AC1027 BUSINESS AND ITS LEGISLATIVE FOUNDATIONS

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AC1027 BUSINESS AND ITS LEGISLATIVE FOUNDATIONS

Introduction cont’d

Topics of study:

1. The English Legal System (an overview)

2. activities

3. Contractual obligations and contract law

4. Obligations of a business, negligence5. Obligations towards employees; employment law

6. Formation and constitution of business entities

7. Management, administration and regulation of companies, their finances and capital raising

8. Companies in difficulties; administration, bankruptcy, liquidation

Core textbook:• Macintyre, E. (2012) Business law. 6th edn. Harlow: Pearson Longman

Recommended textbook:• ACCA PAPER F4 ENG (June 2012), Corporate and business law, the complete text. ACCA• Roach, Lee. (2012) Card & James’ Business law for business, accounting & finance students 2 nd edn. OUP Oxford.

Supplementary textbooks:• Keenan, D. and Riches S. (2009) Business law 9th edn. Harlow: Pearson Longman.

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Today’s topic within the overall context of the syllabus

The English Legal System

Formation and constitution of business entities

Management, administration and regulation of companies

Contractual obligations and contract law

Obligations of a business, negligence

Employment law

Administration, bankruptcy, liquidation

REVISION

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LECTURE 3- Breach of Contract and Damages

Contract terms

or representations

Discharge of contract

Law of Torts (compensation)

Breach of

contract-

damagesDuty of Care of Accountants

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Terms or Representation

• Terms– A promise which was intended by the parties to be a

part of the contract will be a term of the contract.– A contract term will, if false, give rise to a remedy for

breach of contract

• Representation– A representation is something which induces the

formation of a contract but which does not become a term of the contract.

– Representation be regarded as a ‘sales puff’ and have no legal significance.

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Representation

• A representation is not part of the contract because the parties did not intend that it should be.

• If written agreement between the parties appears to be a complete record of what the parties decided, the courts may be reluctant to hear evidence of statements made during the pre-contract negotiations. This means that it can be difficult to persuade a court to add to or vary the terms of a written agreement.

• However,– A pre-contract statement made by an expert to a non-expert is much more

likely to become a term of the agreement. – Statements made by the parties nearer to the conclusion of an agreement are

more likely to become contract terms than those made early on in the negotiations.

– If the parties chose to summarise or record what they have agreed in a written memorandum, the inclusion of an oral pre-contract statement in the memo is evidence that it was meant to be a term of the agreement

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Representation

Mr. M (the seller) had said to Mr. R (the purchaser) that the motorcycle he was about to sell was a 1942 model according to the reg. docs.

A week later Mr. M (the seller) entered into a written contract with Mr. R (the purchaser) which did not refer to the year of the model, the purchaser had not indicated any critical importance for the age of the cycle, the model actually was 1930.

Was that a representation or terms?

Decision: The buyer’s claim for damages failed as the ref to 1942 model was a representation made prior to the contract

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FE1027 – WEEK 3 LECTURE Distinguish terms from mere representations

• Statements made by parties to a contract may be classified as terms or representations

• Breach of terms result in breach of contract. The party(ies) can sue for damages if breaches of terms occur.

• Not honouring a representation does not amount to breach of a contract, so it has no legal significance.

• The court will consider when the representation was made, to assess whether it was designed as a contract term or merely as an incidental statement

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How do you make sure that all important elements are taken into

consideration in setting out the contract?

• Answer: Just include them in the contract or agree that these are part of terms

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FE1027 – WEEK 3 LECTURE Express terms and implied terms

• As a general rule parties to a contract may include whatever terms they choose in the agreement.

• This is termed the principle of freedom of contract

• Terms clearly included in the contract are express terms.

• The law may complement or replace terms by implying terms into a contract

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FE1027 – WEEK 3 LECTURE Implied terms

• A term deemed to form part of a contract even though not expressly mentioned by parties may be implied by law through custom, statute or the courts as necessary to give effect to the presumed intentions of the parties and to bring efficacy to the contract.

• Some terms do not have to be explicitly mentioned. For example, Goods and Service Act 1982 demands that supplier carry out the service with reasonable care and skills. Even if this is not expressly written, this is implied.

• implied terms may override express terms in certain circumstances such as where they are implied by statute.

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FE1027 – WEEK 3 LECTURE Implied terms

• Any express terms override a term which might be implied by customs, e.g. customs of trades.

Terms implied by custom: Hutton v Warren (1836)Landlord gave the claimant, a tenant farmer notice to quit the farm but insisted the tenant should continue to farm during the period of notice.

By custom the tenant was bound to farm the land until the end of the tenancy.

However, the tenant asked for ‘a fair allowance’ for seeds and labour from which he received no benefit because he was to leave the farm.

Problem: Can he demand the allowances for seeds and labour considering the custom that he was bound to the farm the land.?

,

Decision: The tenant was also entitled to a fair allowance for seeds and labour incurred.

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Contract terms

or representations



Breach of

contract-

damagesDuty of Care of Accountants

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FE1027 – WEEK 3 LECTURE Discharge of contract

• When a contractual liability is discharged, it ceases to exist.

• A party’s liability can be discharged by one of the following FOUR ways:

1. Performance (discharge by performance)

2. Agreement, (discharge by agreement)

3. Frustration, and

4. Breach

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• Discharge by Performance:

By performing all of the contractual obligations by both parties.

• Discharge by Agreement:

Both the parties mutually agree to vary the agreement.

• Discharge by Frustration:

When the contracts become subsequently illegal or impossible to perform or becomes radically different from what the parties contemplated when it was originally made.

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• Discharge by Frustration:

Contract can be frustrated on the following grounds:

- The subject matter of the contract ceases to exist (for example a hall is destroyed by fire, so the

booking of the hall hire agreement has become frustrated.

- Unavailability of person who undertook to perform personally (e.g.- person died)

- It becomes illegal (contract with a company in a country which has become enemy country in a war).

Contract with Polish company, when Poland was occupied by Germany in 1939.

• Discharge by Breach of contract:

- is where a party without lawful excuse does not perform his contractual obligations precisely.

- Breach of contract gives rise to a secondary obligation to pay damages to the other party.

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Breach of contract (continued)

• Repudiation (that is to say one party shows an intention not to be bound by the contract) can be defined as a breach of contract which entitles the injured party to end the contract if he so chooses.

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LECTURE 3- Breach of Contract and Remedies



Breach of contract- Remedies

Duty of Care of

Accountants

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RECAP of Lecture 2NATURE OF CONTRACT

Remedies

Refusal to further perform the contract

Action for an agreed sum stipulated in contract

Damages

When a contract is breached one or more remedies available to injured party

To restore injured party’s financial position would have been if the contract was performed

Specific performance

If the contract was to buy Picasso’s painting. Hand the painting over

There are others remedies available

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FE1027 – WEEK 3 LECTURE Remedies for Breach of Contract

DamagesRestoring Financial loss?

• Damages are a common law remedy intended to restore the party who has suffered a loss to the position he would have been in if the contract had been performed.

How far down (remoteness of damage)• In a claim for damages the first issue is remoteness of damage. Here the

courts consider how far down the sequence of cause and effect the consequences of breach should be traced before they should be ignored.

How much?• Secondly, the court must decide how much money to award in respect of

the breach and its relevant consequences, this is the measure of damages

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FE1027 – WEEK 3 LECTURE Damages

• The loss must arise naturally from the breach or in a manner which the parties may reasonably be supposed to have contemplated in making the contract as the probable result of the breach of it.

• Measure of damages is that (financial or non-financial) which will compensate for the loss incurred. It is not intended that the injured party should profit from a claim.

• E.G. The market price rule: where a seller fails to sell the goods, buyer buys similar goods at market price. Seller compensates buyer for any additional costs incurred over the contract cost.

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Example of damagesRuxley Construction (claimant) VS Forsyth (Defendant)Legal facts:

Contract agreed between the parties to build a swimming pool at a price of GBP 70,178 with a maximum depth of 7 feet 6 inches. But after construction, the pool’s maximum depth was found to be 6 feet 9 inches.

Issue:The defendant did not pay GBP 39,000. The claimant (the construction company) sued the defendant. Who should win the case?

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Example of damagesRuxley Construction (claimant) VS Forsyth (Defendant)Legal facts:

Contract agreed between the parties to build a swimming pool at a price of GBP 70,178 with a maximum depth of 7 feet 6 inches. But after construction, the pool’s maximum depth was found to be 6 feet 9 inches.

Issue:The defendant did not pay GBP 39,000. The claimant (the construction company) sued the defendant. Who should win the case?

Option to defendant: Defendant should counter claim for damages for breach of term

Court’s decision: When sued for counter claim, the defended was awarded GBP 21,560 damages (to be payable by the claimant).

Reason:Defendant may have to rebuild the swimming pool (may be by a third party) to restore his original financial loss.

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Breach of contract- damages

Duty of Care of

Accountants

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FE1027 – WEEK 3 LECTURE The Law of Torts

Tort and other wrongs• A tort is a civil wrong and the person wronged sues in a civil court for

compensation or an injunction.• The claimant’s claim generally is that he has suffered a loss such as

personal injury at the hands of the defendant and that defendant should pay damages.

• Types of tort:– Trespass to land– Private nuisance (e.g. noise, smell, vibrations) remedies are entitlement to

reasonable comfort but no more.– Public nuisance created by statute are criminal offences (e.g. obstructing the

highway, takeaway restaurants creating litter and odours, etc) a claimant has to prove that a representative cross-section was inconvenienced.

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FE1027 – WEEK 3 LECTURE Types of tort

– Trespass to the person (e.g. assault, false imprisonment, etc)

– Defamation (e.g. publication of false statements not lawfully justified)

– Deceit (e.g. claimant is misled into taking actions that are to his detriment) such as con-artist who encourages some one to pay him money for goods he has no intention of supplying

– Passing-off (e.g. the use of a name, mark or description by one business that misleads a consumer to believe that their business is that of another). Expensive ‘designer’ products as watches copied and sold as ‘originals’ to unsuspecting customers.

– Negligence (e.g. where the carelessness of an individual or Co. causes physical or financial damage to the claimant. Negligent acts tend to be reckless but not normally intentional.

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FE1027 – WEEK 3 LECTURE The tort of negligence

• The term negligence is used to describe carelessly carrying out an act and breaking a legal duty of care owed to another causing them loss or damage

• Breach of duty of care – the standard of reasonable care requires that the person concerned should do what a reasonable man would do, and should not do what a reasonable man would not do.

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FE1027 – WEEK 3 LECTURE The tort of negligence

• Example of duty of care.

Case: Paris v Stepney Borough Council (1951)

The facts:

P was employed by K on vehicle maintenance. P had already lost the sight

of one eye. It was not the normal practice to issue protective goggles since the risk of

Eye injury was small. A chip of metal flew into P’s good eye and blinded him.

Decision:

There was a higher standard of care owed to P because an injury to his remaining good eye would blind him

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FE1027 – WEEK 3 LECTURE Causality

• A person will only be compensated if he has suffered actual loss, injury, damage or harm as a consequence of another’s actions.

• Courts often have difficulty in determining causation where there are a number of possible causes of injury including the negligent act

Wilsher v Essex AHA (1988)The facts: A premature baby suffered blindness after birth. It was claimed that a

doctor failed to notice that the baby received high doses of oxygen and this caused

the blindness.

Decision: Evidence was provided that there were six possible causes of the

blindness including the one claimed. However, the court could not ascertain which of

the six actually occurred and therefore could not create a direct causal link.

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Remoteness of damage

• Even where causation is proved, a negligence claim can still fail if the damage caused is ‘too remote’.

• Liability is limited to damage that a reasonable man could have foreseen. This does not mean the exact event must be foreseeable in detail, just that the eventual outcome is foreseeable.

Jolley v London Borough of Sutton (2000)The facts: The defendants should have removed a boat which had been dumped two

Years previously. A teenage boy was injured while attempting to repair it.

Decision: Even though the precise incident was not foreseeable, the authority should

Have foreseen that some harm could be caused since they knew children regularly

played on the abandoned boat.

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Breach of contract- damages

Duty of Care of

Accountants

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FE1027 – WEEK 3 LECTUREDuty of care of Accountants and Auditors

• Professional individuals and organisations have a special relationship with their clients and those who rely on their work.

• This is because they act in an expert capacity.

• What then are the issues of negligence and duty of care specific to accountants and auditors?

• Accountants have contractual relationship with clients.

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FE1027 – WEEK 3 LECTUREDuty of care of Accountants and Auditors

• Clients are protected through this contractual relationship if accountants give them negligent advice.

• Shareholders though rely on accountants’ work, they have no contractual relationship with accountants.

• Case law therefore has developed what duty of care accountants owe to shareholders over the years.

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FE1027 – WEEK 3 LECTUREUK Accountancy Firms Limiting Their Liability

• In 2000, the Limited Liability Partnerships Act 2000 was passed,

• Limited liability partnerships have been permitted under law since 2001

• This protects the partners of accountancy firms from the financial consequences of negligent actions as their liability to third parties can now be limited.

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Documents

AC1027 BUSINESS AND ITS LEGISLATIVE FOUNDATIONS