seller’s premises (s.29). When the
goods are delivered the buyer has a right to inspect the goods (s.34). Section 35 concerns
the rules relating to the acceptance of the goods. If the buyer accepts the goods then she
cannot reject these upon discovering a fault at a later date.
KEY CLAUSES
We shall now look at a number of important clauses that you would expect to find in a
contract for the sale of goods.
Force majeure clauses
A force majeure clause is intended to provide more protection than only relying on
frustration to discharge the contract. The parties can list a number of occurrences that will
amount to a force majeure event. This is wider than the narrow approach of frustration that
only applies if it is impossible, illegal to perform the contract, or if the frustrating event has
caused the contract to become something radically different from the one entered into (see
Davis Contractors v Fareham Urban DC [1956] AC 696). No party will be liable for non-
performance caused as a result of one of these events occurring. Unlike frustration, which
will discharge the contract, a force majeure event could allow for the contract to be
suspended until it is possible to complete the contractual obligations.
Entire agreement clause and non-reliance clause
At common law the parol evidence rule excludes any other alleged terms from the contract
where the contract is written. This ensures certainty. However, there are a number of
exceptions at common law, such as where the contract is partly oral and where there is a
collateral contract existing alongside the main contract. To protect the parties it is common
to include an entire agreement clause that states that the written contract is the entire
agreement between the parties. It is common to also include a non-reliance clause that
seeks to prevent a party from claiming that they relied upon any representations when
entering into the contract.
Third party rights and non-assignment
As we have seen in Chapter 3, the Contract (Rights of Third Parties) Act 1999 has created a
statutory exception to the common law doctrine of privity of contract. Many contracts
include a clause excluding any possible third party rights from being created. The parties
may wish to exclude the possibility of one party assigning its contractual obligations to a
third party.
Alternative Dispute Resolution
The parties may wish to include an Alternative Dispute Resolution (ADR) clause in their
contract. ADR is a means to resolving the dispute without going to court. There are a
number of different types of ADR such as mediation, negotiation, expert determination and
arbitration. Each of these different types has advantages and disadvantages.
INTERNATIONAL SALES CONTRACTS
In practice your business will want to conduct trade with companies based in different
jurisdictions. This is because we live in an increasingly globalised world. KAE may wish to
sell its grinding machines to a buyer based in the United States or South Korea. As we saw
above when we looked at which country’s law would govern the contract and which court
would have jurisdiction to hear a dispute, it can be difficult to find a law that both parties
can agree upon. English law and its courts have an excellent international reputation and
many parties based outside this jurisdiction choose to contract using English law.
Vienna Convention on Contracts for the International

Sale of Goods
In an international sales contract between KAE and a seller based overseas there is a
neutral sales law that could be used as this is known as the Vienna Convention on
Contracts for the International Sale of Goods (CISG). CISG is not comprehensive and you
would need to choose a law to govern the contract where CISG does not provide an
answer.
Trade terms
If KAE were to contract to sell 10,000 grinding machines to a seller based in Mexico and the
contract will be governed by English law, then the parties must ensure that they agree upon
inter alia who will deliver the goods to the port of shipment, pay the loading costs, arrange
space in the container ship, contract with the ship’s owners for carriage and insure the
goods. At common law there are a number of trade terms that can be used as shorthand to
assign the parties’ responsibilities. For example, the trade term f.o.b. in its classic meaning,
obliges the seller to deliver the goods to the port of shipment and pay the loading costs.
Beyond this, all other responsibilities are with the buyer. The International Chamber of
Commerce has developed its own trade terms known as INCOTERMS that are different to
those developed by the common law.
SUMMARY
• The Sale of Goods Act 1979 will imply a number of important stipulations as to
title, quality and description into a contract for the sale of goods.
• A contract will contain a number of important clauses that are required to give
effect to the parties’ intentions and to prevent future dispute and liability.
• A contract for the sale of goods will often have an international dimension and it is
important to consider the additional issues that will arise.
FURTHER READING
Adams, J. and MacQueen, H. Atiyah’s Sale of Goods, 12th edn (Pearson, 2010) – refer to this book
for a detailed coverage of domestic sales law and an overview of CISG and trade terms.
Bridge, M. (ed.) Benjamin’s Sale of Goods, 8th edn (Sweet & Maxwell, 2010) – this is the
authoritative guide to the Sale of Goods Act 1979.
Dobson, P. and Stokes, R. Commercial Law, 8th edn (Sweet & Maxwell, 2012) – this is an
accessible textbook and provides a clear approach to the SGA 1979.
Goode, R. and McKendrick, E. Goode on Commercial Law, 4th edn (Penguin, 2010) – refer to this
for an authoritative guide to domestic and international sales law.
Sealy, L. S. and Hooley, R. S. A. Commercial Law: Text, Cases, and Materials, 4th edn (Oxford
University Press, 2008) – this is a useful addition to the above texts with extracts of relevant
cases and academic opinion.
Chapter 5
Tort law
LEARNING OBJECTIVES
• understand the distinction between the obligations imposed by contract law and
tort law;
• appreciate how the law of torts affects businesses and how a business can be
vicariously liable for the acts or omissions of its employees;
• comprehend how liability will arise in the tort of negligence and which types of
loss will generally not be recoverable;
• understand how different torts protect a business’s property, its reputation and
the contracts that it enters into.
INTRODUCTION
In this chapter we will consider the impact of tort law or the law of torts on a business
(Figure 5.1). A tort is a civil wrong and the common law and statute impose duties on
individuals and businesses to avoid breaching a duty owed to another. Tort law is important
as a business will be vicariously liable for the acts and omissions of its employees and will
need to be aware that an employee who drives the company’s lorry negligently, or who
posts offensive comments about a rival business on his employer’s website could result in
the business being liable.
How is tort law different from contract law?
The difference between tort law and contract law is that in tort legal obligations arise
irrespective of whether there is a contract between the claimant and defendant. This
means that in contract law the parties will voluntarily contract and accept their obligations,
whereas in tort the law imposes obligations that will be owed to others regardless of
whether they have consented to them. That is not to say that the parties to a contract will
have complete freedom to determine the extent of their obligations, as the law has
restricted the freedom of contract by introducing rules on the validity of certain terms and
by introducing mandatory obligations for particular types of contracts. The law of tort has
Requirements needed to
establish liability
Negligence
When can you recover pure

economic loss?
Liability could arise where a

Private nuisance business makes excessive
noise or foul smells
Imposes liability on the

Occupiers’ liability
occupier of land
Tort law
Protects an individual’s or
Defamation
a business’s reputation
Protects goodwill in a
Passing off
business or product
Inducement to breach Protects the integrity of a

a contract contract
Where the product causes

Product liability damage to other goods or
personal injury
Protects the owner

Conversion
of chattels
Figure 5.1 Key torts covered in this chapter
developed to establish that a duty of care will be owed in different circumstances and
seeks to regulate our conduct by imposing an obligation to avoid causing others loss. You
will see how the different torts arise and how a business will need to understand first its
legal obligations and thus try to avoid liability, and second the protection that is afforded to
it by tort law.
In this chapter we will consider how the material covered will relate to a fictional business,
Temple, Strand & Holborn Ltd (TSH Ltd). TSH Ltd specialises in fitting out shops.
Tort law 65
Remedies
Unlike contract law the aim of damages in tort law is to put the claimant back in the
position she was in prior to the tort occurring. Damages are intended to be compensatory
in nature. There are different types of damages available, depending on the circumstances
of the claim. In addition to damages a claimant may seek the court to award an equitable
remedy such as an injunction. Injunctions are awarded at the court’s discretion and are
commonly sought in order to prevent a party from acting in a way that would amount to a
civil wrong. For example, we will see below that the defendant could be liable where he
passes off his goods as being associated with the claimants. An injunction could be
awarded to prevent the defendant from selling these goods.
Temporary pre-trial injunctions

A party can apply for an interlocutory injunction that is a temporary restraint to prevent
another party from acting in a certain way until the trial. The test for whether such an
injunction should be awarded by the court was established in American Cyanamid Co v
Ethicon Ltd (No 1) [1975] AC 396. In determining whether to award an interlocutory
injunction, the court should take into account whether damages would be adequate
compensation if the defendant were able to continue with the conduct that the claimant
had objected to. A breach of an injunction amounts to contempt of court and the defendant
could face a custodial sentence.
Burden of proof
It is important to note that the burden of proof is on the claimant and this requires the
claimant to establish that on the balance of probabilities the defendant caused her loss.
This standard is much lower than that which applies in criminal law, where the prosecution
must establish that the defendant is guilty beyond reasonable doubt.
Limitation Act 1980
The claimant’s ability to bring a claim in tort and contract is limited by the Limitation Act
1980. The claimant has six years from the date on which the tort occurred in order to bring
a claim (s.2). However, for personal injury, or death, or for damage caused by defective
products the time limit is three years (ss.11 and 11A). However, you should note that
where there is a latent defect, which is where the claimant does not know that the
defendant has been negligent, then the time limit will be three years from where the
claimant had knowledge that there was a defect (s.14A). Section 14A does not apply
where the defect causes personal injury. Section 14B imposes an overriding time limit of
fifteen years.
Defences
There are a number of defences that the defendant can rely upon. These include where the
claimant has consented to the risk, was committing an illegal act or was contributorily
negligent. Examples of contributory negligence include where the defendant’s negligent driving
injured the claimant, but at the time of the accident the claimant was not wearing his seatbelt.
In Froom v Butcher [1976] QB 286 the Court of Appeal held that as the injuries suffered would
have been reduced or would not have occurred had a seatbelt be worn, the damages awarded
should be reduced to reflect this. In Froom the damages were reduced by 20 per cent.
NEGLIGENCE
We will now look at the tort of negligence and explore the elements that must be
established in order for the defendant to be liable.
The tort of negligence requires a number of elements to be established in order for the
defendant to be liable. First, there must be a duty of care owed by the defendant to the
claimant, which the defendant has breached. Second, the defendant’s breach of that duty
of care must cause the claimant’s loss. This is the causation requirement. Finally, the loss,
which the claimant is attempting to recover, must not be too remote.
Establishing a duty of care
The key case that established a general duty of care was Donoghue v Stevenson [1932]
AC 562.
KEY CASE ANALYSIS: Donoghue v Stevenson [1932] AC 562
Background
The claimant’s friend bought her an opaque bottle of ginger beer from a shop. She
drank most of the ginger beer and found a decomposed snail at the bottom. The
claimant was shocked and suffered gastroenteritis.
The case established a general duty of care for negligence and enabled a consumer
to sue the manufacturer when the product supplied through a third party was
Tort law 67
defective. This avoids the problem of the consumer not being able to sue the
manufacturer in contract as there is no privity of contract between them. The House
of Lords held that everyone owed a duty of care to your neighbour. This meant that
the defendant must take reasonable steps to avoid an act or omission (a failure to
act) that the defendant could reasonably foresee would be likely to injure the
claimant. Lord Atkin stated:
The rule that you are to love your neighbour becomes in law, you must not
injure your neighbour; and the lawyer’s question, Who is my neighbour?
receives a restricted reply. You must take reasonable care to avoid acts or
omissions which you can reasonably foresee would be likely to injure your
neighbour. Who, then, in law is my neighbour? The answer seems to be –
persons who are so closely and directly affected by my 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. (at
p. 580)
Donoghue v Stevenson was a landmark case in the development of the modern tort of
negligence. Let us now consider how a duty of care might arise. Imagine that Mark drives
negligently and he omits to fix his broken brakes. In both instances he can reasonably
foresee that he could injure someone and cause damage to their property. The persons to
whom Mark owes a duty of care are those who would be closely and directly affected by
Mark’s negligent act of driving and the omission to repair the brakes, which he would
understand to be his fellow motorists and pedestrians. The question of what is reasonably
foreseeable is a question of fact and depends on the circumstances of the case.
In Caparo Industries plc v Dickman [1990] 2 AC 605, the House of Lords departed from the
test established in Anns v Merton LBC [1978] 1 AC 728. Lord Bridge in Caparo established
the modern test for determining whether a duty of care could arise in new situations. His
Lordship held that:
[I]n addition to the foreseeability of damage, necessary ingredients in any situation

giving rise to a duty of care are that there should exist between the party owing
the duty and the party to whom it is owed a relationship characterised by the law
as one of ‘proximity’ or ‘neighbourhood’ and that the situation should be one in
which the court considers it fair, just and reasonable that the law should impose a
duty of a given scope upon the one party for the benefit of the other. (at pp.
617–618)
As part of determining whether there is a duty of care the court must ask whether it is ‘fair,
just and reasonable’ to find that such a duty is owed. This goes beyond establishing factors
such as reasonable foreseeability and proximity.
Pure economic loss
Key definition: Pure economic loss
This is a type of loss that is not consequential to personal injury or damage to property.
It is purely concerned with having lost anticipated profits and as a general rule it is
not recoverable.
As a general rule there is no duty of care to avoid causing pure economic loss. This is
illustrated by the Court of Appeal’s decision in Spartan Steel & Alloys Ltd v Martin & Co
(Contractors) Ltd [1973] QB 27, where the court held that pure economic loss could not be
recoverable as it was too remote. In this case an electricity cable had been negligently cut
and this caused the claimant the following losses:
1 the metal, which was damaged as it was being processed at the time;
2 the loss of profits for that metal; and
3 loss of profits for the time that there was no power.
The first two losses were recoverable, even though the loss of profits for damaged metal
was an economic loss, as it was consequential to the actual damage caused. However, the
loss of profits during the time that production was halted was not recoverable as it was
pure economic loss and therefore was not foreseeable. The decision was doubted by the
House of Lords in Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520. Their Lordships held
that pure economic loss could be recovered where there was a sufficiently close
relationship, i.e. proximity, between the parties and the duty of care that was owed could
also cover non-foreseeable harm. However, the decision Junior Books has not always been
followed by subsequent cases and it is of mixed judicial authority. It is clear that economic
loss can be recovered if the loss is consequential to physical damage to property or it is
caused as a result of personal injury (see Leigh & Sullivan Ltd v Aliakmon Shipping Co Ltd
[1985] 2 AER 44).
Tort law 69
Tort of deceit
We will now look at when the claimant is permitted to recover for pure economic loss
where the loss has occurred as a result of the defendant being deceitful or fraudulent.
The requirements needed in order for the defendant to be liable in deceit were reiterated
in Derry v Peek (1889) 14 App Cas 337. Lord Herschell stated that the claimant must prove
that the defendant was fraudulent. His Lordship observed that ‘fraud is proved when it is
shewn [shown] that a false representation has been made (1) knowingly, or (2) without
belief in its truth, or (3) recklessly, careless whether it be true or false’ (at p. 374). The
defendant will be liable where it can be shown that he had no real honest belief in the truth
of the statement. The defendant’s motive is irrelevant. It is unsurprisingly very difficult to
establish liability under the tort of deceit.
?
TSH Ltd holds an open day at its Bristol showroom to attract new clients. Damian
owns House of Greeting Cards in Bath and asks one of TSH Ltd’s directors why
he should choose TSH Ltd to renovate his shop.
Damian is informed that TSH Ltd has a 100 per cent customer satisfaction rate. Based
on the information that Damian has told him about his shop, the director informs Damian
that the work should take no more than two weeks to complete. Damian is very
impressed and enters into a contract with TSH Ltd. Later on he is annoyed to discover
that the work took two months to complete and cost him an additional six weeks in
lost sales. He has also discovered that TSH Ltd only has a 50 per cent customer
satisfaction rate.
Advise Damian as to whether he can recover his loss of profits.
Negligent misstatement
The House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 held
that a duty of care could be owed to avoid causing pure economic loss by making a
negligent misstatement.
KEY CASE ANALYSIS: Hedley Byrne & Co Ltd v Heller & Partners
Ltd [1964] AC 465
Background
The claimant wished to place an order with a company. The claimant was personally
liable for the orders placed and so asked the defendant, who was its banker, to
make an inquiry into the company’s finances. The defendant informed the claimant
that the company’s finances were fine. However, the defendant had included a
disclaimer to exclude liability based on the advice that it had given the claimant.
The information was incorrect.
The House of Lords held that, where the defendant had made a negligent
misstatement, a duty of care was owed to avoid causing the claimant pure economic
loss. The defendant would be liable where he has made a negligent misstatement
that could have been made honestly; he had been asked by the claimant to give
advice or to provide specific information because of his special skills and the
claimant actually had relied on the defendant’s skill and judgment. The defendant
must know or should have known that his advice would be relied upon. Importantly,
while the burden of proof is still on the claimant, she does not need to establish that
the defendant was fraudulent. Rather, she only needs to establish that the advice
was given negligently.
However, in Hedley Byrne the defendant was not liable, despite a duty of care being
owed, because the disclaimer prevented the defendant from being liable. This
exclusion clause would now have to satisfy the requirement as to reasonableness
under the Unfair Contract Terms Act 1977.
The assumption of responsibility by the maker of the written or oral statement is an

important requirement in establishing liability for a negligent misstatement. In IFE Fund SA v
Goldman Sachs International [2007] EWCA Civ 811 Waller LJ held that: ‘The foundation for
liability for negligent misstatements demonstrates that where the terms on which someone
is prepared to give advice or make a statement negatives any assumption of responsibility,
no duty of care will be owed’ (at [28]). Nonetheless, the law can impose a duty if this can be
established on the facts. The existence of a duty of care can be excluded by the parties’
contract (see Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145).
The advice must be given for a specific purpose and to an intended recipient. An example
of when a duty of care will not arise was Caparo Industries plc v Dickman [1990] 2 AC 605.
Tort law 71
KEY CASE ANALYSIS: Caparo Industries plc v Dickman [1990] 2

AC 605
Background
In Caparo Industries plc v Dickman [1990] 2 AC 605 the issue was whether a duty of
care was owed for a negligent misstatement. The auditor had been instructed by
company A to carry out a report on A’s accounts. The report was negligent. The
issue was whether Caparo Industries plc, the company that subsequently took over
company A, could sue the auditors.
The House of Lords held that liability for economic loss caused by a negligent
misstatement would arise where a person makes a statement and communicates it
to an intended recipient for a specific purpose, which was the reason that the maker
understood her advice was given for. The recipient must have relied on the
statement and have suffered a detriment. It was held that no duty of care was owed
as the auditor had not intended or known that Caparo Industries plc would rely on its
report when considering whether to take over company A.
Breach of duty
Not only must there be a duty of care but the defendant must have breached this duty. His
conduct must fall below the standard expected from the reasonable person.
Causation
The claimant must prove that the defendant caused her loss. In Barnett v Chelsea and
Kensington Hospital Management [1969] 1 QB 428, one of the issues to be determined was
whether the defendant had caused the death of the claimant’s husband. The claimant’s
husband had turned up at a hospital and informed the hospital that he was unwell. He was
informed to go home and to see his own doctor in the morning. Unfortunately he died. The
question was whether he would have died had he been treated that evening. The claim
failed because it could not be proved that but for being turned away from the hospital he
would not have died. We can see that for factual causation the but for test provides a way
for the courts to determine whether the defendant’s act or omission actually caused the
claimant’s loss.
?
TSH Ltd is fitting out a shop in central London. One of TSH Ltd’s labourers is
bringing back coffees for his colleagues from a local café. As he is too busy
concentrating on not spilling the coffee, he walks into TSH Ltd’s scaffolding tower.
The scaffolding tower collapses and blocks the road. Unfortunately, it damages three
cars and shatters the windows of an upmarket tailoring shop, which causes shards of
glass to fly everywhere and results in two of its employees suffering minor injuries.
The police arrive five minutes later and decide to close the road for five hours. Upon
being informed, TSH Ltd’s managing director is grateful that the company took out
insurance to cover this type of event. He immediately telephones the insurers and is
shocked to be informed that the insurance policy he took out contains a number of
exemptions and may prove insufficient. He is furious as he read an article in Shop Fitters
Weekly that advised that this particular insurance policy covers all types of losses
imaginable.
Discuss the above scenario in light of the liability that may arise in the tort of negligence.
Remoteness
The damages sought by the claimant must not be too remote. In Overseas Tankship (UK)
Ltd v Miller Steamship Co Pty Ltd (The Wagon Mound) [1967] 1 AC 617, the Privy Council
held that the risk of damage was not foreseeable and therefore the damages were too
remote. In that case, due to the ship’s engineer’s negligence, oil had spilled into Sydney
harbour and caused a fire. It is not enough that an event can be reasonably foreseen; the
personal injury caused must itself be within the contemplation of a reasonable man (see
Bolton v Stone [1951] AC 850).
Obvious danger
In Tomlinson v Congleton BC [2004] 1 A.C. 46, the House of Lords held that where the risk
was clear to the claimant as there were clear warning signs that he ignored, then the
defendant would not have breached the duty of care owed to the claimant as it was
reasonable to expect the claimant to have taken steps to avoid the danger.
Tort law 73
?
TSH Ltd uses special clamps to attach its scaffold to the buildings it is working
on. The clamps are over 15 years old and Fatima, TSH Ltd’s area manager, is
warned that there could be a risk that, as the clamps are old, they might damage
the exterior of the building to which they are attached. Fatima does not think that the
possible risk justifies the cost of replacing the clamps. Unfortunately, one afternoon
Fatima is contacted by a colleague, who informs her that the clamps have caused the
entire façade of a building to collapse.
Discuss TSH Ltd’s possible liability in the tort of negligence.
TRESPASS TO THE PERSON
There can be liability in tort where a person has been falsely imprisoned, assaulted or
suffers a battery. There is a crossover with the criminal law here. A business may face
liability for trespass to the person where one of its employees physically assaults a
customer. This is because the business as the employer could be vicariously liable.
PRIVATE NUISANCE
Key definition: Private nuisance
Liability arises where the defendant has unlawfully interfered with the claimant’s
enjoyment of her land.
A business could be liable in the tort of nuisance if it interferes with the claimant’s
enjoyment of his land. The claimant must have a right in the land (see Hunter v Canary
Wharf Ltd [1997] AC 655 and Newcastle-under-Lyme Corporation v Wolstanton Ltd [1947]
Ch 92). The claimant can sue for private nuisance where his enjoyment of the land is
interfered with due to the defendant’s unlawful interference. In order to prevent this
interference, the claimant may ask the court to grant an injunction. Whether the claimant
succeeds in establishing a cause of action for actionable private nuisance will depend on
many factors. In Sturges v Bridgman (1879) 11 Ch D 852, the Court of Appeal held that
whether some activity amounted to nuisance would depend on the location in which it took
place. For businesses this is important, as a premise such as a factory or storage facility
may cause frequent noise and if there is residential housing nearby there could be a risk
that one of the residents will ultimately commence legal action. Other factors include the
extent of and the duration of the alleged nuisance. The court will have to consider the
reasonableness of the defendant’s interference and the sensitivity of the claimant. The
court will look at whether the claimant’s enjoyment of the land relates to an ordinary use of
the land, or if it is so sensitive that it will not amount to an actionable unlawful interference
(see Robinson v Kilvert (1889) 41 Ch D 88).
Public interest
The court, in determining whether to grant an injunction to prevent the activity complained
of from taking place, must weigh up the loss of enjoyment suffered by the claimant against
the public interest in permitting the activity to take place.
KEY CASE ANALYSIS: Miller v Jackson [1977] QB 966
Background
In Miller v Jackson the claimant was unable to use their garden when cricket was
being played on the adjacent green due to the risk of cricket balls falling into their
garden. Cricket had been played on the green since the beginning of the twentieth
century. The claimant had a house built adjacent to the green and the defendant had
responded by building fences to try and prevent, albeit unsuccessfully, the cricket
balls from landing on the claimant’s property.
The Court of Appeal held that the defendant’s activity amounted to nuisance.
However, it refused to grant an injunction to prevent cricket being played next to the
claimant’s property as it was held to be beneficial to the local youth.
In Miller v Jackson, Lord Denning MR disagreed with the majority that there was a nuisance:
For over 70 years the game of cricket has been played on this ground to the great
benefit of the community as a whole, and to the injury of none. No one could
Tort law 75
suggest that it was a nuisance to the neighbouring owners simply because an

enthusiastic batsman occasionally hit a ball out of the ground for six to the
approval of the admiring onlookers. Then I would ask: Does it suddenly become a
nuisance because one of the neighbours chooses to build a house on the very
edge of the ground – in such a position that it may well be struck by the ball on
the rare occasion when there is a hit for six? To my mind the answer is plainly No.
The building of the house does not convert the playing of cricket into a nuisance
when it was not so before.
The majority disagreed with Lord Denning MR and held that it was no defence for an action
for nuisance for the defendant to argue that the claimant had chosen to move to an area
where the activity, which the claimant regarded as a nuisance, had always taken place.
?
Do you prefer the approach of Lord Denning or the majority in Miller v Jackson
as to whether the defendant was liable for nuisance?
DEFAMATION
The law protects the reputation of individuals and businesses. In South Hetton Coal
Company Ltd v North-Eastern News Association Ltd [1894] 1 QB 133, a company was able
to recover damages where its reputation was injured by the defendant’s libel. Libel refers to
written statements and slander to oral statements that injure the claimant’s reputation.
Section 1(1) of the Defamation Act 2013 states ‘A statement is not defamatory unless its
publication has caused or is likely to cause serious harm to the reputation of the claimant’.
Importantly, s.1(2) requires a business to establish that the published statement ‘is likely to
cause the body serious financial loss’. There are a number of defences available to the
defendant, including the truth (s.2) and honest opinion (s.3).
OCCUPIERS’ LIABILITY
Imagine that TSH Ltd own the freehold of its warehouse in Southampton and lease an office
in Rochester. TSH Ltd would be the occupier of both premises and would be liable under
the Occupiers’ Liability Act 1957 to all visitors to its property. In Wheat v E Lacon & Co Ltd
[1966] AC 552, the House of Lords provided a definition of who was an occupier. Lord
Denning held that an occupier, ‘was simply a convenient word to denote a person who had
a sufficient degree of control over premises to put him under a duty of care towards those
who came lawfully onto the premises’ (p. 577). Therefore, as TSH Ltd would have a
sufficient degree of control over both premises it would be regarded as an occupier. The
duty imposed by the Act is that of the ‘common law duty of care’ (s.2(1)). The extent of the
duty owed depends on age of the visitors and special risks that visitors such as tradesmen
would guard against (s.2(3)). The Occupiers Liability Act 1984 extends the liability of the
occupier to include people who enter onto the occupier’s land without permission.
PASSING OFF
Key definition: Passing off
A tort designed to protect the goodwill or reputation in goods that are manufactured
or services that are provided by a business.
The tort of passing off protects the intellectual property in a business’s name and the
products it manufacturers. In Reckitt & Colman Products Ltd v Borden Inc (No 3) [1990]
1 WLR 491 Lord Oliver reiterated the requirements required for there to be an actionable
passing off. The claimant is required to first, ‘establish a goodwill or reputation attached to
the goods or services which he supplies in the mind of the purchasing public’. This requires
that the claimant prove that the product’s distinctive feature generates goodwill, which
equates to profits. Second, the claimant must ‘demonstrate a misrepresentation by the
defendant to the public (whether or not intentional) leading or likely to lead the public to
believe that goods or services offered by him are the goods or services of the plaintiff’.
A substantial number of the public must be confused and believe that the goods offered by
the defendant are associated with those offered by the claimant. In United Biscuits (UK) Ltd
v Asda Stores Ltd [1997] RPC 513, the supermarket chain Asda was selling chocolate
biscuits and the packaging featured a puffin, which was similar to the ‘Penguin’ chocolate
biscuit product manufactured by United Biscuits. Robert-Walker J was clear that, despite
most customers realising that the products were different, ‘many would believe that the
two must be made by the same manufacturer’. The final requirement is that the claimant
must demonstrate that:
he suffers or . . . is likely to suffer damage by reason of the erroneous belief

engendered by the defendant’s misrepresentation that the source of the defendant’s
goods or services is the same as the source of those offered by the plaintiff.
Tort law 77
The claimant has the burden of proof to establish that the defendant is liable. However, the
tort of passing off is actionable, regardless of whether a distinctive feature of the product or
its name is registered as a trade mark under the Trade Marks Act 1994.
INDUCING A BREACH OF CONTRACT
Key definition: Inducing a breach of contract
This is where the defendant knowingly induces another party to breach its contract
with the claimant.
Imagine that A contracts with B. If B breaches the contract by refusing to perform her
contractual obligations, then A can sue B for breach of contract. However, what if it was C
who induces B to breach the contract? In this case A can sue C in tort for inducing the
breach of contract. We can see that here tort is protecting the integrity of the contract
between A and B. C may wish to induce B to breach a contract as he is seeking to obtain B’s
services or products. The tort of inducing a breach of contract was established in Lumley v
Gye (1853) 2 E & B 216, where the court held that it was wrong that the person inducing the
breach should escape liability. The defendant must intend to induce a breach and there is no
need for the claimant to demonstrate that the defendant intended to cause her any damage.
The tort was considered by the House of Lords in OBG Ltd v Allan [2008] 1 AC 1, where Lord
Hoffmann reiterated the requirements needed for an actionable tort to occur:
To be liable for inducing breach of contract, you must know that you are inducing
a breach of contract. It is not enough that you know that you are procuring an act
which, as a matter of law or construction of the contract, is a breach. You must
actually realize that it will have this effect. Nor does it matter that you ought
reasonably to have done so. (at [39])
The tort was treated as one of accessorial liability. You must intend to induce a breach.
However, no liability will attach if the breach is ‘merely a foreseeable consequence’ (at [43]).
The intention to induce a breach did not have to be motivated by malice.
This commonly arises where trade unions call for industrial action which means that trade
union members breach their employment contracts by going out on strike. The Trade Union
and Labour Relations (Consolidation) Act 1992 provides statutory protection for trade
unions from being sued for inducing a breach of contract.
DEFECTIVE PRODUCT LIABILITY
The liability of a manufacturer of a product to the end user of the product was established
in Donoghue v Stevenson. This permits the recovery of damages in tort regardless of
whether the claimant had a contractual relationship with the defendant. The manufacturer
will not be liable where the loss caused as a result of the product being defective is only
pure economic loss. In Murphy v Brentwood DC [1991] 1 AC 398 Lord Keith stated that:
[T]here is no liability in tort upon a manufacturer towards the purchaser from a

retailer of an article which turns out to be useless or valueless through defects
due to careless manufacture. The loss is economic. It is difficult to draw a
distinction in principle between an article which is useless or valueless and one
which suffers from a defect which would render it dangerous in use but which is
discovered by the purchaser in time to avert any possibility of injury. (p. 465)
The decision in Murphy concerned whether the local authority was liable for negligently
permitting the construction of houses on land that had been unsuitable and had caused
subsidence. The House of Lords ruled that there was no liability as the claimants had
suffered only pure economic loss. The manufacturer will be liable if its product causes
physical damage or personal injury. In D & F Estates v Church Commissioners [1989] AC
177, Lord Bridge (at p. 478) discussed when liability might arise if a central heating boiler
was defective. It is clear that the product, as a result of being defective, must damage other
property. For example, if a boiler explodes and causes a fire, then any damage occurred to
the building and its contents can be recovered. A defective product such as a house that
suffers from subsidence will give rise to no liability if it just causes damage to itself.
Consumers have enhanced protection under the Consumer Protection Act 1987. The
person who supplied the goods or the producer will not be liable where the product is
defective and this causes only the product itself to be damaged (s.5(2)).
TORT OF CONVERSION
Key definition: Conversion
Occurs when there has been the use of a chattel by someone who does not own it,
or does not have permission from its owner to use it. The use will be for an act
inconsistent with the rights of the chattel’s owner.
Tort law 79
Lord Hoffmann in OBG Ltd v Allan [2008] 1 AC 1 observed that:
Anyone who converts a chattel, that is to say, does an act inconsistent with the
rights of the owner, however innocent he may be, is liable for the loss caused
which, if the chattel has not been recovered by the owner, will usually be the
value of the goods. (at [95])
The tort is one of strict liability. It is no defence to argue that you are an innocent purchaser
who purchased the chattel, i.e. personal property, in good faith (Fowler v Hollins (1872) LR 7
QB). The law protects the original owner of the property. We can see how the tort of
conversions works with reference to the decision in Chapter 4 on s.12 of the Sale of Goods
Act 1979. Liability for the conversion of goods has been put onto a statutory footing under
the Torts (Interference with Goods) Act 1977.
?
TSH Ltd is looking to recruit a new managing director and its board of directors
decides to approach Liam Smith, the managing director of a rival company and
ask him if he would join TSH Ltd as its new managing director. Liam informs the
board of directors that contractually he must give his employer at least six months’
notice and therefore will not be able to join TSH Ltd before the six months have expired.
The board asks him to join TSH Ltd with immediate effect and to avoid giving any notice.
Liam agrees and picks up his work laptop and leaves to join TSH Ltd. Once at TSH Ltd’s
premises he opens the laptop and sends an email to his employer saying that he is
resigning with immediate effect. Liam then starts working for TSH Ltd.
Discuss whether either TSH Ltd or Liam Smith is liable in tort?
SUMMARY
• If the requirements for the tort of negligent misstatement are met, then a business
could be liable for causing pure economic loss.
• A business will be liable in tort if it induces the breach of a contract, interferes
with goods owned by someone else, passes its goods or services off as being
associated with another business, causes a private nuisance or where someone is
injured at its premises.
• An employer is vicariously liable for the torts committed by its employees.
FURTHER READING
Buxton, R. ‘How the common law gets made: Hedley Byrne and other cautionary tales’ (2009) 125
Law Quarterly Review 60 – an interesting critique of how the common law has been
developed by judges.
Deakin, S., Johnston, A. and Markesinis, B. Markesinis and Deakin’s Tort Law, 7th edn (Oxford
University Press, 2013) – refer to this textbook for a more in-depth discussion of the material
covered in this chapter.
Hartshorne, J. ‘Contemporary approaches towards pure economic loss in the law of negligence’
(2014) 5 Journal of Business Law 425 – refer to this article for a discussion on the ability to
recover pure economic loss.
Monaghan, C. ‘When does imitation become passing off?’ (2010) 31(6) The Company Lawyer 189
– refer to this short article for more detail on the tort of passing off.
Mullis, A. and Oliphant, K. Torts, 4th edn (Palgrave, 2011) – this is a clear and accessible textbook
on tort law.
Chapter 6
The law of agency
LEARNING OBJECTIVES
• appreciate the role of agency in facilitating business transactions;

• define agency and the different ways that an agency relationship can arise;
• understand the different types of authority that an agent may have;
• comprehend the difference between the disclosed and undisclosed principal; and
• appreciate the rights and duties of the agent.
INTRODUCTION
In this chapter we will explore what is meant by an agency and who are the parties in an
agency relationship. We will look at how an agency is created and the types of authority
that an agent can have. Surprisingly, an agent may exceed the actual authority given to him
by the principal, the person who the agent is acting for, and therefore, the courts could still
hold that the agent does have the authority to enter into a contract. This is non-consensual
authority and we shall explore this as well as the consequences for the principal and agent
where the agent exceeds his actual authority. We will look at the rights and duties of the
agent and the consequences of the agent breaching the duties that he owes to the
principal.
WHAT IS MEANT BY AGENCY?
An agency is where an individual or business, known as the agent, will work on behalf of
another person or business, known as the principal and will represent the principal when
dealing with third parties. There are many different types of agents, and one of the most
common are estate agents, who advertise the principal’s property for sale and will
negotiate on behalf of their principal with third parties. Marketing agents will work for the
principal and will establish a relationship with a third party, which will enable the principal
to enter into a contract with the third party. However, a sales agent will enter into contracts
with a third party on behalf of the principal. We can see that the agent is an essential part
of business, as the principal will need individuals to act on its behalf. Academics have
attempted to define agency and Roderick Munday has noted that ‘[t]he concept of agency
is notoriously slippery and difficult to define’, which is caused by the many different types
of agency and the indiscriminate use of agency ‘to describe individual and entities whose
activities . . . are not actually governed by the law of agency’ (Agency: Law and Principles
(Oxford University Press, 2010), at [1.02]).
We can see that normally the principal and the agent will consensually enter into the
agency relationship. This will be the case where the board of directors acting on behalf of
the company (which is the principal) will in accordance to the articles of association appoint
one of the directors to be the managing director. However, as we shall see, there will be
times where the agency is non-consensual, such as where the agent exceeds the authority
given to him by the principal.
An agent is a fiduciary and owes the principal fiduciary duties, as well as common law and
contractual duties. The fact that the agent is a fiduciary emphasises the importance of the
agent in his ability to enter into contracts with third parties which can alter the principal’s
legal position. Put simply, if you appoint an agent to act on your behalf, and even if you do
not formally appoint them in that capacity, they could contract without authority to sell your
property or compel you to purchase property from the third party. Potentially, the principal
could be forced by the court to honour the contract.
THE PARTIES TO AN AGENCY CONTRACT
Key definition: Principal
The party for whom the agent acts. The agent will owe duties to the principal.
Key definition: Agent
The party who acts on behalf of the principal. The agent can be vested with the authority
to enter into contracts on the principal’s behalf.
Key definition: Third party
The party who has dealings with the agent and who the agent will contract with on
behalf of the principal.
The law of agency 83
We shall see that there are three different relationships. First, we have the agency
relationship between the principal and the agent. Here, there could be a contract between
the agent and the principal, or indeed the agent’s services could be provided free of
charge. Second, there will be a relationship between the agent and the third party. We shall
see that where the principal is disclosed (where the third party knows that there is a
principal) then the agent will not be a party to the contract and will only facilitate the
contract between the principal and third party. Finally, there is the contractual relationship
between the principal and the third party.
THE FORMATION OF AN AGENCY RELATIONSHIP AND

THE AUTHORITY OF THE AGENT
The agency relationship can be created in a number of ways. The principal could expressly
appoint the agent or the agency could be implied from the fact that it is usual for a person
in the agent’s position to have the authority to enter into such a contract. In such cases the
principal will have given his agent the actual authority to enter into that particular contract,
based either on the express appointment and instructions given, or impliedly through the
appointment of an individual to a particular position or task. Conversely, an agency can
arise without the consent of the principal. We shall explore these non-consensual ways that
create an agency and the agent’s authority: apparent authority, usual authority and agency
of necessity (Figure 6.1).
Apparent
authority
Implied
Usual
actual
authority
authority
Creating an
Express
agency and Agency of
actual
the agent’s necessity
authority
authority
Figure 6.1 The different ways that an agent can have authority
Key definition: Express actual authority
Where an agent acts within the scope of the principal’s express instructions.
Key definition: Implied actual authority
Where an agent acts in accordance with what is required to achieve the task given to
him by the principal, or the agent acts within the scope of what is usual for someone
in his position to do.
Key definition: Apparent authority
A form of estoppel based on whether the third party was led by the principal to believe
that the agent had authority.
Key definition: Usual authority
A controversial form of authority based solely on what would be usual for an agent
occupying the agent’s position to do.
Key definition: Agency of necessity
Where the ‘agent’ is forced to take steps to look after the principal’s property or to
dispose of the principal’s property in order to protect the principal’s interest.
EXPRESS ACTUAL AUTHORITY
According to Lord Denning MR in Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, the

agent’s authority, ‘is express when it is given by express words, such as when a board of
directors pass a resolution which authorises two of their number to sign cheques’ (at
p. 583). Therefore, if we were to appoint Josh as our agent and authorise him to conclude
contracts up to the value of £12,000 on our behalf, then when Josh enters into such
contracts he will be acting within the scope of his express actual authority. As Josh’s
principal we are bound to honour the contract.
Ambiguous instructions?
In Ireland v Livingston (1871–72) LR 5 HL 395 the House of Lords held that where the
principal’s instructions to the agent were ambiguous, the agent, so long as he acted
honestly, would be held to be acting within the scope of his express actual authority. Devlin
J in Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, agreed with the reasoning given
in Ireland v Livingston, that where the principal gives ambiguous instructions to the agent,
and the ‘agent acts upon [these] ambiguous instructions he is not in default if he can show
that he adopted what was a reasonable meaning’. It was not open to challenge the agent’s
interpretation of the document as a whole. However, if it was clear that the instructions are
ambiguous, then an agent would be expected to seek clarification from the principal.
Robert Goff LJ in European Asian Bank AG v Punjab & Sind Bank (No 2) [1983] 1 WLR 642
observed:
If instructions are given to an agent, it is understandable that he should expect to

act on those instructions without more; but if, for example, the ambiguity is patent
on the face of the document, it may well be right (especially with the facilities of
modern communications available to him) to have his instructions clarified by his
principal, if time permits, before acting upon them.
This approach was followed in Cooper v National Westminster Bank plc [2009] EWHC 3035
(QB), where it was held that the bank should have sought clarification from its client, and
that proceeding without clarification was not reasonable in the circumstances.
IMPLIED ACTUAL AUTHORITY
If the agent has implied authority then he will be able to enter into contracts with a third
party and the principal will be bound to honour these contracts. Implied actual authority
can arise in a number of ways as was illustrated by the decision in Hely-Hutchinson v
Brayhead Ltd [1968] 1 QB 549.
KEY CASE ANALYSIS: Hely-Hutchinson v Brayhead Ltd [1968] 1

QB 549
Background
Mr Richards was the chairman of the defendant company (the principal). The
defendant wished to purchase the claimant’s company. In order to keep the
claimant’s company from failing, the chairman promised in two separate letters that
the defendant would indemnify the claimant for any personal guarantees that he
gave to a third party. There was an offer of a £10,000 loan to cover the claimant’s
liability for the personal guarantee. Unfortunately, the claimant’s business failed and
the claimant was required to honour the personal guarantee. The claimant expected
to be indemnified by the defendant. The defendant refused and argued that the
claimant did not have the authority to give such an undertaking on behalf of the
defendant. The defendant company’s articles of association prohibited the chairman
from acting in this way without the board’s approval.
The Court of Appeal held that the chairman of the defendant had the implied actual
authority to promise to indemnify the claimant. Lord Denning MR held that:
[actual authority] is implied when it is inferred from the conduct of the

parties and the circumstances of the case, such as when the board of
directors appoint one of their number to be managing director. They
thereby impliedly authorise him to do all such things as fall within the usual
scope of that office. (at p. 583)
Lord Denning MR held that the chairman did not have the express actual authority to
offer the indemnity; this was because he was not authorised to do so by the
defendant’s articles of association. Neither did the chairman have the implied actual
authority as a result of his position. This was because it was not usual for a chairman
to make such an undertaking. However, the chairman had implied authority due to
the fact that the defendant had permitted him to act as de facto managing director
and had accepted the decisions that he had made in the past without requiring the
prior authorisation of the board.
We can see from Hely-Hutchinson that authority can be implied where it is usual that
someone occupying a particular position would be able to enter into certain types of
contracts or to give certain undertakings. In Hely-Hutchinson, the chairman’s authority did
not emanate from his position, because it was not usual for a chairman to give such an
undertaking. However, circumstances could suggest that a person would have such
authority based on being allowed to make certain types of decisions in the past or
unofficially occupying a position (as occurred in Hely-Hutchinson). We can see that the
other directors had acquiesced in permitting the chairman to make unilateral decisions, so
the chairman was acting within the scope of this implied actual authority. In Industrie
Chimiche Italia Centrale and Cerealfin SA v Alexander G Tsavliris & Sons Maritime Co (The
Choko Star) [1990] 1 Lloyd’s Rep 516 the Court of Appeal was clear that ‘implied actual
authority of an agent extends to all subordinate acts which are necessary or ordinarily
incidental to the exercise of his express authority.’ This means that if we asked Phillipa to
sell our house ‘Greenacre’, then Phillipa would have the implied actual authority to do
everything that is incidental to achieve this. Therefore, Phillipa would be authorised to
contract with estate agents, gardeners, removers and solicitors. We would be bound
to honour these contracts, notwithstanding the absence of express authorisation. In
Rosenbaum v Belson [1900] 2 Ch 267 the court held that an agreement instructed to sell a
number of properties on behalf of the principal would have the authority to enter into a
contract of sale without the express authority of the principal.
The limits of implied actual authority
If, however, there is a prohibition on what the agent may do and the agent exceeds this,
then the agent cannot have implied actual authority. In The Unique Mariner [1978] 1 Lloyd’s
Rep 438, the court considered whether the master of a vessel could have the implied
authority to bind the shipowner, and Brandon J observed that ‘the implied actual authority
of a master, unless restricted by such instructions lawfully given, extends to doing whatever
is incidental to, or necessary for, the successful prosecution of the voyage and the safety
and preservation of the ship.’ Thus, while the scope of the ship’s master, in his capacity as
an agent extends to everything that is necessary and incidental to fulfilling what is expected
from him, there are still limitations. The limitation is the existence of a prohibition that
precluded him from acting in a particular way.
APPARENT AUTHORITY
Apparent authority, or ostensible authority, is based on the appearance of authority. As

Lord Denning MR observed in Hely-Hutchinson ‘apparent authority is the authority of an
agent as it appears to others. It often coincides with actual authority (at p. 583)’. What does
this mean? The answer is that apparent authority is a form of estoppel that operates to
protect the third party. To illustrate how it works it is worth considering the following
example:
• Rajah (the agent) works for Sandra (the principal) and Rajah has been informed
that he does not have the authority to enter into contracts over £300 with the
express approval of Sandra. If Rajah enters into a contract with Peter (the third
party) which is over £300 and has not sought Sandra’s permission, then Rajah is
acting outside the scope of his express actual and implied actual authority. If Peter
wished to enforce the contract against Sandra then she would argue that Rajah
lacked authority and she would not be bound to honour the contract.
• However, if it appeared reasonable for Peter to believe that Rajah had the
authority to enter into the contract, then apparent authority estops (prevents)
Sandra from denying the contract. The question to determine is whether it was
reasonable for the third party to believe that the agent had the authority to enter
into contracts of that particular kind. We can see that apparent authority is based
on what the third party reasonably believed and not what was said and done
between the agent and the principal. If the agent did have the apparent authority
and the principal does not fulfil the contractual obligations then the principal will
be liable for breach of contract.
We can see that in the example above Rajah had:
• the actual authority to enter into contracts below £300; and

• the apparent authority to enter into a contract with Peter which was in excess
of £300.
Sandra will argue that, while she consented to give Rajah the authority for the former, she
did not consent for the latter. Apparent authority operates regardless of the consent of the
principal.
Diplock LJ, in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480, considered the relationship between actual and apparent authority and observed that
‘[they] are quite independent of one another. Generally they coexist and coincide, but either
may exist without the other and their respective scopes may be different.’
In Freeman and Lockyer, Diplock LJ defined apparent authority as:
[A] legal relationship between the principal and the contractor created by a
representation, made by the principal to the contractor, intended to be and in fact
acted upon by the contractor, that the agent has authority to enter on behalf of
the principal into a contract of a kind within the scope of the ‘apparent’ authority,
so as to render the principal liable to perform any obligations imposed upon him
by such contract. To the relationship so created the agent is a stranger. (at p. 502)
We shall see that apparent authority is created by the principal’s representation to the third
party. The agent does not create apparent authority and he is indeed a stranger to the
principal–third party relationship.
The requirements needed for apparent authority to

exist
The requirements that are needed for the agent to have apparent authority have been
established in a number of cases.
KEY CASE ANALYSIS: Freeman and Lockyer v Buckhurst Park

Properties (Mangal) Ltd [1964] 2 QB 480
Background
Mr Kapoor and another individual formed a company (Buckhurst Park Properties) to
purchase and resell land. Both men were appointed as directors. Mr Kapoor had
agreed to pay for all the running expenses and the company in turn would reimburse
him. Mr Kapoor entered into a contract with the claimant, Freeman and Lockyer, a
firm of architects. The claimant sought repayment for their services from the
defendant, Buckhurst Park Properties. The defendant denied that they owed the
claimant any money as the contract had been entered into by Mr Kapoor personally
and not on behalf of the company.
The Court of Appeal held that Mr Kapoor had apparent authority because although
he was never officially appointed as managing director, he had been allowed by the
defendant to act as if he were the managing director. It had appeared to the claimant
that Mr Kapoor had been properly appointed as the managing director, and they
were not required to find out before contracting with him whether he had actually
been appointed to that position. Therefore, the defendant was liable.
Pearson LJ observed that:
In this case the company has known of and acquiesced in the agent
professing to act on its behalf, and thereby impliedly representing that he
has the company’s authority to do so. The company is considered to have
made the representation, or caused it to be made, or at any rate to be
responsible for it. Accordingly, as against the other contracting party, who
has altered his position in reliance on the representation, the company is
estopped from denying the truth of the representation. (p. 498)
His Lordship held that a person relying on apparent authority is not required to have:
[O]btained and studied the company’s articles of association and the

incorporated provisions of Table A and made sure that the directors had
power to delegate to a single director. Such a requirement would be an
absurd example of legal pettifoggery. (p. 500)
Diplock LJ considered the requirements that were needed for the court to find that
the agent had apparent authority and therefore could enter into a contract without
the consent of the principal.
(1) that a representation that the agent had authority to enter on behalf of the
company into a contract of the kind sought to be enforced was made to the
contractor;
(2) that such representation was made by a person or persons who had
‘actual’ authority to manage the business of the company either generally
or in respect of those matters to which the contract relates;
(3) that he (the contractor) was induced by such representation to enter into
the contract, that is, that he in fact relied upon it (per Diplock LJ at p. 506).
1 There needs to be a representation to the third party

There needs to be a representation from the principal to the third party that the agent has
authority. The representation cannot come from the agent, as Steyn LJ observed in First
Energy (UK) Ltd: ‘[o]ur law does not recognise, in the context of apparent authority, the idea
of a self-authorising agent.’
The question is how can the representation arise? The representation can be express or
implied. A representation can arise when someone is appointed to a position that usually
has the authority to enter into particular types of contracts. In Armagas Ltd v Mundogas SA,
Lord Keith observed that ‘when the principal has placed the agent in a position which in the
outside world is generally regarded as carrying authority to enter into transactions of the
kind in question’ (at 777 B). However, the third party will not be able to establish that there
was a representation where the agent was in a position that did not usually have the
authority to enter into a transaction of that kind (see Rama Corporation Ltd v Proved Tin &
General Investments Ltd [1952] 2 QB 147 and British Bank of the Middle East v Sun Life
Assurance Co of Canada (UK) [1983] 2 Lloyd’s Rep 9). The decision in First Energy (UK) Ltd v
Hungarian International Bank Ltd [1993] Lloyd’s Rep 194 illustrates how a representation
can arise.
KEY CASE ANALYSIS: First Energy (UK) Ltd v Hungarian

International Bank Ltd [1993] Lloyd’s Rep 194
Background
First Energy supplied and installed heating systems and had created a scheme whereby
customers would pay for the heating system over a period of time. To achieve this, First
Energy required a credit facility and it approached the defendant. It negotiated with Mr
Jamison, who was the senior manager for the defendant at its Manchester branch. The
defendant, like many banks, distinguished between the internal authorisation of a credit
facility and the authority to sign a letter announcing that the facility had been approved.
The defendant required that two employees sign such a letter. However, the Court of
Appeal observed that the claimant ‘would not have been aware of the details of the
internal hierarchy [and] . . . would only have been aware of the outward trappings of the
office conferred on Mr Jamison by [the defendants]’. Crucially, Mr Jamison informed the
claimant that he had no authority to sanction the credit facility. Subsequently, acting
without the approval of the defendant Mr Jamison communicated to the claimant, via a
facility letter, that a credit facility had been approved. The claimant sought to force the
defendant to honour the credit facility offered in the letter.
Steyn LJ observed that the court must protect ‘the reasonable expectations of honest
men’ and that the court should avoid reaching a decision that would frustrate the
‘reasonable expectations of the parties’. Steyn LJ held that the facility letter sent by
Mr Jamison was capable of amounting to ‘an unconditional and firm offer’.
Even though the claimant understood that Mr Jamison lacked the authority to
authorise the credit facility, the fact that Mr Jamison was acting as a senior manager
for the defendant meant that he had the apparent authority to send the facility letter
containing a valid offer. Steyn LJ observed that while an agent cannot make a
representation that he has the authority to enter into a particular transaction, he
could still bind the principal through sending a letter that contained an offer that had
been allegedly approved by his principal. This was as a consequence of the position
that he held. Steyn LJ held that:
Mr Jamison’s position as senior manager in Manchester was such that he was

clothed with ostensible authority to communicate that head office approval
had been given for the facility set out in the 2nd August letter. Although his
status was below that of a managing director or general manager, it was
nevertheless considerable. And, in the circumstances of this case, the idea
that First Energy should have checked with the managing director in London
whether HIB had approved the transaction seems unreal.
To help explain the importance of the decision in First Energy (UK) Ltd we can see that:
• Mr Jamison was an agent and it appeared to the third party that he had
considerable authority by virtue of his position;
• Mr Jamison did not have the authority (actual or apparent) to authorise the credit
facility;
• Mr Jamison did have the authority (apparent) to communicate a purportedly valid
offer of a credit facility on behalf of his principal.
First Energy (UK) Ltd is a controversial decision because of the ability of the agent to self-
authorise the credit facility. However, we can see that in business it is usual for someone
who is in a position of authority to be able to communicate legally binding offers, and it
would be unrealistic for the third party to have to check with the principal.
Previous course of dealings
In Summers v Solomon (1857) 7 Ellis and Blackburn 879 a representation was created
through the principal and third party’s previous course of dealing. The agent had managed
the principal’s shop and had ordered goods from the third party which the principal had
then paid for. The agent had then ordered goods on the principal’s account and used these
for himself. The court held that the principal was liable to pay the third party, because
whatever the principal and agent had agreed privately as to the limits of the agent’s
authority this would not prevent the principal from being liable.
2 The representation must be from the principal or someone with the

authority to make the representation
The representation must be from the principal or someone who has the authority to make
the representation. In Freeman and Lockyer the representation was from the board of
directors who had the authority to act on behalf of the principal. However, the
representation must not come from the agent (First Energy (UK) Ltd).
3 The third party must rely on the representation

Apparent authority is a form of estoppel and the third party must rely on the
representation. Not only must the third party not have actual notice that the agent lacks
authority, he must not suspect that the agent lacks authority. This point was explained by
Lord Scott in Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1
WLR 1846. Lord Scott observed that:
[I]f a person dealing with an agent knows or has reason to believe that the
contract or transaction is contrary to the commercial interests of the agent’s
principal, it is likely to be very difficult for the person to assert with any credibility
that he believed the agent did have actual authority. Lack of such a belief would
be fatal to a claim that the agent had apparent authority. (at p. 1856)
The third party will not be able to argue that the agent has apparent authority where he
should have known that the principal has made a public statement to limit the agent’s
authority. In Overbrooke Estates Ltd v Glencombe Properties Ltd [1974] 1 WLR 1335 the
third party was held to have constructive notice because the auction particulars contain a
limitation on the agent’s authority. While reliance is required the third party need not suffer
a detriment.
?
Marcus works as the manager of Auto Trends, a car dealership, in London. He
has recently been appointed as ‘regional sales director’ in recognition of his many
years of service. Marcus has been informed by Auto Trends that his title is purely
honorary and that he should still refer any issues such as discounts and credit facilities
to head office.
On Monday, Roshan visits Auto Trends and wishes to purchase a car. He enquires about
a discount and Marcus agrees to give him a 20 per cent discount. Roshan thinks that
this is a very large discount, but having seen Marcus’s name badge he proceeds to
purchase the car.
On Tuesday, Amel visits Auto Trends and Marcus offers her a 10 per cent discount;
he is wearing his name badge. Marcus heads back into his office and when he returns
Amel agrees to purchase the car. On her way out Amel hears Marcus’s colleagues
discussing how he needs to have every decision approved by head office. Amel goes
back into the showroom and Marcus informs her that he has contacted head office
and they have approved the discount.
Discuss whether Marcus has authority to offer a 20 per cent discount.

USUAL AUTHORITY
Key definition: Disclosed principal
Where the principal is disclosed the third party will know that they are dealing with
the agent in his capacity as an agent.
Key definition: Undisclosed principal
Where the principal is undisclosed the third party will be unaware of the principal’s
existence.
We have seen that the agent could have implied authority or apparent authority to bind the
principal based on what was usual in terms of the authority a particular agency would have.
This use of what is ‘usual’ is used along with other requirements to establish these types of
authority. However, in Watteau v Fenwick [1893] 1 QB 346, it was held that an agent could
have authority to bind the contract where he was acting without actual authority and there
is no apparent authority, based solely on the usual authority of the position that he
occupied.
KEY CASE ANALYSIS: Watteau v Fenwick [1893] 1 QB 346
Background
The principal employed a manager to run a pub. The manager’s name was above the
door and the licence was in his name. The manager had been expressly prohibited
from purchasing certain types of goods. Nonetheless, he entered into a contract with
a third party to purchase the prohibited goods. The goods were delivered on credit.
The third party sought to recover the purchase price. Importantly, the principal was
undisclosed, that is the third party never knew that the manager was acting as an
agent, and believed that he was contracting with the manager in his own right.
Clearly the agent did not have actual authority. Neither did he have apparent
authority because there was no representation from the principal; this was due to
the fact that the third party did not know that the principal existed. Wills J held that
the agent could still have authority, as otherwise the ‘secret limitation of authority
would prevail and defeat the action of the person dealing with the agent and then
discovering that he was an agent and had a principal’. To prevent ‘mischievous
consequences’ the agent was held to have authority, because someone in his
position would usually have such authority. Thus, usual authority was held to exist
as an independent category of authority.
From a cursory reading of the case the decision in Watteau v Fenwick might not appear to
be that controversial. Wills J was acting to protect the third party who did not know about
the limitation. Had the principal been disclosed, that is known by the third party to exist,
then the agent would have had apparent authority. However, Wills J gave the agent
authority purely based on the usual authority of a pub manager. This negates the need for a
representation to have been made by the principal. The decision was referred to in Jerome
v Bentley & Co [1952] 2 All ER 114 and while the decision was not applied due to factual
differences, the soundness of the decision was not questioned. However, in Rhodian River
Shipping Co SA v Halla Maritime Corp (The Rhodian River and The Rhodian Sailor) [1984] 1
Lloyd’s Rep 373, Bingham J doubted the decision in Watteau v Fenwick and noted that the
decision had not been followed. Bingham J stated that he, ‘would myself be extremely wary
of applying this doctrine, if it exists . . .’ There is considerable academic debate surrounding
the decision in Watteau v Fenwick with academics criticising or defending the decision.
?
Considering the comments made by Bingham J in Rhodian River Shipping Co SA,
could it be said with some certainty that a third party will be unlikely to rely on
Watteau v Fenwick today?
Discuss.
AGENCY OF NECESSITY
Another type of non-consensual agency is agency of necessity. This will operate where B is
forced to take steps to look after P’s property, or to dispose of P’s property, in order to
protect P’s interest. Here P has not consented for B to deal with his property, or to incur
expenses in looking after it. Nonetheless, the law operates to impose authority on B, as an
agent of necessity, to deal with P’s property or to recover expenses incurred. The decision
in Great Northern Railway Company v Swaffield (1873–74) LR 9 Ex 132 illustrates how this
occurs.
KEY CASE ANALYSIS: Great Northern Railway Company v

Swaffield (1873–74) LR 9 Ex 132
Background
The defendant contracted with the claimant to transport the defendant’s horse.
When the horse arrived at its destination the defendant was not there to collect the
horse. The claimant was forced to look after the horse and to contract with a stable
to look after it. The claimant was able to recover the costs from the defendant. The
court was aware that the claimant had a duty to look after the horse and therefore it
would be wrong not to permit him to recover the additional costs.
Pollock B cited the decision of Cargo ex Argos (No 2) (1872–75) LR 4 A & E 13, where
the court had held:
[N]ot merely is a power given, but a duty [is] cast on the master, in many
cases of accident and emergency, to act for the safety of the cargo in such
manner as may be best under the circumstances in which it may be placed;
and that, as a correlative right, he is entitled to charge its owner with the
expenses properly incurred in so doing. (at p. 164)
This had been developed within the context of carrying goods by sea and was
extended in Great Northern Railway Company to apply to a contract for rail carriage.
Therefore, the claimant could recover as an agent of necessity.
It has been doubted whether Cargo ex Argos and Great Northern Railway Company are
cases where an agency of necessity had arisen. The decisions could be explained under the
law of bailment, where a party in possession of the goods has the responsibility to look
after these and thus can recover his expenses. Lord Diplock in Pacific SA v Food Corp of
India (The Winson) [1982] AC 939 believed that the cases could be explained this way. In
Petroleo Brasileiro SA v ENE Kos 1 Limited [2012] UKSC 17, Lord Sumption observed that in
Great Northern Railway Company there had been no emergency (which is now required
for an agency of necessity to arise) and the claimant could have recovered his losses under
the law of bailment.
Key definition: Bailment
Where a person receives good (from the bailor) into his possession whether
consensually (or sometimes non-consensually) he becomes a bailee and must look
after these goods until he returns the goods to the bailor, or is directed by the bailor
to give the goods to a third party.
RATIFICATION
Where the agent has acted without authority, the principal can ratify the contract and
accept it as his own contract. However, in order to ratify the contract, the principal must
have been inexistence at the time when the contract was made (Kelner v Baxter (1866–67)
LR 2 CP 174). This permits the principal to enforce the contract against the third party. If the
agent acts without authority and the principal subsequently ratifies the contract, then the
principal will be bound to honour the contract (see New Falmouth Resorts Ltd v
International Hotels Jamaica Ltd [2013] UKPC 11).
THE DISCLOSED AND UNDISCLOSED PRINCIPAL
We have seen that the principal can be disclosed and undisclosed. Where the principal is
undisclosed the third party believes that the agent is the other party to the contract. The
third party does not realise that the agent is contracting on behalf of the undisclosed
principal. This means that if, and when, the undisclosed principal intervenes and seeks to
enforce the contract, the third party might be unhappy that the undisclosed principal is now
a party to the contract. The undisclosed principal is an exception to the doctrine of privity
and enables the principal to intervene on the contract as a party in his own right.
This could be viewed as unfair to the third party and the question is why does the law
permit the undisclosed principal to intervene. In Keighley, Maxsted & Co v Durrant [1901]
AC 240, Lord Lindley explains the justification for this:
[T]here is an anomaly in holding one person bound to another of whom he knows

nothing and with whom he did not, in fact, intend to contract. But middlemen,
through whom contracts are made, are common and useful in business
transactions, and in the great mass of contracts it is a matter of indifference to
either party whether there is an undisclosed principal or not.
(p. 261)
However, third parties are not always indifferent. In Said v Butt [1920] 3 KB 497, the third
party successfully excluded the undisclosed principal from the contract.
KEY CASE ANALYSIS: Said v Butt [1920] 3 KB 497
Background
The claimant had made unfounded allegations against the defendant’s theatre. The
claimant wished to attend a play at the defendant’s theatre and twice applied for
tickets in his own name. Twice his request was refused. He asked his friend to
purchase tickets in his name. The tickets were purchased and the claimant turned up
with his ticket and sought entry. Unsurprisingly, he was refused entry by the
defendant and sued for breach of contract.
The claimant was an undisclosed principal and his friend had acted as an agent.
However, the court held that because the identity of the parties was a material
consideration there was not a contract that the claimant could enforce. It was clear
that the defendant would never have contracted with the claimant.
The decision in Said v Butt is controversial. In Dyster v Randall & Sons [1926] Ch 932, the
third party was unsuccessful in excluding the undisclosed principal from the contract. While
the undisclosed principal knew that the third party would never have sold the land to him,
the personal identity of the purchaser was not a material ingredient to the contract. This
means that the third party was not contracting with the purchaser because of some
particular personal characteristic, as it was simply a sale of land. The fact that the agent did
not reveal that he was only an agent did not amount to a misrepresentation. Consequently,
the undisclosed principal could enforce the contract. In Rolls Royce Power Engineering plc v
Ricardo Consulting Engineers Ltd [2003] EWHC 2871 (TCC), the third party was able to
exclude the undisclosed principal because of the fact that the personal characteristics of
the parties was a material consideration. This was because the third party and the agent’s
employees had a good working relationship and this was a material consideration.
?
Alison owns two coffee shops in the centre of Leeds. She wishes to sell one of
the coffee shops and is approached by Henry who is a potential purchaser. After
agreeing to sell the coffee shop, Alison discovers that Henry was acting for her
former husband, William, who had previously offered to purchase the coffee shop and
she had refused to sell it to him.
Advise Alison as to whether she can exclude William from the contract.
THE RELATIONSHIP BETWEEN THE THIRD PARTY AND

THE AGENT
Where the principal is disclosed the third party cannot usually sue the agent for breach of
contract, as the agent was not a party to the contract. If the agent is acting without
authority (actual or other) the third party is then entitled to sue the agent for breach of his
collateral warranty of authority (see Collen v Wright (1857) 7 E & B 647). This is because the
agent, when contracting with the third party, has warranted that he is acting with authority.
The warranty of authority could also be made to someone else other than the third party
(see Penn v Bristol & West Building Society [1997] 1 WLR 1356).
If, however, the principal is undisclosed, the agent is a party to the contract. The contract is
initially between the agent and third party. Both are capable of being sued by or suing the
other (see Sims v Bond (1833) 5 B & Ad 389). Once the principal chooses to intervene, the
third party can choose to sue either the principal or the agent. The third party cannot sue
both; therefore he must elect who to sue and once he obtains judgment against either the
principal or the agent, the claims merge and he can no longer sue the other (see Kendall v
Hamilton (1879) 4 App Cas 504). Finally, where the undisclosed principal has intervened in
the contract, the agent will remain liable to the third party. However, the agent cannot sue
the third party.
THE RIGHTS OF THE AGENT
At common law the agent has a number of rights against the principal in addition to any
rights contained in the contract between them.
The agent is entitled to be indemnified for any legitimate expenses or any liabilities incurred
while acting within the scope of his authority. The agent can exercise a lien over the
principal’s goods if he has not been paid any money by the principal. The lien only applies
to the goods in the agent’s possession that relate to the agency (Taylor v Robinson (1818) 8
Taunt 648). The lien can be excluded expressly or by implication in the contract (Withers LLP
v Langbar International Ltd [2011] EWCA Civ 1419).
The agent can receive either commission or remuneration. The method of payment will
often be determined by the agency contract. If the agent is to be paid commission, then the
agent must actually bring about the commissionable event. If the agent is tasked with
finding a purchaser and he does this, then the agent will not receive commission unless the
sale takes place. The courts will not imply a term into the agency contract to force the
principal to sell the property so that the agent has an opportunity to earn his commission
(Luxor (Eastbourne) Ltd v Cooper [1941] AC 108). If the contract is silent as to remuneration
the courts may imply a term where the work provided by the agent would have been
performed with the expectation of remuneration (Way v Latilla [1937] 3 All ER 759).
DUTIES OF THE AGENT
In addition to the duties in the agency contract, the agent owes the principal a number of
important duties. The agent must act with reasonable skill and care and act within the
scope of his actual authority. The agent cannot delegate his duties without the consent of
the principal. The agent is also a fiduciary and therefore owes fiduciary duties to his
principal. This creates a relationship of trust and confidence. These duties protect the
principal, as the agent will potentially have the power to deal with the principal’s property
and act on his behalf. Not all agents will owe the same duties or to the same extent (Kelly
Cooper [1993] AC 205).
KEY CASE ANALYSIS: Kelly v Cooper [1993] AC 205
Background
Kelly approached Cooper, an estate agent, to find a purchaser for his property. Kelly’s
neighbour Brant was also looking to sell his property. A third party called Perot wished
to purchase both properties in order to redevelop the land. Cooper was acting for both
Kelly and Brant and arranged for Perot to purchase both properties. Neither Kelly or
Brant knew about this, or that Perot was purchasing the neighbouring property. Kelly
sued Cooper for breach of his fiduciary duties as Cooper had failed to disclose
important information and had created a situation where there was a conflict of
interest between disclosing information to the principal and earning commission on
both houses.
The case was decided by the Privy Council and Lord Browne-Wilkinson accepted that
the third party’s interest in purchasing both properties was important as, had Kelly
known this during negotiations, he could have used this to his advantage. However,
Cooper was an estate agent and not all types of agents owed the same duties and
these could be impliedly excluded. Both sellers would have realised that Cooper would
act for other parties and that they could not expect full disclosure as ‘otherwise [estate
agents] will be unable to perform their function’. The decision was criticised by
Professor Reynolds as seeming ‘to deny fiduciary obligations to all and to leave
everything to express and implied terms of the contract’ ([1994] JBL 144 at 149).
The decision in Kelly v Cooper was cited approvingly by the House of Lords in Hillier v
Barker Booth & Edward [2008] UKHL 8. We can see that in Kelly v Cooper the duties where
modified by implication. It is also possible to exclude the duties in the contract, although
this exclusion will be subject to the Unfair Contract Terms Act 1977.
?
Given the importance of knowing that a prospective purchaser wishes to
purchase the neighbouring property, in order to secure a higher purchase price,
could it be argued that the decision in Kelly v Cooper undermines the duties that
an agent owes his principal?
Discuss.
The agent as a fiduciary must not act to create an actual or potential conflict of interest
between his own (or a third party’s) interest and the interest of his principal. According to Chitty
on Contracts (31st edn), the agent ‘owes fiduciary duties to prefer his principal’s interests to his
own’. In Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq 461, Lord Carnworth LC stated:
It is a rule of universal application that no one, having [fiduciary] duties to

discharge, shall be allowed to enter into engagements in which he has, or can
have, a personal interest conflicting, or which may possibly conflict, with the
interests of those whom he is bound to protect (at p. 471).
So what if the agent wishes to pursue an activity that might create a conflict of interest?
The answer is that the agent must seek the principal’s consent. The agent must not use the
principal’s property or information, which he learns while acting for the principal for his
own benefit (Boardman v Phipps [1967] 2 AC 46). The agent must not take bribes or make a
secret commission (see the recent decision of the Supreme Court in FHR European
Ventures LLP and others v Cedar Capital Partners LLC [2014] UKSC 45). The agent must be
financially accountable to the principal and keep their funds separate and the accounts
open for inspection. The agent must also act in the best interests of the principal and reveal
all relevant information.
If the agent breaches any of his duties he could lose his right to commission or have his
agency terminated (Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339). Not
every breach of a duty, even a fiduciary duty, will mean that the agent will lose his
commission. In Kelly v Cooper, Lord Browne-Wilkinson observed that an agent should only
lose the right to commission where the breach of fiduciary duties was dishonesty, or if
honest, the breach went to the root of the agent’s obligations. In Hippisley v Knee Bros
[1905] 1 KB 1 it had been decided that an agent would only lose the right if the commission
was not fraudulent or dishonest, or connected to the contract that he performed on behalf
of the principal (per Lord Alverstone CJ at 8).
THE COMMERCIAL AGENTS (COUNCIL DIRECTIVE)

REGULATIONS 1993/3053
We have seen that the agent has very few rights against his principal when these are
contrasted with the duties that he owes the principal. The Commercial Agents (Council
Directive) Regulations 1993/3053 have introduced new rights and duties. This only applies
to commercial agents (see regulation 2). The commercial agent is protected in a number of
ways, including the entitlement to commission during and after the termination of the
agency (regulations 7–9). When the principal wishes to terminate an agency there is a
minimum notice requirement (regulation 15). There is also an automatic entitlement for the
agent to be compensated upon the termination of the agency, or to be indemnified if the
contract states otherwise (regulations 17–18).
TERMINATION OF THE AGENCY
The agency can be terminated in accordance to the contract, the common law and the
Commercial Agent (Council Directive) Regulations.
SUMMARY
• An agent can have both consensual and non-consensual authority, which permits
him to enter into contracts on behalf of the principal.
• Apparent authority is based on the appearance of authority and requires a
representation from the principal to the third party.
• The undisclosed principal is an anomaly in the law of contract and permits the
principal to intervene on a contract made by his agent.
FURTHER READING
Brown, I. ‘The agent’s apparent authority: paradigm or paradox’ [1995] Journal of Business Law
360 – this article explores the decision in First Energy (UK) Ltd and the circumstances where
an agent can have apparent authority.
Cheng-Han, T. ‘Undisclosed principals and contract’ (2004) Law Quarterly Review 480 – this
article explores the justification for permitting the undisclosed principal.
Goodhart, A. L. and Hamson, C. J. ‘Undisclosed principals in contract’ (1930–32) Cambridge Law

Journal 320 – this article is about the undisclosed principal and discusses the rationale for
permitting the principal to remain undisclosed.
Reynolds, F. M. B. ‘Breach of warranty of authority: a point elucidated’ [1998] Journal of Business

Law 151 – this is an interesting commentary on the decision in Penn v Bristol & West
Building Society [1997] and the author discusses the requirements for a warranty of
authority to exist.
Roderick, M. Agency: Law and Principles, 2nd edn (Oxford University Press, 2013) – this book is a
thorough and thoughtful consideration on the law of agency. It is written in an accessible
manner and will give you more detailed analysis of the material covered in this chapter.
Tettenborn, A. ‘Agents, business owners and estoppel’ (1998) Cambridge Law Journal 274 – this
article is concerned with apparent authority.
Chapter 7
Employment law
LEARNING OBJECTIVES
• appreciate the legal responsibilities of an employer to their employees;

• define what is meant by the term employee and who is considered to be a
employee;
• understand the claims that an employee can have against their employer upon the
termination of their contract;
• comprehend what is meant by a restrictive covenant, a garden leave clause and
the implied duty of fidelity; and
• appreciate the protection offered to employees by the Equality Act 2010.
INTRODUCTION
Most businesses will employ people and therefore it is important that those who are
responsible for recruiting, dismissing and managing employees understand how employment
law operates. Everyone who reads this chapter will at some stage of their careers be an
employee, or perhaps will be responsible for managing others and recruiting new employees.
Employment law is a fascinating area of law and is highly relevant to businesses and
individuals. We shall see in this chapter that an employer is restricted as to how and in what
circumstances they can dismiss an employee, that they must also ensure that their
recruitment and working practices do not discriminate and that they comply with various
legal requirements such as the Working Time Regulations, the National Minimum Wage Act
1998, health and safety, and parental rights. Employment law requires reference to and
familiarity with statutory provisions and these can be accessed freely at www.legislation.gov.
uk. It is recommended that you refer to these important provisions throughout the chapter.
Employment law is complex and this chapter is only intended as an introduction. Therefore,
it is essential that you refer to the further reading to help develop your knowledge of this
interesting and highly relevant subject. Employment law is undergoing considerable reform,
as the Coalition government is keen to encourage businesses to recruit and have removed
some of the problems that are associated with employing individuals.
The Beecroft Report which was published in 2012 recommended radical changes and
proved to be very controversial. The report was not an official government report and was
carried out by Mr Adrian Beecroft, who is a private individual. Many of the
recommendations made in the report were rejected or implemented as a result of the
existing Employment Law Review. The Enterprise and Regulatory Reform Act 2013 and the
Growth and Infrastructure Act 2013 have introduced some important changes that you will
need to be aware of. These include:
• changes to unfair dismissal;

• changes to redundancy;
• creation of the employee shareholder.
EMPLOYMENT STATUS
It is important to appreciate that there is a hierarchy in terms of employment law rights.

Statutory provisions offer the employee considerably more protection than those
individuals classified as workers or who are genuinely self-employed.
Whether an individual will be an employee is not always straightforward and will involve
looking at a number of factors. It is important to note that an employee enjoys a privileged
legal status and has enhanced rights when compared to those persons classified as
workers:
• An employee will enjoy the right not to be unfairly dismissed or to be made

redundant, whereas a worker does not enjoy these statutory rights.
• However, both an employee and a worker are protected against wrongful
dismissal and must be paid no less than the national minimum wage.
Example
You may have entered into a contract to work for another but that does not necessarily
mean you will be an employee. Consider this example: Linda is employed by Delby Ltd to
run its accounts department. Linda is an employee and has a continuous contract of
employment. During the Christmas period an agency worker assists Linda. The agency
worker is hired from an agency that supplies administrative support. The agency worker is
not an employee of Delby Ltd (we shall see why below). Delby Ltd has also hired Rupert on
a casual basis over the Christmas period. Rupert is not an employee but rather he is a
worker (we shall also see why below).
This does not mean that the agency worker does not have any rights against Delby Ltd.
Agency workers have received increased rights under the Agency Workers Regulations
2010 (SI 2010/93).
Employment law 107
So how would we determine whether an individual is

an employee?
Key definition: A contract of employment
A contract of employment is defined by s.230 (2) Employment Rights Act 1996

(ERA 1996): ‘In this Act “contract of employment” means a contract of service
or apprenticeship, whether express or implied, and (if it is express) whether oral or in
writing.’
Looking at the definition above, we can see that a contract of employment can be:
• a contract of service, and not a contract for services;

• implied or express;
• expressly made orally or in writing.
In order to determine whether we have an employment contract, a useful starting place is

the employment contract. However, the contract is not conclusive, as the courts will
disregard contracts that state that an individual is not an employee, where such a
description is a sham. The Court of Appeal in Protectacoat Firthglow Ltd v Szilagyi [2009]
EWCA Civ 98 held that in determining whether a contract was a sham the court should
consider whether the words used actually reflected the parties’ true expectations or
intentions.
Key definition: Employee
Section 230 (1) ERA 1996 provides a statutory definition of an employee: ‘In this Act
“employee” means an individual who has entered into or works under (or, where the
employment has ceased, worked under) a contract of employment.’
The definition from s.230 ERA 1996 is not particularly helpful and the common law has
developed a number of tests to determine employment status. The older tests focused on
how much control the employer had over the individual, or how integrated an individual
was within the employer’s organisation (per Denning LJ in Bank voor Handel en Scheepvaart
N. V. Slatford [1953] 1 QB 248).
The multiple or economic reality test
The test that is used today is the multiple test (or as it is otherwise known, the economic
reality test). The test is so called because the courts will consider a number of criteria in
order to see whether an individual is an employee. The test is from Ready Mixed Concrete
(South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497.
KEY CASE ANALYSIS: Ready Mixed Concrete (South East) Ltd v

Minister of Pensions and National Insurance [1968] 2 QB 497
Background
A company entered into a contract with Mr Latimer. In the contract he was
described as an independent contractor. Mr Latimer owned the vehicle that he used
for company business and he was paid for every mile that he used the vehicle for
company business. The vehicle was required for the exclusive use of the company
and this meant that he could not work for anyone else. Mr Latimer was able to
provide a substitute driver as long as the company consented to this. He had to
comply with the company rules, wear the company uniform and pay his own income
tax and national insurance. The question which had to be determined by the court
was whether Mr Latimer was an employee.
Mackenna J held that there were three conditions that had to be fulfilled in order for
a contract of service to exist:
(i) The servant agrees that, in consideration of a wage or other remuneration,

he will provide his own work and skill in the performance of some service
for his master.
(ii) He agrees, expressly or impliedly, that in the performance of that service he
will be subject to the other’s control in a sufficient degree to make that
other master.
(iii) The other provisions of the contract are consistent with its being a contract
of service (at p. 515).
Mr Latimer was held not to be an employee: ‘A man does not cease to run a
business on his own account because he agrees to run it efficiently or to accept
another’s superintendence’ (at p. 526).
The fact that he enjoyed sufficient freedom meant that he was an independent
contractor and not an employee:
Employment law 109
He is free to decide whether he will maintain the vehicle by his own labour
or that of another, and, if he decides to use another’s, he is free to choose
whom he will employ and on what terms. He is free to use another’s
services to drive the vehicle when he is away because of sickness or
holidays, or indeed at any other time when he has not been directed to
drive himself. He is free again in his choice of a competent driver to take his
place at these times, and whoever he appoints will be his servant and not
the company’s. (at p. 526)
Mackenna J observed that the judge must determine the classification of the
contract. The fact that someone may be under an obligation to perform work and
agree to be under another’s control ‘is a necessary, though not always a sufficient,
condition of a contract of service’ (at p. 517). However, Mackenna J was of the
opinion that degree of control was not everything or the only factor to consider.
In Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173, Cooke J

considered the tests that are used to determine whether there was a contract of service or
a contract for service. Cooke J (at pp. 184–185) noted that it might not be possible to draw
an exhaustive list of the factors which the court would consider. He noted that ‘control will
no doubt always have to be considered, although it can no longer be regarded as the sole
determining factor’ and that important factors included:
• whether the person supplies his own equipment;

• whether the person hires his own workers;
• the extent of his financial risk and the opportunity for profit;
• the responsibility for investment and management.
Sometimes it will be straightforward to ascertain whether an individual will, or will not, be

an employee. However, it can be quite difficult, especially if an individual is permitted to
allow another person to perform his work or to refuse to work a particular shift. A number
of factors must be considered in determining whether a person is an employee. We have
seen that where there is sufficient independence there will not be a contract of service.
Mutuality of obligations and personal service
The mutuality of obligations is required for there to be a contract of service. This means
that the employer must be under an obligation to provide work and the employee must be
under an obligation to accept it. In Ready Mixed Concrete the ability to substitute was held
to be inconsistent with a contract of service. In Express & Echo Publications Ltd v Tanton
[1999] ICR 693, Peter Gibson LJ stated:
[I]t is necessary for a contract of employment to contain an obligation on the part

of the employee to provide his services personally. Without such an irreducible
minimum of obligation, it cannot be said that the contract is one of service.
(at p. 699)
In Express & Echo Publications Ltd a delivery driver was held to be an independent
contractor as he was permitted to engage a substitute driver at his own expense. Thus the
employee must perform personal service. The House of Lords in Carmichael v National
Power Plc [1999] 1 WLR 2042 held that tour guides who were employed at a power plant on
a casual basis were not employees as there was no mutuality of obligations. The tour
guides were only asked to work when the employer required them to. The House of Lords
rejected the Court of Appeal’s approach. The Court of Appeal had found an implied term
that there was an obligation that a reasonable amount of work would be offered and
performed (see Carmichael v National Power plc [1998] IRLR 301). The ability to turn down
work can indicate that you are not an employee. If you are able to choose whether to work
on any particular day, and if you do not choose to work then someone else will perform the
work, you will not be an employee (Bebbington v Palmer (t/a Sturry News) [2010]
UKEAT/0371/09/DM).
Even if you are able to delegate your work to someone else, you could still be an employee.
This was the case in Weight Watchers (UK) Ltd v Revenue and Customs Commissioners
[2010] UKFTT 54 (TC), where it was held that there was a strong degree of control by Weight
Watchers over people running the weight loss groups and that there existed the mutuality
of obligations, notwithstanding the ability of the employees to delegate their meetings to
other persons. This was because their freedom of nomination was restricted to other group
leaders and they receive no monetary consideration for these meetings. This decision is
similar to MacFarlane v Glasgow City Council [2001] IRLR 7 where the right to delegate was
controlled by the employer. In Autoclenz Ltd v Belcher [2011] UKSC 41; [2011] ICR 1157, the
Supreme Court considered whether car valeters were employees.
KEY CASE ANALYSIS: Autoclenz Ltd v Belcher [2011] UKSC 41;

[2011] ICR 1157
Background
The case concerned car valeters who worked for a company that required them to
sign a contract stating that they were not employees. The contract also contained
other terms that were inconsistent with this being a contract of service. The car
valeters brought a claim submitting that they were workers for the purpose of the
Working Time Regulations 1999 and the National Minimum Wage Regulations 1999.
Employment law 111
The Supreme Court held that they were workers for the purposes of the claim, and
that they were employees. It was possible to disregard the written contract if it was
inconsistent with the parties’ actual relationship. The court held that the right to
substitute your work to another was inconsistent with a person being an employee.
Even if such a clause was not used, its existence would still prevent someone from
being an employee. However, this was the case only if such a clause was genuine
and reflected the parties’ true intentions. If it did not do this, then the court may
disregard the clause (see Protectacoat Firthglow Ltd v Szilagyi above). The court
would need to consider the parties’ relative bargaining power to determine whether
the parties’ agreement was a sham, i.e. is the employer in a dominant position? In
Autoclenz the Supreme Court disregarded the written contract and the substitution
clause.
Now let us consider whether Horace would be regarded as an employee:
?
Horace works for Delby Ltd’s private tuition department. He works 35 hours a
week. His contract states that he is self-employed and responsible for paying
his own income tax and national insurance. Horace is required to work Monday
to Friday from 9.00am to 5.00pm. His contract permits him to delegate his teaching to
colleagues and lecturers from other institutions, so long as they are on Delby Ltd’s list
of approved tutors.
Would Horace be considered to be an employee?
Agency workers
In James v Greenwich London Borough Council [2007] ICR 577, the question to be
determined was whether an agency worker could be an employee of the end user. The end
user will have a contract with the agency, which will then supply the agency worker. The
Court of Appeal held that the fact the agency worker had worked for the end user for a long
time was not enough to establish a contract of employment. The key issue was whether
there was an implied contract, which was inconsistent with there being no contract. The
Court of Appeal had agreed with the tribunal that where there was an agency relationship,
there was no need to imply a contract.
Employee shareholders
You should be aware that the new employee shareholder status will apply to those
employees who agree to exchange many of their employment rights in return for shares in
their employer’s business (see the Growth and Infrastructure Act 2013). This has proved
very controversial because, for as little as £2,000 worth of shares, it is possible for an
employer to remove a considerable amount of the statutory protection that is currently
afforded to employees.
THE EMPLOYMENT CONTRACT
As we have seen, the word ‘employee’ is just descriptive. The agreement could amount to
a sham, as it does not reflect the actual operation of the contract.
Written statement
There is no requirement that the contract must be in writing (s.230(2) ERA 1996). All that is
required is that the employee receives a written statement of particulars under s.1 ERA
1996. This must be given to the employee not less than two months after the beginning of
the employment (s.1(2) ERA 1996). The statement needs to contain information including
the names of the employer and the employee, the rate of pay or how pay will be calculated,
terms relating to hours of work, the job title, and description of the work that the employee
will perform.
Terms
The terms in the contract can be express or implied. Terms can be implied through a
number of tests such as the business efficacy test, the officious bystander test and to
reflect industry practice. Terms can also be potentially incorporated into a contract through
a collective agreement that has been agreed between the employer and the employees’
trade union. Throughout this chapter we will see examples of implied terms.
Employment law 113
VARIATION OF THE CONTRACT
The employer may wish to vary the contract for a number of reasons. The general rule is
that the employer may not vary the contract unilaterally; however, the employer could
include a clause that will permit a variation without requiring the employees’ consent (see
Wandsworth v London Borough Council v D’Silva [1998] IRLR 193). In Bateman v Asda Stores
Ltd [2010] IRLR 370 the staff handbook was part of the contract and it contained a right for
the employer to change the terms of contract. The clause was clear and unambiguous. The
employer unilaterally introduced a new pay structure and this was held not to amount to a
breach of contract. However, a unilateral variation of the contract without such a clause
could amount to a repudiatory breach of the contract.
BUSINESS TRANSFERS
If the employer transfers the whole or part of the business, then the Transfer of
Undertakings (Protection of Employment) (TUPE) Regulations 2006 will apply. TUPE protects
the employees and protects their existing contractual rights.
VICARIOUS LIABILITY
The employer will be liable for the torts that an employee commits in the course of their
employment. The employer will not be liable where the employee is held to be acting
outside the scope of their employment (see Rose v Plenty [1976] 1 WLR 141).
The courts have interpreted this to include liability where the employee commits a criminal
offence. In Lister v Hesley Hall Ltd [2001] UKHL 22, an employer was vicariously liable for the
acts committed by its employee. In Lister the criminal act was sexual abuse and this was still
sufficiently connected with his duties as an employee. Another example is Fennelly v Connex
South Eastern Ltd [2001] IRLR 390, where a ticket inspector assaulted a commuter. The Court
of Appeal held that the employer was vicariously liable because the employee was still acting
within the course of his employment and had been given the power to inspect tickets. Buxton
LJ held that: ‘I consider it artificial to say that just because Mr Fennelly was walking on, what
happened next – immediately next – was divorced from what Mr Sparrow was employed to
do. The [assault] sprang directly out of the altercation’ (at [18]).
RESTRICTIVE COVENANTS
Key definition: Restrictive covenants
A restrictive covenant is a restraint of trade and is intended to prevent the employee

from competing with the employer once they have left their employment. Such a clause
can prevent non-competition, non-poaching of colleagues and non-solicitation of
clients.
An employer may wish to restrict the ability of an employee who has left their employment
to work for a competitor or to set up a rival business, to poach their employees, or to solicit
their customers. Including restrictive covenants in the employment contract makes
commercial sense and many professionals such as accountants or lawyers will have such
clauses in their contracts. There is a concern that a former employee will reveal confidential
information to competitors and exploit their knowledge of the employer’s customers and
trade secrets. Therefore, in order to be legally enforceable, such a clause must protect a
legitimate business interest (Jack Allen (Sales and Service) Ltd v Smith [1999] IRLR 19).
However, it is important to note that such restraints must be expressly incorporated into
the employment contract.
A restrictive covenant is a restraint of trade and is prima facie void (see Nordenfelt v Maxim
Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535). In order to be enforceable it must be
reasonable. Therefore, when drafting such a clause it must be reasonable in terms of
duration, geographical scope and nature. A restrictive covenant will only protect a
legitimate business interest that requires protection. For example, using such a clause to
prevent an employee from working for a rival employer in any area of their business would
be unreasonable, as it would be wider than the legitimate business interest that the
employer would be seeking to protect.
Employment law 115
KEY CASE ANALYSIS: Littlewoods Organisation Ltd v Harris

[1977] 1 WLR 1472
Background
Harris had worked for Littlewoods, a catalogue company, and after leaving
Littlewoods’ employment he worked for a rival catalogue company. Littlewoods
wished to prevent this and sought to rely on the restrictive covenant contained in
Harris’ contract.
The Court of Appeal in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 held
that a clause that prevented a former employee from working for a competitor in the
United Kingdom for a year was reasonable. This was because the employer’s
business was a catalogue company and therefore required nationwide protection.
Lord Denning MR was willing to read the original clause that had applied worldwide,
to instead only apply to the United Kingdom.
In Fitch v Dewes [1921] 2 AC 158, a restrictive covenant that prevented a junior clerk from
seeking legal employment within seven miles of the Town Hall of Tamworth, was held to be
reasonable. Lord Parmoor observed that the area was not too wide:
It is no more than adequate protection for a solicitor who desires to protect his
professional secrets and to protect his clients from being enticed away by a
former clerk who has had access to all his papers and has been in direct personal
relation with a number of his clients. (pp. 169–170)
If a restrictive covenant is unreasonable, then the courts may apply a test known as the
blue pencil test. This will involve removing the unreasonable elements and leaving the parts
that are enforceable. However, the courts will not apply the blue pencil test where this will
result in the contracts making a new contract. In Francotyp-Postalia Ltd v Whitehead [2011]
EWHC 367 (Ch), the court refused to apply the blue pencil test and remove a word from the
definition section of the contract to save a restrictive covenant as it would impact upon
other enforceable clauses.
?
Mark works for Delby Ltd as a software developer and wishes to move jobs so
that he can work for a competitor. In his contract there is a restrictive covenant
that states that he ‘cannot work for a competitor within the first three years of
leaving Delby Ltd’s employment anywhere within the United Kingdom’.
Could Delby Ltd rely on the restrictive covenant to prevent Mark from working for its
competitor?
Duty of mutual trust and confidence
Both the employer and employee owe each other a duty of mutual trust and confidence.
This is an important duty as if it is breached then this could enable either party to terminate
the employment contract.
Duty of fidelity
During the employment contract the employee owes the employer an implied duty of
fidelity. This means that the employee owes a duty of good faith. The employee owes a
duty of loyalty and must not compete against the employer. This means that the employee
must not moonlight, that is undertake work in their own time that would compete with their
employer’s business. The employee must not reveal information about the employer’s
business and must keep all information confidential. This implied duty extends to
confidentiality and to not misusing the employer’s property.
Duty of confidentiality
The duty of confidentiality is implied from the relationship between the employer and
employee. During the employment contract the employee must not reveal any relevant
information relating to their employment and must keep all information confidential
that is gained in the course of their employment. After the employment relationship is
terminated the employee is still under a duty to not reveal confidential information;
however, this is now a much lighter obligation and only protects information that is
genuinely confidential.
Employment law 117
KEY CASE ANALYSIS: Faccenda Chicken Ltd v Fowler [1986] 3

WLR 288
Background
The claimant was a business that sold chickens from refrigerated vans. It employed
the defendant as its sales manager. Subsequently, the defendant used the
information about sales and pricing that he had learned from the claimant in order to
establish his own business.
The Court of Appeal held that after the termination of the employment relationship,
there was still a duty owed by the employee. However, the duty did not cover all
confidential information, but only information that amounted to a trade secret.
Therefore, the defendant was not in breach of this implied term as the information
he had used was not a trade secret. Examples of what would amount to a trade
secret included a chemical formula (see Amber Size and Chemical Co Ltd v Menzel
[1913] 2 Ch 239).
The question of what amounted to a trade secret was considered in Goldenfry Foods Ltd v
Austin [2011] EWHC 137 (QB), where it was held that there had been a breach of the duty of
confidentially by former employees of the claimant. The former employees had established
a rival business and had used the claimant’s trade secrets.
?
Mick works for Delby Ltd’s engineering department and has been working on a
design for a new type of door springs. His team has spent two years building
and testing the new door springs. During this time Mick has met with Delby
Ltd’s customers and has discussed their requirements for door springs and how much
they would be willing to pay. Mick retires from Delby Ltd and sets up a company
manufacturing door springs. Last week he enters into a contract to supply one of Delby
Ltd’s largest customers with door springs.
Discuss.
WORKING TIME REGULATIONS 1998
The Working Time Regulations 1998 (WTR) protect workers and establish minimum amounts
that include the entitlement to leave (reg 13), rest breaks (reg 12), the amount of daily rest
that workers are entitled to (reg 10) and the maximum weekly working time (reg 4). It is
possible to opt out of the WTR and certain regulations do not apply to those who can
determine their own working time (reg 20).
NATIONAL MINIMUM WAGE ACT 1998
It is a criminal offence to pay a worker less than the minimum wage (s.31). The minimum
wage will apply different rates depending on the age of the worker. It is increased each
year. You should note that the minimum wage is not the same as the living wage, which is
the amount you need in order to be able to have an adequate standard of living. In London
there has been a campaign to encourage employers to pay the living wage, which is higher
than the minimum wage. It should be noted that there is no legal requirement for an
employer to pay the living wage; whereas, the employer must pay the minimum wage.
PARENTAL RIGHTS
Maternity and paternity leave applies to all eligible employees who qualify to have parental
leave. The right to leave also extends to parents who adopt a baby. This is a complex area
and we will just consider a mother who is to give birth. As an employee she will be
potentially eligible, subject to the amount of time that she has worked for the employer, to
take up to 52 weeks’ maternity leave. During her maternity leave she will receive statutory
maternity pay for the first 39 weeks, which is calculated at different amounts for the first 6
weeks and the final 33 weeks.
MOBILITY CLAUSES
Key definition: Mobility clause
A mobility clause enables the employer to ask an employee to work at another

location other than the employee’s contractual place of work.
Employment law 119
The mobility clause must be expressly incorporated into the contract. The employer can
only request the employee work at the locations listed in the clause. In United Bank v
Akhtar [1989] IRLR 507, the Employment Appeal Tribunal considered the enforceability of a
clause that required an employee to relocate to any part of the United Kingdom. The
employee had asked for three months to arrange the move and this was refused. It was
held that although the clause covered the United Kingdom, the employer was in breach of
the clause, as there was an implied term that the employer should provide reasonable
notice and financial assistance to enable the employee to comply with the request. The
employer’s behaviour had breached the implied duty of mutual trust and confidence and
the employee was able to argue that he had been constructively dismissed.
BRINGING THE CONTRACT TO AN END
This next section will look at bringing the contract to an end.
Notice period
An employee who wishes to resign must give the correct contractual notice. Failure to give
notice will amount to a breach of contract. We shall see below that an employer who does
not give an employee the correct amount of notice before dismissing them risks facing a
claim for wrongful dismissal.
Gardening leave clauses
When the employee gives notice of their intention to leave the employer’s employment, or
when the employer gives the employee notice that they will be dismissed, the employer in
both instances may wish to remove the employee from the workplace until the
employment contract has come to an end. A garden leave clause permits the employer to
do this and is designed to safeguard the employer’s confidential information and customer
base. In William Hill Organisation Ltd v Tucker [1999] ICR 291, the Court of Appeal
distinguished between an obligation to only pay the employee (the employee could be sent
home without there being a garden leave clause), or whether there was an obligation to
permit the employee to work (where there needed to be an express garden leave clause).
Therefore, skilled employees who need to practise their skills on a regular basis (otherwise
they would be de-skilled) will have a right to work. In Christie v Carmichael [2010] IRLR 1016,
it was held by the Scottish Employment Appeal Tribunal that the employer of a chartered
accountant did not have an obligation to provide work as the employee would not become
de-skilled.
The employee must continue to receive full pay and other benefits. This would include
discretionary bonuses, as in SG v R Valuation Service Co v Boudrais [2008] EWHC 1340 (QB),
where this was a substantial part of the remuneration package. It must be remembered
that a garden leave clause is a restraint of trade and is void subject to the clause being
reasonable (see Symbian Ltd v Christensen [2001] IRLR 77). If the employee attempts to
work for a competitor during the period of time covered by the garden leave clause, then
the employer may apply for an injunction to prevent this.
TYPES OF DISMISSAL
There are different types of dismissal (see Figure 7.1). The employer may dismiss the
employee using express words. This is known as actual dismissal. The employee may be
dismissed upon the expiration of a fixed-term contract. It is also possible that the employee
may claim that they have been constructively dismissed.
Constructive dismissal
This occurs where the employer commits a repudiatory breach of the employment
contract. Constructive dismissal can give rise to a claim for wrongful and unfair dismissal
(Sutcliffe v Hawker Siddley Aviation Ltd [1973] ICR 560). This could be where there has been
a serious breach of health and safety or bullying by management. The repudiatory breach
does not have to be the only reason why the employee resigned (see Jones v F Sirl & Son
(Furnishers) Ltd [1997] IRLR 493). The Court of Appeal in Meikle v Nottinghamshire County
Council [2004] ICR 1 stated that:
The proper approach, therefore, once a repudiation of the contract by the

employer has been established, is to ask whether the employee has accepted that
repudiation by treating the contract of employment as at an end. It must be in
response to the repudiation, but the fact that the employee also objected to the
other actions or inactions of the employer, not amounting to a breach of contract,
would not vitiate the acceptance of the repudiation. (at p. 11)
It is clear that the employee ‘must act in sufficient time’ and accept that there has been a
repudiatory breach and resign (Meikle, at p. 16). Failure to do so will amount to the
employee waiving the breach.
Employment law 121
Has there been a

dismissal, i.e. actual
or constructive?
No Yes
Has the correct

notice been given?
No Yes
Consider a claim for

wrongful dismissal –
NB consider whether
there is a PILON
clause
Was the dismissal

fair?
Yes No
Have you been

dismissed by Consider a claim
reason of for unfair dismissal
redundancy?
Is the reason for

Do you meet the
Are you an dismissal potentially
requirements for
employee? fair? If so, was it
bringing a claim?
reasonable?
Figure 7.1 Possible claims upon dismissal

?
Jasmin works in one of Delby Ltd’s showrooms. On Friday, while Jasmin is
talking to customers, her manager, Rita, walks over and berates her for being
incompetent. Jasmin is distraught as the customers and her colleagues have
overheard what has been said.
Could Jasmin claim that she has been constructively dismissed? Would it matter that
Jasmin has recently been looking to move jobs? Could Jasmin wait until she has found
another job before accepting the breach?
WRONGFUL DISMISSAL
Key definition: Wrongful dismissal
This is a common law claim for breach of contract that a worker or an employee can
bring where they have been dismissed without receiving the correct notice period, or
the correct pay and other benefits due during this period.
Wrongful dismissal arises where a person has been dismissed without receiving the correct
amount of notice, pay and other benefits that they should have received during the notice
period. Eligibility to claim wrongful dismissal does not depend on your employment status.
Therefore both an employee and a worker can bring a claim for wrongful dismissal.
Wrongful dismissal is based on there having been a breach of contract. A continuous

contract of employment will last until it is terminated. In order to terminate the contract, the
employer (or employee) must give the correct amount of notice. The notice requirement
should be stated in the contract (i.e. the contractual notice period). Section 86(1) ERA 1996
provides a minimum statutory notice period that must be complied with. The amount of
notice will depend on length of service and the maximum statutory notice period is 12
weeks. The contractual notice period may be more generous than the statutory minimum,
but it must be no less.
Employment law 123
Key definition: Fixed-term contract
A fixed-term contract will last for a predetermined amount of time. An example of

someone on a fixed-term contract is a football manager, or someone who is specifically
employed to cover maternity leave.
A person who is dismissed prior to the expiry of the fixed-term contract can claim wrongful
dismissal. Clearly, a fixed-term contract lasting two years may risk the employer being left
unable to dismiss an employee during these two years. That is why a fixed-term contract
might include a break-clause. Such a clause will permit the employer to terminate the
contract at an earlier date.
When does notice not have to be given?
The employer does not have to give notice where the employee, or worker, has committed
a repudiatory breach of the contract. Examples include gross misconduct, theft, violence
and repeatedly disobeying orders (Boston Deep Sea Fishing and Ice Company v Ansell
(1888) 39 Ch D 339). The employee can be dismissed summarily. Where the contract has
been frustrated by the employee being no longer able to perform his work, then the
contract is said to have been discharged and notice does not need to be given. Examples
include long-term illness and imprisonment (FC Shepherd & Co v Jerrom [1987] QB 301).
The employer could include a payment in lieu of notice clause in the contract (PILON).
A PILON clause enables the employer to terminate the contract without giving the
employee notice. It is important to note that where notice is required (even if a PILON
clause has been used), the employer must give the employee the salary and benefits that
the employee would have received during the notice period.
Remedies
The remedies available for wrongful dismissal are to enable the employee to recover the
pay he would have received but for being prevented from serving out his notice period. The
damages would include the employee’s salary and other benefits.
Bringing the claim
Wrongful dismissal is essentially a claim for breach of contract and therefore can be heard
by the County or High Court, or the employment tribunal. Where a claim is heard before the
County or High court then there is a six-year time limit from the breach (Limitation Act
1980). The employment tribunal has a considerably shorter time limit of three months.
Larger claims will be heard before the County or the High Court as there is no limit on the
damages that could be recovered, whereas at the employment tribunal damages are
capped at around £25,000.
UNFAIR DISMISSAL
Key definition: Unfair dismissal
Where the employer dismisses an employee for a reason that is unfair, either in terms
of the circumstances or the procedure used, the employee can claim that they have
been unfairly dismissed. Unfair dismissal is a statutory claim. A dismissal for certain
types of reasons will be automatically unfair.
It is important to note that only employees have protection from being unfairly dismissed.
The right to not be unfairly dismissed is found in s.94 ERA 1996. To claim unfair dismissal
the employee must:
• have been dismissed by the employer from a fixed-term or a continuous contract

of employment; or
• have been constructively dismissed as a result of the employer’s conduct.
The employee must submit their claim to the employment tribunal within three months of
the effective date of termination (s.97 ERA 1996). Only employees who have worked for the
employer for more than two years can claim unfair dismissal (s.108 ERA 1996). However,
note that for those employees dismissed for an automatically unfair reason this
requirement does not apply. Certain categories of employees cannot bring a claim for
unfair dismissal. These include share fishermen.
The employer has the burden to show that the dismissal was for a potentially fair reason
(s.98 ERA 196). There are five potentially fair reasons: capability or qualifications, conduct,
Employment law 125
redundancy, illegality and some other substantial reason. Section 98(3) defines what is
meant by capability and qualifications.
Where there has been a dismissal for an automatically unfair reason then the employer is
unable to argue that it was fair to dismiss in the circumstances. The automatically unfair
reasons include trade union membership, pregnancy, unfair selection for redundancy and
those raising health and safety issues.
Reasonableness
The tribunal will consider whether the dismissal for a potentially fair reason was fair in both
the circumstances and the procedure used. Guidance has been established by the decision
of the Employment Appeal Tribunal in Iceland Frozen Foods Ltd v Jones [1983] ICR 16.
KEY CASE ANALYSIS: Iceland Frozen Foods Ltd v Jones [1983]

ICR 16.
Background
An employee who had been dismissed argued that his dismissal was unfair. He had
been dismissed for failing to work the security system and for deceit. The question
that concerned the EAT was what the correct approach should be for determining
reasonableness.
The EAT provided guidance to determine reasonableness:
(i) The tribunal must start by considering words of the statute.

(ii) They must consider reasonableness of the employer’s conduct and not
their own views.
(iii) They must not substitute their decision on the right course to adopt for that
particular employer.
(iv) They must consider the ‘band of reasonable responses to the employee’s
conduct within which one employer might reasonably take one view,
another quite reasonably take another’.
(v) As an industrial jury, they must determine whether the employer’s actions
fell within the band of reasonable responses.
Ensuring that the employer dismisses an employee for a valid reason is important. Even if
the employee’s conduct is poor, there is a risk that dismissing the employee for a minor
incidence of misconduct could be held to be unfair. Employers are expected to adopt a fair
procedure (British Home Stores Ltd v Burchell [1980] ICR 303 and Orr v Milton Keynes
Council [2011] EWCA Civ 62) and to follow their own company disciplinary procedure or the
ACAS code of practice. It must be noted that what will be reasonable will depend on the
size of the employer’s business as well as the circumstances of the case.
Remedies for unfair dismissal
The employment tribunal can order that the employee is reinstated (he receives his old job
back) or is re-engaged (he receives a new position with the employer or an association
business). This is rarely ordered, as the employment relationship will have inevitably broken
down.
We will look at the types of compensation that the claimant can be rewarded:
(i) Basic award

This award is based on the number of years that the employee has worked for the
employer (s.119 ERA 1996). It takes into account up to 20 years’ service and for each year
the employee is awarded one week’s pay (capped at £450). However, note that there is a
multiplier based on the age of the employee:
• for every year that the employee worked aged 41 or above he will receive one
week’s pay x 1.5;
• for every year that the employee worked aged 22–40 he will receive one week’s
pay x 1;
• for every year that the employee has worked aged 21 or under he will receive one
week’s pay x 0.5.
Example
For example, imagine that Rushon has worked for Delby Ltd for 30 years. His weekly pay is
£670. Rushon is 49 years old.
1 We would cap Rushon’s weekly pay at £450.

2 We would disregard the first 10 years of his employment at Delby Ltd.
3 We would divide the years he worked into aged 41 and over, 22–40 and 21 and
under:
• 9 years aged 41 and over.
• 11 years aged 22–40.
Employment law 127
4 We would then do the calculations:
• 9 ⫻ £450 ⫻ 1.5 = £4,050

• 11 ⫻ £450 ⫻ 1 = £4,950
5 The final amount would be Rushon’s basic award.
It is important to note that the cap of £450 will be increased in the future and when
determining the basic award you should check what the current amount is.
We will now consider how you would calculate the following claimant’s basic award:
?
Sonya has worked at Delby Ltd for 13 years. Sonya is 28 years old and earns
£297 per week. Sonya has been unfairly dismissed and she would like to know
how much her basic award would be.
(ii) Compensatory award

This award is the amount that the tribunal considers to be just and equitable in the
circumstances (s.123 ERA 1996). It is based on the employee’s losses post dismissal. Under
s.124 ERA 1996, the maximum compensation available is £74,200. The compensation can
be reduced or increased by the tribunal for a number of reasons.
REDUNDANCY
Key definition: Redundancy
This occurs where the employer has dismissed an employee for reasons including the
closure of a business or the employee’s particular workplace, or where there is a
reduction in the need for the work that the employee performs.
Only employees are eligible to claim redundancy payments (s.135 EA 1996). According to
s.139, an employee will be dismissed by way of redundancy if the dismissal is wholly or
mainly attributable to the cessation of the employer’s business in the place where the
employee was employed, or the cessation of the employer’s business for the purpose that
the employee was employed for. The employee is also dismissed where the need for work of
a particular kind has ceased or diminished across the business or at a particular premise. If
the dismissal is not a genuine redundancy situation, then the employee will be considered to
have been unfairly dismissed and eligible to claim both the basic and compensatory award.
Not only must there be a genuine redundancy, the redundancy must be both fair in the
circumstances and procedure. There are different requirements for redundancies
depending on the number of employees who are being made redundant (fewer than 20,
20–99 and over 100). For example, the length of consultation required for 20–99
redundancies will be 30 days before there can be a dismissal, while for 100 redundancies
this is 45 days.
These requirements involve having a fair selection criteria to avoid the employer using
the redundancy situation to dismiss predetermined members of staff. It will not be a
redundancy if the employer could provide suitable alternative employment. However,
if the employer offers the employee suitable alternative employment and the employee
unreasonably refuses this, the employee will not be able to claim the statutory redundancy
payment.
Redundancy award
To receive the statutory redundancy award the employee must have worked for the
employer for more than two years. A claim must be made to the employment tribunal
within six months of the effective date of termination. The calculation of the statutory
redundancy award is the same as the basic award for unfair dismissal (see above).
CALCULATING AWARDS
You need to remember that employment law is complex and there may be many claims
being brought. Therefore, you cannot simply add together the available awards for each
claim and advise a client that she will receive the entire amount. The tribunal will not permit
a claimant to be over compensated. It is worth remembering that the award could be
reduced or increased due to a number of factors.
EQUALITY ACT 2010
For employers, the Equality Act 2010 (EA 2010) is important as it consolidates the previous
legislation that had provided protection from discrimination. Employers must not
Employment law 129
discriminate against their employees and therefore it is important to understand what

constitutes discrimination.
Protected characteristics
Under the EA 2010 there are nine protected characteristics (s.4). These are age, disability,
gender reassignment, marriage and civil partnership, pregnancy and maternity, race,
religion or belief, sex and sexual orientation. Each protected characteristic is defined by the
EA 2010 and case law. We shall look at disability and religion to demonstrate how the EA
2010 operates. To look at the other protected characteristics please visit: www.legislation.
gov.uk/ukpga/2010/15/contents.
Disability
Key definition: Disability
Section 6 EA 2010 defines disability as a physical or mental impairment that has a

substantial and long-term adverse effect on a person’s ability to carry out normal day-
to-day activities.
If the employee is suffering from an addiction then this is not a mental impairment.
However, in Power v Panasonic UK Ltd [2003] IRLR 151, it was held that if this causes a
physical or mental impairment then the employee will be regarded as disabled.
Schedule 1 provides guidance on what is meant by a long-term and substantial adverse

effect. A long-term effect means that the impairment should last at least 12 months, is likely
to last at least 12 months or is likely to last the rest of the person’s life. Substantial adverse
effects relate to normal day-to-day activities and not any specialist activities (Chief
Constable of Dumfries & Galloway v Adams [2009] ICR 1034. The employment tribunal must
consider expert medical evidence (where available) when determining this point. In Sussex
Partnership NHS Foundation Trust v Norris [2012] Eq LR 1068, the expert medical evidence
did not show that the job applicant’s recurring risk of infection, which was caused by
suffering from immunodeficiency, had a substantial adverse impact on the applicant’s
ability to carry out normal day-to-day activities. However, the tribunal deduced that it
would.
The focus should be on what the person cannot do, rather than what they can still do
(Goodwin v Patent Office [1999] ICR 302). The reason for this is quite clear, as someone who
is visually impaired is still capable of doing a significant number of day-to-day activities.
However, in J v DLA Piper UK [2010] ICR 1052, the Employment Appeal Tribunal held that in
some cases it is necessary to consider what the claimant can still do:
The ultimate question is no doubt always whether a particular capacity is

substantially affected; and it is thus immaterial that other capacities may be
wholly unimpaired. But in many cases, including this, considering what the
claimant is still able to do, in relation to the relevant capacity, is simply a part
of the exercise of assessing the extent to which that capacity is impaired. (at
p. 1079)
If medical treatment is used, then the effect of the medical treatment is disregarded when
determining the effect of the impairment (schedule 1, paragraph 5). Certain medical
conditions are deemed to be disabilities. According to schedule 6 these are cancer, HIV
infection and multiple sclerosis.
Religion or belief
Section 10 defines religion or belief. Subsection (1) states that any religion or indeed a lack
of religion is protected (i.e. atheists). Subsection (2) states that any religious or philosophical
belief is protected as is lack of a belief (case law on belief). From the guidance notes a
philosophical belief will not automatically be protected, as the belief must meet certain
conditions such as ‘be a belief as to a weighty and substantial aspect of human life and
behaviour’ and ‘not conflict with the fundamental rights of others’ (this comes from the
decision in Grainger Ltd v Nicholson [2010] 2 All ER 253).
PROHIBITED CONDUCT UNDER THE EQUALITY ACT 2010
Key definition: Prohibited conduct
The EA 2010 prohibits conduct including direct discrimination, indirect discrimination,

harassment and victimisation.
The EA 2010 prohibits certain types of conduct and these apply across all the protected
characteristics. However, you should note that some of these only apply to certain
protected characteristics and that we will only cover a few examples of prohibited conduct.
Where there has been prohibited conduct, the victim of the discrimination will be able to
apply to the employment tribunal to recover damages.
Employment law 131
Direct discrimination
Key definition: Direct discrimination
Section 13 prohibits direct discrimination. Direct discrimination occurs where the

employer would treat an employee less favourably than she does or would treat another
employee because of their protected characteristic.
There is no defence to s.13, unless the protected characteristic is age. It is not possible for
the employee to argue that there had been no intention to discriminate. An example of this
might be an old fashioned firm of builders that refuses to allow women to do heavy manual
work on a building site, or a hospital insisting that trainee male nurses are chaperoned
when working with patients (see Moyhing v Barts & London NHS Trust [2006] IRLR 860).
Indirect discrimination
Indirect discrimination is prohibited by s.19. This occurs where the employer applies ‘a
provision, criterion or practice which is discriminatory in relation to a relevant protected
characteristic’ of B who is their employee:
• This must be applied (or would be applied) to people who do not share B’s
protected characteristic.
• It must put someone sharing B’s protected characteristic ‘at a particular
disadvantage when compared with persons with whom B does not share it’
and ‘it puts, or would put, B at that disadvantage when compared with
persons with whom B does not share it’.
How does this work? Imagine that Francis is classified as disabled for the purposes of s.6
EA 2010. Francis’s employer has a rule that all staff must work one weekend a month. Due
to poor transport connections at the weekend, Francis struggles to commute to work as
she cannot drive a car for medical reasons. Francis would argue that this provision would
put someone who shared her protected characteristic at a particular disadvantage over her
co-workers who are not disabled. Francis would argue that she is at a particular
disadvantage. However, there is a defence that the employer can raise. The employer can
argue that the provision, criterion or practice is a proportionate means of achieving a
legitimate aim. An example of indirect discrimination is London Underground Ltd v Edwards
(No 2) [1999] ICR 494.
KEY CASE ANALYSIS: London Underground Ltd v Edwards (No 2)

[1999] ICR 494
Background
A single mother was employed as a train operator and complained that due to an
introduction of a new shift pattern she would be unable to work. This was because
she was now unable to arrange childcare. She was the only train operator who was
unable to accept the new shift pattern.
The relevant legislation at the time was the Sex Discrimination Act 1975, although
today it would be the EA 2010. The Court of Appeal held that there had been indirect
discrimination as statistically women, who were more likely to have childcare
commitments than men, would find it harder to comply with the new shift pattern.
The pool of comparison to determine whether discrimination had taken place was all
the train operators and the Court of Appeal held that the tribunal was right to take
into account their own knowledge of childcare responsibilities and the predominance
of single parents who were female over single parents who were male.
Discrimination arising from disability
Section 15 EA 2010 establishes the prohibited conduct of discrimination arising from

disability. This provision is different from s.13 as the employer would discriminate
where he ‘treats (the employee) unfavourably because of something arising in
consequence of B’s disability’, as opposed to ‘less favourably’ under s.13. This gives
disabled persons more protection and reverses the House of Lord’s controversial
decision in Malcolm v Lewisham LBC [2008] 1 AC 1399. The case related to a tenant of
Lewisham LBC. Lord Scott discussed the example of a blind man and his dog being
refused entry to a restaurant:
The dog is not a potential beneficiary of the (disability discrimination legislation).

It is the blind man who is. If he is refused entry it is not because he is blind but
because he is accompanied by a dog and is not prepared to leave his dog
outside. Anyone, whether sighted or blind, who was accompanied by a
dog would have been treated in the same way. The reason for the treatment
would not have related to the blindness; it would have related to the dog.
(italics added, at [35])
Employment law 133
Under s.15 there is no need to show less favourable, rather unfavourable treatment. This
has increased the protection afforded to disabled persons. However, the employer would
have a defence where the treatment complained of is ‘a proportionate means of achieving
a legitimate aim’.
Duty to make reasonable adjustments
Under s.20 there is a duty to make reasonable adjustments for disabled persons. In the
employment context this would entail providing access to a building and toilet facilities,
access to the kitchen and adjusting the workstation.
Harassment and victimisation
Harassment is prohibited by s.26 and could occur where the employer or a co-worker
‘engages in unwanted conduct related to a relevant protected characteristic’, which has the
purpose (i.e. it was deliberate) or the effect of violating the employee’s dignity or ‘creating
an intimidating, hostile, degrading, humiliating or offensive environment’. It would be
possible for a heterosexual man to bring a claim if his colleagues engaged in homophobic
banter at his expense, even if they knew he was heterosexual. This would be the case
because the victimisation was based on his supposed sexual orientation (see English v
Thomas Sanderson Blinds Ltd [2008] EWCA Civ 1421). Victimisation is prohibited under s.27.
Particular provisions relating to employment
Section 39 prevents discrimination for both employees and applicants. This provision is
important in the employment context, especially in terms of recruitment, dismissal and
opportunities such as training and promotion. Section 40 prevents the employer from
harassing employees and applicants. Originally, it also used to protect employees from
being harassed by a third party while in the course of their employment. This provision has
been repealed.
Genuine occupational requirements
Schedule 9 lists genuine occupational requirements. Where these apply there will not be
discrimination under provisions such as s.39. This protects employers who require a person
of a particular gender, age or a particular religion or race for a job. For example, the
Equality and Human Rights Commission has observed that: ‘If a butcher has to prepare
halal meat (meat that has been prepared in a way that is consistent with the Muslim faith),
it might be justified to insist that this role is performed by a Muslim.’
Now that we have looked at the protected characteristics and prohibited conduct, please
consider the following example:
?
Karl works for Delby Ltd as a manager in its showroom. Karl’s job requires him
to work Monday–Friday and to be on his feet for much of the day. Unfortunately,
Karl is involved in a car accident and his legs are badly injured. The doctors
estimate that Karl will need to use crutches for the rest of his life. He finds it difficult
to stand up for more than 15 minutes and uses medication to relieve the pain, which
helps him to be on his feet for more than 30 minutes at one time. Karl has requested
that he is permitted to move departments to work in the telesales team, so that he
can work at a desk. Karl has also requested that he can work at home on two days a
week as he finds commuting to work to be too tiring. Delby Ltd refuses to permit Karl
to move departments as he does not have telesales experience, and refuses his request
to work from home due to the costs in providing a laptop. In any event, the company
policy prohibits all employees from working at home.
Advise Karl as to whether he can claim that he has been discriminated against.
Equal pay
The EA 2010 also covers the equality of the terms offered. It prevents men and women
being offered lower pay than someone of a different gender and ensures that there is
equality during pregnancy and maternity leave.
HEALTH AND SAFETY
The employer owes the employee duties at common law. In Wilsons & Clyde Coal Co Ltd v
English [1938] AC 57, the House of Lords held that:
[T]here was a duty on the employer to take reasonable care and to use reasonable
skill, first, to provide and maintain proper machinery, plant, appliances, and works;
secondly, to select properly skilled persons to manage and superintend the
business; and thirdly, to provide a proper system of working. (per Lord Maugham,
at p. 86)
Employment law 135
In addition to the Health and Safety at Work Act 1974 that imposes statutory duties on the
employer, there are regulations that cover a variety of different health and safety issues.
SUMMARY
• It is important to determine whether someone is, or is not, an employee.

• Employees have greater statutory protection than other types of workers.
• The employee and the employer both owe each other important duties.
• If an employee is dismissed by the employer, she might be able to bring a claim
for wrongful dismissal and unfair dismissal.
• The Equality Act 2010 protects individuals from being discriminated against.
FURTHER READING
Emir, A. Selwyn’s Law of Employment, 18th edn (Oxford University Press, 2014) – a detailed and
comprehensive textbook that explores the areas covered in this chapter in considerable
detail.
Honeyball, S. Honeyball and Bowers’ Textbook on Employment Law, 13th edn (Oxford University
Press, 2014) – this book provides clear coverage of employment law.
Honeyball, S. Great Debates in Employment Law (Palgrave, 2011) – refer to this book for an
informative discussion on key areas of debate in employment law.
Sargeant, M. Discrimination and the Law (Routledge, 2013) – this book provides detailed coverage
of the Equality Act 2010.
Sargeant, M. and Lewis, D. Employment Law, 7th edn (Pearson, 2014) – this book offers more
detail on the material covered here.
Chapter 8
Unincorporated businesses
LEARNING OBJECTIVES
• understand what is meant by an unincorporated business;

• distinguish between a sole trader and a partnership;
• appreciate the rules that govern a partnership and the role of the partnership
agreement;
• comprehend the potential problems that may arise when being in a partnership;
• understand how a partnership can be dissolved and the potential personal
liabilities of the partners.
INTRODUCTION
In this chapter we will look at two different types of unincorporated businesses, sole traders and
partnerships. We will look at why you would choose to have a business that is unincorporated, as
opposed to a business that is incorporated. As you read through both this chapter and Chapter 9
you should consider those businesses that you encounter on a daily basis, and determine what
type of business these are, and why might these businesses have been established in that
particular way.
RUNNING A BUSINESS AS A SOLE TRADER
Key definition: Sole trader
A type of unincorporated business that is carried on by one person who is personally

liable for all liabilities. There is no distinction between the sole trader and the business.
Key definition: Unincorporated business
A business that does not have a separate legal personality to that of its owners.
Where a person sets up business on their own they can choose to be a sole trader. A sole
trader is a type of unincorporated business and this means that in law there is no
distinction between the business owner and the business. Unlike a company, a sole trader
does not have a separate legal personality and the business’s assets and liabilities belong
to her. If Alicia Andrews sets up a business as a sole trader and the business incurs
liabilities of £500,000 and does not have any assets, then unfortunately, it will be Alicia who
must pay the £500,000 from her own personal assets. This will mean that Alicia may have
to sell her own assets, such as her house and car, to pay the money. If Alicia does not have
the money she could be declared bankrupt. This is a significant consideration for those
wishing to establish a business as a sole trader.
Lack of formalities in setting up the business
There are no formal requirements that have to be met when setting up a business as a sole
trader. This is unlike an incorporated business. If you have an idea to make money you can
decide to become a sole trader the moment that you read this sentence and you can cease
being a sole trader as quickly as that. There are a number of points that you must consider.
The first is that if there is more than one person running the business then it will be a
partnership (see below). The second is that as a sole trader you will be self-employed and
will have to pay income tax on any profits and pay national insurance. This will require you
to contact Her Majesty’s Revenue and Customs (HMRC) and to notify them of this. You will
need to keep accounts and to submit the relevant information to HMRC. The third is that
there are restrictions on what you can call your business, as you must not use a name that
implies that you are running an incorporated business. You can either use your own name,
or have a business name, but in any event you must state on all correspondence and at
your premises that you are trading under the business name. So for Alicia this would be
‘Alicia Andrews t/a Learn French Quickly’. The relevant rules for the information that a sole
trader must disclose to the public and the restrictions on the business’s name are
contained in the Companies Act 2006 (CA 2006).
Lack of formalities when running the business
Unlike a company, there are no formalities required when running a business as a sole
trader. The financial affairs of the business are not made public.
Unincorporated businesses 139
RUNNING A BUSINESS AS AN ORDINARY PARTNERSHIP
Key definition: Partnership
This is a type of unincorporated business and is created where two or more persons
carry on a business together with the intention of making a profit.
In this section of the chapter we will consider ordinary partnerships. Imagine that Noor,
Philippe, Sandra and Joshua wish to go into business together. As there is more than one of
them they would not be able to be a sole trader, unless the other three are content to just
be employees. The four of them could go into business together as a partnership. The type
of partnership that we will be exploring is an ordinary partnership and is governed by the
Partnership Act 1890.
Why might you set up a partnership?
An ordinary partnership is an unincorporated business and does not have a separate legal
personality and therefore there is no legal distinction between the partnership and the
partners. This is significant as in the event that the partnership cannot afford to pay its
liabilities it will be the partners who will be personally liable for all outstanding liabilities. We
shall see that the partners need to be aware from the outset that the other partners’
actions could result in all the partners being liable. Therefore, Noor, Philippe, Sandra and
Joshua will need to be able to trust each other. This is different than being a sole trader,
where you make all the decisions and are responsible for any liabilities incurred.
Partnership Act 1890
If Noor, Philippe, Sandra and Joshua wish to form a partnership then they should make sure
that they understand the Partnership Act 1890 (PA 1890). It is not a particularly lengthy Act
and its provisions are relatively clear. The PA 1890 provides mandatory rules that will apply
to all partnerships, and fall-back provisions which the parties are able to change in
accordance with their own agreement. The PA 1890 can best be described as the rulebook
and a failure to understand how its terms will affect the partnership could be detrimental to
the partners. This is why a lawyer should advise the parties when they decide to form a
partnership.
Setting up a partnership
Noor, Philippe, Sandra and Joshua wish to form a partnership. We shall see how they would
go about doing this.
The partnership must comply with the statutory definition

Section 1(1) of the PA 1890 states that ‘[p]artnership is the relation which subsists between
persons carrying on a business in common with a view of profit’. This means that there
must be two or more persons and this is a condition that Noor, Philippe, Sandra and Joshua
clearly satisfy. Additionally, as they will be working together and intend to make a profit,
Noor, Philippe, Sandra and Joshua would meet the statutory definition of a partnership. The
consequences of being in a partnership are illustrated by the decision in Hodson v Hodson
[2009] EWCA Civ 1042.
KEY CASE ANALYSIS: Hodson v Hodson [2009] EWCA Civ 1042
Background
In Hodson v Hodson [2009] EWCA Civ 1042, the issue was whether the appellant was
in a partnership with another defendant. The appellant argued that there was no
partnership as she had sold 99 per cent of the legal practice and had only retained
the additional 1 per cent so that she could supervise the new owner, as the Law
Society had mandated a supervision requirement.
The Court of Appeal held that the appellant and the new owner were in a partnership
as the partnership deed met the requirements of s.1(1) PA 1890. Importantly, the
legal practice would not have been in business without the appellant’s supervisory
capacity. The decision meant that the appellant was liable for damages awarded by a
court against the partnership.
So long as the requirements in s.1(1) PA 1890 are met there will be a partnership even if
one of the partners does not receive a share of the profits. This was the case in M Young
Legal Associates Ltd v Zahid (A Firm) [2006] EWCA Civ 613 where a partner was just paid a
salary. The court held that there was a partnership in order for the partners to practice
together as solicitors. It was held that a partner regardless of whether he receives a share
of the profits, or just a salary, would still be jointly liable for the partnership’s liabilities.
When is a partnership created?

In law a partnership is created as soon as the statutory requirement in s.1(1) is met. This
point is demonstrated in the House of Lords’ decision in Khan v Miah [2000] 1 WLR 2123.
KEY CASE ANALYSIS: Khan v Miah [2000] 1 WLR 2123
Background
The claimant and defendant had decided to go into business together as proprietors
of a restaurant. They had acquired a suitable premise and had fitted it out as a
restaurant. However, the relationship had broken down and prior to the restaurant
opening the claimant had decided to end the joint venture. The question was
whether there was a partnership. The Court of Appeal had held that there was no
partnership as the business had yet to trade.
The House of Lords held that the Court of Appeal was wrong to hold that there could
be no partnership prior to the business trading. Lord Millett (at p. 2127) was critical of
the narrow approach taken by the Court of Appeal:
[The Court of Appeal] described the business which the parties agreed to
carry on together as the business of a restaurant, meaning the preparation
and serving of meals to customers, and asked themselves whether the
restaurant had commenced trading by the relevant date. But this was an
impossibly narrow view of the enterprise on which the parties agreed to
embark. They did not intend to become partners in an existing business.
They did not agree merely to take over and run a restaurant. They agreed to
find suitable premises, fit them out as a restaurant and run the restaurant
once they had set it up. The acquisition, conversion and fitting out of the
premises and the purchase of furniture and equipment were all part of the
joint venture, were undertaken with a view of ultimate profit, and formed
part of the business which the parties agreed to carry on in partnership
together.
There is no rule of law that the parties to a joint venture do not become
partners until actual trading commences. The rule is that persons who
agree to carry on a business activity as a joint venture do not become
partners until they actually embark on the activity in question. It is
necessary to identify the venture in order to decide whether the parties
have actually embarked upon it, but it is not necessary to attach any
particular name to it. Any commercial activity which is capable of being
carried on by an individual is capable of being carried on in partnership.
It is clear that Lord Millett viewed the preparatory steps carried out by the parties as
being very important and sufficient to give rise to a partnership as they were being
undertaken with a view to make a profit. We can see that such an approach is
sensible as a business does not start the moment the first paying customers come
through the door, but rather when you lay the groundwork in order to establish the
business. His Lordship observed that:
The work of finding, acquiring and fitting out a shop or restaurant begins
long before the premises are open for business and the first customers
walk through the door. Such work is undertaken with a view of profit, and
may be undertaken as well by partners as by a sole trader.
The consequences of this decision is that a partnership was held to exist and
therefore the obligations, duties and rules about property owner and profits are
applicable even before the business commences trading.
The rules for determining existence of a partnership are listed in s.2 PA 1890. Section 2(3)
concerns the effect of an individual receiving a share of the partnership’s profits; it states
that receiving ‘a share of the profits of a business is prima facie evidence that he is a
partner in the business’. Therefore, a person who receives a share of the profits would
need to bring evidence to rebut this presumption. Subsection (3) must be read with
paragraphs (a)–(e) which list circumstances where receiving a share of profits does not
make a person a partner.
The firm
Key definition: Firm
This term refers to the persons who have entered into a partnership and they are
referred to collectively as the firm.
Under the PA 1890 the word firm is used to refer to a partnership. Section 4 states that,
‘[p]ersons who have entered into partnership with one another are for the purposes of this
Act called collectively a firm, and the name under which their business is carried on is
called the firm-name’. This is why legal practices are referred to as firms, as they have been
set up as partnerships.
The partnership agreement

There is no requirement that Noor, Philippe, Sandra and Joshua are required to draft a
written partnership agreement. As soon as the requirements in s.1(1) are satisfied they will
be regarded in law as a partnership. If they do not agree specific terms as to how the
partnership will be governed, then the PA 1890 will apply and provide a set of rules to
determine how the partnership will be run. Noor, Philippe, Sandra and Joshua could have
agreed certain terms such as payment of a salary and the sharing of profit orally and this
would still be effective. However, in the interests of certainty and ensuring that the
partnership agreement reflects Noor, Philippe, Sandra and Joshua’s true intentions it is
advisable that there is a written partnership agreement. The written partnership agreement
does not have to be executed by deed. You will see that many of the fall-back rules provided
by the PA 1890 may not suit every partnership and so it is important that the partnership
agreement is clear as to what will happen with regards to the sharing of the profits and
other important considerations.
The partnership agreement can be varied at a later date by the consent of all the partners.
The partner’s consent can either be express or inferred from a course of dealings between
the partners (s.19 PA 1890).
In the partnership agreement it is possible to create a fixed-term partnership, a partnership

for a specific task, or a partnership at will. It is important that Noor, Philippe, Sandra and
Joshua consider how long they wish to be in business together.
No need to register a partnership at Companies House

In Chapter 9 we shall see that in order to create an incorporated business such as a limited
liability partnership or a private company limited by shares there are requirements that need
to be satisfied before the business can be registered. These requirements relate to the
documentation and fee that are stipulated by the legislation governing each type of business
and these must be submitted to Companies House. The advantage of setting up a partnership
is that none of these requirements apply. Equally, none of the ongoing reporting
requirements apply to partnerships and the partnership’s affairs are not made public on the
register at Companies House. This is important as incorporated businesses must submit their
accounts to Companies House and anyone is able to view the business’s financial health.
Naming restrictions
The Companies Act 2006 (CA 2006) contains restrictions on what the partnership can be
called. The restrictions do not prevent ‘individuals carrying on business in partnership
under a name consisting of the surnames of all the partners without any addition other
than a permitted addition’ (s.1192(2(b)). So if Julia Smith and Richard Wells were to go into
partnership it could be called ‘Smith and Wells’. However, they could use permitted
additions – their forenames ‘Julia Smith and Richard Wells’ or their initials ‘J. Smith and R.
Wells’ (s.1192(3)(b)). Section 1197 states that it is an offence to have a company that is
misleading as to the type of business that it is. Therefore, the partnership could not be ‘Julia
Smith and Richard Wells Ltd’, as this would suggest that the partnership is a private limited
company. A partnership could trade under a business name and not be called by its
partners’ surnames. However, it is also important to note the extensive restrictions on the
choice of business names under the CA 2006. Unsurprisingly, when naming a partnership it
is important to avoid incurring liability under the tort of passing off. We explored this tort in
Chapter 4 and there will be liability where a name is similar to that of another business and
this causes confusion for customers or takes customers away from the other business due
to the similarity of the name (see Ewing v Buttercup Margarine Co Ltd [1917] 2 Ch 1).
Disclosure of important information

A partnership must state the name of each member of the partnership and the place of
business on all business letters and other important correspondence (s.1202(1) CA 2006).
For the purposes of s.1202(1)), if there are more than 20 partners you only need to disclose
the names of the first 20 (s.1203(1)). However, a full list must be kept at the partnership’s
place of business and anyone is able to inspect this list (s.1203(2) and (3)). The disclosure
requirements must also be displayed in a prominent position at the partnership’s premises
or any other place where customers or suppliers have access (s.1204(1)).
?
Noor, Philippe, Sandra and Joshua decide to set up a partnership. They decide
that the written partnership agreement will be signed on 1 August and on this
date they will officially become partners of the firm. In the meantime they all
meet up at Joshua’s flat and think of ways to make money. They decide that Sandra
will not receive any share of the profits, but will instead receive a salary of £17,000 a
year. On 18 July, Philippe is sent by the others to purchase £40,000 worth of stock from
ABC Ltd and plans to use this for the partnership.
Consider the following points:
• On 18 July was the partnership in existence? Or did the partnership only

come into existence on 1 August?
• Would Sandra be regarded as a partner if she did not receive a share of the
profits?
• What could the partnership be called and what information would need to
be disclosed and how would this disclosure be achieved?
Running the partnership
All the partners are entitled to take part in the management of the partnership (s.24(5) PA
1890). The partners could decide expressly or impliedly that the management could be
restricted to certain partners. If the partners are in dispute about ‘ordinary matters
connected with the partnership’, then s.24(8) states that a majority of the partners may take
the decisions. There is a restriction here as ‘no change may be made in the nature of the
partnership business without the consent of all existing partners’. This means that decisions
reflecting the nature of the partnership cannot just be taken by a majority of the partners.
Section 24(8) can be amended by the partner’s express or implied agreement.
No entitlement to a salary
In Noor, Philippe, Sandra and Joshua’s partnership none of the partners are entitled to be
paid a salary (s.24(6)). However, the partners could have agreed expressly or impliedly to
change this. A salary could be paid, for example, if Noor is devoting more time than any of
the other partners to carrying out the partnership’s business. In that case the partnership
could decide to pay her a salary.
Equal division of profits (and losses)

When the partnership is created Noor, Philippe, Sandra and Joshua will subscribe by
allocating capital to the partnership. If they all intend to contribute an equal amount and
devote roughly the same amount of time working then equal division of profits would make
sense. Section 24(1) PA 1890 states that ‘[a]ll the partners are entitled to share equally in
the capital and profits of the business, and must contribute equally towards the losses
whether of capital or otherwise sustained by the firm’. The partners can change this
through express or implied agreement and could agree that there will be an unequal
division of profits and losses.
Partnership property
The partnership does not have a separate legal personality and therefore it cannot hold
property in its own right and so the property is owned by the partners. This means that any
property held and applied by the partners for the purposes of the partnership must not be
used for any other purpose (s.20(1) PA 1890). We can see how this applies in practice when
we consider the Court of Appeal’s decision in Popat v Shonchhatra [1997] 1 WLR 1367.
KEY CASE ANALYSIS: Popat v Shonchhatra [1997] 1 WLR 1367
Background
In Popat v Shonchhatra a partnership had been entered into and the leasehold of a
shop acquired by the partners as joint tenants. Popat left the partnership and
Shonchhatra purchased the freehold of the shop. Later on Shonchhatra sold the
freehold and the goodwill of the business.
The Court of Appeal held that as soon as any asset was contributed to the
partnership it became partnership property and no one partner could argue that he
owned a specific asset. The partners both had a propriety interest in all the assets.
The freehold had been purchased with partnership assets and therefore Popat was
entitled to a share of the sale price.
Section 21 PA 1890 states that anything purchased with partnership property is considered
to belong to the firm. In Nadeem v Rafiq [2007] EWHC 2959 (Ch), the issue involved whether
there was a partnership and if there was whether the premise that had been purchased
was partnership property. The court answered both issues in the affirmative. Both partners
had contributed to the deposit to purchase the premises through the business bank
account. Therefore, the premises was an asset of the partnership.
The ability of a partner to bind the partnership
In this next section we shall see the problems that may arise for Noor, Philippe, Sandra and
Joshua as partners. We will look at the authority of each partner to bind the partnership,
which really means incurring liability for all the partners (see Figure 8.1).
Section 5 PA 1890 states that:
• 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 in the usual way
business of the kind carried on by the firm of which he is a member binds the firm
and his partners
Entering into Partnership

Actual
a contract on liable/must
authority to
behalf of the honour
do this
partnership contract
But if the
Entering into Partnership
No actual contract is
a contract on liable/must
authority to usual for
behalf of the honour
do this business of
partnership contract
partnership
Figure 8.1 In what circumstances under s.5 PA 1890 can an individual partner
bind the partnership?
• 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.
This is an important section and it is necessary to consider each line to see how it applies in
practice. We will now apply s.5 to Noor, Philippe, Sandra and Joshua’s partnership (the firm):
• Sandra is an agent of the firm and the other partners and the firm does not have a
distinct legal personality. As an agent of the firm Sandra can enter into contracts
on behalf of the firm, although this must be for the purpose of the partnership’s
business.
• If Sandra enters into a contract with a third party on behalf of the firm then the
firm will be liable to honour that contract and will be liable for any debts incurred.
• This makes sense if the other partners have agreed for Sandra to enter into that
particular contract or contracts of this type, as then Sandra will have actual
authority.
• However, what if Sandra was told that she cannot enter into a contract as all the
partners must approve this type of decision? In that case the firm will be liable for
the contract if Sandra’s act was for the ‘carrying on in the usual way business of
the kind carried on by the firm’. The firm would have to honour the contract if it
was a contract that a partner for that type of firm would usually enter into. This is
apparent authority and will bind the firm in the absence of Sandra having actual
authority.
• If Sandra had no authority then the firm would not be liable if the third party knew
that Sandra had no authority, or did not know that Sandra was a partner of the
firm and believed that the contract was between it and Sandra in her personal
capacity.
The problem for the other partners is that if Sandra exceeds her authority and enters into a
contract on behalf of the firm, then if Sandra is held to have apparent authority it will be the
firm that incurs liability. Importantly, if there are insufficient partnership assets to cover the
amount owed it will mean that the partners are personally liable. The firm could attempt to
sue Sandra but she may not have the personal assets to compensate the firm.
When will the firm by bound?
Considering the example above, if Sandra had purchased a printing machine worth £4,000
and the firm was a printing business, then it is likely that the firm would be bound.
However, there will be times when the contract entered into by a partner will be held not to
be usual for a particular partnership’s business.
I) PREPOSTEROUS INVESTMENT SCHEME
In JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057, a firm of solicitors was held not to be
bound by a partner’s statements, as the transaction and the partner’s preposterous
promises as to the expected risk free returns were not something that was within the
ordinary course of business of a solicitor. The partner had promised the claimant a risk
free investment scheme. Once the money was invested, the partner would manage the
scheme. However, the scheme was fraudulent and the partner was held personally
liable for deceit.
II) LIABILITY FOR FRAUD WHERE AN UNDERTAKING IS MADE WITHIN THE

USUAL COURSE OF BUSINESS
KEY CASE ANALYSIS: United Bank of Kuwait v Hammoud [1988]

1 WLR 1051
Background
Mr Emmanuel, a partner in a firm of solicitors, had made an undertaking to a number
of banks that turned out to be fraudulent. The question was whether the firm was
liable for the undertaking given by a partner.
The Court of Appeal held that as the banks when they relied on the undertaking would
have seen this as something given in the usual course of a solicitor’s business, then
the firm was liable. Lord Donaldson MR explained why the firm was liable:
The banks, knowing that Mr. Emmanuel was a practising solicitor with
established firms, were entitled to assume the truth of what he stated
unless alerted to the fact that the contrary might be the case. There was
nothing to alert them. All that could be said was that they ought to have
known that their knowledge was incomplete but there was nothing known
to them which was wholly inconsistent with the facts as they were asserted
by Mr. Emmanuel. (at p. 1066)
The partners might agree to restrict the ability of a partner to bind the firm. If a partner
breaches this agreement then he will be liable to the other partners. The agreement will
only be binding on third parties who are aware of the restriction (s.8 PA 1890).
Liability of the individual partners
All partners are bound by acts done on behalf of the firm (s.6 PA 1890). This could be where
a contract has been entered into or a guarantee has been given. Looking at s.5 above we
can see that even where one partner acts without the authority of the other partners and
incurs a liability, then the other partners could be personally liable if the partnership has
insufficient assets. Section 9 states that ‘[e]very partner in a firm is liable jointly with the
other partners . . . for all debts and obligations of the firm incurred while he is a partner . . .’.
This means that if the business owes £100,000 to its creditors and only has £10,000 in
assets, the creditors can sue the partners in their personal capacity as they all will be jointly
liable for the debt. If Philippe, Sandra and Joshua have no assets and declare bankruptcy,
then it will be Noor who will end up paying off the business’s debts. While the firm will be
liable for any tort committed by a partner where he or she acts with actual authority or
within ‘the ordinary course of the business of the firm’, the individual partners will also be
jointly and severally liable (ss.10 and 12).
A liability of a non-partner
It is not only actual partners who will incur liability. A non-partner who holds herself out, or
allows another to hold her out as a partner, will be liable where a third party has on the
basis of this ‘representation given credit to the firm’ (s.14(1)). This makes sense as in the
event that the firm does not pay the third party for the goods, the third party has been led
to believe that he can recover the money from the alleged partner and it would be unfair if
that was not the case.
?
Noor, Philippe, Sandra and Joshua are in a partnership that provides catering for
events. They have agreed that all the partners must approve any contract over
£1,000. On Monday, Joshua walks past Mega Kitchen Ltd’s showroom and sees
an industrial oven on sale for £13,000. This particular oven runs on solar power and
can be used anywhere. The showroom manager explains to Joshua that the oven usually
costs £18,000 and that if you buy four ovens you will receive a further discount of 10
per cent. Joshua thinks that the deal is too good to be true and enters into a contract
to purchase four ovens at £46,800. The money is due in 14 days’ time. On Wednesday
the invoice arrives at the firm’s offices and the other partners are shocked to see what
Joshua has done. Sandra telephones Mega Kitchens Ltd to explain; however, she is
informed that a contract is a contract and that the money is owed. Philippe logs into
the firm’s online bank account and sees that the firm has only £3,000. This is in addition
to its assets which are worth £4,000. A quick look on an online auction site reveals
that the ovens are worth £2,000 each secondhand.
Noor, Philippe and Sandra are concerned that the firm may have to pay for the ovens
and that there are not enough assets to cover the money due. They are aware that
Joshua lives with his parents and has £500 in savings.
Advise Noor, Philippe and Sandra about their potential liabilities with respect to the
money owed to Mega Kitchens Ltd.
Right to be indemnified and money lent to the firm
Imagine that Philippe has spent his own money to pay for goods to be used by the
partnership. Philippe will want to be indemnified by the firm for the money that he has
spent. Section 24(2) permits a partner to be indemnified where the payment that he has
made or the liability that he has incurred was in ‘the ordinary and proper conduct of the
business of the firm’ or was made in order to save or preserve the firm’s property. When
the partnership is formed the partners will each subscribe capital, which will be used to
acquire premises and stock. However, it may be necessary for a partner to loan additional
money to the partnership and on this money she will be entitled to be paid 5 per cent
interest (s.24(3)). These rights can be excluded by the express or implied agreement of the
partners.
Bookkeeping
The partnership’s books need to be kept at the firm’s place of business and each partner
should be able to inspect the accounts (s.24(9)).
Duties of the partners
The partners are fiduciaries and owe fiduciary duties to each other. According to Lord Eldon
LC in Const v Harris (1824) Turn & R 495, at 525 they are expected ‘to be true and faithful to
each other’. These rules were developed in equity and are extremely strict. In Chapter 6 we
looked at the definition of a fiduciary when we explored the duties of an agent to his
principal. The PA 1890 contains a number of statutory duties.
According to s.28 PA 1890, ‘[p]artners are bound to render true accounts and full
information of all things affecting the partnership to any partner or his legal
representatives’. This means that the partners cannot hide information and must make a
full disclosure about all monies made from business transactions. Partners cannot without
the consent of the other partners make private profits ‘from any transaction concerning the
partnership, or from any use by him of the partnership property name or business
connexion’ (s.29(1)). This means that if Noor uses a van that had been purchased with the
firm’s money for her gardening business at weekends, then she would be in breach of
s.29(1) as she is using the partnership’s property and should account for the use of the van.
Finally, s.30 prevents a partner from competing against the firm. This section will be
breached where a partner ‘carries on any business of the same nature as and competing
with that of the firm’ and the consequences of this will be that the partner must give the
firm all the profit that he has made. An example of how these duties can be breached is
Broadhurst v Broadhurst [2006] EWHC 2727 (Ch). In this case the partnership involved the
importation and sale of cars. It was alleged by one partner that the other had breached his
duties. There were a number of alleged breaches which the court accepted including
lending a car that the partnership owed to a third party, which had caused the car to
deteriorate and decrease in value, and lying about the fact that a car had been sold and
thereby not disclosing the sale of an expensive car to his wife by pretending that the car
was still for sale.
Leaving the partnership
A partner may decide that they wish to retire from the partnership. Simply by deciding to
retire from the partnership will not mean that the partner avoids liability for any outstanding
debts that existed prior to his retirement (s.17(2)). Section 17(3) provides for the outgoing
partner to enter into an agreement with the remaining partners of the newly constituted
firm (i.e. without the old partners) and the creditors to discharge all liabilities. It is possible
for the outgoing partner to be liable to future creditors of the firm if they believed that he is
still a partner. Section 36 states that the outgoing partner must take steps to give notice of
the change and in England or Wales he would do this by taking out an advertisement in the
London Gazette.
Expelling a partner
Section 25 PA 1890 states that ‘[n]o majority of the partners can expel any partner unless a
power to do so has been conferred by express agreement between the partners’. So if
Noor, Philippe and Sandra decide that they could no longer work with Joshua and wish to
expel him from the partnership then they could not do this unless the partnership
agreement permitted expulsion. In this case they will need to dissolve the partnership (see
below).
New partners
No new partners may join the partnership unless all the existing partners consent to this
(s.24(7)). This is the general rule and can be modified by the partners’ express or implied
agreement.
Dissolution/Terminating the partnership
If a partnership is not for a fixed term then it will be a partnership at will. A partner could
decide to determine the partnership and dissolve it by giving notice to the other partners
(s.26(1)). A partnership will also dissolve if it was established for a specific adventure and
that adventure has been completed (s.32). The partnership will also be dissolved if a partner
dies or is declared bankrupt (s.33(1)). The partnership will be dissolved if it becomes
unlawful for the firm to continue (s.34).
Under section 35 the partners can ask the court to dissolve a partnership. This will occur
where the consent of all partners cannot be obtained. The partnership will be dissolved for
reasons including where a partner ‘is guilty of conduct that is calculated to prejudicially
affect the carrying on of the business’, or where a partner
fully or persistently commits a breach of the partnership agreement, or otherwise

so conducts himself in matters relating to the partnership business that it is not
reasonably practicable for the other partner or partners to carry on the business in
partnership with him.
WHAT HAPPENS TO FINAL ASSETS WHEN THE

PARTNERSHIP IS DISSOLVED?
Section 44 provides how the final assets will be dealt with if the partnership is dissolved
(Figure 8.2).
(a) pay out any losses first. If there is a shortfall then

individual partners are liable ‘in the proportion in which
they were entitled to share profits’ and (b) the partnership’s
assets and any contributions by partners will be used to:
1 Pay money which is owed to non-partners (creditors)
2 Repay the partners the money which they have

advanced to the firm (lent) and not their capital investment
3 Repay the partners’ original capital investment
4 Finally, any profits will be divided among the partners

in accordance with the partnership agreement
Figure 8.2 Section 44 PA 1890 governs what happens when a partnership is

dissolved
?
Noor, Philippe, Sandra and Joshua decide to dissolve the partnership. They each
subscribed £3,000 capital to the partnership and subsequently Sandra lent the
partnership £5,000. The partnership has the following assets, £5,000 in the bank
account and stock in Noor’s garage that could be resold for around £6,000. There is
also £5,700 which is owed to various creditors.
How would s.44 PA 1890 apply here?
LIMITED PARTNERSHIPS
Key definition: Limited partnership
A type of partnership where there is a distinction between the general members who
have unlimited liability for the firm’s debts and limited partners whose liability is limited
to the extent of their capital contribution to the firm.
The Limited Partnership Act 1907 (LPA 1907) created a new type of partnership where a
partnership could have two types of members, general partners who would be liable for all
the firm’s liabilities and limited partners, who will only be liable to the extent of their capital or
property contribution to the partnership (s.4(1)). The Partnership Act 1890 applies to this type
of partnership, unless it is inconsistent with the LPA 1907 (s.7). A limited partner is not
allowed to take part in the management of the firm and neither does he have the power to
bind the firm (s.6(1)). There is a duty to register the limited partnership at Companies House
and this must include the proscribed details that must be supplied, including the names of the
limited partners and the amount that they have contributed to the limited partnership (ss.8
and 8A). The name of the limited partnership must end with ‘limited partnership’ or ‘LP’ (s.8B).
SUMMARY
• A sole trader is a type of unincorporated business that does not have a separate
legal personality.
• A partnership is an unincorporated business and does not have a separate legal

personality.
• A partnership is governed by a partnership agreement or in the absence of any
agreed terms by the Partnership Act 1890.
FURTHER READING
MacIntyre, E. Business Law, 6th edn (Pearson, 2013) – this textbook provides additional detail on
the material covered in this chapter.
Marson, J. Business Law, 3rd edn (Oxford University Press, 2013) – you should refer to this
textbook for additional detail on partnerships and sole traders.
Morse, G. Partnership Law, 7th edn (Oxford University Press, 2010) – this is an extremely detailed
and well-written text that explores partnership law.
Chapter 9
Incorporated businesses
LEARNING OBJECTIVES
• understand the distinction between incorporated and unincorporated businesses;

• appreciate why an ordinary partnership may wish to become a limited liability
partnership;
• distinguish between public limited companies and private limited companies;
• comprehend the significance of the veil of incorporation and in what
circumstances will the courts pierce the veil;
• understand the extent of the duties owed by a director and the rights that the
shareholders have.
INTRODUCTION
This chapter considers the different types of incorporated business structures that you will
encounter as part of your studies (Figure 9.1). Each of the different business structures
covered in this chapter has a separate legal personality to that of its owners. This means
that in law the business, because it has been incorporated at Companies House, is distinct
Private limited
company (Ltd)
Incorporated Public limited

businesses company (plc)
Limited liability
partnership
(LLP)
Figure 9.1 Chapter overview

from whoever may own it. The separation between the business and its owners is
significant and it offers protection to those who want to protect their personal assets in the
event that the business becomes insolvent. In this chapter we will look at limited liability
partnerships, public limited companies and private limited companies. As you work through
this chapter it is useful to consider why people in business choose to set up each of the
three different types of incorporated businesses.
LIMITED LIABILITY PARTNERSHIP ACT 2000
In Chapter 8 we explored unincorporated businesses that included ordinary partnerships,

which as you will remember did not have a separate legal personality. For example, if Ed,
David and Nick decide to set up a partnership then the liabilities of the partnership will be
indistinct from all three of the partners. So, if the partnership accrued £500,000 in liabilities
to its creditors, then all three of the partners would be liable to repay this, even if it meant
that they had to sell their own personal assets to do this. This type of partnership is
regulated by the Partnership Act 1890 and there is a risk that partners will have unlimited
liability for the debts of the partnership. The Limited Liability Partnership Act 2000 (LLPA
2000) has provided that those businesses that wish to operate as a partnership can enjoy
limited liability without having to become a company. A limited liability partnership has a
separate legal personality to its members (s.1(2)). In order to incorporate a limited liability
partnership the requirements in s.2 must be met. Section 2(1) requires that ‘two or more
persons associated for carrying on a lawful business with a view to profit must have
subscribed their names to an incorporation document’. The content of the incorporation
document is laid out in subsection (2). The members of the limited liability partnership are
not employees (s.4(4)). The members’ relationship with each other is governed by the
partnership agreement (s.5). The schedule to the LLPA 2000 states that the name of a
limited liability partnership must end with limited liability partnership or llp or LLP. You will
typically see that many law firms and accountancy firms have chosen to become limited
liability partnerships. However, it should be noted that there are considerably more
administrative requirements with a limited liability partnership than an ordinary partnership.
The registration and continual notification requirements for a limited liability partnership are
not that dissimilar to that of a company.
There are differences between a limited liability partnership and a private company
limited by shares. In a company it will be the directors, who may or may not be
shareholders, who will conduct the management of its affairs. In many companies there
is no correlation between being a shareholder (one of the owners) and becoming a
director of the company. Whereas, in a limited liability partnership all of the members
will take part in the management of the business. The profits of the limited liability
partnerships are shared among the members and each member will pay income tax
on his share of the profit.
Incorporated businesses 159
THE COMPANIES ACT 2006
The Companies Act 2006 (CA 2006) is 1,297 sections in length and was the product of a
comprehensive reform of company law. The CA 2006 replaced the Companies Act 1985.
TYPES OF COMPANIES
In this chapter we will explore limited companies. A limited company is one where the
liability of its members is limited by shares or by guarantee. However, a company can be
unlimited and this will mean that the liability of its members is unlimited (s.3 CA 2006).
Public limited companies
Members of a public company can have their liability limited by shares or by guarantee.
A public company will be listed on the stock exchange and any member of the public is
able to purchase shares in the company and to sell their own shares. It is possible for a
company to be incorporated as a public company and then to become private (ss.97–101).
Equally, the opposite can happen (ss.90–96). This would happen if ABC Ltd wanted to raise
money to compete against its international competitors. If it was a public company then it
could raise additional funds by issuing shares on the stock exchange.
Private limited companies
A private limited company could be incorporated and have its members’ liability limited by
shares. This would mean that in the event that the company became insolvent the
shareholders would only be liable up to the extent of their shareholding. Alternatively, the
company could be incorporated and have its members’ liability limited by guarantee. This
would mean that in the event that the company becomes insolvent the members would
guarantee to pay a specific amount.
SETTING UP A COMPANY
In this chapter we will look at a private company that has been limited by shares. This type
of company is the most common type of incorporated business that is used in the United
Kingdom. We shall see the reasons for this below. In order to set up a company, a number
of important steps need to be completed. It is important to remember that a company will
not exist until Companies House issues a certificate of incorporation.
Promoters
Key definition: Promoter
A person who undertakes to establish a company and takes the steps that are
necessary in order to achieve this.
Key definition: Pre-incorporation contract
A contract entered into by the promoters prior to the incorporation of the company.
The promoters will be personally liable on a pre-incorporation contract.
Imagine that Karl and Tom are partners in a business that renovates old sport cars. They
decide in order to develop their business that they will form a private company limited by
shares. Here Karl and Tom would be known as the promoters of the yet to exist company
and they would be the individuals who would take all the necessary steps to set up the
company. Lord Cockburn CJ in Twycross v Grant (1877) 2 CPD 469 observed that ‘[a]
promoter, I apprehend, is one who undertakes to form a company with reference to a given
project and to set it going, and who takes the necessary steps to accomplish that purpose’
(at p. 541). Once the formation of the company is completed, an individual is no longer
regarded as a promoter.
Promoters are fiduciaries who owe special duties to the yet to be incorporated company.
In their capacity as promoters Karl and Tom would need to be careful, as promoters will be
personally liable for any contracts that they have entered into, even if these contracts are
purportedly made on behalf of the company. This is because the company does not yet
exist and even when the company comes into existence they will still be liable on any
contracts that they entered into before the issuing of the certificate of incorporation.
In Chapter 6 we saw that agents may have any contracts that they entered into without
authorisation ratified by their principals. However, this does not apply to promoters who
cannot at a later date ask the company (i.e. the decision will be taken by Karl and Tom in
their new capacity as directors) to ratify the contract. This is because, according to the
decision Kelner v Baxter (1866–67) LR 2 CP 174, in order to ratify a contract a principal
must be in existence at the time when the contract was made. Clearly, with a pre-
incorporation contract made by the promoters this is not the case, as the company
was not in existence at the time.
Worked example
Imagine that Karl and Tom decide to establish a company on Thursday. However, on
Tuesday they enter into a contract with Adam to lease his barn for ten years. The company
is subsequently incorporated and two years later the company starts to lose money and is
unable to pay its many creditors. The company is declared insolvent. We have seen in
Chapter 8 that the big disadvantage of being an unincorporated business is that you are
personally liable for the business’s losses. While Karl and Tom would not be liable for any
debts incurred post incorporation, they would still be liable on the pre-incorporation
contract they entered into with Adam. Applying the decision in Kelner v Baxter, they could
not argue that the company had ratified the contract and therefore the company and not
themselves personally would be liable. However, the company could have entered into a
contract of novation with Adam. This means that the company contracts on the same
terms as the original pre-incorporation contract and this releases the promoters from
personal liability (Natal Land and Colonization Company Ltd v Pauline Colliery and
Development Syndicate Ltd [1904] AC 120). We have seen that Adam can sue the
promoters for a breach of the pre-incorporation contract, and if Adam is in breach of his
obligations then the promoters may sue him.
Off-the-shelf company
Before we look at the steps needed to establish a company it is important to consider that
it is possible to purchase an off-the-shelf company. This is a company that has already
been incorporated and can be purchased, as opposed to creating a new company.
Key requirements
A private limited company requires a minimum of one director. There is no requirement

that the company has a company secretary. A director must be aged 16 years or above.
Documents required by Companies House
Key definition: Companies House
The public body that is responsible for the creation and the dissolution of companies.
It stores information, which companies have a legal obligation to supply, and the public
are able to view this.
It is possible to establish (or incorporate) a company online at Companies House.

Companies House requires that certain information be supplied. The company will require a
registered office and this must be an address within the United Kingdom.
The INO1 form

There are a number of documents that must be supplied. The INO1 form must include the
details of the directors and the company secretary and include information pertaining to
their usual residential address, nationality, date of birth, occupation. The names and
addresses of each shareholder who subscribes to the company must be included.
Companies House will require information as to the number of shares issued, the class of
shares, how much the share is worth and how much has been paid up for each share. The
INO1 form also includes a certificate of compliance.
Memorandum of association
A memorandum of association must also be included. Where the company will have a
share capital, then this document will confirm that each shareholder (or subscriber) intends
to form the company and as a minimum take one share. The names of all the subscribers
will be listed and they will confirm their intention.
Articles of association
The company will require articles of association. This is the company’s constitution and will
set out how it is intended that the company will be governed. This document is very
important as it contains the rules for conducting company business, such as the
percentage of shareholders required to take certain decisions. You do not need to draft
your own articles of association as you can incorporate the model articles. For private
companies that are limited by shares the previous model to use was called Table A and this
has been replaced by the model articles in schedule 1 of the Companies (Model Articles)
Regulations 2008.
Naming your company

Your company’s name will clearly be important and when selecting a name you must be
aware that you are not using the same name as an existing business, or that you do not
infringe another business’s intellectual property rights, i.e. if the name is a trademark, or
that you are not liable for the tort of passing off. Companies House provides examples of
names that would be too similar to existing names:
• where the names sound and look similar: Dynamic Technology Limited would be
regarded as ‘too like’ Dinamix Teknology Limited;
• where there are differences in a couple of letters or characters: for example,

International Logistic Support Limited and International Logistical Support Limited
would be ‘too like’ but ICL plc & ICG plc would not.
It is important that the name of a company is not too similar to an existing name, as
otherwise the company could be liable under the tort of passing off (see Chapter 5). The
restrictions on what you can name a company are set out under ss.53–76 CA 2006.
You can carry out a search of existing company names on the Companies House website.
If your proposed name contains sensitive words or expressions then you will require the
Secretary of State’s approach. Examples include where the company’s name indicates a
special function (‘Institute’), a link with the government (‘Cabinet Office’), or if it were to
cause a criminal offence (such as using the word ‘Solicitor’ unless you are regulated by the
Solicitors Regulatory Authority).
The registration fee

The fee for incorporating a company must also be included. At the time of writing the fee
to incorporate a company online was £15.00 and for paper applications it was £20.00.
?
Jennifer and Noor wish to establish a business selling tablet cases and acces-
sories. They would like to know how they would establish a private company
limited by shares and what documents would be required. Last week a supplier
approached Jennifer and Noor and offered to sell them 4,000 tablet cases.
Would you advise Jennifer and Noor to enter into the contract either before, or after,
the company was incorporated?
PUBLIC ACCESS
The information held by Companies House is available to the public (subject to some
exceptions). This is important because where the company has limited liability potential
suppliers, creditors and investors are able to ascertain the financial health of the company
before doing business with it. Equally, competitors are able to use this information to their
advantage. It is also possible to search against the names of the directors to see which
other companies they have been a director for. The public can look at whether the
company has met its filing requirements for its annual accounts and see how much profit
has, or has not, been made.
?
Donald Smith, a director of a new company, has approached Lucy and asked
her to supply his company with £13,000 worth of stock. Donald stated that the
company would pay Lucy 60 days after the contract was entered into. Lucy wants
the business, but she is concerned about the company’s financial health. She is sure
that she has met Donald previously when he worked for another company and she is
suspicious as to why he is working for this new company.
Advise Lucy on how she can use the register at Companies House to her advantage.
REPORTING REQUIREMENTS
The information held by Companies House will also include the annual return which must
be submitted each year. If you do not submit the annual return then the company could be
struck off. The annual return will contain current information pertaining to the subscribers,
shareholding and directors. The company will also need to file annual accounts.
Additionally, the company will need to submit information to Companies House including
resolutions, changes to directors, charges (i.e. security for loans) and the company’s
constitution.
We can see that the reporting requirements are onerous. Focusing on a private company
limited by shares, a small company with just two directors and three shareholders would be
required to comply with these requirements.
TAXATION
A private company will pay corporation tax on its profits. The rate of corporation tax will
depend on the profits made by a company. For example from 1 April 2014 the rate is 20 per
cent where the profit is £300,000 or less, and 21 per cent where it is above £300,000. Once
profits have been taxed the board of directors can decide to retain the money within the
company as an asset or an investment. Alternatively, the board could decide to issue a
dividend to shareholders. Each shareholder will pay income tax on the dividend that they
receive. The advantage of paying corporation tax, as opposed to income tax as a sole
trader, is that the amount of tax payable on any profits will be potentially lower under the
corporation tax regime. However, in deciding which type of business is more beneficial in
terms of taxation it is best to consult an accountant who can properly advise you. The
following example demonstrates the differences between corporation tax and income tax:
• Brian is a sole trader and his business makes £120,000 profit in financial year
2014–15. Brian would pay income tax at 20 per cent for the first £34,370 which he
makes (less his personal allowance which would be tax free). On any profit over
£34,370 to £150,000 he would pay 40 per cent income tax. If Brian made over
£150,000 then for any profit over that amount he would pay 50 per cent income
tax.
• Brian sets up a company and is the sole shareholder. The company makes
£120,000 profit in 2014–15. The company pays corporation tax at 20 per cent.
Brian’s salary as a director will be deducted before profits are calculated. Brian will
pay income tax on his personal salary. If Brian wishes to issue a dividend in his
capacity as a director then he will pay income tax on the dividend.
Directors will pay income tax (PAYE) on their salaries and shareholders will pay income tax
on any dividends. Additionally, the company could be liable to pay capital gains tax (CGT) on
the sale of any assets.
SEPARATE LEGAL PERSONALITY
Key definition: Separate legal personality
A business that has been incorporated at Companies House will have a separate legal
personality to that of its owners. This means that the business will be regarded as a
distinct legal person and can enter into contracts, purchase property, employ people,
sue and be sued.
A company that has been incorporated at Companies House is regarded in law as having a
separate legal personality. This is very important for a number of reasons. First, there will
be a distinction between the company and the shareholders who own it. This means that if
a private company limited by shares becomes insolvent, the maximum extent of a
shareholder’s personal liability will be their paid up or unpaid shareholding. The shareholder
receives protection from unlimited personal liability.
This is an advantage over unincorporated businesses where there is no legal distinction

between the business owner and the business. Consequentially, the business owner has
unlimited personal liability.
The company is capable of owning property, employing staff, commencing legal action and
of being sued. The company can also face criminal prosecution for offences such as
corporate manslaughter (see the Corporate Manslaughter and Corporate Homicide Act
2007). Additionally, the company may own shares in another company or enter into a
partnership.
As the company has a separate legal personality there is a risk that persons or businesses
owed money by the company will receive nothing in the event that it becomes insolvent,
notwithstanding the fact that its shareholders may be multi-millionaires. The most
important decision regarding separate legal personality is Salomon v Salomon & Co Ltd
[1897] AC 22.
KEY CASE ANALYSIS: Salomon v Salomon & Co Ltd [1897] AC 22
Background
Mr Salomon owned a business and decided to sell it to a private limited company
that he had created in accordance with the Companies Act 1862. The company had
seven shareholders, which included Mr Salomon who had 20,000 shares and his wife
and children who had one share each. As part of the purchase price of the company
Mr Salomon received a debenture, which was a floating charge over the company.
This debenture would make Mr Salomon a priority creditor if the company became
insolvent. Eventually the company became insolvent and the unsecured creditors
were not paid as there was not enough money left once Mr Salomon’s debenture
was repaid. There was an attempt to have Mr Salomon indemnify the company. The
Court of Appeal held that the creation of the company had been a sham to enable
Mr Salomon to avoid personal liability and to have priority over other creditors via the
creation of the debenture.
The House of Lords held that as the company had met the requirement of the
Companies Act 1862 it was validly created and therefore it had a separate legal
personality and its liabilities were distinct from its shareholders. It was irrelevant that
Mr Salomon had created the company to protect his business and that he was
protected by the debenture. This decision is of utmost important as it protected the
integrity of a company as being legally distinct from its owners.
In his judgment Lord Herschell considered the argument that the company had
merely been created as an alias for Mr Salomon, and the other shareholders were
just ‘dummies’ in order to meet the statutory requirements. His Lordship was
unconvinced by these arguments:
It is to be observed that both Courts treated the company as a legal entity

distinct from Salomon and the then members who composed it, and
therefore as a validly constituted corporation. This is, indeed, necessarily
involved in the judgment which declared that the company was entitled to
certain rights as against Salomon. Under these circumstances, I am at a
loss to understand what is meant by saying that A. Salomon & Co., Limited,
is but an ‘alias’ for A. Salomon. It is not another name for the same person;
the company is ex hypothesi a distinct legal persona.
...
Here, it is true, Salomon owned all the shares except six, so that if the
business were profitable he would be entitled, substantially, to the whole of
the profits. The other shareholders, too, are said to have been ‘dummies’,
the nominees of Salomon. But when once it is conceded that they were
individual members of the company distinct from Salomon, and sufficiently
so to bring into existence in conjunction with him a validly constituted
corporation, I am unable to see how the facts to which I have just referred
can affect the legal position of the company, or give it rights as against its
members which it would not otherwise possess. (pp. 42–43)
Lord Halsbury LC had stated:
Either the limited company was a legal entity or it was not. If it was, the
business belonged to it and not to Mr Salomon. If it was not, there was no
person and no thing to be an agent at all; and it is impossible to say at the
same time that there is a company and there is not. (at p. 31)
DISTINCTION BETWEEN A DIRECTOR AND

A SHAREHOLDER
A director is an officer of the company and together with the rest of the directors she will
manage the company. In many small companies the shareholders will also be directors.
The shareholders own the company. In larger companies the shareholders may not have
much control over the company’s affairs and, as we shall see below, the directors owe
their duties to the company and not to the shareholders. The articles of association will
state the types of shares in the company and their voting rights. Unlike a partnership under
the Partnership Act 1890, a person can set up a company and subsequently resign as a
director and still remain as a part owner of the business. This is because the owners of the
company do not have to act as its managers.
The directors are appointed to manage the company and although the shareholders own
the company, the directors will owe their duties to the company. The directors will have
day-to-day control of the company and shareholders will be provided with the opportunity
to vote on resolutions that can include removing a director and appointing a new director.
The percentage of votes needed to pass certain types of resolutions will be determined in
the articles of association. Ordinary resolutions require over 50 per cent support, whereas
special resolutions require 75 per cent support. This means that a majority shareholder can
exercise considerable power in a company and could prevent certain resolutions from
being passed.
SHAREHOLDER LIABILITY
If you are a shareholder in a company limited by shares you will not be personally liable in
the event that the company becomes insolvent. The only liability that a shareholder will
have is their investment in the company which is represented by their shareholding. A
shareholder will be liable for any shares that he has yet to pay up on. This is advantageous
when contrasted with an unincorporated business.
?
Karl and Tom are the only shareholders in Restore Ur Car Ltd. They both own
50 shares at £2 each and have paid up the full amount. Karl is a multi-millionaire
and Tom owns a castle in Kent. Restore Ur Car Ltd’s assets are worth £23,000
and it has liabilities of £560,000.
Discuss Karl and Tom’s liability as shareholders of Restore Ur Car Ltd.

PIERCING THE VEIL OF INCORPORATION
Key definition: Veil of incorporation
One of the key features of an incorporated company is that the law regards the
company and its owners as being separate legal persons. If the company has been
properly incorporated, then the courts will not treat the company’s assets as belonging
to its shareholders, or the company’s actions as those of the shareholders, nor will
they hold that the shareholders are personally liable for the company’s liabilities. In
certain circumstances the courts can pierce the veil of incorporation.
Raja, Mary and

Lucas are the
directors
RM Ltd creates a SC Ltd (100%
subsidiary company owned by RM Ltd)
SC Ltd SC Ltd’s assets and
liabilities are distinct
from its owner (RM Ltd)
Create – RM Ltd Raja, Mary and
Raja and Mary –
(100% owned by Lucas are the
shareholders
Raja and Mary) directors
RM Ltd’s assets and

liabilities are distinct
from its owners
Figure 9.2 Parent and subsidiary companies
Scenario
Imagine that Raja and Mary decide to set up a business together and they have chosen to
create a private company limited by shares. The company is called RM Ltd and the only
shareholders are Raja and Mary. The directors of RM Ltd are Raja, Mary and Lucas. The
board of directors decides to create a subsidiary company, SC Ltd. SC Ltd is created in
order to pursue a new business venture, which in this economic climate might prove to be
risky. SC Ltd will be wholly owned by RM Ltd which will be the only shareholder. Initially, the
directors of SC Ltd will be Raja, Mary and Lucas.
?
After reading this section of the chapter please consider the following questions:
• If RM Ltd was to become insolvent what would Raja, Mary and Lucas’
liabilities be?
• If SC Ltd was to become insolvent would RM Ltd, as the parent
company, be liable for SC Ltd’s debts?
Shareholders do not own the company’s assets
It is important to note that a limited company that has been incorporated will have a
separate legal personality. It will be legally distinct in terms of its liabilities and assets from
the shareholders, who will own the company.
KEY CASE ANALYSIS: Macaura v Northern Assurance Co Ltd

[1925] AC 619
Background
Mr Macaura owned a timber estate and decided to sell this to a company. He was
the sole shareholder of the company. Unfortunately, he decided to insure the timber
in his own name and not in the company’s name. At a later date a fire destroyed the
timber and he attempted to claim on the insurance policy.
The House of Lords held that Mr Macaura could not recover under the insurance
policy, as he had no insurable interest in the goods. The goods did not belong to him
but rather to the company. Even as the sole shareholder he did not have any
insurable interest. Lord Buckmaster stated that ‘no shareholder has any right to any
item of property owned by the company, for he has no legal or equitable interest
therein’ (at p. 626).
We have seen in Salomon v Salomon that the courts are not concerned with the
shareholders and directors for the purposes of the company’s liability. However, there may
be circumstances when the courts will pierce the veil of incorporation and look at why the
company had been created and hold the shareholder liable for avoiding a legal obligation or
evading a restriction.
KEY CASE ANALYSIS: Petrodel Resources Ltd v Prest [2013]

UKSC 34; [2013] 2 AC 415
Background
The decision involved a marital dispute. The wife alleged that her husband had
transferred various properties in which he had a beneficial interest to a company in
order to prevent the wife from obtaining a fair division of the marital assets.
The Supreme Court held that piercing the corporate veil could be justified in certain
circumstances in order to prevent a person from deliberately using a company to
avoid an obligation or frustrating a legal restriction. But on the facts there was no
evidence that this had been the husband’s intention and therefore the court would
not pierce the corporate veil. However, the court ordered that the properties must
be transferred to the wife on the basis that on the available evidence it could be
inferred that the husband was the beneficial owner. By ordering a transfer in these
circumstances it did not pierce the corporate veil.
In the Court of Appeal’s decision in Prest v Petrodel Resources Ltd [2012] EWCA Civ 1395,
Rimer LJ had reiterated the distinction between the company and its shareholders:
The judge noted . . . that ‘a lay person’ might think that a husband ‘was entitled’ to
a house owned by a company that he owned. A lay person might so think but he
would be wrong. If the same lay person carried on a business through a company
of which he was the sole owner, and caused the company to incur liabilities that it
could not meet, he would have no hesitation in asserting that the liabilities must
be met exclusively by the company (by recourse exclusively to its assets) and
(provided his shares were fully paid) had nothing to do with him personally. That is
what limited liability is about. (at [102])
Fraudulent trading and the misapplication of assets
Exceptions that permit the court to pierce the corporate veil include where the company’s
assets are misapplied, or where there is wrongful or fraudulent trading (see ss.212–214 of
the Insolvency Act 1986).
Setting up the company as a façade – the subsidiary

company
Key definition: Subsidiary company
This is a company that is set up by a parent company to pursue a particular venture.

The subsidiary company will protect the parent company from liability if the venture
proves to be unsuccessful. The use of subsidiary companies is very common to shield
the rest of the corporate group from financial loss and to minimise tax liability.
The Court of Appeal in Adams v Cape Industries plc [1990] Ch 433 considered in what
circumstances the corporate veil could be pierced by the courts. The decision concerned
whether a subsidiary company, that is a company created by another company, was a
separate legal entity. If the court pierced the veil of incorporation then it would see that the
shareholder of the subsidiary was the parent company, and would then proceed to hold the
parent company liable. The court referred to the judgment of Lord Keith in Woolfson v
Strathclyde Regional Council 1978 SLT 159, where it was held that the corporate veil could
be pierced where it was apparent that the company was being used as a façade to conceal
the true facts. The court noted that, in Wallersteiner v Moir [1974] 1 WLR 991, Lord Denning
MR had argued that a subsidiary company was not ‘a separate and independent entity’.
However, the court observed that both Buckley LJ and Scarman LJ in Wallersteiner had
disagreed with Denning MR on this point. The court observed ‘[w]e therefore think that the
plaintiffs can derive little support from those dicta of Lord Denning MR’. The court asked
whether the fact that the parent company was using the subsidiary company as a way to
hide its involvement with the sale of asbestos and lawfully reducing its tax in the United
States justified piercing the veil of incorporation. Its answer was no. Legally, there was
nothing wrong with a corporate group setting up a company to shield the rest of the group
from liability.
Criminal liability
In Customs and Excise Commissioners v Hare [1996] 2 All ER 391, the Court of Appeal held
that the corporate veil could be lifted to charge individuals with criminal activity, as
opposed to charging the company. Over a £100 million had not been paid in excise duty
and the official receiver sought to recover assets. The court held that the assets were not in
fact owned by the company, but rather they were owned by those who had engaged in
criminal activity.
Avoiding obligations and breaching restrictions
We have seen in Petrodel Resources Ltd that the court will pierce the veil of incorporation
where the company is being deliberately used to avoid a lawful obligation or to breach a
restriction. In Jones v Lipman [1962] 1 WLR 832 the court lifted the veil of incorporation
where the owner of land had agreed to sell land to the claimant. However, the owner
changed his mind and established a company with the intention of frustrating the obligation
to transfer the land. He subsequently sold the land to the company. The court ordered
specific performance which compelled the defendant to transfer the land to the claimant.
The court viewed the defendant and the company as not distinct. An example of a legal
restriction being avoided was Gilford Motor Co Ltd v Horne [1933] Ch 935, where the
defendant had worked for the claimant and was prevented by a restrictive covenant from
competing against it. To avoid the restriction, the defendant set up a company. The
company was held to be a sham and an injunction was awarded to prevent both the
defendant and the company from competing with the claimant. Therefore, the court held
there to be no distinction between the two.
Tortious liability
A director of a company may be liable personally where he makes a negligent

misstatement to the claimant and there has been an assumption of personal responsibility
by the director (see Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830). A director
may also be personally liable for a fraudulent misrepresentation as he will not be permitted
to say that he committed the tort on behalf of the company (see Standard Chartered Bank v
Pakistan National Shipping Corp (No 2) [2002] UKHL 43).
?
Do you think that the decisions in Jones v Lipman and Gilford Motor Co Ltd v
Horne were correctly decided?
WHO RUNS A COMPANY?
Key definition: Director
A director is responsible for the management of the company. A court may hold that
a person is a director regardless of the title that he holds.
Key definition: Shareholder
A shareholder is a person who owns shares in a company. The shareholders may

collectively own the company, but the company is legally distinct from them.
Key definition: Member
This refers to a shareholder. Members have certain rights under the Companies Act 2006.
The company is run by its directors. The number of directors required by a private limited
company is one (s.155 CA 2006). Although, the company’s articles of association may
require that there is more than one director.
Definition of director
Section 250 CA 2006 defines a director as including ‘any person occupying the position of
director, by whatever name called’. If a director has been properly appointed to the
company’s board in accordance with the articles of association then she is known as a de
jure director. If a director is appointed but there has been non-compliance with the articles
of association then the director is known as a de facto director. In larger companies a
director may be appointed not as an executive director, who is someone who is expected
to devote their time to the managing of the company, but rather as a non-executive
director who has been appointed to the board in order to advise at board meetings. A
shadow director is someone who has not been appointed to the board but who seeks to
control the management of the company from behind the scenes. Section 251 CA 2006
defines a shadow director as ‘a person with whose directions or instructions the directors
of the company are accustomed to act’. However, s.251(2) states that ‘(a) person is not to
be regarded as a shadow director by reason only that the directors act on advice given by
him in a professional capacity’. It is important to note that anyone who is regarded as being
a director, regardless of their title or lack of official involvement with the company, can be
held by the courts to owe to the company duties as a director (see below).
?
Granny Mavis’ two grandsons own 100 per cent of the shareholding in New
Company Ltd. Every evening Granny Mavis listens to her grandsons discussing
business matters and she frequently offers her advice on what they should do.
The grandsons feel obliged to follow their grandmother’s advice as they do not want
to upset her.
Is Granny Mavis a director?
Board meeting
At the board meeting the directors will take decisions relating to the running of the
company. The board meeting must be in quorum, this means that a minimum number of
directors must be present. The articles of association will determine this number. The board
can delegate certain decision-making powers to individual directors.
Managing director
The managing director will be responsible for the management of the company. A company
does not need a managing director.
Chairman
The company does not need to have a full-time chairman: this is because a director can be
appointed as the chair for a board meeting. A chairperson may be given a casting vote if
there is an even split in the votes.
Shareholders
The shareholders at the annual general meeting (AGM) or extraordinary meetings will take
important decisions. These decisions are made by ordinary or special resolutions and
records of these must be sent to Companies House. The shareholders’ involvement is
needed to make changes such as to the articles of association (s.21 CA 2006), or to change
the company’s name.
Salary
Directors do not have to be paid a salary.
Are directors employees?
A director is not automatically an employee of the company. The employment status of a

director would be determined with reference to any employment contract and other factors
(see Chapter 7).
Do directors have the authority to bind the company?
A director is an agent of the company and can have the authority to bind the company in
any contracts that she makes on the company’s behalf. Whether a director does have the
actual or apparent authority will depend on many factors including the articles of
association, decisions taken by the board and whether the other party to the contract
believed that the director had the authority to enter into a contract of that particular kind.
DIRECTORS’ DUTIES
The CA 2006 codified the existing duties in common law and equitable principles that the
director owed to the company (s.170(3)). A director is a fiduciary which means that he owes
the company a number of very strict duties and these duties have now been codified by the
CA 2006. Nonetheless, it is necessary to consider the case law here to interpret the
statutory duties (s.170(4). These duties may also apply to a shadow director (s.170(5)). More
than one duty can apply in any given situation (s.179). We will now consider each of these
duties in turn.
s.171 Duty to act within powers
This provision states that the director must ‘(a) act in accordance with the company’s
constitution, and (b) only exercise powers for the purposes for which they are conferred’.
This means that the director not only must not exceed his powers, but also he must not use
these for an improper purpose. In determining whether there has been a breach, the court
will consider why the powers were conferred on the director, to see if her apparently valid
use of the powers breached s.171.
s.172 Duty to promote the success of the company
Under s.172(1), there is an obligation on the director to ‘act in the way he considers, in
good faith, would be most likely to promote the success of the company for the benefit of
its members as a whole’. This links the success of the company and the shareholders who
must ultimately benefit. The director must also have regard to a number of factors (a) to (f)
which include the long-term consequences of the decision, the environmental impact and
the need to act fairly between the shareholders.
s.173 Duty to exercise independent judgment
A director must not fetter her discretion and restrict her ability to take decisions in the
future. This means that you cannot allow others to make decisions for you.
s.174 Duty to exercise reasonable care, skill and diligence
This section requires the director to exercise reasonable skills and diligence. Whether the
director has fallen below the expected standard will be determined in accordance with
what the ‘reasonably diligent person with the general knowledge, skill and experience that
may reasonably be expected of a person carrying out the functions carried out by the
director in relation to the company’ and the skills and experience the director himself
possesses (s.174(2)). It is important to appreciate that if you are a director you must not
lose interest in the company’s day-to-day affairs. You are a director in order to act on
behalf of the company and must fulfil your duties. If you wish to step back from the
management of the company then you must resign as a director. However, if you are no
longer a director then you will lose the ability to manage the company on a day-to-day
basis. If you decide that you no longer wish to act as a director then if you still continue to
take an interest in the management of the company you would still be regarded as a
shadow director.
?
Harvey is a director in a software development company and has worked in the
industry for 15 years and is highly experienced. Mike has recently joined the
company’s board after spending three years working in the company’s human
resources department. Harvey and Mike are responsible for overseeing the
development and sale of a software product. Unfortunately, things do not go well and
the company is now suing both Harvey and Mike for failing to carry out their duties
with reasonable care, skill and diligence.
Would Mike necessarily owe a lower duty of care than Harvey?

s.175 Duty to avoid conflicts of interest
The CA 2006 has reformed the existing law in relation to conflicts of interest as there will
not be a conflict ‘if the situation cannot reasonably be regarded as likely to give rise to a
conflict of interest’ (s.175(4)(a)). At common law, any possibility of conflict was enough to
give rise to a breach of the duties owed and therefore it was no defence to argue that the
reasonable person would not view the director’s actions as giving rise to a conflict of
interest (see Boardman v Phipps [1967] 2 AC 46). In Boardman v Phipps, Lord Upjohn
dissented from the majority and had argued that there should be no breach where it would
not be reasonably regarded as giving rise to a conflict of interest. The rationale for s.175 is
to avoid a director entering into ventures that compete with the interests of the company.
This duty does not just apply to working in competition, as it also applies to ‘the exploitation
of any property, information or opportunity (and it is immaterial whether the company could
take advantage of the property, information or opportunity)’ (s.175(2)). The inclusion of the
fact that it would be immaterial whether the company could have taken the advantage
replicates common law, where the courts have held that this is no defence (see Regal
(Hastings) Ltd v Gulliver [1967] 2 AC 134). In Industrial Development Consultants Ltd v
Cooley [1972] 1 WLR 443 the court held that a director who had resigned and
subsequently took advantage of a contract that would never have been awarded to his
former employer had breached his fiduciary duties and had to account for any profit
that he had made.
KEY CASE ANALYSIS: Bhullar v Bhullar [2003] EWCA Civ 424
Background
In Bhullar v Bhullar [2003] a director of a grocery business had purchased a
commercial property near to the company’s premises which, although not a property
that the company had intended to purchase, was nonetheless a good business
opportunity.
The court held that the director had breached his fiduciary duties as he had
permitted a conflict of interest to arise between the company and his personal
interests. It was immaterial that the company had not intended to purchase the
company. The purchase was a good opportunity and was sufficiently proximate to
the company’s premises to have been a good investment.
The decision in Bhullar was followed in Pennyfeathers Ltd v Pennyfeathers Property Co Ltd
[2013] EWHC 3530 (Ch). In this case the directors had used an opportunity owned by the
company to purchase land. It was irrelevant that the company would not have pursued the
opportunity itself. According to s.175(4)(b), a director will not have breached the duty that
he owes under s.175 if his actions have been authorised by the board of directors.
?
Do you think that it is right that a director should be liable under s.175 CA 2006
where she takes advantage of an opportunity that the company would never
have chosen to exploit? Would it make a difference if the opportunity was in an
area unrelated to the area that the company operated in?
When answering this question you should consider precisely who in a company
decides whether to exploit an opportunity.
s.176 Duty not to accept benefits from third parties
This duty is not breached ‘if the acceptance of the benefit cannot reasonably be regarded
as likely to give rise to a conflict of interest’ (s.176(4)). It is important to appreciate that
benefits given in return for being awarded contracts could amount to a criminal offence
under the Bribery Act 2010.
s.177 Duty to declare interest in proposed transaction

or arrangement
If the director is aware that the company is entering into a transaction or an arrangement
that he directly or indirectly has an interest in, then he must declare this interest to the
board prior to the transaction taking place. Similarly to s.175(4)(a), an interest that cannot
reasonably be regarded to amount to a conflict of interest does not need to be declared.
s.182 Declaration of interest in existing transaction or

arrangement
This provision is similar to s.177 and a declaration of interest must be made as soon as the
director becomes aware of this. Non-disclosure will amount to a criminal offence under
s.183.
?
Alfred is a director of Build It High Ltd (BIH Ltd). BIH Ltd is looking to purchase
new premises. On 3 June, BIH Ltd’s board of directors meets to vote on whether
to purchase a warehouse owned by New Holdings Ltd (NH Ltd). Alfred is aware
that he is a 35 per cent shareholder in NH Ltd. However, he decides that he does not
need to tell the board as he will just stay quiet during the meeting and vote in
accordance with what the majority of the directors have decided.
On 8 June, Ivor, BIH Ltd’s sales director, meets with a supplier and during the meeting
he is given tickets for an around the world cruise. Ivor accepts these and decides that
no one needs to know about this. On 14 June, Ivor contracts to purchase stock worth
£77,000 from the supplier.
Discuss any legal issues that have arisen here.
Protection from liability
The court has the power to relieve a director from liability (in whole, or part) where the
director has breached his duties to the company, if the court believes ‘that he acted
honestly and reasonably, and that having regard to all the circumstances of the case
(including those connected with his appointment) he ought fairly to be excused’
(s.1157 CA 2006).
A note of caution
The director owes these duties to the company and if breached he could be sued by the
company. Even if a director is currently the only shareholder and subsequently sells his
shareholding, he could still in the future be potentially liable, if the new board of directors
commences litigation against him on behalf of the company.
DIRECTORS’ LIABILITY TO THIRD PARTIES
As discussed above, a director could be personally liable where he has made a fraudulent
misrepresentation, commits a criminal offence or who makes a negligent misstatement and
assumes personal responsibility to the third party. In addition, a director may be asked to
give a personal guarantee before a bank will lend the company additional funds. If the
director agrees to give a personal guarantee, then in the event that the company defaults
on the loan the director will be personally liable.
COMPANY DIRECTORS DISQUALIFICATION ACT 1986
The Company Directors Disqualification Act 1986 (CDDA 1986) is there to regulate those
persons who are unsuitable to act as a director. The court may order that a person is
disqualified from being a director. This may be because the company has become insolvent
and the court finds that he is unfit to be a director in the future (s.6 CDDA 1986). A director
may be disqualified for reasons such as persistent breaches of his obligations under the CA
2006 (s.3 CDDA 1986) and having been convicted for committing a criminal offence (ss.2
and 5 CDDA 1986). Where there is a disqualification order and a person breaches this order
and acts as a director, then he could be liable for a fine and face up to two years’
imprisonment (s.13 CDDA 1986). Under s.6 a director of an insolvent company who
has been held to be unfit by the courts may be disqualified from being a director for
up to 15 years.
SHAREHOLDERS’ RIGHTS
While the shareholders own the company this does not mean that a shareholder will
manage the company’s day-to-day affairs. A shareholder must become a director in order
to do this. In reality a shareholder in many smaller companies may also be a director, as
there is often just one director and one shareholder. The CA 2006 protects shareholders
and permits them to have a say in important decisions.
Involvement in decision making
The CA 2006 will state that certain types of decisions require an ordinary or a special
resolution. According to s.268(1) ‘[a]n ordinary resolution of the members (or of a class of
members) of a company means a resolution that is passed by a simple majority’; whereas a
special resolution ‘means a resolution passed by a majority of not less than 75%’ (s.283(1)).
The company’s articles of association could change the requirement for an ordinary
resolution to a special resolution. The method of voting and the weighting of the shares
owned would depend on how the vote will take place.
Shareholders are involved in decisions such as changing the company’s articles, which
requires a special resolution (s.21), or loaning money to a director, which requires an
ordinary resolution (s.197(3)).
Each year there will be an annual general meeting that all shareholders must be invited to
attend and to vote on decisions taken there. Additionally, it is possible to call a general
meeting to take decisions. A general meeting can be called by the board of directors (s.302)
and also by any shareholders who have more than 50 per cent of the voting rights in the
company (s.305).
Approving substantial property transactions

We have seen above that a director must notify the board if there is a transaction in which
he has a direct or indirect interest. The CA 2006 protects the shareholders by requiring that
their permission is required before the company can enter into a substantial property
transaction with a director or someone who is connected with the director (s.190). Section
191(2) states that an asset is substantial if it exceeds £100,000 or 10 per cent of the
company’s asset value so long as the asset is worth more than £5,000.
How a director can be dismissed
The shareholders can decide to dismiss a director or even the entire board. According to
s.168 CA 2006 this can occur through an ordinary resolution.
Protection of minority shareholders
A shareholder who owns a minority of the shares may find that they feel that the company
is not being run in a way that benefits them, or that the directors are breaching the duties
that they owe to the company. The CA 2006 permits a shareholder to bring a derivative
action where there has been a breach of a director’s duties (s.260(3)). The shareholder is
bringing the claim on behalf of the company, as the company is owed the duty that has
been allegedly breached (s.260(1)). The shareholder needs to have the court’s permission to
bring a derivative claim and has the burden of demonstrating that there is a prima facie
case for the court giving permission (s.261(2)). Section 264 states the factors that the court
must take into account in deciding whether to permit a claim to be brought. These factors
include whether the shareholder is acting in good faith and whether a person ‘acting in
accordance with section 172 (duty to promote the success of the company) would not seek
to continue the claim’.
If a shareholder believes that the directors have been unfairly prejudicial to all of the
members or a part of the members then she can petition to the court for an order to
provide the claimant with relief (s.994–996). This relief could be to direct how the company
regulates its affairs in the future, stop an act from occurring or order that an act does
occur. The court could also allow civil proceedings to be brought in the company’s name by
the shareholder petitioning the court (see s.996).
?
Aisha own 15 per cent of the shares in TBC Ltd and is unhappy with the conduct
of the directors. Aisha feels that she has been ignored and that she is concerned
with the fact that the company is losing money. Ralph, one of the directors, is
seldom in the office and spends his days playing golf, while Phoebe, the other director,
is busy setting up her own business and never seems to respond to emails or telephone
calls. Aisha is really good friends with David and Helen who each own 20 per cent of
the shares in TBC Ltd.
Discuss the options that are available to Aisha.
Creation and the transfer of shares
A limited company must have shares that have a share capital that is fixed at a nominal
value (s.542). Over time the company can create new shares to raise additional capital. In a
private company that has only one class of shares, it is the directors, subject to the articles
of association, who can take the decision to allot additional shares (s.550).
Section 544 states that the shares in a company are transferable in accordance with the
articles of association. In a private limited company the shareholders may wish to transfer
their shareholding to someone else. The CA 2006 states the requirements that must be met in
order to do this. The articles of association may confer the directors with discretion to restrict
the transfer of shares, such as allowing existing shareholders the right of first refusal.
Dividends
The dividend reflects the profits that the company has made. If the directors decide to
award a dividend, then a shareholder has a right to receive this. There is no requirement
that a dividend must be paid.
SUMMARY
• A limited liability partnership, a public limited company and a private limited

company are types of incorporated business where the members enjoy limited
liability.
• The Companies Act 2006 regulates both private and public companies. The duties
owed by directors and the rights of shareholders are stated in the Act.
• The directors owe their duties to the company. The Companies Act 2006 has
codified the directors’ duties, although it is still necessary to consider the existing
case law to understand how the courts will interpret these duties.
• A private limited company will be governed in accordance with its articles of
association.
FURTHER READING
Dignam, A. and Lowry, J. Company Law, 7th edn (Oxford University Press, 2012) – you should
refer to this book for a more detailed account of the material covered in this chapter.
Gray, A. ‘The statutory derivative claim: an outmoded superfluousness?’ [2012] 33(10) Company
Lawyer 295 – an interesting article on the derivate claim under the Companies Act 2006.
Lim, E. ‘Directors’ fiduciary duties: a new analytical framework’ (2013) 129 Law Quarterly Review
242 – you should refer to this article for a detailed consideration of directors’ duties under
the Companies Act 2006.
Sealy, L. ‘The statutory statement of directors’ duties: the devil in the detail’ [2008] Company Law
Newsletter 1 – this is a brief but authoritative overview of directors duties under the
Companies Act 2006.
Sealy, L. and Worthington, S. Sealy & Worthington’s Cases and Materials in Company Law,
10th edn (Oxford University Press, 2013) – this book is useful for those students who wish
to explore company law in more detail.
Index
acceptance 25–7 capacity, contract law 31

Acts of Parliament 8–9 capital gains tax 165
Admiralty, Commercial and Mercantile Court 11 case law 7
advertising 23–4 causation 71–2
age discrimination 129, 131 certainty, importance of 48–9, 59
agency 35; apparent authority 87–93; definition 81–2; chairman 175
disclosed and undisclosed principal 97–9; express Chancery Division 11
actual authority 84–5; formation 82; implied actual choice of jurisdiction 47
authority 85–7; of necessity 84, 96–7; ratification choice of law 47
97; termination 103; third parties 99; usual Civil Procedure Rules (1998) 11
authority 94–5 claimants 19
agency contracts, parties to 82–3 commercial agents 102
agency workers 111 commercial pressure 34
agents 82; duties 100–2; regulations 102; rights of 100 commission (agents right to) 102
alternative dispute resolution 60 common law 7, 11
ambiguous clauses 55 companies: management 174–6; setting up 159–63;
annual accounts 164 types 159; see also incorporated businesses
annual general meeting 175, 182 Companies Act 2006 159
annual return 164 Companies House 152, 159, 161; documents required
anticipatory breach 41 162; and partnerships 143; public access 163–4;
apparent authority 84, 87–9; previous course of dealings reporting requirements 164
92–4; requirements 89 Company Directors Disqualification Act 1986 181
appeals 11; see also Court of Appeal company secretary 162
articles of association 162, 175 compensatory award, unfair dismissal 127
assignment 35 computer software 45–6
automatically unfair reasons for dismissal 125 conditions 55
awards: calculating 128; redundancy 128; unfair confidentiality, duty of 116–17
dismissal 126–7 conflicts of interest 178–9; agency 102
consideration 28–9
bailment 97 constructive notice 93
bargaining power 111 constructive dismissal 120–2
barristers 18–9 consultation before redundancy 128
bartering 45 contempt of court 65
basic award, unfair dismissal 126 contract for service 109
battle of the forms 48 contract for the sale of goods 44–5; agreement and
Beecroft Report 106 non-reliance clause 59; alternative dispute
bilateral contract 23 resolution 60; force majeure clauses 59;
bills, parliamentary 8 international sales 60; key terms 49; parties’
binding precedent 17, 18 obligations 48–9; problems 45–6; third party rights
blue pencil test 115 and non-assignment 59
board meetings 175 contract law 7, 11; acceptance 25–7; capacity 31;
boilerplate clauses 46 consideration 28–9; discharging 38–41;
breach of contract 40–1, 99; remedies 41, 58 enforcement 35; existing legal duties 29;
bribery 179 inducing a breach 77; intention to create legal
burden of proof 65 relations 31–2; offer 23–4, 26–7; promises to
business efficacy test 112 accept less 30–1; promises to pay more than
business transfers 113 originally agreed 29–30; promissory estoppel 31;
remedies for breach 41; and tort law 63–4; vitiating dismissal: automatically unfair reasons 125; constructive
factors 32–5 120–2; fair reasons 124; unfair 124–7; wrongful
contract of employment 107, 112; termination 119–20; 122–4
variation 113 dissenting opinions 18
contract of service 109; conditions 108 dividends, shareholders 164, 165, 183
contract terms 36–8 doctrine of precedent 17–18
contra proferentem rule 55 documents: public access 163–4; reporting requirements
contributory negligence 66 164; required by Companies House 162
conversion 58, 78–9 duress 34
core public authority 10 duty of care 64, 66–8, 71
corporate manslaughter 166 duty of confidentiality 116–17
corporate veil, piercing see veil of incorporation duty of fidelity 116
corporation tax 164–5 duty of mutual trust and confidence116–17
Council of Europe 9–10
Court of Appeal 11, 17; Civil Division 12; Criminal Division economic duress 34
13 economic reality test 108–9
Court of Chancery 7, 11 employees 127; definition 107
Court of Common Pleas 7 employee shareholders 112
Court of Exchequer 7 Employment Appeal Tribunal 14
Court of Justice of the European Union (CJEU) 9, 15 employment contract 112; termination 119–20; variation
Court of King’s Bench 7 113
court structure 10, 14; criminal law 12–14; employment employment law, court structure 14
law 14; private law 11–12 employment status 106; agency workers 111;
criminal law 12–14 determining 107; employee shareholders 112;
Crown Court 13 multiple or economic reality test 108–9; mutuality
Crown Prosecution Service (CPS) 19 of obligations and personal service 109–11
custom 8 employment tribunals 14, 124
entire agreement clause 59
damages 65 equal pay 134
deceit 33, 69 equity 7, 11
defamation 11, 75 European Court of Human Rights (ECtHR) 15
defective product liability 78 European Union law 9, 47
defendants 19 exclusion clauses 54–5
delegated legislation 9 express actual authority 84; ambiguous instructions
delivery, acceptance and inspection 58 85
description, sale by 52–3 express contractual terms 36, 55
devolution 6
directors 158, 161, 162, 163, 174–6; dismissal 182; fidelity, duty of 116
disqualification 181; duties 175–80; liability 180–1; fiduciaries 82, 102, 151, 160, 176
and shareholders 167–8 firms, partnership 142
directors’ duties 176, 179, 180; act within powers 176; fitness for particular purpose 53
avoid conflicts of interests 178–9; declare interests fixed-term contract 123
179; exercise independent judgement 177; not to f.o.b 60
accept benefits from third parties 179; promote force majeure clauses 59
company’s success 177; reasonable care, skill and fraud 33, 148
diligence 177 fraudulent misrepresentation 173
disability 129; discrimination 129, 132–3; duty to make frustration 38–40, 59
reasonable adjustments 133
disclosed principal 94, 97–9 gardening leave clauses 119
disclosure, requirements for partnerships 144, 152 genuine occupational requirements 133–4
discrimination 128; direct 131; disability 132–3; golden rule 17
genuine occupational requirements 133–4; good faith, duty of 116
indirect 131–2 goods, definition 45
Index 187
Hansard 17 maternity leave 118

harassment 133 members, shareholders 174
health and safety 134 memorandum of association 162
High Court 11 minimum wage 118
House of Commons 8 mischief rule 17
House of Lords 8, 12 misrepresentation 33, 76
human rights 9 mistake 34
hybrid public authority 10 mobility clauses 118–9
monetary consideration 45
illegality 34 multiple or economic reality test 108–9
implied actual authority 84, 85–7; limits 87 Munday, Roderick 82
implied assumpsit 29 mutuality of obligations 109–11
implied condition 53, 54 mutual trust and confidence, duty of 116–17
implied contractual terms 36, 50, 55
implied warranties 51 naming a business 138, 143–4, 158, 162–3, 175
income tax 138, 165 National Assembly of Wales 6
incorporated businesses 157; management 174–6; national minimum wage 118
setting up 159–63; types 159 negligence 66; causation 71–2; duty of care 66–8, 71;
INCOTERMS 60 negligent misstatement 69–71; obvious danger 72;
independent contractors 110 pure economic loss 68; remoteness 72
inducing a breach of contract 77 negligent misstatement 69–71, 173
industrial action 77 New Zealand 16
injunctions 65 non-reliance clause 59
innominate terms 37–8 Northern Ireland 14; Northern Ireland Assembly 6
Inns of Court 7, 19 notice of acceptance 25
INO1 form 162 notice period 119, 123
intellectual property 76 nuisance 73
interlocutory injunctions 65
international sales contracts 60 obiter dicta 18
invitations to treat 23–4 obvious danger 72
occupier’s liability 75–6
judge made law, common law 7 offer 23–4, 25–7
judiciary 7, 10, 12; composition 16 offeree 23
juries 11 offeror 23
jurisdiction 47 officious bystander test 112
off-the-shelf companies 161
legal profession 18–19 “of the essence” 50
liability: directors’ 180–1; of individual partners 149–50; ordinary partnerships 139; ability to bind 146–9; assets
and the veil of incorporation 173 see also vicarious after dissolution 153–4; bookkeeping 151; leaving
liability 151–2; liability of partners 149–50; partners’ duties
libel 75 151; right to be indemnified 150; running 145–6;
Limitation Act 1980 65 setting up 140–4; termination 152; see also
limited companies 159 Partnership Act 1890
Limited Liability Partnership Act 2000 158 ordinary resolutions 181, 182
limited partnerships 154
living wage 118 parental rights 118
Lord Chancellor 10 Parliament 6
Lord Chief Justice of England and Wales 10 Parliamentary sovereignty 8
loyalty, duty of 116 parol evidence rule 59
partners: ability to bind the partnership 146–7; duties
Magistrates’ Court 13 151; expelling 151; new 151
managing directors 175 Partnership Act 1890 139–40;
Master of the Rolls 12 partnership agreements 143
partnerships 139 see also limited partnerships; ordinary restraint of trade 114
partnerships restrictive covenants 114–15, 173
passing off 76–7, 144, 162–3 retention of title clause 57–8
passing of property 45–6, 56–7
passing of risk 57 Sale of Goods Act 1979 46, 49–58; conform to sample
past consideration 29 54; delivery, acceptance and inspection 58;
paternity leave 118 description 52–3; exclusion clauses 54–5;
personal service 109–11 express warranties 55; fitness for particular
postal rule 25–6 purpose 53–4; good title 58; passing of risk 57;
precedent 17–18 perished goods 56; quality 53; remedies 58; time
pre-incorporation contract 160 50; title 50–2; transfer of property 56–7; transfer
preposterous investment scheme 148 whilst retaining title 57–8
price of the goods 49 sales agents 81–2
principal 82, 97–9 Scotland 6, 14
private law, court structure 11–12 secondary legislation 9
private limited companies 159; limited by shares 158 self-employed indivuduals138
private nuisance 73–5 separate legal personality 138, 139, 158, 165–7
privity of contract 35–6 separation of powers 12
Privy Council 16 shadow directors 174, 176, 177
profits and salary, and partnerships 145 shareholders 158, 159, 162, 166, 174, 175; decision-
prohibited conduct 130; direct discrimination 131; making 181–2; and directors 167–8; dismissing
discrimination arising from disability 132–3; directors 182; employee 112; liability of 168;
equal pay 134; Equality Act 2010 128–9; genuine minority 182; veil of incorporation 170–1
occupational requirements 133–4; harassment shares 159, 162, 166; creation and transfer 183;
and victimisation 133; indirect discrimination dividends 164, 165, 183
131–2 slander 75
promisee 28 software 45–6
promises: to accept less 30; to pay more 29–30 sole traders 137–8
promisor 28 solicitors 18–19
promissory estoppel 31 sources of law 6; Acts of Parliament 8–9; common
promoters 160 law 7; European Convention on Human Rights
property: and partnerships 145–6; passing 45–6; 9–10; custom 8; European Union law 9
shareholder approval 182; transfer of 56–7 special resolutions 181
prosecution 19 specific goods 52, 56
protected characteristics 129–30; Equality Act 2010 specific performance 58
128–9 standard form of contract 48
public authorities 10 statutory interpretation 17
public interest, nuisance 73–4 subsidiary companies 172
public limited companies 159 supply of goods 47
pure economic loss 68 Supreme Court 12, 14, 17, 18
quality of the goods 53 taxation 138, 164–5

Queen’s Bench Division 11 Technology and Construction Court 11
third parties 35–6, 82; and the agent 99; rights 59
ratio decidendi 18 time, stipulations 50
reasonableness 55, 114, 115; unfair dismissal 125–6 time limits 65, 124
redundancy 127–8; award 128 title 50–2; good 58
Reid, Lord 7 tort law 7, 11, 58, 63; and contract law 63–4; defences
religion and belief discrimination 129, 130; Equality Act 66; key torts 64; remedies 65
2010 128–9 trade terms 60
remedies for misrepresentation 33 trade unions 77
remoteness in tort 72 trespass to the person 73
repudiatory breach 40 tribunals 14
Index 189
unascertained goods 52, 56 verbal contracts 21, 59

undisclosed principal 35, 94, 97–9 vicarious liability 63, 113
undue influence 35 victimisation 133
unfair dismissal 124–7; reasonableness 125–6; remedies Vienna Convention on Contracts for the International
126 Sale of Goods 60
unilateral contract 23 voidable contracts 32
unincorporated businesses 137; limited partnerships void contracts 32
154; ordinary partnerships 139–53; sole traders
137–8 Wales 6
usual authority 84, 94–5 warranties 37, 55
working time 118
veil of incorporation 169; avoiding obligations and wrongful dismissal 122–4; bringing a claim 124; notice
breaching restrictions 173; criminal liability 173; 123; remedies 123
fraudulent trading 172; misapplication of assets
172; shareholders 170–1; subsidiary companies
172; tortious liability 173

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What is the book about?

What is the book about?

What topics are covered in the book?

What topics are covered in the book?

Beginning

Chris Monaghan is Senior Lecturer in Law at Greenwich University.

Beginning Constitutional Law, Nick Howard

Following in Spring 2015

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 2015 Chris Monaghan

The right of Chris Monaghan to be identiﬁed as author of this work has

All rights reserved. No part of this book may be reprinted or

Trademark notice: Product or corporate names may be trademarks

British Library Cataloguing in Publication Data

Library of Congress Cataloging in Publication Data has been requested.

ISBN: 978-1-138-77986-0 (hbk)

1 Introduction to business law 1

2 The English legal system 5

4 Contracts for the sale of goods 43

6 The law of agency 81

The duties of the agent 100

7 Employment law 105

8 Unincorporated businesses 137

9 Incorporated businesses 157

Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 ....................................................... 102

Caparo Industries Plc v Dickman [1990] 2 AC 605 ............................................................ 67, 71

D & F Estates Ltd v Church Commissioners for England [1989]

Earl of Oxford’s case (1615) 21 ER 485 ...................................................................................... 7

Faccenda Chicken Ltd v Fowler [1986] 3 WLR 288 ................................................................ 117

G Scammell Nephew Ltd v HC & JG Ouston [1941] AC 251 .................................................... 49

Hadley v Baxendale (18540 9 Ex 341 ....................................................................................... 41

Iceland Frozen Foods Ltd v Jones [1983] ICR 16 ................................................................... 125

Industrie Chimiche Italia Centrale and Cerealiﬁn SA v Alexander G

J v DLA Piper LLP UK [2010] ICR 1052 ..................................................................................... 130

Keighley, Maxsted & Co v Durrant [1901] AC 240 ................................................................... 98

Nadeem v Raﬁq [2007] EWHC 2959 (Ch) ................................................................................ 146

OBG Ltd v Allan [2008] 1 AC 1 ............................................................................................ 77, 79

Paciﬁc SA v Food Corporation of India (The Winson) [1982] AC 939 ...................................... 97

Robinson v Kilvert (1889) 41 Ch D 88 ....................................................................................... 74

Said v Butt [1920] 3 KB 497 ....................................................................................................... 98

Taylor v Caldwell (1863) 3 B & S 826 ........................................................................................ 39

Unique Mariner, The [1978] 1 Lloyd’s Rep 438 ........................................................................ 87

Wallersteiner v Moir [1974] 1 WLR 991 .................................................................................. 172

Young v Bristol Aeroplane Co. [1944] KB 718 .......................................................................... 18

STATUTES s.261(2) ............................................. 182

s.1(2) ................................................... 75 Growth and Infrastructure Act

Torts (Interference with Goods) Commercial Agents (Council Directive)

Agency Workers Regulations Working Time Regulations 1998

This book is dedicated to Sheila.

Answers to on-the-spot questions

Contract law Discharging a

Figure 1.1 Overview of Beginning Business Law

USING THE LAW

After reading this chapter, you should be able to:

THE UNITED KINGDOM’S LEGAL SYSTEMS

Two parliaments and two national assemblies

The common law

Development of the common law

Where did equity come from?

Do judges make law?