Business Law

2024

Authored by
Syed Hasib Rahman (Barrister-at-Law)
Basic Information

Faculty Syed Hasib M Rahman (Barrister-at-Law)

Office Hour 11.30-1.30 PM (Sunday and Tuesday)
Contact Details [email protected] Mobile: +88-01712832686
Course Pre-requisites None
Department offering the School of business (USB)
course
Course Title Legal Issues in Business
Course Code BBA + MBA Credit 3 Term 2024
Number of Number of
Number of Lectures 22 Total 22
Tutorials Practical

COURSE OBJECTIVES:

The main objective of “Business Law” is to equip the students to some basic legal concepts that are
integral to business environment. The course is designed in a way to facilitate a practical approach of
learning through interactive lectures. This course will introduce the students to a very practical approach
towards the legal issues in corporate sector locally and internationally with reference from various
aspects. The scope of business law is large and diversified. At the present time, the roles of business
organisations are expanding rapidly both at national and international level. With this expansion, the
companies and business organisations are exposed to various legal rules and regulations.
Thus, it became crucially important to have at least a basic understanding of business law and the legal
system in which a business or company operates. It is necessary for the business organisations and the
people involved in it, to have awareness of various legal concepts in relation to transactions and
operations of the organisation. To acquire an understanding of law, this course aims to introduce the
students, to the various legal concepts prevailing in the business organisations. Whether you are an
entrepreneur starting your own business, a manager advancing your career or just starting out in the
business world, studying business law will better prepare you for a successful and rewarding career in
business. It’s important for business owners, managers, and other professionals to have a basic
understanding of business law to help them make better decisions.
Thus, as students of MBA it is expected that you get acquainted and have a sound knowledge of business
law.

COURSE DESCRIPTION:

This course aims to introduce students to the legal principles governing business law with reference to
the most important areas and help them acquire a basic knowledge and understanding of the rules
governing the areas specified in the syllabus below. Additionally, this course aims to develop the ability
to identify and apply the rules of law prevailing in the business environment in a practical and
professional manner apart from being purely academic.
Syllabus
1. Introduction to Business Law
2. Contract Law: Offer and Acceptance
3. Contract Law: Consideration
4. Contract Law: Intention
5. Contract Law: Capacity
6. Frustration of Contract
7. Company Law: Separate Legal Entity
8. Company Law: Lifting the Corporate Veil
9. Agency: Disclosed Agency
10. Agency: Undisclosed Agency
11. Banking Law: Letter of Credit

Text Book:
1. Ewan McKendrick-Law of Contract.
2. Commercial Law – Robert Bradgate
3. Subject Guide will be provided

Course Materials: Subject Guide for the course will be provided.

All students are encouraged to read news items, articles and journals regarding business law to enrich them
with up-to-date information prevailing in the corporate business arena.
EVALUATION
Type of Evaluation Nos. Weight
Class Attendance/Group Participation 0%
Quiz/Class tests /Homework 1-2 20%
Presentation 1-2 40%
Midterm Assessment 1 20%
Final Assessment 1 20%
Total 100%
N.B. All students must attend lectures and take part in class discussions. Absence without reasonable
excuse will be penalized. There will be no makeup exams of any sort.

COURSE GRADING COMPONENTS:

A+ A A- B+ B B- C+ C D
95 90 85 80 75 70 65 55 50

The details will be informed in the class. COURSE

POLICY:

All students must attend all the lectures. Absence shall be penalized unless there are reasonable excuses.
There will be no make up exams of any sort.

Additionally, students must follow the standard rules of ULAB as applicable to them.

Syed Hasib Rahman

Signature
 Why do you need business law?

It’s important for business owners, managers, and other professionals to have a basic understanding of
business law to help them make better decisions. Businesses need these laws for the same reasons that
people do: to distinguish between reasonable behaviour and unacceptable behavior, to afford certainty
and solidity, to protect the public and consumers, and to provide a mechanism for businesses to resolve
legal disputes.

Throughout a business’ existence, it can do most things that a person can do, and we need laws to control
those activities. A business can buy and sell property, sue and be sued, enter into contracts, hire and fire
employees, and even commit crimes.

We need business laws to cover all these activities so that businesses can operate with some measure of
predictability. For example, suppose you wanted to open a shoe factory. You’ll need to buy a piece of
property and build your factory, which will be very expensive. Without established, predictable property
laws that ensure that you are the legal owner of the land, you would be very reluctant to build the factory.
There would always be some risk that someone else would come along and claim your property and
factory as their own.

The same is true for all other business activity. You wouldn’t ship shoes to a retailer unless you had a
way to force them to pay for the goods. You wouldn’t hire employees without some means of firing them
if they didn’t do their job. In other words, it’s important to enter into contracts with a means of enforcing
the agreement.

It’s also important for business owners, managers, and supervisors to understand what rights the business
has against other businesses and individuals. For example, if you have an employee who is not doing his
or her job, you should know your options.

If you make and sell tires, you must know who will be held liable if someone is injured due to a blowout.
If you enter into a contract with another business, you need to know who is bound to the contract, as well
as what happens if those individuals cannot perform what they legally agreed to do.

The answers to all of these situations and more are provided by business law. The course is not intended
to make anyone an expert in any area of business law, but instead to make business managers, owners,
and executives more aware of the many legal issues that arise in the day-to-day operation of any
business. Being aware of these potential issues will help you make the judgment calls and decisions that
business professionals makes on a daily basis. A basic understanding of business law and related legal
issues can help you advert potential legal issues as they come up, make better decisions, and know when
to seek legal help.
Whether you are an entrepreneur starting your own business, a manager advancing your career or just
starting out in the business world, studying business law will better prepare you for a successful and
rewarding career in business.

You could see law as the framework of rules in which a society operates. Many aspects of society are -
directly or indirectly - related to economics: your job, renting or buying a house, starting or running a
business, doing groceries, trade and travel, et cetera. Inevitably, many branches of law are related to
economics: labor law, corporate law, consumer law, European Law (free movement and trade), et cetera.
Although the usefulness of studying economics may almost seem self-evident (considering this strong
relationship with law), there are a few concrete examples of how knowledge of economics could help
lawyers:

A better understanding of society (through a better understanding of economics) could help you to better
understand the design of the legal system
It would help you to model/predict the practical implications of legal changes
It could help you to find potential improvements of the law
In fact, there is a special branch of both economics and law where the fields are brought together: ‘law
and economics’, sometimes called the ‘economics of law’ or the ‘economic analysis of law’
CHAPTER 1
Introduction to Studying Law

INTRODUCTION

This chapter provides an overview of some of the concepts and principles which form the
background to the topics covered in the rest of the book. it also contains some hints on
studying law.

LEARNING OBJECTIVES

When you have studied this chapter, you should be able to:
■ Appreciate the distinguishing features of a legal rule
■ Understand the characteristics of law
■ State its purposes

■ Distinguish between civil and criminal law.

What is law?
Law may be defined as a body of rules, created by the state, binding within its jurisdiction and
enforced with the authority of the state through the use of sanctions. Here is an analysis of this
definition.

Rules
Rules are commands aimed at regulating behaviour. Rules tell us what we can and cannot do;
sometimes they may permit behaviour subject to fulfilling a condition. For example, an extension of
business premises is illegal unless planning permission is obtained; a shop may not sell alcohol without
a license.

Created by the state

Parliament is responsible for creating most of the law applicable in the UK. Such law is contained in
Acts of Parliament or statutes.

The jurisdiction of the state

The law of any country is binding only within its territory. The Parliament may introduce laws
applicable to the country.

Enforcement
A legal dispute may require formal resolution by the court or tribunal. The state or a party to the
dispute may initiate the enforcement proceedings. A sanction or penalty may be imposed in order to
compensate the injured party or punish the wrongdoer.

Why do we need law?

Any society, or group within it, however small, will make rules for the purposes of organisation, to
promote the safety and convenience of members and to regulate their relationships with each other. An
affluent industrialized state requires a complex system of law which aims to fulfil a number of
purposes.
1. to provide a governmental structure and legislative procedures: constitutional law;
2. to provide public services and to raise taxes to pay for them: administrative and tax law;
 3. to regulate and promote the economy: administrative, civil and criminal law are all involved;
4. to promote public order and preserve national security: criminal law;
5. to give individual members personal rights and duties in relation to others and to enable personal
enforcement of these rights: the civil law. Civil law duties may arise through agreement between
the parties (the law of contract), or be imposed directly (the law of tort);
6. to give legal validity to approved relationships and transactions between members of the society:
this involves the law of contract, the law of property and succession, company and partnership
law, and family law.

The differences between criminal and civil law

It is important from the outset to understand the differences between civil and criminal law.
Dual liability for a breach of both civil and criminal law may arise from the same set of facts; but since
these two branches of the law have very different purposes, their procedures and penalties differ radically.
The following example illustrates these crucial differences.

Arif is treated to a fancy lunch at ‘The Fat Box’ by Humaira. Subsequently, both Arif and Humaira
become ill with food poisoning, which they claim was caused by the insanitary condition of Fat Box’s
kitchen.
The criminal proceedings
State v Fat Box
Selling impure food is a criminal offence under the Food Safety Act 1990 (Fictitious): it is in the
interests of public safety to control and punish such behaviour.
In this sort of case, Fat Box may be prosecuted in the magistrates’ court by the local authority’s
trading standards department, rather than by the police. The burden of proving Fat Box’s guilt lies
on the prosecutor, who has to prove beyond all reasonable doubt that the food poisoning was
caused by the condition of the food. If Fat Box is found guilty, he may be fined or jailed for a
period of time or both: a fine is a sum of money payable to the court; it does not go to the victims
of the crime.
 The civil proceedings
Humaira v Fat Box Arif v Fat Box

Humaira and Arif want compensation for having been made ill. Both are self-employed and, in
addition to the pain and inconvenience of their illness, they have also lost earnings while they were
laid low.

Two separate claims are involved: Humaira, who bought the food, will sue for breach of contract,
as the food was clearly not of satisfactory quality; Arif, who was harmed by the food but had no
contract with Fat Box, will sue claiming negligence or breach of the Consumer Protection Act
1987. Humaira and Arif will bring a take action and will have to prove that on the balance of
probabilities Fat Box caused their problems. This is a lower standard of proof than that required in
criminal proceedings, as the court requires it to be proved only that it is more likely than not that
Fat Box was responsible. If Humaira and Arif win, damages will be payable to them by Fat Box to
compensate them for their pain and suffering and all economic loss resulting from it, including
medical costs and loss of earnings. Humaira will also be able to reclaim the cost of the meal.
Changing the law
It is important to realise that the law is subject to frequent change. Very few principles actually remain
constant. These changes reflect social, political, economic and technological developments taking
place within society.
Social change
Changes in moral values have influenced a number of legal developments in the last 30 years,
including reform of the divorce law, decriminalization of homosexuality and abortion, as well as the
introduction of legislation to prevent discrimination on the grounds of sex, race, sexual orientation,
disability, religion or beliefs and age.
Political change
No government can initiate new policies unless it has legal authority to do so. This means that the law
may require constant, and often radical, change. The privatisation of the water, gas and electricity
industries was achieved by repeal of previous legislation which had introduced a policy of
nationalisation.
Economic and technological change
Much of the law governing commerce and industry, including the regulation of health and safety at
work, is subject to such influence. As industrial practice changes, old hazards disappear and new ones
develop. For example, the commercial exploitation of the internal
combustion engine has led to the development of a huge body of road traffic law.
In practice, these influences and political change may be interlinked: an economic or social issue is
often the focus of a political policy.

How the Law is Made

Parliament
Most English law is currently made by, or with the authority of, Parliament. Direct
(parliamentary/primary) legislation comprises Acts of Parliament, created by the passage of a Bill
through certain prescribed processes in the House of Commons and the House of Lords. Indirect
(delegated) legislation is created by a body (usually a government department or local authority) which
has been given the power to legislate by Parliament under an enabling Act.
The courts

The law made by the courts is case law, sometimes described as common law. Until the nineteenth
century the courts were the primary law-makers, but were superseded by Parliament since social
conditions required a different style of law-making.

Since most law is now statutory, the courts are mainly concerned with the interpretation and
application of points of law derived from Acts of Parliament and delegated legislation. When
exercising this function the courts must respect the sovereignty of Parliament as a superior law-making
body. A judge interpreting a statute will therefore aim to give such meaning to a disputed point of
legislation as to reflect what Parliament seemed to have intended. The words used in the statute are the
main focus of the interpretation exercise and limit the freedom of the court. If the statute has an
apparent gap and consequently an injustice PART 1 INTRODUCTION 24 exists, the court is not
necessarily free to create the law to fill that gap, unless the context gives the necessary scope.
Otherwise, all that the court can do is to recommend that Parliament amends the legislation.

The law of binding precedent

The court hierarchy

The Supreme Court – The Appellate Division
The Supreme Court – The High Court
Division The District Courts

When exercising either their creative or interpretative functions, judges are bound by the law of
binding precedent. This is a distinctive feature of the legal system. Under English law judges are not
necessarily entitled to make their own decisions about the development or interpretation of the law.
They may be bound by a decision reached in a previous case.
Two factors are crucial to determining whether a precedent (previous judicial decision) is binding:

1. the position in the court hierarchy of the court which decided the precedent, relative to the
position of the court trying the current case. Inferior courts are bound by the decisions of
superior courts
2. whether the facts of the current case come within the scope of the principle of law in the
previous decision.

Essential legal terms

The claimant and defendant

These are the parties in a civil case (action). The claimant sues (brings the case against) the defendant.

The prosecution and the defence

These are the parties to a criminal case. The ‘defence’ is sometimes called the defendant or the
accused. The prosecution is brought by the state. This is why criminal cases are usually reported as
State v (xyz).

The appellant and the respondent

These are the parties in an appeal hearing. The appellant is the party who is bringing the appeal against
the decision of the court below, in which the respondent won his or her case.
CHAPTER 2
THE LAW OF CONTRACT:
Offer and acceptance

Introduction
A contract is a legally binding agreement concerning a bargain which is essentially commercial in
its nature and involves the sale or hire of commodities such as goods, services or land. Such
contracts are known as simple contracts, since they are usually enforceable without having to be
put into writing. You probably make literally hundreds of contracts every year when doing
everyday things like shopping, getting your hair cut, or getting your DVD player repaired. None of
the legal paraphernalia that the words ‘forming a contract’ may bring to mind are involved in
such transactions. They are legally binding without documents, signatures or witnesses. If the
goods or services provided to you are defective, you have legal rights arising from the contract
you made with the shop. To enforce those rights you will, of course, need to prove the existence
of the contract. The receipt is handy evidence of this. However, if you have lost this, other
evidence – like a credit card docket, or a cheque stub, or the word of your Aunt who was with
you at the time – will be perfectly adequate. In this chapter we shall examine how contracts are
formed.

LEARNING OBJECTIVES
WHEN YOU HAVE STUDIED THIS CHAPTER, YOU SHOULD BE ABLE TO:
■ LIST THE ESSENTIAL REQUIREMENTS FOR A BINDING CONTRACT
■ DEFINE OFFER AND ACCEPTANCE
■ DISTINGUISH BETWEEN AN INVITATION TO TREAT AND AN OFFER
■ DEMONSTRATE HOW OFFER AND ACCEPTANCE MAY BE EFFECTIVELY COMMUNICATED.
What is a Contract?

A contract may be defined as an agreement between two or more parties intended to create a legal obligation
between them which is legally binding/enforceable.

Treitel (1995): “A contract is an agreement giving rise to obligations that are enforced by the law. The factor
which distinguishes contractual from other legal obligations is that they are based on the agreement of
contracting parties. This is, however, subject to a number of qualifications.”

Essentials of a legally binding contract has the following qualifications.

1. An offer
2. An acceptance
3. Consideration
4. Intention to create legal relationship
5. Capacity

Writing is not usually essential.

As indicated above in the Introduction, writing is not a legal requirement for the great majority of
contracts, though it may well be useful proof of the contents of a complex contract. While the law does
not require a binding contract to be in writing, most clients would not be very happy to have settled
complicated terms by word of mouth only.

A minority of contracts must be written in order to be valid. These include contracts to sell land under
the Law of Property (Miscellaneous Provisions) Act 1989, and contracts to obtain credit which are
governed by the Consumer Credit Act. Where such regulation applies, the written document comprises
the contract. Without the contractual document the law will treat the transaction as if it does not exist,
regardless of other available evidence.
The offer
This may be defined as a clear statement of the terms on which one party (the offeror) is prepared to
do business with another party (the offeree) and it must be capable of acceptance. The offer sets out
the terms upon which the offeror is willing to enter into contractual relations with the offeree. In order
to be capable of acceptance, the offer must not be too vague; if the offeree accepts, each party should
know what their rights and obligations are.

An offer may be bilateral or unilateral.

Most offers are bilateral, i.e. such an offer consists of a promise made in return for a promise. In a sale
of goods contract, for example, the offeror promises to take and pay for goods and the offeree promises
to supply goods of an appropriate description and standard.

The first requisite of any contract is a legally binding agreement (consisting of an offer and
acceptance). An offer according to Treitel is an expression of willingness to enter into a contract under
certain terms made with the intention that it shall become binding as soon as it is accepted by the
offeror. It is important to be able to distinguish what the law will treat as an offer from other statements
which will not form the basis of an enforceable contract.

A legally binding offer will include:

1. Clearly stated terms.
2. Intention to do business.
3. Capable of Acceptance
Clearly Stated Terms:

Hillas v Arcos [1932]

Hillas & Company were merchants purchasing timber from Arcos. They reached an agreement to
purchase 22,000 standards of timber, under the specific condition that they should also have the option
of entering a contract with Arcos to purchase 100,000 standards the following year with a 5%
reduction on price. Arcos refused to sell them the 100,000 standards the following year. Hillas brought
action against Arcos for breach of contract.
Held: This was a valid offer. Clarification of this rather vague option could readily be gleaned from the
previous business dealings of the parties, as well as from custom and practice in the timber trade.

Foley v Classique Coaches[1934]

An arbitration clause in a long-term contract stated that Foley would supply petrol to the coach company
“at a price to be agreed in writing and from time to time’.
Held. The contract was binding as the arbitration clause would enable any lack of clarity about the price to
be resolved when and if necessary.

In Scammel v Ouston (1941), Ouston ordered a van from Scammel on the understanding that the
balance of the purchase price could be paid on hire purchase terms over two years. Scammel used a
number of different hire purchase terms and the specific terms of his agreement with Ouston were
never actually fixed. When Scammel failed to deliver the van, Ouston sued for breach of contract. It
was held that the action failed on the basis that no contract could be established, due to the uncertainty
of the terms; no specific hire purchase terms had been identified.
Intention to do Business & Communication
An offer represents the parties ‘last word’ prior to acceptance. A statement which does not indicate
commitment to be bound by its terms will not be interpreted as a valid offer.
Problems arise where a party who believes that an offer has been made, communicates an acceptance.
The party then believes that a contract exists, however, if the original statement is not valid offer, there
will yet be no contract, since a valid contract requires both offers and acceptance.

Confusion can sometimes arise when what would appear, in the everyday sense of the word, to be an
offer is held by the law to be only an invitation to treat. This issue arises particularly in the following
area.

Most advertisements for the sale of goods, land and services are not usually treated by the courts as
indicating the necessary intention to forma an offer. Such statements invite potential customers too
make an offer. It is then up to the business proprietor to decide potential customers offer. Without
acceptance no contract exists; therefore, buyers have no right to the goods, etc. they want to purchase.

In Gibson v Manchester City Council (1979), a council tenant was interested in buying his house. He
completed an application form and received a letter from the Council stating that it 'may be prepared to
sell the house to you for £2,180. Mr. Gibson initially, inquired the purchase price, pointing out that the
path to the house was in a bad condition. The Council refused to change the price, saying that the price
had been fixed taking into account the condition of the property. Mr. Gibson then wrote on March 1971
asking the Council to 'carry on with the purchase’. Following a change in political control of the
Council in May 1971, it decided to stop selling Council houses to tenants. Mr. Gibson was informed
that the Council would not proceed with the sale of the house. Mr. Gibson brought legal proceedings
claiming that the letter he had received stating the purchase price was an offer which he had accepted
on 18 March 1971. The House of Lords. However, ruled that the Council had not made an offer; the
letter giving the purchase price was merely one step in the negotiations for a contract and amounted
only to an invitation to treat.
Its purpose was simply to invite the making of a 'formal application amounting to an offer, from the
tenant.
MERE STATEMENTS OF PRICE (Gibson v Manchester)
A statement of the minimum price at which a party may be willing to sell will not amount to an offer
(it will be an invitation to treat).
Legal Principle
Negotiations to enter into a contract can amount to an invitation to treat but not an offer.

Fisher v Bell [1961]

The defendant exhibited a flick knife in his shop window wan was prosecuted for offering for sale an
offensive weapon. Held: The defendant was not guilty since he had not made an offer. Goods in a shop
window, even those bearing a price tag, represents an invitation to treat, not an offer. Customers make
offers by saying that they are prepared to do business at the price shown. Seller then decide if they want to
accept, only if they do does any contract result.

Patridge v Crittenden (11968) It was held that a magazine advertisement selling some birds at a
particular price was an invitation to treat.

It was held in Grainger & Sons v Gough (1896) that the circulation of a price list by a wine merchant was
not an offer to sell at those prices but merely an invitation to treat
 .

Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953]

The defendants were charged with breaking a law which provided that certain drugs could only be sold under
the supervision of a qualified pharmacist. They had placed the drugs on open display in their self-service
store and, although a qualified person was stationed at the cash desk, it was alleged that the contract of sale
had been formed when the customer removed the goods from the shelf, the display being an offer to sell. It
was held that Boots were not guilty. The display of goods on the shelf was only an invitation to treat. In law,
the customer offered to buy the goods at the cash desk where the pharmacist was stationed. This decision is
clearly practical, as the alternative would mean that, once customers had placed goods in their shopping
baskets, they would be bound to accept them and could not change their minds and return the goods to the
shelve

Unilateral Offer

In order to understand the law on offer and acceptance, you need to understand the concepts of
unilateral and bilateral contracts. Most contracts are bilateral. This means that each party takes on an
obligation, usually by promising the other something - for example, A promises to sell something and
B to buy it.

By contrast a unilateral contract arises where only one party assumes an obligation under the contract.
A unilateral offer is a promise made in return for the completion of a specified act.
In Carlill v Carbolic Smoke Ball Co (1893), the defendants were the manufacturers' of ‘smoke balls’
which they claimed could prevent flu. They published advertisements stating that if anyone used their
smoke balls for a specified time and still caught flu, they would pay that person £100, and that to prove
they were serious about the claim, they had deposited £1,000 with their bankers.

Mrs. Carlill bought and used a smoke ball but nevertheless ended up with flu. She therefore claimed
the £100, which the company refused to pay. They argued that their advertisement could not give rise
to a contract, since it was impossible to make a contract with the whole world, and that therefore they
were not legally bound to pay the money. This argument was rejected by the court, which held that the
advertisement did constitute an offer to the world at large, which became a contract when it was
accepted by Mrs. Carlill using the smoke ball and getting flu. She was therefore entitled to the £100.

Legal Principle
Offers can be addressed to the general public and are accepted when the offer is acted upon by a
member of the general public. Advertisements for unilateral contracts are generally treated as offers.

Advertisements
A distinction is generally made between advertisements for a unilateral contract, and those for a bilateral
contract.

How long does an offer last?

An offer may cease to exist under any of the following circumstances.

Specified time:
Where an offeror states that an offer will remain open for a specific length of time, it lapses when that
time is up.

Reasonable length of time

Where the offeror has not specified how long the offer will remain open, it will lapse after a reasonable
length of time has passed. Exactly how long this is w 11 depend upon whether the means of
communicating the offer were fast or slow and on its subject matter - for example, offers to buy
perishable goods, or a commodity whose price fluctuates daily, will lapse quite quickly. Offers to buy
shares on the stock market may last only seconds. In Ramsgate Victoria Hotel Ltd v Montefiore
(1866), the defendant, Montefiore, applied for shares in the company, paying a deposit into their bank.
After hearing nothing from them for five months, he was then informed that the shares had been
allotted to him, and asked to pay the balance due on them. He refused to do so, and the court upheld his
argument that five months was not a reasonable length of time for acceptance of an offer to buy shares,
which are a commodity with a rapidly fluctuating price. Therefore the offer had lapsed before the
company tried to accept it. And there was no contract between them.

Rejection
An offer lapses when the offeree rejects it. If A offers to sell B her car on Tuesday, and B says no, B
cannot come back on Wednesday and insist on accepting the offer.

Counter- offer
A counter-offer terminates the original offer.
In Hyde v Wrench (1840), the defendant offered to sell his farm for £1,000, and the claimant
responded by offering to buy it at £950 - this is called making a counter-offer. The farm owner refused
to sell at that price, and when the claimant later tried to accept the offer to buy at £1,000. It was held
that this offer was no longer available; it had been terminated by the counter-offer. In this situation the
offeror can make a new offer on exactly the same terms, but is not obliged to do so.
Legal Principle
A counter-offer terminates the original offer and is a fresh offer.
However, A mere request for information is not a counter offer. If the offeree asks the offeror for more
information, the original offer stands and the offeree has neither accepted or rejected the offer. For
example, if B merely asks A if the £1000 includes delivery of the books, this would be classed as a
mere request for information, not a counter offer.
Stevenson Jaques & Co. v McLean (1880) 5 QBD 346 - Mclean (M) offered to sell Stevenson (S)
iron. S asked whether he would accept delivery over 2 months, and if not, what his longest time limit
for delivery would be. M did not respond and later claimed that the original offer had not been
accepted because S’s telegram was a counter offer. It was held that the telegram was a mere request for
information, not a counter offer, or a rejection of the original offer.

Withdrawal of offer / Revocation of Offer

The withdrawal of an offer is sometimes described as the revocation of an offer, the old case of Payne
v Cave establishes the principle that an offer may be withdrawn at any time up until it is accepted. In
Routledge v Grant (1828), the defendant made a provisional offer to buy the claimant's house at a
specified price, 'a definite answer (acceptance) to be given within six weeks from date. It was held that,
regardless of this provision, the defendant still had the right to withdraw the offer at any moment
before acceptance, even though the time limit had not expired.

Withdrawal must be communicated.

It is not enough for an offeror simply to change their mind about an offer; they must notify the offeree
that it is being revoked. (Routledge v Grant)
Acceptance
Acceptance must be unconditional:

An acceptance must accept the precise/exact terms of an offer. In Tinn v Hoffman (1873), one party
offered to sell the other 1,200 tons of iron, it was held that the other party's order for 800 tons was not
an acceptance.
Acceptance must be a ‘mirror image’ of the offer The offeree must be agreeing to all the terms of the
offer and not trying to introduce new terms. In Jones v Daniel (1894) the offeree responded to an offer
by submitting a draft contract which included some new terms. This response was held to be a counter-
offer, not an acceptance.

Specified methods of acceptance:

If an offeror states that his or her offer must be accepted in a particular way (acceptance by email),
then it is only acceptable by that method (email) or an equally effective one will be binding. To be
considered equally effective, a mode of acceptance should not be slower than method specified in the
offer nor have any disadvantages for the offeror. It was stated in Tinn v Hoffman (1873) that where
the offeree was asked to reply to return by post any method which would arrive before return of post
would be sufficient.

Silence
The case of Felthouse v Bindley shows that, although the offeror can stipulate how the acceptance is
to be made, he or she cannot stipulate that silence shall amount to acceptance.
Legal Principle
The offeror cannot impose a contract on the offeree against his wishes by deeming that his silence should
amount to an acceptance.
Acceptance must be communicated:

An acceptance does not usually take effect until it is communicated to the offeror. As Lord Denning
explained in Entores Ltd v Miles Far East Corporation (1955), A shouts an offer to B across a river
but, just as B yells back an acceptable, a noisy aircraft flies over, preventing A from hearing B's reply,
no contract has been made. A must be able to hear B's acceptance before it can take effect. The same
would apply if the contract was made by telephone, and A failed to catch what B said because of
interference on the line; there is no contract until A knows that B is accepting the offer. The principal
reason for this rule is that, without it, people might be bound by a contract without knowing that their
offer had been accepted, which could obviously create difficulties in all kinds of situations. Where
parties negotiate face to face, communication of the acceptance is unlikely to be a problem; any
difficulties tend to arise where the parties are communicating at a distance, for example, by post,
telephone, telegram, telex, fax, email or messenger.
Practice Quiz
1 Does an offer exist in the following circumstances?
(a) Josh puts a teddy bear wearing a price ticket in his shop window.
(b) Rachel distributes flyers stating ‘Cheap Offer: 10% off the cost of all our pizzas’.
(c) Mary advertises a reward of £50 for the return of her lost bracelet.
(d) Martha returns Mary’s bracelet and then discovers that a reward was offered.
(e) Peter offered to sell his car to Esther for £3,000; Esther told him she would pay only £2,500.
(f) Ali offered to sell her fridge-freezer to Paul for £100. He asked her to give him three days to decide.
The next day she sold the freezer to Jacob.

2 Has a valid acceptance resulted in the following situations?

(a) John offers to sell potatoes to Thomas, who replies that he will take them if he can raise the money.
(b) Eva offers to sell apples to Matthew and tells him that she will assume that he wants to buy them unless
he tells her to the contrary by 10 o’clock on Saturday morning. The deadline has now passed but
Matthew has not been in touch.
(d) Susanna offered by telephone to rewire Antony’s house. He accepted, but Susanna did not hear
because the line went dead.
Practice Question (Problem Solving)

QUESTION

On June 5 Alvin wrote to Bob offering to sell 500 bags of sand at

£20 per bag.

On June 7 Bob posted a reply in which he accepted Alvin’s offer but

added that if he did not hear to the contrary, he would assume that
the price included delivery to his (Bob’s) yard.

Alvin emailed Bob mentioning that there will be no changes to his

first offer.

On receiving Alvin’s email at 11am on June 8, Bob posted a letter to

Alvin confirming his acceptance of Alvin’s terms which were unchanged.

But later that day, Bob got a better deal from Carl and sent an email
to Alvin saying that he did not want to proceed with the contract
anymore.

Advise Alvin.
Activity:
Legal Principal

No Question Answer
1 Hyde v Wrench
2 TINN V HOFFMAN
3 RAMSGATE VICTORIA HOTEL
4 ENTORES V MILES
5 ROUTLEDGE V GRANT
6 WITHDRAWAL MUST BE COMMUNICATED
-Name the Case-
7 CARLILL V CARBOLIC SMOKE BALLS
8 PAYNE V CAVE
9 GILBSON V MANCHESTER CITY COUNCIL
10 FELTHOUSE V BINDLEY
11 WHEN CAN AN OFFER BE REVOKED?
12 ALL ADVERTISEMENTS IN NEWSPAPER ARE
INVITATION TO TREAT.
TRUE OR FALSE
13 WHAT IS A REASONABLE TIME FOR AN
OFFER?
14 ARIF WANTS TO SELL HIS IPHONE X, HE ASKS
BUSHRA WHETHER SHE WANTS TO BUY OR
NOT? BUSHAR ACCEPTS THE OFFER.
15 WHAT IS THE DIFFERENCE BETWEEN
INVITATION TO TREAT AND AN OFFER?
CHAPTER 3
THE LAW OF CONTRACT:
Consideration

Introduction

Where one party agrees to do something for the other without anything being promised in
return, that party is said to be making a gratuitous promise. A legally binding contract cannot
result from such a promise, only a moral obligation. It is quite possible to find agreements in
which the elements of offer, acceptance and consideration can be identified, but the
agreement will not be binding as a contract unless that is deemed to be the parties’ intention.
When they entered into the agreement, they may not have intended that failure to perform
the agreement would make them liable to legal sanctions for breach of contract.

Learning Objectives
When you have studied the next three chapters you should be able to:
■ Define consideration
■ Recognise the circumstances when valid consideration exists
■ Describe the operation of the promissory estoppel doctrine
■ Appreciate the characteristics of agreements which demonstrate intention to
create legal relations
Introduction

A mere agreement alone does not make a contract. Parties to the contract must provide consideration if
they wish to sue on the contract. This means that each side must promise to give or do something for
the other.

Basic rule:

– An agreement will not be legally enforceable unless it is supported by consideration.

Definition

“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 detriment, loss or responsibility, given, suffered, or
undertaken by the other.” (Lush J. in Currie v. Misa (1875)

Consideration must be legally sufficient but not adequate

– Consideration must provide some benefit to the promisor or some detriment to the promisee but
benefit or detriment need not amount to much. Indeed, very nominal consideration can be provided for
very valuable promises.

Consideration need only be legally sufficient, not economically adequate.

Thomas v. Thomas (1842)

Facts:

Before he died, Mr Thomas said he wished for his wife to have the house they lived in for the rest of
her life. However, this was not written into his will. After he died, his executors, ‘in consideration of
such promise’, agreed with Mrs Thomas that she would pay a rent of £1 per year and keep the house in
good repair, in return for being allowed to live in the house. However, later they tried to dispossess her
from the house.

Issues:

A valid contract must be supported by consideration. That is, the promisee must promise to do
something in return for the promise of the other party. It was argued that there was no contract because
Mrs Thomas, the promise to pay £1, provided inadequate consideration as the rent was nothing like a
commercial rent for the property. Mrs Thomas argued that her promise to pay rent and keep the house
in repair was good consideration.

Held:

The executors’ statement did not create a contract as it only expressed their motive for entering into the
agreement. However, the £1 rent was recognized as good consideration.

The court stated that consideration means something which is of some value in the eye of the law,
moving from the plaintiff, without consideration the transaction was merely a voluntary gift. However,
by agreeing to pay rent in return for being allowed to stay in the property, Mrs Thomas had provided
consideration, even though it was not economically adequate or anything like a commercial rent for
the building. Therefore, the contract was enforceable.

The reason behind this rule is that it is impossible for the court to decide what is adequate
consideration. The parties to the contract must decide the quantum of consideration and if consent was
freely given, the court will enforce the agreement.

Advertising campaigns frequently offer to supply goods in return for wrappers, packet tops or vouchers
cut from relevant product wrapping. If you comply with what is asked, then a binding contract results
and you are entitled to the tea towel, cuddly toy or other delight being offered. So in Chappell v
Nestlé & Co. Ltd (1960, HL) three chocolate wrappers were held to constitute valid consideration
entitling the sender to pop music recordings. Nestlé derived a clear economic benefit from an increase
in sales. It was irrelevant that the wrappers would be thrown away on arrival. Sufficiency usually
involves taking on some new obligation in return for the other party’s promise of payment. Performing
an existing legal duty does not generally amount to sufficient consideration.

Stilk v Myrick (1809) Two sailors deserted from a ship in the course of a voyage. The captain
promised the remainder of the crew that he would pay a bonus to each man if they got the ship home to
England from Scandinavia. Held: this promise was not binding. Crew members were required by their
contracts to cope with the normal difficulties of a voyage, which in those days included crew shortages
of this kind. Therefore, there was insufficient consideration to make the captain’s promise enforceable.

The court’s unwillingness to enforce promises of this kind generally results from a concern that the
promisee has exerted economic duress – blackmailed the promisor into offering extra payment.

The court may take a more generous attitude if satisfied that the public interest is not adversely
affected and that enforcing the promise would produce the fairest outcome.

Hartley v Ponsonby (1857) The facts of this case are similar to those in Stilk v Myrick, but here the
depletion of the crew and the length of the journey were so great that the crew’s existing contract of
employment was discharged. Held: by getting the ship home, the crew effectively were taking on a
new set of duties and thus providing sufficient consideration for the captain’s promise of more pay.
And by finding that the promisee, in carrying out the legal duty, has actually conferred a new benefit
on the promisor

Glasbrook Bros v Glamorgan County Council (1925, HL) The defendant mine owners, fearing
vandalism of their premises during an industrial dispute, promised that if the police authority provided
a full-time guard, they would make a donation to a police charity. Held: this promise was binding, as
the police could have fulfilled their legal duty by periodic inspection of the premises: the full-time
guard exceeded this and was therefore sufficient consideration.
3 Or by deciding that the act of the promisor enabled the promisee to avoid some material
disadvantage.
Williams v Roffey Bros (1990, CA) Roffey was a builder who had a contract to refurbish a building
for a housing association. This contract contained a delay clause under which Roffey was required to
pay substantial sums if the work was not finished on time. Roffey sub-contracted carpentry work to
Williams, who later ran into financial difficulties and told Roffey that because of this he would be
unable to continue. Roffey promised him payment of extra money to complete the contract on time. He
then refused to honour this undertaking arguing that Williams was merely doing what he had originally
contracted to do.
Held: Roffey’s promise was binding, since by securing the completion of the contract he was obtaining
a benefit, or at least avoiding a burden. He avoided having to pay the delay costs to the housing
association. He had freely entered into the agreement and not been forced by economic duress.
CHAPTER 4
THE LAW OF CONTRACT:
Intention to Create Legal relations

Introduction

If two or more parties make an agreement without any intention of being legally bound by it, that
agreement will not be regarded by the courts as a contract. It is important to remember with regard to
this issue that the courts assess the parties' intentions objectively - so, if to onlookers their (parties to
the contract) behaviour or words would suggest they intended to be bound, the fact that one secretly
had reservations is irrelevant.

As far as intent to be legally bound is concerned, contracts can be divided into domestic and social
agreements on the one hand and commercial transactions on the other. Where an agreement falls into
the domestic and social category, there is a rebuttable (challengeable) presumption that the parties do
not intend to create legal relations. The reverse applies in commercial agreements, where it is
presumed that the parties do intend such agreements to be legally binding. Again, this principle can be
rebutted if there is evidence that the parties did not intend their agreement to be legally enforceable.

COMMERCIAL CONTEXT:

Edwards v Skyways [1964] 1 WLR 349 Court of Appeal

The claimant was an airline pilot working for the defendant. He was to be made redundant. The
defendants said that if he withdrew his contributions to the company pension fund, they would pay him
the equivalent of company contributions in an ex gratia payment. The claimant agreed to this and
withdrew his contributions. The company then ran into further financial difficulty and went back on
their promise relating to the ex gratia payment.
Held: The agreement had been made in a business context which raised a strong presumption that
the agreement is legally binding. The claimant could therefore enforce the agreement and was entitled
to the money.

Kleinwort Benson (KB) v Malaysia Mining Corporation BHD (MMC BHD) [1989] 1 WLR 379
Court of Appeal

Malaysia Mining Corporation Metals Ltd (MMC Metals)(Meena Bazar) was a wholly owned
subsidiary of the defendant, MMC BHD (Gemcon Group). MMC Metals approached the claimant
KB Bank for a loan. MMC Metals was a relatively newly formed company lacking in the size and
resources of MMC BHD. The bank approached MMC BHD asking if they would act as guarantor for
the loan. MMC (parent company) refused to act as guarantor but stated that it was their company
policy to ensure that their subsidiaries are always in a position to meet their debts. In reliance of this
letter of comfort the bank advanced money to MMC Metals.

MMC Metals subsequently went into administration/liquidation/insolvency having not paid the loan.
KB brought an action against MMC BHD to recover their loss based on the assurance given in the
comfort letter.

Held: The comfort letter had no legal effect. The fact that MMC BHD had refused to act as
guarantor demonstrated they did not intend to be legally bound. The comfort letter referred to
company policy at that time. There was nothing to stop the company changing its policy.

Legal Principle

There is a strong presumption in commercial agreements that the parties intend to be legally bound,
and, unless there is very clear contrary evidence, this presumption will not be rebutted.

FAMILY CONTEXT

Jones v Padavatton [1969] 1 WLR 328 Court of Appeal

A mother promised to pay her daughter $200 per month if she gave up her job in the US and went to
London to study for the bar. The daughter was reluctant to do so at first as she had a well-paid job with
the Indian embassy in Washington and was quite happy and settled, however, the mother persuaded her
that it would be in her interest to do so. The mother's idea was that the daughter could then join her in
Trinidad as a lawyer. This initial agreement wasn't working out as the daughter believed the $200
was US dollars whereas the mother meant Trinidad dollars which was about less than half what she
was expecting. This meant the daughter could only afford to rent one room for her and her son to live
in. The Mother then agreed to purchase a house for the daughter to live in. She purchased a large house
so that the daughter could rent out other rooms and use the income as her maintenance. The daughter
then married and did not complete her studies. The mother sought possession of the house. The
question for the court was whether there existed a legally binding agreement between the mother and
daughter or whether the agreement was merely a family agreement not intended to be binding.

Held: The agreement was purely a domestic agreement which raises a presumption that the parties do
not intend to be legally bound by the agreement. There was no evidence to rebut this presumption.

Balfour v Balfour [1919] 2 KB 571

A husband worked overseas and agreed to send maintenance payments to his wife. At the time of the
agreement the couple were happily married. The relationship later soured and the husband stopped
making the payments. The wife sought to enforce the agreement.

Held: The agreement was a purely social and domestic agreement and therefore it was presumed that
the parties did not intend to be legally bound.

Merritt v Merritt [1970] 1 WLR 1211 Court of Appeal

A husband left his wife and went to live with another woman. There was £180 left owing on the house
which was jointly owned by the couple. The husband signed an agreement whereby he would pay
the wife £40 per month to enable her to meet the mortgage payments and if she paid all the charges in
connection with the mortgage until it was paid off he would transfer his share of the house to her.
When the mortgage was fully paid she brought an action for a declaration that the house belonged to
her.

Held: The agreement was binding. The Court of Appeal distinguished the case of Balfour v Balfour
on the grounds that the parties were separated. Where spouses are separated it is generally considered
that they do intend to be bound by their agreements. The written agreement signed was further
evidence of an intention to be bound.

SOCIAL RELATIONS/CONTEXT

Simpkins v Pays [1955]

A Grandmother, granddaughter and a lodger entered into a weekly competition run by the Sunday
Empire News. The coupon was sent in the grandmothers name each week and all three made forecasts
and they took it in turns to pay. They had agreed that if any of them won they would share the
winnings between them. The grandmother received £250 in prize money and refused to share it with
the other two. The lodger brought the action to claim one third of the prize money.

Held: There was a binding contract despite the family connection as the 1. lodger was also party to the
contract and 2. also the fact that they contributed equally to the competition with the expectation that
any price would be shared. This rebutted the presumption of no intention to create legal relations.

Practice Question

1. State the differences between commercial agreements and domestic agreements in terms of
legal presumptions about intention.

2. Sally and Malley are best friends. They fill up lottery tickets together randomly and one day
Sally wins under her name. Sally does not want to share and Malley objects.
What kind of agreement is this? Can Malley claim his share from Sally’s winnings?
CHAPTER 5
THE LAW OF CONTRACT:
Capacity

The general rule of law is that any person is competent to bind himself to any contract he chooses to
make, provided that it is not illegal or void for reasons of public policy. At common law there are
exceptions to this rule in the case of corporations, minors, mentally incompetent and intoxicated
persons. The exceptions are now greatly reduced in scope.

(a) Corporations

Registered companies

These are companies registered under the Companies Act - in effect, most commercial companies.
When registering, companies must supply a document called a memorandum of association, which
carries information including an 'objects clause ' laying down the range of activities in which that
company will be allowed to engage. Before the Companies Act 1994 was passed, any contract that was
outside a company's stated range of activities was invalid - it was said to be ultra vires (meaning
outside the powers of the company). Under the Companies Act 2006 a company can be liable for a
contract made outside its stated activities if the other party has acted in good faith.

The reason for limiting the contractual capacity of registered companies is to provide shareholders and
creditors with safeguards against directors who use company resources for their own unauthorised
purposes.
(b) Minors

Minor under the age of 18 are not capable of creating legal relations and such their contracts are not
binding. Therefore, contracts do not bind minors.

(c) Mental Incompetents

This category covers people suffering from mental disability (which appears to include both mental
illness and mental handicap), and those who are drunk when the contract is made. In general, contracts
made with someone in either state (mental incapacity and drunkenness) will be valid, unless, at the
time when the contract is made, that (1) person is incapable of understanding the nature of the
transaction and (2) the other party knows this. In such circumstances the contract is voidable: the
party suffering from mental disability or drunkenness can choose whether or not to terminate it
(contract).

In Gore v Gibson (1845) it was held that a contract made by a person so intoxicated as not to know the
consequences of his act is not binding on him if his condition is known to the other party.

Where one party is incapable, through drunkenness or mental disability, of understanding the nature of
the transaction, but the other party does not realise this, the courts will ignore the incapacity. In Hart v
O'Connor (1985), the Court held that a person of unsound (unstable) mind was bound by his agreement
to sell some land because, when the contract was made, the buyer did not realise that the seller had any
mental incapacity.

The fact that a person has a poor understanding of the language in which the contract was made and is
illiterate does not render them incapable of making a contract. The defendant in Barclays Bank
Schwartz (1995) was a Romanian and had signed contracts rendering him liable for his company's
debts of over £500,000. In an attempt to resist paying the money he argued that his poor English and
illiteracy meant he lacked the capacity to make the contracts. This argument was rejected by the Court,
being described by the court as 'straight from the book of feeble excuses'. A person who was illiterate,
or did not understand the language of a contract, was aware of this, and the obligation was on them to
make sure that the contract was explained.
Practice Question

Ali who is the managing director of Netflix Company wants to appoint Ranveer as an executive director of
the board of directors. Ranveer is schizophrenic.
Advise whether Ranveer will be able to become an executive director.
CHAPTER 6
FRUSTRATION OF CONTRACT
A frustrated contract is a contract that, subsequent to its formation, and without fault of either party, is
incapable of being performed due to an unforeseen event (or events), resulting in the obligations under
the contract being radically different from those contemplated by the parties to the contract.

The legal consequence of a contract which is found to have been frustrated is that the contract is
automatically terminated at the point of frustration.

The doctrine of frustration discharges both parties from their contractual obligations where following
the formation of the contract, performance of the contractual obligations become either:

1. Impossible; or Radically different

2. Unavailability of party

Case law

Taylor v Caldwell (1863)

▪ C hired a music hall from Ds to put on 4 concerts.

▪ Six days before the concerts, the music hall was destroyed by fire.

▪ C brought damages for breach of contract to cover expenses incurred in preparing for the

concert.

When the existence of a specific thing is essential to the performance of the contract, parties would
have contemplated continued existence as the foundation of what is to be done when entering into
contract.

Therefore, there is an implied condition in the contract that the parties will be excused when
performance becomes impossible due to a thing perishing without fault from the contractor.

Unavailability of party.
Contracts requiring personal performance will be frustrated if either party falls ill or is imprisoned,
providing that the non-availability of that party substantially affects the performance. In Robinson v
Davison (1871) a piano player was booked to perform, but was ill on the day of the concert. He was
sued for breach of contract, but it was held that the contract had been frustrated when his illness made
it impossible to perform.

What will not amount to frustration?

Foreseen and foreseeable events

A particular event will not frustrate a contract if the contract makes provision for such an event; the
event merely renders the contract more onerous; it was foreseen or foreseeable; or if it was due to the
fault of one of the parties.

Where the supervening event which interferes with performance is one which the parties foresaw, or
could have foreseen, it is generally assumed that they made the contract with the knowledge of what
could happen and shaped their terms accordingly. If, for example, a shipbuilder contracts to build a
ship at a time when it is generally thought that the price of raw materials is about to rise, the
shipbuilder will usually take this into account when agreeing the price of the ship. In such cases, if the
event concerned does happen this should not frustrate the contract. The exception is where the
frustrating event is a wartime prohibition on trading with the enemy: the fact that the war was a
foreseeable event does not prevent the prohibition from frustrating contracts.

Self-induced frustration

A contract will not be frustrated by any supervening event which is the fault of one of the parties. In
the Canadian case of Maritime National Fish Ltd v Ocean Trawlers Ltd (1935) a ship, the St
Cuthbert, was chartered for a year from the owners. Both parties were aware that the St Cuthbert was a
type of ship that required a licence from the Canadian Government before it could be legally operated.
The charterers were operating five ships, but were only granted three licences, which they used for
three ships that they owned. They then claimed that the charter was frustrated by the Government’s
refusal to grant more licences. The Privy Council rejected this view, on the grounds that the charterers
themselves had a choice and decided not to use one of the available licences for the St Cuthbert.

Similarly, in The Super Servant Two (1990) the defendants contracted to carry the plaintiff’s drilling
rig in one of their two vessels designed for this purpose, the Super Servants One and Two. Before the
contract was carried out, the Super Servant Two sank; the defendants said they could not use the Super
Servant One because it was needed for another contract, and therefore claimed that the sinking
frustrated the contract. The courts denied this claim: the defendants had chosen to use the Super
Servant One on the other contract. The decision also seems to have been influenced by the fact that the
other contract was finalized after the one made with the plaintiff, and the defendants continued to try to
negotiate extra payments before deciding which contract to allocate to the Super Servant One – in other
words, they seemed to be trying to use frustration to avoid an agreement which had become
inconvenient.
Chapter 7
Company Law:
Corporate Personality and its Advantages

Introduction

This chapter provides an outline description of the commonest forms

of business organisation (the sole trader, the partnership and the
registered company) and the legal consequences which flow from
setting up a business in each of these ways. First, though, it is
necessary to gain understanding of three concepts which are
recurring themes in the law relating to business organisation –
legal personality, incorporation and limited liability.

Learning Objectives
When you have studied this chapter you should be able to:
■ Define the different forms of business organisation
described in this chapter
■ Understand the concept of legal personality
■ Distinguish between public and private companies
■ Explain what is meant by limited liability and how it is created.
Legal personality, incorporation, and limited liability

Legal personality
Under English law all human beings are endowed with a legal personality from birth until death. A
person’s legal personality is made up of that person’s legal rights and duties.
These are subject to change throughout the lifetime of the subject. A child has only very limited rights
and few duties. The average adult has a complex bundle of rights and duties determined by the adult’s
current status: for example, as a married or single person, employer, employee, taxpayer, receiver of
welfare benefit, debtor or creditor.

Incorporation
It is not just human beings who have legal rights and duties: the law permits the creation of artificial or
legal persons (corporations) which have a legal personality, separate from the members. A corporation
is brought into being (incorporated) by operation of law. Some form of legal process must be
completed before it comes into existence. This chapter is primarily concerned with corporations
created exclusively for commercial purposes by registration in compliance with the Companies Acts.
However, corporations may be created by other means and for different reasons.

1. Independent corporate existence/ Separate legal personality: The outstanding feature of a

company is its independent corporate existence. A partnership in contract has no existence apart from
its members. A company, on the other hand, is in law a person. This is a distinct legal person existing
independently of its members. By incorporation a company is vested with a corporate personality
which is distinct from the members who compose it. It becomes impersonalised. The business now
belongs to an institution. The entity of the enterprise becomes institutionalised.
In the words of Palmer, the benefits following from incorporation can hardly be exaggerated. It is
because of incorporation that the owner of the business stops to trade in his own person. The company
carries on the business, the liabilities are the company's liabilities and the former owner is under no
liability for anything the company does, although, as principal shareholder, he is able to take full
advantage of profits which the company makes.
2. Limited liability
The privilege of limiting liability for business debts is one of the principal advantages of doing
business under the corporate form of organisation. The company, being a separate legal person, is the
owner of its assets and bound by its liabilities. Members, even as a whole, are neither the owners of the
company's undertaking, nor liable for its debts. Where the members’ exercise the choice of registering
the company with limited liability, the members' personal liability becomes limited or restricted to the
nominal value of the shares taken by them or the amount guaranteed by them. No member is bound to
contribute anything more than the nominal value of the shares held by him.

In a partnership, on the other hand, the liability of the partners for the debts of the business is
unlimited. They are bound to meet, without any limit, all the business obligations of the firm. The
whole fortune of a partner is at stake, as the creditors can levy execution even on his private property.
Speaking of the advantage of trading with limited liability. One of the primary and accepted
motivations behind incorporating a company is to limit personal risks by obtaining the benefit of
limited liability.

Salomon v Salomon & Co. Ltd (1897):

Salomon (S) owned a shoe repair business; he decided to turn this business into a limited company. He
created a company called Salomon & Co Ltd, owned by himself, his wife and his five children, all
owning one share each.
S&C Ltd then bought the business from Salomon. S&C Ltd had to pay for the business:
– £10,000 in cash
– £20,000 in shares (priced at £1)
– £10,000 owed, paid by a debenture (a loan from Salomon to S&C Ltd)
The company offered Salomon a secured debenture over its assets so if the company failed to pay the
£10,000, S had a right to the assets of the company, to recover what he was owed.
A few months later, S&C Ltd went into liquidation/insolvency/bankruptcy, left owing £10,000 to other
creditors, along with the £10,000 owed to S. The assets of the company were worth around £10,000.
The House of Lords ruled that:
– Salomon was not personally liable for the debts owed by S&C Ltd
– Salomon was entitled to the assets of S&C Ltd, since he was a secured creditor (through the
debenture)

The company had been created properly in accordance with the Companies Act and was a separate
entity on whose behalf Mr Salomon acted as agent. It was irrelevant that after incorporation ownership
and management stayed in the same hands as they had before. The company had borrowed the money
and was legally liable to pay it back to its secured creditor who took preference over the other
creditors.

Generally, the Salomon v Salomon approach has been strictly adhered to, though to a very limited
extent the courts have created exceptions to prevent fraud. There was no evidence of fraud from the
evidence in Salomon v Salomon. Although Mr Salomon may seem to outward appearances to have
been sailing rather close to the wind, he did not deceive anybody. His fellow shareholders knew what
was going on. The charge on the company’s assets was appropriately registered; the creditors could
have found out about it before dealing with the company had they chosen to do so. In law they had
notice of it.

3. Perpetual succession
An incorporated company never dies. It is an entity with perpetual succession. A, B and C are the only
members of a company, holding all its shares. Their shares may be transferred to or inherited by x, y
and z who may, therefore, become the new members and managers of the company. But the company
will remain the same entity. In spite of the total change in membership, "the company will be the entity
with the same privileges and immunities estates and possessions. Perpetual succession, therefore,
means that the membership of a company may keep changing from time to time, but that does not
affect the company's continuity. The death or insolvency of individual members does not, in any way,
affect the corporate existence of the company. "Members may come and go but the company can go on
forever.
The guarantors of a company's loan could not claim to be relieved of liability by reason of the fact that
the company's management had totally changed including the managing director. Such changes do not
affect the continuity of the company or its commercial and contractual relations. The identity of a
company is not linked with its membership or management [Punjab National Bank v Laksmi Industrial]

4. Separate property
A company being a legal person, is capable of owning, enjoying and disposing property in its own
name. The company becomes the owner of its capital and assets. The shareholders are not the several
or joint owners of the company's property. The company is the real person in which all its property is
vested and by which it is controlled, managed and disposed of.

Macaura v Northern Assurance.

M formed a company to buy his previous timber business. However, he forgot to transfer the insurance
from his name to his company. The business burnt down. The insurers were not required to pay out,
since it is unlawful to insure against another person’s loss.
A member does not even have an insurable interest in the property of the company- A person was the
holder of nearly all the shares, except one. He insured the company’s timber in his own name. The
timber having been destroyed by fire, the insurance company was held not liable to him. No
shareholder has any right to any item of property owned by the company, for he has no legal or
equitable interest therein, it is the property of the company.
Thus, incorporation helps the property of the company to be clearly distinguished from that of its
members. "The property is vested in the company as a body corporate, and no changes of individual
membership affect the title. The property, however much, the shareholders may come and go, remains
vested in the company, and the company can convey, assign, mortgage, or otherwise deal with it
irrespective of these changes.

5. Transferable shares
When joint stock companies were established the great object was that their shares should be capable,
of being easily transferred. Incorporation enables a member to sell his shares in the open market and to
get back his investment without having to withdraw the money from the company. This provides
liquidity to the investor and stability to the company.

6. Capacity to sue and be sued

A company, being a body corporate, can sue and be sued in its own name. Criminal complaint can be
filed by a company but it must be represented by a natural person. It is not necessary that the same
person should act as a representative throughout. The complaint by a company is liable to be dismissed
because of the absence of the representative in the same way in which an individual complaint is liable
to be dismissed for absence of the complainant.
A company has the right to protect its fair name. It can sue for such defamatory remarks against it as
are likely to damage its business or property, etc.
A company has a right to seek damages where a defamatory material published about it affects its
business.

Exceptions to the Separate Legal Personality Doctrine

Lifting the corporate veil
The chief advantage of incorporation from which all others follow is the separate legal entity of the
company. In reality, however, the business of the legal person is always carried on by, and for the
benefit of, some individuals. Ultimately, some human beings are the real beneficiaries of the corporate
advantages, "in law, a corporation is a distinct entity, yet in reality it is an association of persons who
are in fact the beneficial owners of all the corporate property". And what the Salomon case decides is
that "in questions of property and capacity, of acts done and rights acquired or, liabilities assumed
thereby the personalities of the natural persons who are the company's cooperators is to be ignored".
This theory of corporate entity is indeed the basic principle on which the whole law of corporations is
based. Instances are not few in which the courts have successfully resisted the temptation to break
through the corporate veil.
Practice Question
CHAPTER 8
Company Law:
Lifting the Corporate Veil

The concept of a company being a legal entity can sometimes give undesirable results. In particular,
shareholders could use a company to obtain funds dishonestly, and then not be liable for repayment.
When we speak of “lifting the veil” we are referring to instances where the law goes behind the
corporate personality and attach liability to the individual members or directors, instead of the
company.

There are therefore numerous exceptions to the rules defined by Salomon v Salomon & Co Ltd, (i.e.
the rule that the directors and other officers, being separate and individual members of the company
cannot be held liable for defaults of the company). These exceptions can be implemented by the courts
on a case-by-case basis, or by statute.
Since the courts rule on a case-by-case basis, it can be difficult to classify the exceptions. The General
approach of the courts is to intervene when justice of the particular case demands it.

When the true legal position of a company and the circumstances under which its entity as a corporate
body will be ignored and the corporate veil is lifted, the individual shareholder may be treated as liable
for its acts.
The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or
improper conduct is intended to be prevented.
Cases of fraud or where the company is a mere sham:

These occur where individuals have used the separate legal entity to do something they are personally
forbidden from doing; hiding behind the company for protection.

In Jones and Lipman (1962) Mr. Lipman had entered into a contract with Mr. Jones for the sale of
land. Mr. Lipman then changed his mind and did not want to complete the sale. He formed a company
in order to avoid the transaction and conveyed the land to it (company) instead. He (Lipman) then
claimed he no longer owned the land and could not comply with the contract. The judge found that the
company was a mere façade or front behind which Mr. Lipman was hiding. The judge therefore lifted
the corporate veil and granted an order for specific performance against Mr. Lipman.

Gilford Motor Co Ltd v Horne (1933): Horne was a car salesman, and left Gilford. His contract
stated that he wasn’t allowed to sell to G’s customers for a period after leaving. H set up a company
which then approached his former customers; H argued that firstly his company was approaching the
customers, not him; and secondly, if there was wrongdoing, his company was liable and not him. The
courts held that the company was sham, and granted an injunction against his company as well as him.
Practice Question

Question 1
Romeo and Juliet formed a company called Legend Enterprises used for buying and
selling carpets. A newly appointed director, M created another company using the
documents of Laila Enterprises. Romeo and Juliet did not know about this plan of M. M
was making a lot of money from his new company using all resources of Laila
Enterprises. Romeo and Juliet wants to share the profit from M’s new company.
State whether veil lifting can arise in this situation. Give reason for your advice.

Question 2

Mr Mercedez and Mr Ferrari opened a company to buy and sell cars. The third director,
Mr Suzuki already told Mercedez and Ferrari that he will buy and sell some cars
through his other private company also. All of them agreed. A few years later Mercedez
and Ferrari are suffering losses and want to transfer liabilities to Mr Suzuki’s private
company.

Advice whether veil should be lifted in this case. Give reason for your advice.
CHAPTER 9
Law of Agency:
Creation of Agency-Disclosed Agency

INTRODUCTION
An agency relationship may arise in any situation where one party (the principal)
authorises another person (the agent) to act on his or her behalf. any contract
made by the agent on the principal’s behalf is binding by or against the third
party
with whom the agent negotiated. the agent may also be liable to the principal if
the agent acted negligently or in breach of any contract of agency.
you will already be aware of a number of situations where an agent may be
employed – when you want to buy a house you may employ an estate agent; you may
have obtained insurance through an insurance broker or bought shares through a
stockbroker; an employer may choose to obtain staff through an employment
agency; in many sale of goods situations, agents may be employed by sellers
or buyers to obtain customers or to arrange transport for international trading
deals
– in all these situations the principal (the person employing the agent) uses the
agent in order to capitalise on the agent’s expertise in the relevant business
area.
an agent is not necessarily a professional, engaged for commercial purposes. an
agency relationship may arise where a person agrees to handle the affairs of a
friend
who is currently unable to act personally, because of being abroad or in ill
health.
learning objectives
when you have studied this chapter, you should be able to:
■ describe how an agency relationship may be created
■ explain the rights and duties of the agent and the principal
■ distinguish between the ways by which the agency relationship may
be terminated
■ appreciate the nature of some particular types of agency relationships.
What is an agency?

Introduction

The law of agency plays an important role in commercial transactions, particularly with the advent of
the modern company that, by a legal fiction, is regarded as having personality and may enter into
transactions in its own right. Even with individuals, it will often be easier to transact through
intermediaries/agents. Accordingly, much day-to-day commercial transacting is facilitated by
intermediaries acting within the scope of the authority/power that has been conferred on them whether
expressly or by implication. Such persons who act on behalf of others are regarded as agents and the
legal effect of such acts by agents is that the person for whom they are acting - the principal - is bound
by such acts and may incur legal obligations to the third party who has dealt with the agents. By this,
the law of agency is able to multiply the individual´s legal personality in space.
Lord Alverstone CJ once defined an agent as ‘any person who happens to act on behalf of another’
(The Queen v Kane it is far too broad and imprecise [1901] 1 QB 472). While this gives a sense of
what an agent does, as a statement of the meaning given to the term ‘agent’ by the law of agency: ‘
If P (the principal/ULAB) instructs A (the agent/TEACHER) to act in the purchase or sale of goods
from or to T (the third party seller/STUDENTS), the contract of sale that arises is enforceable between
P and T. In general, A has no liability to either P or T on that contract:

Where a person contracts as agent for a principal the contract [AGENT AND THE THIRD PARTY] is
the contract of the principal, and not that of the agent; and at law the only person who may sue is the
principal, and the only person who can be sued is the principal. (Montgomerie v United Kingdom
Mutual Steamship Association [1891] 1 QB 370, Wright J.)

There are three parties, P, A and T, and three relationships:

• the relationship between P and A

• the relationship between A and T

• the relationship between P and T

RELATIONSHIP BETWEEN THE PRINCIPAL AND AGENT

As the agent is an intermediary, generally, once the principal and third party are brought into a
contractual relationship, the agent drops out of the picture, subject to any issues of remuneration or
indemnification that he may have against the principal, and more exceptionally, against the third party.
Generally, agents are entitled to be indemnified for all liabilities reasonably incurred in the execution
of the agents´ authority.

Aside from any specific contractual obligations that may govern the relationship between the principal
and the agent, an agent is considered a fiduciary vis-à-vis the principal. As such, the agent should not,
without obtaining the informed consent of the principal, place himself in a position where his duty to
his principal may conflict with his own interests. See the case of Armstrong v Jackson (1917).

Obviously, if the agent exceeds the authority conferred on him and this causes the principal loss, the
principal may claim against the agent.

Creation of Agency/Power of the Agent

The authority of the agent is the keystone of the agency relationship. Provided an agent has legal
authority to do business on the principal’s behalf, any resulting contract is binding by and against the
principal.
An agency may be created:

a. by Actual Authority (express or implied) agreement between the principal and agent. Actual
Authority: Express Authority & Implied Authority

b. where there is a representation by the principal to the third party that the agent has authority
(agency by estoppel/apparent authority)

c. where the principal ratifies an act by someone who, without authorization, purported to
undertake that act as an agent of the principal. Ratification

Actual Authority
Express authority: The power is derived from the principal’s explicit directions.

The most obvious way to create an agency relationship is by express consent or authorization. Express
authority arises where the principal expressly by words consents to the agent acting for the principal in
a certain way and the agent agrees. For example, where the agent is instructed to sell a particular
property for the principal. This authority may be contained in documents and/or conversations between
the parties (e.g Aviva Life & Pensions UK Ltd v Strand Street Properties Ltd [2010] EWCA Civ 444 at
54). In determining the express authority of an agent, the normal rules for construing contracts apply.
(For a discussion of express authority, see SMC Electronics Ltd v Akhter Computers Ltd [2001] 1
BCLC 433.)
What if the instructions from the principal to the agent are ambiguous (not clear)? In Ireland v
Livingston (1872) and Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, it was held that an
agent who adopts a reasonable interpretation will not be in breach of its mandate (obligation). But in
European Asian Bank AG v Punjab & Sind Bank (No 2) [1983]. Similarly, in Patel v Standard
Chartered Bank [2001] All ER having referred to these authorities, Toulson J observed:

Obviously, it cannot be open to every contracting party to act upon a bona fide, but mistaken,
interpretation of a contractual document prepared by the other, and to hold the other to that
interpretation… If the 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. In
other words, the critical question is not limited to whether the agent’s interpretation was reasonable; it
is whether he behaved reasonably in acting upon that interpretation.
Implied authority: The principal is unlikely to spell out every detail of what is required. The principal
is, however, deemed to have impliedly given the agent authority to accomplish anything necessarily
incidental to the performance of the principal’s directions.

In addition to express actual authority, the agent may have implied actual authority. Implied actual
authority is a way of filling in the gaps in order to make sense of the agency agreement/express
authority. It is important to recognise that implied authority cannot contradict express actual authority.
It is not a means of altering that agreement or of making it in some sense fairer.

The agent will have implied actual authority to do those things that are necessarily incidental to the
execution of the express actual authority (Ulab Teacher). The question is, do the powers expressly
given by the principal to the agent enable the agent to carry out the specified task, or can that task only
be undertaken by implying the authority to do things in addition to those that are expressly authorised?
Authorizing an agent to enter into a contract to buy land carries implied actual authority to sign the
documents required under statute because the requirement for writing in such transactions means that
without such authority the agent would not be able to perform the task agreed (Rosenbaum v Belson
[1900] 2 Ch 267). On the other hand, in Bryant, Powis, and Bryant Ltd v Law Banque du Peuple
[1891-94] All ER 1253, an agent, who had express actual authority by power of attorney to buy or sell
goods, charter vessels and employ agents and servants, did not have implied actual authority to borrow
money because this was not necessary to carry through the tasks that had been expressly authorised.

The most common instances of implied authority arise when a person is appointed to a position
without any express authority being conferred on that person, and the position is one which usually
carries with it a certain authority. For example, when a board of directors appoints one of its own to the
position of managing director or chief executive officer the board impliedly authorizes him to do all
such things as fall within the usual scope of that office/position - see Hely Hutchinson v Brayhead Ltd
[1968] 1 QB 549 at p 583. One would expect that most managing directors will usually at least have
implied authority to authorize or enter into contracts that are within the company´s ordinary course of
business.

Apparent Authority

It should be noted that express and implied authority are regarded as actual or real authority. In other
words, the authority actually exists. However, even where no authority has been expressly or impliedly
conferred/given, to an `agent´ may still be able to legally bind the `principal ‘to the Third Party. In such
cases, it is said that the `agent´ has apparent authority. Although the authority is not real, to the extent
that the `agent´s´ acts are capable of binding the `principal´, an agency relationship is created. The
reason why the principal is capable of becoming bound [to the Third Party] is because the law of
agency operates principally in the commercial realm where transactional certainty is important. As
such, the law of agency cannot be limited to cases where the agent has actual authority, whether
express or implied. If commercial transactions in the modern economy are to be able to take place
quickly and efficiently, any such limits would substantially increase the costs of transacting. If the law
were such that there would never be any circumstances under which a principal would be bound by the
unauthorized acts of the principal´s agent, a third party would always have to refer to the principal to
be certain of entering into a binding transaction. A principal would be able to resile from an
unauthorized contract entered into by the principal´s agent no matter how objectively reasonable it was
for the third party to have thought that the agent was properly authorized.

Typically, a third party dealing with an agent will not have knowledge of the terms of the contract
between the agent and principal and so will not know the scope of the agent’s actual authority: ‘In
ordinary business dealings the contractor at the time of entering into the contract can in the nature of
things hardly ever rely on the “actual” authority of the agent.’ Accordingly, the law of agency has
developed the doctrine/principle of apparent authority whereby an agent who appears to have authority
is capable of binding his principal where the third party has acted on the faith of such appearance of
authority, usually by entering into a contract with the agent.
The doctrine/principle is not an unqualified one; it arises where, on the facts, it appears or looks as if a
person (the `agent´) has actual authority. This appearance of authority has come about because of
something that the `principal´ did or said/ action/inaction, in other words, because of a representation
by the `principal´. If the third party relies on this (representation by the principal) and enters into a
contract with the `agent´ believing that the `agent´ is acting on behalf of the `principal´, the `principal´
is bound. The most common explanation for apparent authority is that it rests on the doctrine of
estoppel. (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] above, Diplock LJ.
The third party, therefore, relies on a perception of the authority of the agent as represented by the
principal. The representation creates an agency by estoppel – in other words, the principal is prevented
or estopped from denying the existence of the agency. The representation will also establish the scope
of the agent’s apparent authority. As Lord Denning expressed it, apparent authority is ‘the authority of
an agent as it appears to others.’

An agency by estoppel arises where:

• the principal (or someone acting with the actual authority of the principal) represents to the
third party that the agent is authorised to undertake the transaction which the agent and the third party
subsequently conclude

• the agent does not purport to make the agreement as principal

As a result, the principal may be bound to a third party even though:

• the agent does not have actual authority, or

• the agency agreement has ceased, or

This is because the agency is based on estoppel and not the consent of the principal, who may not have
intended to create an agency (Freeman & Lockyer v Buckhurst Park Properties)
Where someone is represented by the principal as having authority to act as agent, that person will
possess the usual authority of such agents in spite of any restrictions imposed by the principal on the
agent (Hely-Hutchinson v Brayhead Ltd [1968]. In Freeman & Lockyer v Buckhurst Park Properties
(Mangal) Ltd, K and H formed a company to buy and then sell some land. The articles of association
contained a power to appoint a managing director but none was appointed. K instructed F, a firm of
architects, to do work in connection with the land, which they did. On an action by F for their fees, it
was held that since K was not the managing director he had no actual authority to employ F, but he did
have apparent authority because, with the knowledge of the board of directors, he had acted throughout
the transaction as if he were managing director and his action in engaging F was within the usual
authority of a managing director.

Representation by the principal

In order to be bound by the apparent authority of the agent, the principal must have represented to the
third party that the agent had the necessary authority to conclude the transaction on behalf of the
principal and the third party must have a reasonable belief that the agent had such authority. In general,
if the representation as to authority comes from the person purporting to be an agent (Nayyar & Others
v Sapte & Anor [2009] the principal will not be bound to the third party, although the bogus agent may
be liable to the third party for breach of an implied warranty of authority.

The representation may be by words or by actions. Usually, silence or inaction will not amount to a
representation unless there is a duty to say something, which will be rare. However, it arose in Spiro v
Lintern: L said nothing when his wife (who had no authority to do so) entered into a contract for the
sale of L’s house, and, as a result, the buyers incurred various expenses in contemplation of completion
of the sale; L’s silence amounted to a representation that his wife had authority to sell the house.

Barrett v Deere (1828, HL)

The defendant went to the claimant’s counting house to pay a debt and handed his payment over to a
rogue, who was in the claimant creditor’s counting house and appeared to be responsible for
transacting business there.
Held: this was sufficient to discharge the debt. It was reasonable for the debtor to believe that the rogue
was the creditor’s agent and had the creditor’s authority, since the creditor had the right to control all
transactions taking place on the premises.

Armagas v Mundogas (1986)

For apparent authority to exist the representation must come from the Principal that A has such
authority, it cannot come from the agent. An agent cannot be said to have authority solely on the basis
that he has held himself out as having it. Unless the agent would usually have authority to do the act in
question, it will be very difficult for a T to rely on a specific representation of the agent's authority to
act, as the T would normally have been put on enquiry as to the actual limitation on the agent's
authority. An agent will not have apparent authority to make such a representation where the third
party knows, or ought to know, that the agent does not possess authority.
A third party's knowledge of the agent's actual authority cannot be overridden by claims as to apparent
authority. The reason is that in such a situation the T has not relied on the representation by the
principal. The T knew that the agent had no authority to do the specific act, which A held himself out
as having the authority to do. Armagas v Mundogas was therefore treated as a case where the third
party has been put on notice.

The Vice president, A, had actual authority to agree to a sale of a ship but not to agree to a three year
charter-back of the ship. The TP knew that a person in A's position did not have the usual authority to
deal with the transaction. However, the TP was told falsely by someone not within the company that A
obtained specific authority for it. Held: there had been no representation by the company that A had
such authority and therefore he was not ostensibly authorised. And A was held not to be in a position
that would lead the third party to reasonably believe that A had authority to undertake the transaction.

What is Apparent Authority?

Apparent authority/ostensible authority is often called the agency by estoppel. This authority arises
without the consent or agreement of the Principal (P) and the Agent (A). It arises merely, where the
Principal puts his agent in a position where it is reasonable for a Third Party (TP) to assume/believe
that the agent has authority as a result of the representation made by the Principal to the Third Party.
When the Third Party has this impression of authority and acts in reliance of it then the Principal is
estopped from denying that the agent has this authority and therefore will be bound by the agent's act.
As per Lord Denning in Hely-Hutchinson v Brayhead apparent authority is the authority as it appears
to others.

The requirement are embodied in Lord Diplock’s statement in Freeman & Lockyer v Buckhurst Park
Properties
• Appearance of Authority
• Representation from the Principle to the Third Party
• Reliance and entered into the agreement/contract

It is important to note that the appearance of authority must have arisen because of what the `principal´
did. An agent cannot make representations as to his own authority and bind the principal by what the
agent himself says - see Sigma Cable (Pte) Ltd v NEI Parsons Ltd [1992] 2 SLR 1087. If this were not
the position, anybody with some nexus to the principal could claim to have authority to bind the
principal and cause the principal to incur obligations to a third party.

Ratification

Ratification is a means by which the agency relationship is created retrospectively. Where the agent
does not have actual authority, the principal cannot rely on the acts of the agent since the agent was not
authorized to perform those acts. If the principal wishes to enforce the contract that the agent has
entered into, the principal must adopt what the agent has done. The doctrine of ratification allows a
principal to adopt his or her agent´s past acts. By doing so, the principal retrospectively clothes his
agent with authority and the law then proceeds on the basis that the agent had authority from the outset.
The doctrine of ratification facilitates the utility of the law of agency as an agent who exceeds his
authority can have his acts adopted if the principal wishes to affirm the agent´s acts, albeit
retrospectively. From the third party's perspective, the third party had consented to the transaction and
ratification should generally be unobjectionable.

The purported agency must be revealed to the third party before the transaction is concluded. There
can be no ratification where A makes the contract as principal (Keighley, Maxsted & Co v Durant
[1901]. It will be sufficient if the agent states that they are acting for a class of persons to which the
principal belongs (National Oilwell (UK) Ltd v Davy Offshore Ltd above. For ratification to take
place, the agent must have purported to act on behalf of a principal. If the agent did not make it clear
that the agent was acting for a principal, and the agent was not properly authorized to so act, no
ratification can take place. Since what the agent did was unauthorized, and the agent did not purport to
act for anybody but himself, there is no basis to allow the principal to adopt the `agent´s´ acts. A
principal who wishes to ratify must also ratify the agent´s acts in their entirety. A principal cannot pick
and choose those parts of the contract that he likes and discard the rest. To allow him to do so would be
to impose a different contract on the third party than the one to which he agreed.

The third party must believe that the person with whom they are dealing has authority to act for
another. If, for example, the agent tells the third party that the agreement is subject to ratification, any
action by the principal will not bring it within the doctrine of ratification because, in effect, the agent is
saying there will be no contract until the principal has approved it. In such circumstances the
principal’s ‘approval/ratification’ may, however, amount to an acceptance of the third party’s offer so
that the contract comes into existence at that point and does not date back to the time of the original
agreement, as is the case where there is effective ratification.

Where an agent acts in an unauthorized manner, the agent breaches his duty to the principal. Thus,
where a principal is liable to the third party because of apparent authority, the principal is entitled to
recover his loss from the agent. However, where the principal ratifies the agent´s acts, in general, the
principal waives his rights against the agent for the breach of duty, since the principal has seen it fit to
adopt the agent´s acts. There may be circumstances though where the principal feels compelled to
adopt the agent´s acts, e.g. the principal´s business reputation would materially suffer if no ratification
took place, and in such circumstances, it is possible that ratification will not absolve the agent from
liability to the principal.

Effect of Ratification
Ratification puts the parties into the position they would have been in had the act been authorised from
the outset: ‘Ratification when it exists is equivalent to a previous authority’ (Lord Lindley in Keighley,
Maxsted & Co v Durant [1901]. This means the principal can sue or be sued by the third party.
The agent will not be liable to the principal for excess of authority, nor to the third party for breach of
the implied warranty of authority. The agent may be entitled to be indemnified by the principal for any
liability incurred.

Since ratification puts the parties into the same position as if the act had been authorised from the
outset, then logically it relates back to the moment of the original contract. The unusual consequence of
this was illustrated by Bolton Partners v Lambert (1889) 41 Ch D. S accepted an offer from L on
behalf of B but without B’s authority. L later withdrew the offer and only then did B ratify. It was held
that the contract was binding on L. No real reasoning was provided for this other than that ratification
meant ‘the agent is put in the same position as if he had had authority to do the act at the time the act
was done by him’ (Cotton LJ). This rule may seem unfair since it allows the principal – but not the
third party – to choose whether or not to ratify. Yet, it can be argued that the third party who believed
themselves to be bound by the contract and so to hold the principal, who declines to ratify, liable would
be even more unfair. If the principal fails to ratify, the third party may be able to bring an action for
breach of warranty of authority against the agent.

Limits to Ratification/exception

Because of the potential injustice to third parties, one limit to the doctrine of ratification is that it must
take place within a reasonable time after the agent´s unauthorized acts. If ratification does not take
place within such time, the principal loses the right to ratify - see Metropolitan Asylums Board v
Kingham & Sons (1890); Re Portuguese Consolidated Copper Mines, Ltd (1890). What is a
reasonable time will depend on the nature of the contract and the circumstances. For example, if the
contract is for the sale of perishable goods such as fruit and vegetables, the time for ratification must be
relatively brief. In addition, if the third party knows that the agent is unauthorized, the third party can
give a reasonable time limit to the principal to elect whether to ratify or not. If the principal chooses
not to do so, the right to ratify will be lost.
Practice Question

1. Z ltd hires A as a receptionist. Two months into the job, A starts selling various magazines
from the office my taking pre-orders from its customers. After a few months one of the customers’
orders a large amount of magazines worth around TK 50000. A stopped coming to the office thereafter.
Advice

2. Becky hired Anne to only to sell jewellery to its customers. While Becky was away Anne
purchased a number of items of jewellery from a collection shown to her by Eddie, for TK3000. Becky
believed this deal to be a bargain, one that she felt Annette would not want to let slip by.
On Becky’s return, she discovered that the jewellery pieces were very rare and in fact worth
TK300,000. Eddie, also having heard that the jewellery items were worth much more, returned to the
shop and insisted that the items be returned because he was unaware that Anne did not own the shop,
and thus had no right to buy them. However, Becky refused to give the items back, arguing that the
contract was valid.
Advice
CHAPTER 10
Law of Agency:
Creation of Agency-Undisclosed Agency

The undisclosed principal

There is no legal requirement that the agency be disclosed. T may not be aware that they are dealing
with an agent. This is known as undisclosed principal or undisclosed agency. Up to this point, the law
of agency in respect of third parties seems relatively consistent in that it involves representations made
by the principal to the third party, but on entering the realm of undisclosed principals this consistency
vanishes. Here the existence of the agency is not disclosed: T may have given no thought to whether or
not A is acting for someone else, or T may believe that A is the principal. Here A and T are the
contracting parties, until T discovers that there is a principal standing behind A, in which case T can
elect to sue P rather than A, if there is a breach; or before that occurs, P may intervene to enforce the
contract. It is important to emphasize that the contract is between the agent and a third party. The
undisclosed principal, therefore, intervenes in an existing contract.

The doctrine is difficult to reconcile with the idea that contract rests on agreement between the parties
for here the third party enters a contract only to discover that the other contractor is merely an agent
and that the contract is with someone entirely different. The reason for this, according to Lord Lindley,
is that, ‘in the great mass of contracts it is a matter of indifference to either party whether there is an
undisclosed principal or not.’ Keighley, Maxsted & Co v Durant

Lord Lloyd (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (Sealy and Hooley, pp.179-
80)) summarized the law:

(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting
within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act
on the principal’s behalf. (3) The agent of an undisclosed principal may also sue and be sued on the
contract. (4) Any defence which the third party may have against the agent is available against his
principal. (5) The terms of the contract may, expressly or by implication, exclude the principal’s right
to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract,
may show that the agent is the true and only principal.

Where the agent acts without authority the principal cannot sue or be sued on the contract. Ratification
by the principal is not possible because the principal is not identified to the third party at the time of
the act by the agent.

Excluding the application of the doctrine

The doctrine of undisclosed principal will not apply if:

• The terms of the contract exclude the right of P to intervene. In Humble v Hunter [1848]
12 QB 310, the description in a contract of one party as ‘owner’ of a ship excluded the possibility of
admitting evidence to show he was merely the agent for the true owner.

• A does not intend to act as agent in the contract

In practice, the courts have made it relatively difficult for the third party by requiring them to prove a
negative. It is assumed that commercial parties are willing to contract with anyone, unless an
expression of unwillingness can be proved (Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968],
Diplock LJ).

Nevertheless, it may be the clear intention of T to deal only with A and not with any other party, for
example, where A possesses certain skills or where personal relationships had been developed in the
course of earlier work upon which the present transaction builds (Rolls-Royce Power Engineering. In
such cases, the contract is between T and A. (Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd
[1968], Diplock LJ).
Difficulty has been caused by cases in which the objection of the third party is to the personality of the
undisclosed principal. In Dyster v Randall & Sons [1926] Ch 932 is more satisfactory. Here a
developer, knowing that a landowner would not sell to him, bought through an agent. In the course of
his judgment Lawrence J agreed with much of what had been said by McCardie J, nevertheless, he
ordered specific performance. He remarked that, ‘mere non-disclosure as to the person actually entitled
to the benefit of a contract…does not amount to misrepresentation, even though the contracting party
knows that, if the disclosure were made, the other party would not enter into the contract’. It would
seem that the courts favour this approach, particularly where commercial parties are involved. In Nash
v Dix [1898] 78 LT 445, it was concluded that the third party had contracted with someone acting as
principal and not as agent. In that case, T did not wish to sell a chapel to a Roman Catholic Committee.
X purchased the chapel and resold it to the committee. It was held that X had acted as the principal in
the purchase from T, indeed the evidence revealed that he made a profit on the trade.

UNDISCLOSED AGENCY

Under the law of agency, there is a peculiar feature known as undisclosed agency. Essentially, where an
agent enters into a contract intending to do so on behalf of the agent´s principal, provided the agent
was acting within the scope of the agent´s authority, the principal may as a general rule sue and be sued
on the contract even though the principal´s existence (and not merely his identity) was unknown to the
third party - see Siu Yin Kwan v Eastern Insurance Co [1994] 2 WLR 370. Since ratification is only
possible where an agent has purported to act for a principal, no ratification can arise in cases involving
undisclosed agency.

The doctrine of the undisclosed principal has been widely criticized as it allows a person who is not a
party to the original contract, to take all the benefits of such a contract against the third party who was
altogether unaware of the existence of the undisclosed principal. It is said that this offends well-
accepted principles of contract law the privity of contract doctrine. However, to the extent that the
doctrine of the undisclosed principal pre-dated the development of the strict rules of privity of contract,
it is clear that both concepts are well capable of co-existing.
Unlike cases of disclosed agency where generally the contract is only between the principal and the
third party, in undisclosed agency cases, the initial contract is one made between the third party and the
agent in the agent´s personal capacity. Since the third party believed that he was dealing with the agent,
and the agent did not contract in a representative capacity, the agent clearly assumed personal liability
under the contract. The agent may therefore sue and be sued on the agreement.

However, because the agent actually intended to act on behalf of the principal, the principal is entitled
to intervene on the contract entered into, should the principal wish to do so and the agent´s right to sue
must generally give way to the principal´s. The principal may therefore sue on the contract and, at the
same time, when the third party discovers his existence, the third party has an option of enforcing the
contract against the principal or the agent. The third party must elect against whom he wishes to
enforce the contract; he cannot enforce it against both parties.

Rationale for Undisclosed Agency

Undisclosed agency has been justified based on commercial convenience. Often, persons act for
someone else without disclosing this fact. This is not because they are trying to perpetrate a fraud but
simply because the existence and identity of the principal is often of no importance to the other party,
particularly in transactions involving the sale and purchase of goods. It may also be that the agent
sometimes acts on his own account and sometimes for others, and it is inconvenient to segregate these
various transactions. Sometimes, an agent does not disclose that he is acting for someone else because
he does not want the other party to go directly to the principal and cut out the agent. Or a principal may
not want the market to know for good business reasons what he is doing and so he uses an agent and
tells the agent to behave as if the agent was acting for himself only.

Defences Available Against the Undisclosed Principal

When the principal enforces the contract, he must do so subject to any claims that the third party may
have against the agent personally. Therefore, if the third party has a valid claim against the agent, that
claim may be set off against any claim that the principal may bring against the third party arising out of
the transaction entered into by the agent on behalf of the undisclosed principal. Thus, if the agent owes
the third party $1000, and the third party buys goods worth $1500 from the agent, without knowing
that the agent was acting for an undisclosed principal, in a suit by the undisclosed principal against the
third party for the sum of $1500, the third party will be entitled to set off the sum of $1000 owed by
the agent to him against the claim of $1500. Thus, the third party need only pay the undisclosed
principal $500.

The reason for this is not difficult to divine. The third party may, for example, have entered the contract
with the agent because of the existence of a right of set-off that the third party had against the agent.
The third party may have purchased goods from the agent knowing that payment would not have to be
made in full but could be deducted from what was owed to the third party by the agent - see Greer v
Downs Supply Co [1927] 2 KB 28. Allowing the third party to raise such defenses against the principal
is necessary is to prevent injustice to the third party who has dealt with the agent because the agent
already owes obligations to the third party.

Limits to the Undisclosed Principal´s Ability to Sue

There are certain limits to the ability of the undisclosed principal to sue. For example, an undisclosed
principal cannot sue where he did not have capacity to enter into the contract at the time it was made.
Since the undisclosed principal could not have made the contract himself, he cannot take the benefit of
another person´s acts on his behalf.

Where the terms of the contract are inconsistent with the existence of an undisclosed principal, the
undisclosed principal may not intervene on the contract. For example, the contract may contain an
express or implied term that excludes the possibility of an undisclosed principal, e.g. where the
contract described the agent as the "owner" of the property, which objectively suggests that the agent
was only acting for himself and excludes the possibility of the agent acting for someone else.

An undisclosed principal also cannot intervene where the third party had some special reason for
contracting only with the agent or entered into a contract with the agent based on considerations or
factors personal to the agent. Examples of this include a contract of employment where the technical
skills of the employee are important, a performance by the agent or a painting to be done by the agent
where the skill or reputation of the agent is paramount.
Practice Question

Esmond, who is a toy manufacturer, knows that Agatha works as an agent for several companies,
including Toytoys Ltd. Agatha is aware that Esmond has had serious problems in the past with Toytoys
over its alleged failure to pay for goods on time and that because of this Esmond has made it clear that
he does not want to trade with Toytoys. Agatha enters into a deal with Esmond. Later, Esmond
discovers that Agatha is acting as agent for Toytoys and he refuses to continue with the deal.

Advise Toytoys as to its rights and obligations in relation to Esmond.

CHAPTER 11
Banking Law:

Letter of Credit

Uniform Customs and Practice for Documentary Credits

(UCP)

The documentary credit or banker’s commercial credit or commercial letter of credit provides a means
of avoiding some of the difficulties posed by the documentary bill. Originally, it was simply a letter
from the buyer’s bank to the seller’s bank guaranteeing payment. It now involves a promise by the
buyer’s bank to the seller to pay against documents relating to the goods. This gives the seller greater
reassurance, although there is the risk of the bank becoming insolvent and so preventing it from
fulfilling its promise. If the credit is transferrable, it can be used by the seller to finance other
transactions.
Invariably, documentary credits incorporate the Uniform Customs and Practice for Documentary
Credits (hereafter UCP), which was first issued in 1933. The most recent version was produced by the
International Chamber of Commerce (ICC) in 2006 (known as UCP 600), which came into effect on 1
July 2007, replacing UCP 500 (issued in 1993). The ICC was established in 1919 to facilitate
international trade and the objective of the UCP is to pursue this objective through the codification of
best practice in international payments. By this means it is intended that the UCP should establish a
degree of uniformity that is not affected by the particular country or legal system within which the
rules are being applied.
The UCP have no legal effect unless incorporated into a contract by the parties (UCP 600, article 1),
although in the unlikely event of there being no clause incorporating the UCP, it seems likely that a
court would imply them or, at least, construe the contract in accordance with the UCP – assuming this
did not contradict the intention of the parties.
If the UCP are incorporated particular provisions can be excluded, either wholly or partially, by
express terms of the contract and by legislation. But contractual exclusions are likely to be viewed with
caution by the courts. In Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631, the credit was
expressed to be subject to the UCP ‘except so far as otherwise expressly stated’; but it was held that
the UCP would only be overridden where there was an irreconcilable inconsistency between the
express terms and the UCP. ‘To my mind, it is wrong to approach this question of construction by
looking at the document first without reference to the Uniform Customs’ (Sir John Megaw). Yet, if the
parties have clearly agreed on something that is contrary to the UCP, their agreement must be applied.
The UCP are not comprehensive and various matters are omitted, which means recourse must be had
to the common law to fill the gaps.
In view of the usage of letters of credit it might seem remarkable that relatively few cases come before
the courts. Sir Thomas Bingham MR (Glencore International AG v Bank of China [1996] 1 Lloyd’s
Rep 135 (Sealy and Hooley, p.833)) explained:

The parties to these transactions (buyers, sellers, issuing and advising banks) are seasoned
professionals, not inexperienced consumers. The banks are not required to familiarise themselves with
any of the infinitely various terms, conventions or esoteric understandings of the sales transactions
themselves: their role is limited to the demanding, but essentially clerical task of scrutinising the
documents tendered under the credit to establish that they conform to the terms of the credit. Banks,
rightly jealous of their reputation in the international market-place, are generally careful not to refuse
payment on grounds of non-conformity unless the non-conformity is clear. Practice is generally
governed by the Uniform Customs and Practice for Documentary Credits (“the UCP”), a code of rules
settled by experienced market professionals and kept under review to ensure that the law reflects the
best practice and reasonable expectations of experienced market practitioners. When Courts, here and
abroad, are asked to rule on questions…they seek to give effect to the international consequences
underlying the UCP.

Strict compliance
The documentary credit relies on the presentation of the documents relating to the goods required by
the terms of the credit. The bank to which documents are presented must ensure that they comply with
the terms of the credit. Sellers need to be reassured that banks across the world will use the same
standards when determining if the documents comply with the terms of the credit. There is no
obligation to check them against the goods. The UCP 500 and its predecessors did not require strict
compliance between the documents and the credit, and the UCP only lays down broad principles. The
courts therefore look at standard international banking practice and at the International Standard
Banking Practice for the Examination of Documents under Documentary Credits, which was produced
by a taskforce appointed by the Banking Commission of the ICC.

The English courts have applied a strict compliance rule. The documents must comply precisely with
requirements stipulated in the credit. The issuing or confirming bank is only required to pay, and is
only entitled to be reimbursed by the buyer, if the documents presented strictly conform to those
stipulated in the credit. Viscount Sumner remarked that, ‘there is no room for documents which are
almost the same, or which will do just as well’ (Equitable Trust Co of New York v Dawson Partners
Ltd [1927] 27 Ll L Rep 49 (Sealy and Hooley, p.827)). Even apparently insignificant discrepancies
will mean the bank must not pay (Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993]
1 Lloyd’s Rep 236; see also, [1999] 1 Lloyd’s Rep 36 (Sealy and Hooley, p.830)).
To determine whether or not the description of the goods in the document complies with the credit, the
court will look at the document as a whole, but will also look to see if there is inconsistency
between documents (Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147 (Sealy and Hooley,
pp.863-64); Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135 (Sealy and Hooley,
p.833); Credit Agricole Indosuez v Chailease Finance Corporation [2000] 1 All ER (Comm) 399
(Sealy and Hooley, pp.833-34)).

One reason for this rule is illustrated by JH Rayner & Co Ltd v Hambro’s Bank Ltd [1943] KB 37
(Sealy and Hooley, p.829). The credit stipulated Coromandel groundnuts, but the seller presented a bill
of lading for machine-shelled groundnut kernels and an invoice for Coromandel groundnuts. Even
though within the trade these terms were interchangeable, the bank was entitled to refuse payment
because it could not be expected to have notice of all the trade customs involved in the transactions that
underlie the documentary credits with which it might deal. Moreover, banks cannot be expected to be
able to distinguish between minor and material discrepancies.

Furthermore, the parties have not agreed that the bank should have any discretion over what is required
for compliance. In general terms, this approach fits in with the separation between the underlying
contract (for example, the sale contract) and the credit, which means that the banks do not have to
concern themselves with the
performance of the underlying contract. Finally, the banks are agents of the applicant and so must
adhere to the terms of their authority: failure to do so will mean the applicant has no obligation to
reimburse.
The problem with a strict compliance rule is that it meant a majority of documentary credit
presentments were not compliant; indeed the introduction to UCP 600 noted that around 70 per cent of
documents were non-compliant on first presentation.
The courts have allowed some tolerance by not requiring mirror image compliance (that is, the use of
exactly the same words), but only that the words used in one document should not be inconsistent with
those used in another: for example, ‘Coromandel groundnuts’ is consistent with a document describing
the goods as ‘Coromandel groundnuts per order 3702’ but not with one describing them as ‘machine-
shelled groundnut kernels’.
In addition, the courts permitted banks to pay where there is a trivial discrepancy. What is meant by
‘trivial’ is unclear. In Bankers Trust Co v State Bank of India [1991] 2 Lloyd’s Rep 443, it was held to
be trivial where the telex number of the buyer was given as 931310 on the relevant documents instead
of 981310 because there was no doubt that this was a mere typographical error (see UCP 600, article
14(j)). In Glencore International AG v Bank of China [1996] 1 Lloyd’s Rep 135, the word ‘branch’
was used instead of ‘brand’, but the court held that this was a mere error and the word should be read
as ‘brand’. Yet, in another case, the failure to place the number of the letter of credit and the buyer’s
name on each document was held to be fatal (Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami
Iran [1999] 1 Lloyd’s Rep 36), and the misspelling of a name may also be fatal (Beyene v Irving Trust
Co., 596 F. Supp. 438 (S.D.N.Y.), affirmed, 762 F.2d 4 (2nd Cir. 1985)).
It might be suggested that the courts could use the trivial discrepancy exception to relax strict
compliance or, at least, to alter its meaning. Evans LJ has remarked that ‘the requirement of strict
compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all
documents. To some extent, therefore, the banker must exercise his own judgment whether the
requirement is satisfied by the documents presented to him.’ (Kredietbank Antwerp v Midland Bank
plc [1999] 1 All ER (Comm) 801 (Sealy and Hooley, p.831).)
While reiterating the strict compliance principle, UCP 600 relaxes it to some extent (Fortis Bank SA v
Indian Overseas Bank [2009] 2 CLC 550; [2010] EWHC 84 (Comm)). Article 14(a) states that the
bank ‘must examine a presentation to determine, on the basis of the documents alone, whether or not
the documents on their face constitute a complying presentation.’ If there is a complying presentation
the bank must pay (UCP 600, article 15). UCP 600, article 14(b) states:
Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank
acting on their behalf, must determine on the basis of the documents alone whether or not they appear
on their face to be in compliance with the terms and conditions of the Credit. If the documents appear
on their face not to be in compliance with the terms and conditions of the Credit, such banks may
refuse to take up the documents.
UCP 600 highlights the importance of the commercial invoice and makes a distinction between it and
other documents. Article 18(c) states that the description of the goods in the commercial invoice must
correspond with the description in the credit. In other documents certain data must be present so that
they can be connected with the cargo (Banque de L’Indochine et De Suez SA v JH Rayner (Mincing
Lane) Ltd [1983] Q.B. 711). The description they contain may not be identical as long as this does not
conflict with the description in the credit (UCP 600, article 14(d), (e). See Glencore International AG v
Bank of China [1996] 1 Lloyd’s Rep 135 (Sealy and Hooley, p.863), where the court took a contextual
approach, stating that the documents should be read together and not separately. Compare with
Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236 (Sealy and
Hooley, pp.859-60)). UCP 600, article 14(j) states that addresses of the beneficiary and applicant in
documents need not be the same as stated in the credit, but must be within the same country, and
contact details (telephone, email, telex, etc) will be disregarded. Article 17 permits copies to be used in
certain circumstances where ‘original’ documents were stipulated (see 8.3.3 below). Article 30(a)
states that ‘about’ or ‘approximately’ used in connection with the amount of the credit or the unit price
stated in the credit are to be construed as allowing a tolerance not exceeding 10 per cent. Article 30(b)
allows a tolerance of 5% in the quantity of goods, unless the credit stipulates the quantity in terms of
numbers of packages or individual items. It would seem, therefore, that the latter would lead to a
different decision in Moralice (London) Ltd v F Man [1954] 2 Lloyd’s Rep 526 (Sealy and Hooley,
p.858). (UCP 500 article 39(c) permitted a similar tolerance).
These developments should not be pressed too far and be seen as an abrogation of the strict compliance
test. Certainly they would not have changed the decision in the JH Rayner case. Yet, while they may
ease the job of banks, they may also put them at risk of rejecting documents that comply, or paying
where the documents do not comply.
(Note the application of the strict conformity rule as between the buyer and seller: Seely and Hooley,
p.828).

Effects of non-compliance
It is a matter for the bank – not the applicant – to determine if the documents conform (Bankers Trust
Co v State Bank of India [1991] 2 Lloyd’s Rep 443), but having identified a discrepancy the bank may
approach the buyer for a waiver (UCP 600, article 16(b)).
This does not extend the time period within which the bank must make a decision (see 8.3.3). The
buyer, of course, may choose not to waive non-compliance and the motive for doing so is irrelevant.
The bank’s safest position might be to reject non-compliant documents, but, in practice, it may choose
to take a risk rather than annoy a valued customer. It is also worth reflecting on the impact that strict
adherence by banks to their obligations might have on the system of payment by documentary credit in
view of the estimate that as many as 70 per cent of all tenders are defective.
If the bank refuses documents for non-compliance, it must give notice to the bank from which the
documents came, or to the beneficiary of the documents where presented by the beneficiary directly.
This notice must list all of the discrepancies (UCP 600, article 16) and must be issued within 5 banking
days following the day of presentation (UCP 600, article 14(b); Bankers Trust Co v State Bank of India
[1991] 2 Lloyd’s Rep 443 (Sealy and Hooley, pp.872-74)). While the bank may contact the
applicant to see if they are prepared to waive the discrepancy, this does not extend the deadline (UCP
600, article 16(b)). Failure to list a discrepancy or to meet the deadline will mean that the notice
relating to discrepancies is not properly served under article 16, which means that the bank cannot
argue that the documents do not comply (UCP 600, article 16(f)). The bank cannot later raise
discrepancies not listed in the original rejection (UCP 600, article 16(c)(ii)). The beneficiary can cure
defects and tender documents again as long as the credit has not expired.
Where the documents do not comply with the credit, the bank can pay subject to an indemnity from the
beneficiary for any loss (Banque de l’Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983]
QB 711 (Sealy and Hooley, pp.877-78)). This strategy obviously involves risk for the bank and its
willingness to do it depends on a number of factors, such as an assessment as to the likelihood of the
buyer refusing to adopt
the payment and the desire of the bank to maintain good relations with the customer (the beneficiary).
Autonomy of the credit

The documentary credit establishes payment obligations that are separate from the sale contract (UCP
600, article 4). Where the seller is in breach of the sale contract, the buyer has remedies against the
seller under the sale contract, but will, normally, not be entitled to prevent payment by seeking an
injunction to restrain either the bank from paying or the seller from collecting payment. Furthermore,
the issuing bank cannot refuse to pay on the ground that it has not received funds from the buyer or
that it has rights of set-off against the buyer.

The autonomy rule reflects the commercial importance of ensuring that confirmed credits impose an
absolute obligation to pay and the fact that the parties are dealing with documents rather than goods.
The judges have regarded it as important that irrevocable credits are treated as equivalent to cash.
The whole commercial purpose for which the system of confirmed irrevocable documentary credits
has been developed in international trade is to give to the seller an assured right to be paid before he
parts with control of the goods. This does not permit of any dispute with the buyer as to the
performance of the contract of sale being used as a ground for non-payment or reduction or deferment
of payment. (Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of Canada, The
American Accord [1983] 1 AC 168 (Sealy and Hooley, pp.843-47).)

Fraud
The bank may refuse payment where there is compelling evidence of fraudulent presentation by the
beneficiary or their agent. This issue is not mentioned in UCP 600 and is, therefore, left to local law.
The standard of proof makes it difficult to show that there has been fraud. In English law there is fraud
if the beneficiary or their agent presents documents knowing they contain untrue statements and
intending they should be acted on by the person receiving the documents. The motive for this act is not
relevant (Standard Chartered Bank v Pakistan National Shipping Corpn (No. 2) [2003] 1 AC 959).
Where the beneficiary or their agent is not aware of the untruth and has acted in good faith, the bank is
obliged to pay as long as the documents ‘appear on their face to be in accordance with the terms and
conditions of the credit’ (Lord Diplock in United City Merchants (Investments) Ltd v Royal Bank of
Canada, The American Accord [1983] 1 AC 168 (Sealy and Hooley, pp.843-47)). Furthermore, there
must be ‘compelling but not irrefutable’ evidence of fraud (Goode (2010), p.1102), so that it is not
enough to show that a reasonable banker would think there was fraud (Society of Lloyd’s v Canadian
Imperial Bank of Canada [1993] 2 Lloyd’s Rep 579).
Sealy and Hooley (p.850) point out that, ‘it remains a cause of some unease that the seller, however
innocent himself, becomes entitled to payment through tender of a document that carries a deliberately
false shipping date, when tender of a document giving the true shipping date could have been rejected
as discrepant’. (For a vigorous criticism of the view that a mere nullity does not constitute a ground for
refusal to pay, see Goode (2010), pp.1104-07.)
Practice Question
The English case of United City Merchant (Investment) Ltd v Royal Bank of Canada where Lord
Diplock noted that the fundamental principle that underlies the autonomy doctrine when his Lordship
stated thus

‘The whole commercial purpose for which the system of confirmed irrevocable documentary
credits has been developed in international trade is to give to the seller an assured right to be
paid before he parts with control of the goods that does not permit of any dispute with the buyer
as to the performance of the contract of sale being used as a ground for non-payment or
reduction or deferment of payment’.

Discuss
Appendix -1 Study Tips

Get rid of your misconceptions

You will probably find law much more interesting than you believe when you begin your studies.
Contrary to common belief, it is not primarily concerned with ancient, dry, and precise regulations
which you must learn by heart. Most of your studies are concerned with quite modern cases, which
have come to court just because the law was not precise and consequently gave rise to the dispute. This
book looks at how the law applies to real-life situations, which will help you to recall the legal
principles on which it is based. Effective communication of your understanding of the principles is the
main requirement for examination success. Remembering all the cases by name and being able to
quote statutes word for word is icing on the cake – impressive, but not essential.

Law is relevant to you

Remember that the law responds and develops as required by the society within which it operates. It
affects you personally; studying this book will increase your knowledge of your rights as a consumer
and of your responsibilities and rights as a business owner, employer or employee. Widen your
horizons Your studies will be more rewarding if you do not consider law as something to be thought
about only when you are in class or reading a textbook. The effects of many areas of the law are
widely reported and discussed in the media. Such reports can help you to see how the law works (or
does not work), as well as reminding you of what you have studied. Stay in touch with the news, try to
look at a quality daily paper and look out for relevant TV and radio programmes. Some suggestions for
resources appear in Appendix 1. The Internet is an excellent research tool. Try visiting the websites
suggested by the web activity references at the end of Chapters 2–25.

Make connections
The more you study, the easier it gets. Studying law is rather like doing a large jigsaw without the help
of a picture – progress is initially slow while the framework is established, but patience is rewarded.
Once the picture begins to reveal itself, you can see more easily how the different pieces fit together
and the task gets easier and quicker. Try not to think of each topic as a separate entity to be ‘done’ and
neatly filed away in the memory. Exploit the links with other related topics; this aids both recollection
and understanding. Exam questions may involve a problem, raising issues about a number of different
topics; the ability to see connections is vital to an effective response. To help you do this, frequent
cross-references appear in the text. Pondering on the questions in the ‘Worth thinking about?’ sections
in each of the subsequent chapters and maybe discussing these with your classmates will help with the
process.
Appendix - 2 S
keleton
Argumen
t
Guidance
Note:
Skeleton
Argumen
ts

What is the point of a skeleton argument?

• to identify what is and is not in issue
• to identify the arguments on each side
• to assist the judge to understand the case
• to justify the judge finding in your favour

POINTS RELATING TO CONTENT

1. Start by saying what the application is
for A short paragraph setting out clearly:
• what you want
• no more than one or two short sentences setting the scene
• no more than one or two short sentences giving some indication of the issues

2. Identify the issues

• an ‘issue’ is essentially what is in dispute in a case: the questions the judge needs to answer to
decide the case
• you need to identify the central issues early on in the skeleton
• the issues may be disputes as to what the law is, or disputes on the facts
• for example: There are three central issues in this case. Firstly whether or not the floor was wet,
secondly whether the system of work was dangerous…
3. Identify the propositions of law you are going to rely upon
• formulate the proposition of law first and then cite your authority
• no more than one authority per proposition
• use the highest most recent authority you can find
• always cite the page you want the judge to look at (Case List)
• attach copies of cases you are relying upon
4. Remember to argue your case
• be persuasive
• it is not enough to simply list the issues and the evidence relating to them
• say why the judge should find in your favour
• say what you want the judge to decide – i.e. the relief you seek, whatever it is, should be very
clear

POINTS RELATING TO STYLE

Be as brief as the nature of the case allows
• it is NOT A SCRIPT!!!!!
• include the essentials that the judge needs to decide in your favour
• Write with clarity, precision, and brevity

5. Make sure the skeleton looks perfect

• proofread for errors and correct them
• print on one side only
• double-space with wide margins for notes

6. Number your paragraphs and your pages

• simple paragraph numbering system 1) 2) 3) … is best
• numbers and letters are easier to refer to than bullet points or dashes (at paragraph 3(c) of my
skeleton argument…is preferable to …at the third bullet point halfway down page 2…)

7. Use the third person

• don’t use the first person (I, me, my) use the Claimant/Defendant e.g. the Claimant submits
that…the Defendant will rely upon…

8. How to use it at the hearing

• if the judge has had it in advance, remember that he will probably have read it
• DO NOT READ IT OUT!!
• do not simply repeat the contents of the skeleton
• use it to help the judge know where you are e.g. “I now turn to the third submission, which is
dealt with at paragraph 8 of my skeleton… I have set out the 3 main points on this issue at paragraph
16 of my skeleton”
• refer to it whenever you move on to a new issue or sub-issue
Appendix -3 School
of Law

Pres
enta
tion/
Adv
ocac
y
202
1/20
22

1. Introduce yourself (and your opponent)

Introduce yourself as Mr/Mrs/Miss/Ms Smith and tell him/her which party (Claimant or Defendant)
you represent. It is not usual to use your first name. Introduce your opponent as ‘my learned friend”.
Do not bid the judge ‘good morning’ or ‘good afternoon’ unless the judge says so to you, in which
case it you may respond.

Tribunal Judges are addressed as Sir or Ma’am

2. Tell the judge what exactly the hearing is about.

For example “Sir, this is the Claimant’s application for summary judgment under CPR Part 24.”
3. Establish whether the judge has all the relevant papers.

You must ensure that he or she has all the relevant papers. Some documents, such as the claim form,
particulars of claim and the defence etc. will, or should be, on the court file already (having been filed
at court) whereas others will have been included with the application notice for the hearing in question.
Check, however, that the judge has all the papers that you intend to refer to.

4. Enquire whether the judge has read the papers.

You must do this in a non-judgmental way. District Judges have very limited reading time and often
take hearings at the last minute. They do not, therefore, take kindly to being asked if they have read the
papers in a tone of voice that suggests that they are indolent if they have not done so. Something along
the lines of “have you had an opportunity to read the papers, sir?” is unlikely to offend.

5. Give a short case summary (if asked)

You must be able to give a short summary of what the case is all about. Your case summary should be
given in neutral terms (this is not an opportunity for you to start arguing your case). Help the judge by
identifying at the outset what the case is all about. For example:

“Sir. This is a personal injuries claim arising out of a road traffic accident on 3 November 2010
when the Claimant, a child, was knocked off his bicycle by a car being driven by the Defendant
on Highfield Road in Durham. The Claimant sustained a broken leg and other injuries and also
claims for the loss of his bicycle and other minor expenses. The Claimant’s case is that he was
stationary in the middle of the road waiting to turn right into New Lane when the Defendant’s
car came round the bend too fast and failed to stop in time. The Defendant’s case is that the
Claimant pulled across the road in front of him without looking. There is also an issue of
contributory negligence concerning whether the lights on the Claimant’s bicycle were
working.”

Or
 “Sir. This is a claim for damages for breach of a contract for services concerning damp-
proofing work undertaken in August 2021 by the Defendant, a local firm of specialist damp-
proofing contractors, in the basement of premises belonging to the Claimant. The Claimant’s
case is that the work was not undertaken with reasonable skill and care, in that the damp-
proofing material applied to the walls of the basement did not lap over the material used to
damp-proof the floor, thus permitting the ingress of water and damp through the unprotected
area. The problem came to light following prolonged rainfall in November 2009 when the
basement became flooded. Extensive repairs were required during which time the basement,
which was occupied by a restaurant, was unusable. The Defendant’s case is that the ingress of
water did not occur as alleged by the Claimant but in fact resulted from the damp-proofing in
the walls being penetrated by nails and screws used to fix shelves, pictures and other fittings
being driven through the damp-proofing material in the walls.”

It is also helpful to give a history of the litigation, starting with the date on which the claim form was
issued. If there has already been a hearing, say when it was, which judge heard it, and what the
outcome was.

6. Set out the law

Take the judge to the relevant part of the CPR. Identify any test that he or she has to apply. If you rely
on other statute or case law, identify it at this stage. Needless to say, your skeleton argument will also
contain the relevant law.

7. Argue your case

Make constant reference to your skeleton argument. When starting a new point or raising a new issue,
identify where it is in your skeleton argument and then elaborate upon it in your oral argument.

List the propositions or arguments that you intend to advance.

All assertions of fact must be supported by reference to the evidence – either the paragraph of the
witness statement or the relevant document.

You are there to persuade the judge – not simply present the evidence and leave him to reach his own
conclusion. Comment on the evidence, highlight its significance, show why it supports your case.

When referring to part of witness statement or to a document, tell the judge where it is and then wait
for him find it. Summarise what it says, or read it out if it is short, and then wait for the judge to read
it. When he or she looks up, start again.

Watch the judge’s pen. He or she will be making notes of what you say. After making a point, stop and
wait for the judge to make a note. Pausing at the end of each point gives the judge an opportunity to
ask you any questions. Remember, it is better for him to ask you a question about something that you
have not yet persuaded him on as that gives you an opportunity to convince him on the point. If you go
charging ahead then you will have lost the opportunity to persuade him.

End your submission with a brief summary of your arguments. If you can think of a good final phrase
that sums up your case then use it, but remember that you are in a district judge’s chambers and not on
the stage of the Theatre Royal. The usual final sentence is ‘unless I can be of further assistance, those
are my submissions.”
 Appendix - 4

PRESENTATION SELF ASSESSMENT FORM

Student Name &

ID/Group Name

Presentation Skill EXPECTED:

Practiced Grade
ACTUAL:

Topic of Presentation Date

Main Points of POSITIVE NEGATIVE

Tutor Feedback.

What I think I did well.

What I think I should do
better.

SYED HASIB RAHMAN

Tutor Signature
Appendix -5
Glossary of Legal Terms:
A
Acceptance: unconditional assent to the terms of an offer

Accused (the): the person being prosecuted in criminal trial.

Agent: a person with the authority to carry out business on behalf of another person. Apparent
authority: the agent has no real authority but it appears that they do, because of failure by the principal
to give notice that it has ended or to correct the impression that it exists.

Binding precedent: a judicial decision which a court must follow.

Bilateral offer: a contractual promise of performance of an act in return for the other party’s promise
of performance

Board meeting: a meeting of the company’s directors.

Claimant: the party who brings a civil action.

Consideration: money/goods/services/land representing the bargain element of the contract.

Contract of service: a contract between employer and employee.

Copyright: protects ownership of original literary/artistic/dramatic work recorded in any tangible

form.

Counter-offer: an offer made in response to an existing offer.

D
Defence: the person being prosecuted/their legal representatives. Defendant: person against whom
criminal or civil proceedings are brought.

Disclaimer: a statement by which a party seeks to avoid liability for the consequences of negligent advice
or behaviour.

Estopped: prevented in law from denying the existence of a right of another person

Express term: a contractual term specifically stated to be part of the contract.

Exclusion clause: a contractual term which attempts to limit or exempt a party’s contract/tort liability
against another. Sometimes called an exemption clause.

Executive director: responsible for the day-to-day management of the company.

Exhibit: a document or object (including a photograph) introduced as evidence during a trial.

Fixed charges: like floating charge but attached to particular assets.

Floating charges: attached to the company’s assets in general, to provide security for debenture holders.

Frustration: impossibility of contract performance occurs subsequently to formation but before

performance.

General meeting: meeting to which all members are invited.

Gratuitous promise: a promise which is not supported by

consideration. H
Hierarchy: structure arranged so that each component is superior to the ones below.

Indemnity: payment to make good expenses/losses incurred by one party while acting for the benefit
of another

Intention to create legal relations: the parties’ intention to make their agreement legally binding.

Invitation to treat: encouragement to make an offer, usually by advertisement of some kind.

Implied term: a term which was not specified in the contract, but may be implied into it by statute or
common law.

Issued capital: the number of shares issued.

Jurisdiction: Power of a court to adjudicate cases and issue orders. Territory within which a court or
government agency may properly exercise its power.

Kin: blood relative.

Legal personality: the bundle of rights and duties attaching to a human or legal/artificial
person/corporation.

Limited liability: limitation of financial responsibility for registered company’s liabilities enjoyed by
company members.

Limited liability partnership: registered partnership with corporate status whose members’ liability
is limited to the amount of their investment. Governed by company and partnership law.
Limited partnership: a partnership with limited liability.

Mitigate: reduce the loss arising from a breach of contract.

Naked promise: see gratuitous promise above.

Objection: Evidence or arguments introduced to counter, disprove, or contradict the opposing party's
evidence or argument, either at trial or in a reply brief.

Offer: a full clear statement of terms on which the maker is prepared to do business with the person(s)
to whom the offer is communicated. Offeree: the recipient of the offer.

Offeror: the maker of the offer.

Ordinary resolution: requires a simple majority.

Overrule: the court declares an existing binding precedent to be no longer good law.

Partnership: two or more people working together with a view to sharing profit.

Patent: protects ownership of original invention of a product or process.

Private company: registered company (Ltd) not able to sell shares to the public.

Preference shares: give holders the right to a fixed rate of dividend, specified on issue of the shares.

Principal: person for whom an agent acts. May be disclosed or undisclosed.

Privity of contract: exclusivity of contractual rights and duties to parties who contribute consideration.

Promisee: a party making a promise.

Promisor: a recipient of a promise.

Public company: registered company (plc) able to sell its shares to members of the public.

Quasi-fiduciary: describes a relationship involving a high degree of trust, though not a fiduciary
relationship as such.

Quantum of damages: the amount of money necessary to compensate for the damage caused.

Ratification: acknowledgement that a prior obligation is binding

Redundancy: an employee’s job ceases to exist because the employer restructures/changes business
practices/ceases to carry on business/or closes location where employee works.

Redeemable shares: short-term shares, to be bought back by the company.

Reserve capital: fund created by special resolution to protect creditors on winding up.

Resolution: a proposal to be voted upon by members.

Rebuttal: Evidence or arguments introduced to counter, disprove, or contradict the opposing party's
evidence or argument, either at trial or in a reply brief.

Sanction: Penalties or other means of enforcement used to provide incentives for obedience with the
law, or with rules
Simple contract: a contract that does not need to be in the form of a deed to be valid

Sole trader: one-man/woman business.

Trade mark: protects ownership of distinguishing marks used to advertise goods and service

Tender: a competitive offer (bid) to provide goods or services.

Unilateral offer: an offer of a promise in return for the performance of an act

V
Vicarious liability: liability for the tort of another person.
Veil of incorporation: protects the company from the liabilities of its members

W
Wrongful dismissal: breach of contract by the employer

X
Y
Z