Key Aspects of The Law of Contract and The Tort of Negligence

KEY ASPECTS OF THE LAW OF CONTRACT AND
THE TORT OF NEGLIGENCE
RELATED LINKS
Student Accountant hub page
This article is relevant to Paper F4 (ENG)
Together, contract and the tort of negligence form syllabus area B of the Paper F4 (ENG) syllabus: the law of
obligations. As this indicates, the areas have a certain amount in common:
they are both areas of civil law
the claimant will bring an action against the defendant and must prove the case on the balance of
probabilities
remedies may be awarded provided that the claimants loss is not too remote a consequence of the
defendants breach
the remedies are generally intended to compensate the claimant rather than to punish the defendant.
Until relatively recently, tort was one of the areas on Paper F4 that caused candidates the most difficulty. In recent
sessions, the tort answers have tended to be stronger, but there is also evidence of some confusion between tort and
contract, with negligence-based material frequently arising in answers to contract questions.
The aim of this brief article is to set out some key aspects of contract and the tort of negligence using the following
headings:
The relationship between the parties
The nature of the obligation
Causation and remoteness of damage
The measure of damages.
Using the same headings should remind you of the key aspects of each of the two areas in such a way that you are
less likely to confuse them. (The words contract and negligence are deliberately repeated in each heading so that
you get into the habit of distinguishing between the rules for each area, rather than having a general set of notes on,
say, remoteness of damage, which confuses material from both areas.)
KEY ASPECTS OF THE LAW OF CONTRACT

Contract the relationship between the parties
A contract is a legally binding agreement formed by the mutual consent of the parties. The parties may be known to
each other, as with a client and an accountant, or they may be strangers, as with a software company and a person
who downloads and installs the software. In either case, there is a clear relationship between the parties and this
relationship is both formed and governed by the contract. (The rules governing the formation and content of contracts
are set out in syllabus areas B1 and B2 of Paper F4 (ENG) syllabus.)
Contract the nature of the obligation
In a contractual relationship, the nature of the obligation is determined by the terms of the contract. By entering into
the contract, the parties agree to accept the resulting obligations. That is not to say that there is complete freedom of
contract, since certain contractual terms may be restricted by statute for example, under the Unfair Contract Terms
Act 1977. Nevertheless, in order for a contract to be binding, the parties must intend to create legal relations and their
contractual obligations are based on mutual consent.
Contract causation and remoteness of damage

This issue concerns the extent of the defendants liability for the chain of events set in motion by the breach of
contract. The leading case is Hadley v Baxendale (1854) in which the defendant was contracted to transport a broken
mill shaft from the claimants mill to the repairers. The defendant was late in delivering the shaft and the mill was idle
for a longer period as a result. The claimant sought damages for loss of profits during the delay. The court found for
the defendant, setting out a two-stage test for remoteness of damage. In order to be recoverable, the loss must be:
either a normal result of the breach, or
one which, at the time of the contract, both parties would have contemplated as a probable result.
Here, given how important a drive shaft was to a mill, neither test was satisfied, since it was reasonable to expect that
the mill would have a spare shaft. Another useful case here is Victoria Laundry v Newham Industries (1949). Here,
the defendants delay caused the defendant loss of profit, including the loss of an unusually lucrative contract. The
defendant was liable for normal loss of profit under the first limb of the Hadley test, but not for the loss from that
particular contract. He would only have been liable for that had he known about it when the contract was formed.
Contract the measure of damages
The remedies available for breach of contract include the common law remedies of damages, action for the price
and quantum meruit, as well as the equitable remedies of injunction and specific performance.
Remember that a breach of contract is a breach of a legal obligation, so the aim of the remedies is to put the claimant
in the position that they would have been had the defendant fulfilled the obligation. This means putting the claimant in
the position that they would have been in had the contract been performed. In relation to damages, this may be
divided into expectation loss (benefits that might have been gained from the performance of the contract) and reliance
loss (expenses incurred by the claimant in his side of the contract).
The conduct of the claimant may also affect the amount of damages payable, since the claimant is under an
obligation to take reasonable measures to mitigate the loss, as inPayzu v Saunders (1919). For example, if the buyer
refuses to accept or pay for the goods, the seller must recover what they can by selling the goods to a third party. The
damages will be the difference between the contract price and the amount that the seller receives. If the seller
receives the contract price or higher from a third party, only nominal damages will be claimable. A claimant who does
not attempt to mitigate their loss may have their damages reduced by the amount by which they could have done so.
It is for the defendant to prove that the claimant failed to mitigate the loss.
We will now use the same headings in relation to the tort of negligence.
KEY ASPECTS OF THE TORT OF NEGLIGENCE

Negligence the relationship between the parties
Negligence cases are based on a non-contractual relationship between the parties. The parties may be known to
each other, as with a surgeon and a patient, or they may be strangers, as with two drivers involved in a road traffic
accident. Due to the lack of any agreed relationship between the parties, the first question that arises in the case of
negligence is that of whether any relationship exists between them at all. If one party is to be held liable to another in
negligence, the relationship that must first be established is that of a duty of care.
Exam answers often state as a learned fact that liability in negligence is non-contractual, but it is worth spending a
little longer thinking about what it actually means. As a future accountant, you may find it helpful to relate this point to
professional negligence cases since these illustrate the extent to which an accountant may be held liable in
relationships where there may be no contractual obligation.
A useful case in this respect is Caparo Industries plc v Dickman (1990). Here, the claimants were shareholders in a
company and the defendants were the companys auditors. The claimants relied on the audited accounts and
purchased more shares with a view to making a takeover bid. Having taken over the company, the claimants
discovered that the company had in fact made a 400,000 loss rather than the 1.2m profit shown by the financial
statements. The House of Lords held that the requirements for a duty of care to exist were as follows:
the harm must be reasonably foreseeable
there must be proximity between the claimant and the defendant
it must be just, fair and reasonable to impose a duty of care on the defendant.
Note that foreseeability at this stage in the context of negligence is used to establish whether there is any relationship
between the parties; this is not necessary at this stage in contract since the contract itself establishes that there is a
relationship. (We will consider foreseeability again in relation to remoteness of damage, which is discussed below.)
In Caparo, the contract was between the company and the auditors. The individual shareholders did not have a
contract with the auditors. The question was whether the auditors owed a duty of care to the shareholders. The House
of Lords held that the auditors owed a duty to the shareholders as a body, but that they did not owe a duty to potential
investors or to existing shareholders who planned to increase their shareholding. The defendants were therefore not
liable.
Caparo is one of a number of cases considering professional negligence. (This is covered by syllabus area B5 of
Paper F4 (ENG).) A key theme running through these cases is the existence of the so-called special relationship.
This was first established in Hedley Byrne & Co Ltd v Heller and Partners (1963). Bear in mind that the question of a
special relationship is likely to be relevant where the claimant does not have a contractual relationship with the
professional providing the advice.
In Hedley Byrne itself, the claimant provided services on credit to a client. It did so on the basis of a credit reference
given by the defendant, the clients bank. Note that there was a contract between the claimant and the client and a
contract between the client and the bank, but no contract between the claimant and the bank. The defendant was
able to avoid liability by relying on an exclusion clause contained in the credit reference. However, had the clause not
been present, the defendant would have been liable because it had used its special skill to provide a statement to the
claimant in the knowledge that the claimant would rely on this.
Other cases that you may find helpful to consider in this context are as follows:
JEB Fasteners Ltd v Marks, Bloom & Co (1982)
Morgan Crucible v Hill Samuel Bank Ltd (1991)
James McNaghten Paper Group Ltd v Hicks Anderson & Co (1991)
ADT v BDO Binder Hamlyn (1995)
NRG v Bacon & Woodrow and Ernst & Young (1996)

In each case, identify any contractual relationships between the various parties involved and the nature of the
relationship between the claimant and the defendant.
Negligence the nature of the obligation
In relation to negligence, the nature of the obligation is not agreed between the parties but rather is imposed by
operation of law. For example, a road user will owe a duty of care to other road users and a manufacturer will owe a
duty of care to the final consumers of its products. Once a duty of care has been held to exist, the defendants actions
are judged by the standard of the reasonable man in the defendants position:Blyth v Birmingham Water
Works (1856). The standard of care for professionals is of the reasonable professional having or holding himself out
as having the skill or ability in question. Learners and the inexperienced will also be judged against the standards of
the fully-qualified.
Negligence causation and remoteness of damage
In relation to negligence, issues of causation and remoteness tend to be considered separately. The key test for
causation is known as the but for test, which basically asks whether the loss would have been sustained but for the
defendants negligence. The leading case here is Barnett v Chelsea and Kensington HMC (1969). The claimant
arrived at the hospital emergency department complaining of stomach pains. He was sent home without being
examined and subsequently died. Even though the doctor owed the patient a duty of care and had breached the duty,
the breach of duty had not caused the patients death, since the poisoning was so advanced by the time the patient
arrived at the hospital that he could not have been saved even with prompt treatment. The defendant was therefore
not liable.
The key test for remoteness in negligence is one of foreseeability. In The Wagon Mound (1961), the defendants
negligently allowed oil to spill into Sydney Harbour. The claimants were welding, but ceased doing so on seeing the
oil. Having been advised that the sparks would not ignite oil lying on the surface of the water, they resumed work.
Sparks ignited debris lying on the surface of the oil, which in turn ignited and damaged the claimants wharf. It was
held that the defendants were not liable since the only foreseeable damage was pollution rather than fire. By contrast,
in Jolley v London Borough of Sutton (2000), a local authority failed to remove an abandoned boat for two years. A 14
year-old was seriously injured when he tried to jack up the boat in order to repair it. The authority was found liable
since it knew that children regularly played on the boat, so it was foreseeable that a child would be injured. It did not
matter that the precise nature of the injury could not be foreseen. The cases may appear to conflict, since The Wagon
Mound focuses on foreseeability of the type of damage whereasJolley v Sutton focuses on foreseeability of some
harm. There are a number of cases in this area and they are not always easy to reconcile. For the purposes of Paper
F4, the key point to remember is that the test for remoteness in the tort of negligence is based on foreseeability of
harm. You should be prepared to illustrate this point with examples.
Note that the law of negligence considers foreseeability twice: once in relation to duty of care and again in relation to
remoteness. Remember that, if there is no duty of care, the question of remoteness does not arise. Caparo v
Dickman is a useful illustration of this: it might be foreseeable that existing shareholders would rely on an audit report
in deciding whether to increase their shareholding. Nevertheless, the auditor did not owe a duty of care to potential
investors. This was based on other aspects of the duty test: proximity and the question of whether it was fair, just and
reasonable to impose a duty.
Negligence the measure of damages
As with contract, once liability in negligence has been established, the next point to consider is that of remedies and
the aim of the remedies is to put the claimant in the position that he would have been in had the breach of obligations
not taken place. For negligence, the aim is therefore to put the claimant in the position that they would have been had
the tort not been committed.
Again, as with contract, the damages payable may also be reduced because of the claimants conduct. In negligence,
this may be due to the partial defence of contributory negligence. This happens in cases where, even though the
defendant was at fault, the claimant contributed to their own loss. Where this happens, the claimants damages are
reduced by the percentage to which the claimant is held to be at fault. The leading case here is Sayers v Harlow
UDC (1958) where the claimant was trapped in a public toilet due to a defective lock. She was injured when trying to
climb out and it was held that she had contributed to her own injuries. It is for the defendant to prove that the claimant
was contributorily negligent.
CONCLUSION
Contract and the tort of negligence arise in separate questions on Paper F4, so you will not be asked to compare and
contrast them. The aim of this article is to identify some key similarities and differences so that you are less likely to
confuse these two areas. Your aim for the exam should be to be able to explain these key aspects of contract and
negligence without confusing them. You may find that the following table acts as a useful revision aid:
Contractual
liability
Liability in
negligence
The relationship is noncontractual and is
imposed by law. The
defendant must owe the
claimant a duty of care.
Relationship
between the
parties
The relationship is created and

governed by the contract. The
parties enter the relationship by
mutual consent.
Nature of
obligation
The defendant must act

according to the standard
of care expected of the
The parties must comply with the reasonable man or the
terms of the contract.
reasonable professional.
Causation
and
remoteness
If the loss is a normal result of

the breach, the defendant will be
liable; if the loss is not a normal
result of the breach, the
defendant will only be liable if
they knew of the unusual
circumstances.
The defendants
negligence must cause
the claimants loss and the
loss must have been a
foreseeable consequence
of the breach of duty.
Measure of
damages
The aim is to compensate the

claimant by putting them in the
position that they would have
been had the contract been
performed.
The aim is to compensate

the claimant by putting
them in the position that
they would have been had
the negligence not taken
place.
Possible
reduction of
damages
Damages may be reduced by the

amount that could have been
mitigated if the claimant fails to
take reasonable action to
mitigate the loss.
Damages may be reduced

by the relevant percentage
if the claimants conduct
contributed to the loss.
Written by a member of the Paper F4 examining team
ICC INTRODUCES NEW INTERNATIONAL

COMMERCIAL TERMS
RELATED LINKS
This article discusses International Commercial Terms or Incoterms which are often found in
international trade contracts
Incoterms is an abbreviation of International Commercial Terms. These terms have been published by the
International Chamber of Commerce (ICC) since 1936 and have been subject to review and updating since that date.
The most recent updates were announced in Paris by the ICC on 16 September 2010. Although earlier versions of
Incoterms may still be incorporated into future contracts if the parties agree, it is likely that most contracts made now
will refer to this latest edition of Incoterms. In order to avoid the possibility of confusion, contracts should refer
specifically to the Incoterms 2010 rather than just Incoterms, if the parties wish the new terms to apply. This will avoid
any subsequent dispute as to which set of rules apply. The assumption is that the new version of the ICC terms will
apply to Paper F4 (GLO).
The Incoterms are often to be found in international contracts, and they seek to provide a common set of rules for the
most frequently used international terms of trade with the aim of removing confusion over their interpretation. For
example, the terms set out exactly who is under the obligation to take control of and/or insure goods at a particular
point in the shipping process. The terms also deal with the obligation for the clearance of the goods for export or
import, and requirements on the packing of items.
CLASSES OF TERMS
Among the changes made in the 2010 rules is the reduction in the overall number from 13 to 11. This is the result of
the removal of four previous terms and the inclusion of two new ones. In effect, this is a replacement of four previous
rules, DAF, DES, DEQ and DDU, by two new rules that may be used irrespective of the agreed mode of transport.
These new rules are DAT (Delivered at Terminal), and DAP (Delivered at Place) (see below for more details).
Changes have also been made to better deal with cargo security and insurance, and the language has been changed
to reflect the modern usage in international trade.
The new rules have been separated into two classes rather than the previous four categories. The current two classes
of terms are:
(i) rules for use in relation to any mode or modes of transport
These can be used in cases where either maritime transport is not involved in the carriage of the goods, or where
maritime transport is used for only part of the carriage. This first class includes the following seven Incoterms that can
be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of
transport is employed:
EXW
FCA
CPT
CIP
DAT
DAP
DDP
Ex Words
Free Carrier
Carriage Paid To
Carriage and Insurance Paid To
Delivered at Terminal
Delivered at Place
Delivered Duty Paid
Most of the terms retain their former meanings, so no further explanation will be provided. However, as DAT and DAP
are new and replace previous delivery terms, they need some, if brief, explanation.
DAT replaces the more specific DEQ (Delivered ex Quay). It requires the seller to pay for carriage to the terminal,
except for costs related to import clearance, and to assume all risks up to the point that the goods are unloaded at the
terminal. The seller delivers when the goods, having been unloaded from the arriving means of transport, are placed
at the buyer's disposal at a named terminal at the named port or place of destination. As indicated, DAT requires the
seller to clear the goods for export where applicable but the seller has no obligation to clear the goods for import, pay
any import duty or carry out any import customs formalities.
DAP (Delivered at Place) replaces DAF (Delivered at Frontier), DES (Delivered ex Ship) and DDU (Delivered Duty
Unpaid). Under DAP, a seller bears all the costs, other than import clearance costs and risks involved in bringing the
goods to the named destination. Consequently, the seller assumes all risks and costs prior to the point that the goods
are ready for unloading by the buyer at the agreed destination.
It should be emphasised that although all the terms listed apply when there is no maritime transport, they can be used
in cases where a ship is used for part only of the carriage.
(ii) rules for sea and inland waterway transport
These rules apply where the point of delivery and the place to which the goods are carried to the buyer are both ports.
There are four substantives rules:
FAS Free Alongside Ship
FOB Free on Board
CFR Cost and Freight
CIF
Cost Insurance and Freight
None of these rules has been changed in practice, although in relation to the last three FOB, CFR and CIF
reference to the ship's rail as the point of delivery has now been deleted and this has been replaced with the goods
being delivered when they are on board the vessel. This is clearly done in the pursuit of updating language and as
the ICCs own introduction to the new rules states: This more closely reflects modern commercial reality and avoids
the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.
SPHERE OF APPLICATION
A further change and recognition of existing practice is that the new rules apply to domestic as well as international
trade, whereas previous Incoterms applied to international sale contracts. As a result, the new rules state that the
obligation to comply with export/import formalities exists only where applicable. This alteration is in recognition of the
fact that some trade blocs, such as the European Union, have minimised if not removed the significance of border
formalities. It is also expected that this particular alteration should lead to greater use of the Incoterm rules within the
US.
SALE OF GOODS IN TRANSIT

Reflecting the fact that commodities may be sold several times over during transit, through a string of sale contracts,
the new rules have been amended to indicate that in reality a purchaser/seller in the middle of the string of contracts
does not actually ship the commodities, as they are already on board when they acquire title over them.
Consequently, under the new the rules, only the first seller will be responsible for shipping the goods and subsequent
sellers will be under the obligation to procure goods shipped. This is not a major change but it does tidy up the rules.
SECURITY
Given the context of uncertainty regarding potential terrorism and the need for heightened security, many countries
have introduced security checks in relation to goods crossing their boundaries. The new Incoterm rules now require
both sellers and buyers to provide sufficient information to one another so that export/import clearance can be
obtained.
TERMINAL HANDLING CHARGES

The new rules look to clarify responsibility for costs arising at the end of the journey. Under the old Incoterms rules
CPT, CIP, CFR, CIF, DAT, DAP, and DDP , the seller was required to make arrangements for the carriage of the goods
to the agreed destination but it was actually the buyer who actually paid the costs, as these were included in the total
selling price. This gave rise to problems where the carrier or terminal operator charged further handling costs to the
buyer/receiver of the goods. The new Incoterms rules seek to avoid this eventuality by clearly allocating such costs
between the parties.
ELECTRONIC DOCUMENTATION
The previous rules provided for the use of electronic data interchange, where the parties had agreed its use. The new
rules provide for the use of paper communications or equivalent electronic record or procedure where agreed or
customary, with customary indicating recognition of current practice in this regard.
CONCLUSION
Incoterms are a core constituent of international contracts and have frequently formed the basis for questions in the
Paper F4 Global exam. Although in the manner of an updating exercise, the new Incoterms 2010 do introduce
significant new rules for students of the Paper F4 Global syllabus to take into consideration in their preparation for
future exams.
BRIBERY ACT 2010
RELATED LINKS
Focusing on the Bribery Act 2010, this article considers the likely key role accountants will play in reviewing
organisational risks relating to bribery, and implementing adequate procedures and controls
The Bribery Act 2010 was passed in April 2010 and will be examinable from June 2012. The Act repeals old UK
bribery laws and is aimed at dealing with the risk of bribery and corruption, which undermines corporate governance,
the rule of law and damages economic development.
BRIBERY OFFENCES
There are four offences of bribery under the Act:
S1 Offences of bribing another person
It is an offence to offer a financial or other advantage to another person to perform improperly a relevant function or
activity, or to reward a person for the improper performance of such a function or activity.
S2 Offences relating to being bribed
It is an offence where a person receives or accepts a financial or other advantage to perform a relevant function or
activity improperly.
Relevant function or activity includes any function of a public nature, any activity connected with a business, any
activity performed in the course of a persons employment, and any activity performed by or on behalf of a body of
persons. The activity may be performed in a country outside the UK.
S6 Bribery of foreign public officials
It is an offence directly, or though a third party, to offer a financial or other advantage to a foreign public official (FPO)
to influence them in their capacity as a FPO, and to obtain relevant business, or an advantage in the conduct of
business.
FPO means an individual who holds a legislative, administrative or judicial position of any kind outside the UK, or
who exercises a public function outside the UK, or is an official or agent of a public international organisation.
S7 Failure of commercial organisations to prevent bribery
It is an offence for a commercial organisation (a UK company or partnership) if a person associated with it bribes
another person intending to obtain or retain business, or to obtain or retain an advantage in the conduct of the
business for the organisation. This could take place outside the UK. S.8 defines associated persons as someone who
performs services for or on behalf of the commercial organisation, and, therefore, could be an employee, agent or
subsidiary.
An organisation does, however, have a defence under s7 if it can prove it had in place adequate procedures designed
to prevent bribery. S9 requires the Secretary of State to publish guidance about adequate procedures. The guidance,
which was published in March 2011, states that what counts as adequate will depend on the bribery risks faced by an
organisation, and the nature, size and complexity of the business. Further, if there is no risk of bribery, then an
organisation will not require any procedures to prevent bribery. The guidance is not prescriptive and is based around
six guiding principles.
THE SIX PRINCIPLES

1. Proportionate procedures
The procedures taken by an organisation should be proportionate to the risks it faces and the nature, scale and
complexity of its activities. A small organisation would require different procedures to a large multinational
organisation.
2. Top-level commitment
The top-level management should be committed to prevent bribery and foster a culture within the organisation in
which bribery is unacceptable.
3. Risk assessment
Organisations should assess the nature and extent of its exposure to risks of bribery, including potential external and
internal risks of bribery.
For example, some industries are considered higher risk than others, such as the extractive industries; some
overseas markets may be higher risk where there is an absence of anti-bribery legislation.
4. Due diligence
The organisation should apply due diligence procedures in respect of persons who perform services for or on behalf
of the organisation in order to mitigate bribery risks.
5. Communication
The organisation should ensure its bribery prevention policies and procedures are embedded and understood
throughout the organisation through internal and external communication, including training, proportionate to the risks
it faces. Communication and training enhances awareness and helps to deter bribery.
6. Monitoring and review
The organisation should monitor and review procedures designed to prevent bribery and make improvements where
necessary. The risks an organisation faces may change and, therefore, an organisation should evaluate the
effectiveness of its anti-bribery procedures and adapt where necessary.
The question of whether an organisation had adequate procedures in place to prevent bribery is a matter that will be
determined by the courts by taking into account the circumstances of the case. The onus will, however, be on the
organisation to prove it had adequate procedures in place.
It should be noted that genuine hospitality that is reasonable and proportionate is not prohibited by the Act.
PENALTIES
An individual found guilty is liable to imprisonment for a maximum of 10 years. (This has been increased from seven
years.)
An organisation found guilty is liable to an unlimited fine. The obvious further damage to the organisation is
reputational damage and the consequences of this, as well as potential civil claims against directors for the failure to
maintain adequate procedures.
CONCLUSION
The Bribery Act 2010 aims to combat bribery and encourage free and fair competition. It replaces outdated and
criticised laws on bribery. All of the offences have extra-territorial application. Of most significance is the introduction
of a new offence against commercial organisations that fail to prevent a bribe being paid on their behalf, subject to the
statutory defence.
Organisations will be responsible for putting adequate procedures in place to prevent bribery; the core principle
behind these being proportionality. It is likely accountants will be key to the organisation reviewing risks relating to
bribery and implementing adequate procedures and controls.
Sally McQueen is ACCA examinations content manager
PLEDGE RECENT CHANGES IN RUSSIAN

LEGISLATION
RELATED LINKS
AND OTHER RELATED ASPECTS OF RELATED CORPORATE LAW
Relevant to Paper F4 (RUS)

This article goes into more detailed knowledge than is expected from Paper F4 candidates. Please read
the Syllabus and Study Guide in order to familiarise yourself with the learning objectives for this paper.
This article provides a brief overview of recent amendments made to the corporate and business law legislation of the
Russian Federation. Drastic changes were implemented to the Civil Code (The Civil Code of the Russian Federation:
Part I No.51 - FZ, 30 November 1994; Part II No.14 - FZ, 26 January 1996; Part III No.146 - FZ, 26 November 2001;
Part IV No.230 - FZ, 24 November 2006), the law on pledge (The Law of the Russian Federation No.2872 - 1 On
Pledge, 29 May 1992), the law on mortgage (The Federal Law of the Russian Federation No.102 - FZ, On Mortgage,
16 July 1998), and the Bankruptcy Law (The Federal Law of the Russian Federation No.127 - FZ, On Insolvency
(Bankruptcy), 26 October 2002) under Federal Law No. 306 FZ, 30 December 2008.
These amendments directly affect the relationship between a lender and a borrower, as a pledge is generally a
subsidiary obligation in credit relations. The need to sell a debtors property only arises when a debtor cannot fulfil
their obligations under the main (credit) agreement.
Article 348 of the Civil Code now provides that in both a pledge contract and afterwards (in the case of non-fulfillment
of obligations secured by the pledge) the ability to sell the pledged property (and to set a price) is possible without
recourse to the court. If the pledger (the debtor the person providing the pledge) is a natural person, or the pledge
is of real estate (ie a mortgage) such agreements must be notarised.
Also, in situations where periodic payments are due, the systematic infringement of payment terms (occurring more
than three times within 12 months) will result in the seizure of the pledged property. Even if the pledger does not fulfil
their agreed obligations on the seizure of the pledged property, a special execution may be based on a notarised
endorsement.
The pledgee (the creditor) must inform the pledger on the initiation of the recovery procedure without recourse to
court.
In certain cases (eg selling of securities) an independent appraiser, invited by both parties, must evaluate the
mortgaged property.
EXECUTION BY COURT DECISION

A court decision to levy an execution on the object of a pledge can only take place in certain circumstances, including
the following:
With the consent or permission of the other person or body, required for the conclusion of the contract on the
pledge of property of the individual.
When the object of the pledge is property of considerable historic, artistic or other cultural value for society.
If the pledger is absent and is impossible to locate.
When the object of the pledge is residential accommodation belonging to a natural person under the right of
ownership.
When the pledge contract does not stipulate the order on levy execution on the pledged property.
A claim for levying execution on the pledged property may be rejected by the court if the violation, committed by the
debtor (with respect to the obligation secured by the pledge), is utterly insignificant.
This is when the sum of the overdue obligation is worth less than 5% of the value of the subject of the pledge, and the
overdue period is less than three months.
For this reason, the amount of the pledgers claim is obviously disproportionate to the cost of the pledged property.
SALE OF PLEDGED PROPERTY

A sale of pledged property is executed by open auction in the order established by the procedural legislation (The
Civil Procedural Code of the Russian Federation No.138 - FZ, 14 November 2002), unless otherwise provided for by
law.
The initial selling price of a pledged property, from which the bidding starts, is 80% of its market valuation as
determined by an independent appraiser, unless otherwise provided for by the pledge agreement.
The pledged property is sold to the highest bidder.
Right of pledgee
If the auction is declared as having failed, the pledgee has the right, by an agreement with the pledger concluded
within one month from the date of the auction, to acquire the pledged property and to offset the sale price by the
amount of his claims, secured against the pledge. The rules of a sale and purchase contract apply to such an
agreement.
Re-auction
At a re-auction, the initial selling price is 15% lower than that at the first auction.
If the re-auction is also declared as having failed, the pledgee has the right to keep the pledged property, appraised at
a value not less than 10% below its initial selling price at the first auction.
If the pledgee does not avail himself of this right within one month from the date of declaring the re-auction as having
failed, the contract of pledge is terminated.
Amount realised
If the amount realised from the pledged property is insufficient to cover the claims, the pledgee has the right (in the
absence of any other provisions in the law or in the contract) to demand the shortfall from other property of the debtor,
but without the right of priority based on pledge.
If the amount realised exceeds the claims secured by the pledge, the excess must be returned to the pledger within
10 days from the date of due payment by the purchaser.
Right to terminate sale
The debtor and the pledger (if the pledge is provided by a third party) have the right, at any time before the sale of the
pledged object, to terminate the sale by fulfilling the obligation secured by pledge. An agreement restricting this right
is insignificant (The Civil Code, Article 350.7).
The debtor has the right to petition for delay of the sale for up to one year.
BANKRUPTCY
In case of bankruptcy, the debtors bankruptcy estate includes all property available as at the date the receivership is
initiated, and any revealed during receivership proceedings, except for:
those properties, the sale of which is prohibited by law
exclusive rights, including rights to engage in specific types of the debtors activity
residential premises, pre-school institutions and public facilities.
After inventory and appraisal, the property of the bankruptcy estate is sold at auction or by bidding, unless another
procedure has been established by the creditors meeting or the committee.
Any property the sale of which requires special permit is sold by closed bidding.
Property not sold by the first bidding is submitted for re-bidding or sold without bidding. A bankruptcy estate consists
of two parts:
All of the debtors assets indicated in their balance sheet or similar documents, as at the date of the
receivers appointment.
Property revealed during the receivership.
Not all of the debtors property is included in the bankruptcy estate, only that on which recovery is sought. The
following property in the possession of, but not legally owned by the debtor, is excluded from the bankruptcy estate:
Leased property or property in the safe keeping of the debtor.
Personal property of the employees of the enterprise, but not of the founders of the legal entity.
Priority in satisfaction
Article 134 of the Bankruptcy Law stipulates the following order of priority when satisfying creditors claims, according
to the Register of creditors claims:
i) legal costs and the arbitrage managers fees
ii) debts on salaries and dismissal payments
iii) current maintenance expenses
iv) other claims on liabilities which emerged during the bankruptcy procedures.
Settlements with creditors of each priority are only conducted after full settlement has been made to the
creditors of the preceding priority. Within each priority, creditors are satisfied according to the following turns:
First turn claims of individuals for payments for harm caused to life and health.
Second turn discharge pay and labour remuneration under labour contracts.
Third turn all other creditors: obligatory payments to the budget and non-budgetary funds and settlements
with creditors on the remaining civil law obligations.
If claims of creditors on current payments belong to the same turn they are satisfied in chronological order.
Pledged property is exempted from the estate. Seventy per cent of the money raised after realisation of the pledged
property is directed to the creditor whose rights are secured by the pledged property.
If there is money left after selling off the pledged property, 20% is directed to the special banking account of the
debtor for settlements with first and second turns, and the rest is for reimbursement of court expenses and arbitrage
managers fees. If the creditor secured under pledge is a bankruptcy creditor, they receive 80% of the money raised
after realisation of the pledged property. If there is money left after selling off the pledged property, 15% is directed to
the special banking account of the debtor for settlements with first and second turns, and the rest is for
reimbursement of court expenses and arbitrage managers fees.

The receiver is obliged to eliminate all the debtors existing bank accounts other than the sole bank account used to
satisfy the claims of the debtors creditors. The funds in this account are replenished by the proceeds from public
sales of the debtors property (and, failing that, through private contracts) and by collection of the debtors accounts
receivable.
If the debtor has insufficient funds to cover creditors claims of a single priority, the remaining funds are allocated pro
rata to the amount of creditors claims.
If a claim is submitted after the settlements had been started, and this claim has a higher priority compared to the
priority of claims currently being settled, settlements should be postponed until the claim with a higher priority is
repaid.
Claims made after the Register of claims has been closed have the lowest priority and should be settled only if there
is debtors property remaining. This includes:
arbitrage managers fees presented after closing of the Register of claims, and
claims on obligatory payments arising after opening of the receivership notwithstanding the term of their
presentation (The Ruling of the Federal Arbitrazh Court of Moscow, Circuit No.KG - A40/9322 - 05, 9 November
2005).
If claims were not settled due to insufficient funds, they are deemed cancelled. Creditors may claim from the third
parties, if the debtors property has been obtained illegally.
When dealing with any debtor property remaining after full settlements with creditors of all priorities, if creditors refuse
to take the property for execution of obligations before them, the property goes to the local self-government bodies of
the Russian Federation where the debtor is located.
If the debtors property is insufficient to settle the arbitrage managers remuneration, such expenses in the part not
covered by the debtors property, is reimbursed by the creditor claimant (The Ruling of the Presidium of the High
Arbitrazh Court No. 6007/08, 13 November 2008).
CONCLUSION
The current procedure regarding the sale of a debtors property reflects the current market situation when, due to the
global economic crisis, many businesses cannot execute their obligations.
Dr Anna Shashkova is a visiting lecturer at ATC in Russia, professor of law at the Moscow State University for
International Relations (MGIMO), and lawyer of the Moscow Region Bar Association
SPANDECK VS DSTA
RELATED LINKS
SPANDECK ENGINEERING V DEFENCE SCIENCE AND TECHNOLOGY AGENCY

(DSTA)
Relevant to Paper F4 (SGP)
This article focuses on the impact of the case of Spandeck Engineering (S) Pte Ltd v Defence Science & Technology
Agency (DSTA) (see reference 1) (Spandeck) on the law of negligence in Singapore.
In Singapore, it is trite law that, in order to mount a claim in negligence, a claimant has to establish the following basic
elements:
the defendant owes the claimant a duty of care
the defendant has breached that duty of care by acting (or omitting to act) below the standard of care
required
the defendants breach has caused the claimant damage
the claimants losses arising from the defendants breach are not too remote, and
such losses can be adequately proved and quantified (see reference 2).
The issue with which the Court of Appeal in Spandeck was primarily concerned related to the first of these elements
ie whether or not DSTA (the respondent) owed Spandeck Engineering (S) Pte Ltd (the appellant) a duty of care.
THE FACTS
Briefly, the facts of Spandeck are as follows. The appellant was the contractor in a building project commissioned by
the Singapore Government (the employer), while the respondent was the superintending officer of the project.
As such, the latters duties included the certification of interim payments in respect of the appellants work. The
dispute arose because the appellant alleged that the respondent had under-certified the appellants work, leading to
underpayment by the employer. The appellants contract with the employer (the Contract) contained an arbitration
clause which provided, inter alia, that any dispute between the employer and the appellant as to any certificate or
valuation by the respondent could be referred by either of the disputing parties to arbitration. The appellant, however,
did not commence arbitration proceedings against the employer in order to resolve the dispute because it had, by that
time, already novated the Contract to a third party and had thereby lost the right to this line of recourse.
Instead, the appellant claimed against the respondent in negligence on the grounds that: (i) the respondent owed the
appellant a duty of care to apply professional skill and judgment in certifying, in a fair and unbiased manner, payment
for work carried out by the appellant, so as to avoid causing it any loss due to undervaluation and under-certification
of works, and (ii) the respondent had breached this duty by negligently undervaluing and under-certifying the
appellants works.
THE LAW OF NEGLIGENCE PRE-SPANDECK

Before coming to its decision, the Court of Appeal in Spandeck reviewed the existing law of negligence in Singapore
as well as in England. It found that one of the more generally accepted tests used to establish duty of care is the
three-part test (see reference 3) laid down in the case of Caparo Industries plc v Dickman (see reference 4). However,
the Court of Appeal in Spandeck noted that this test is not applicable to all cases of negligence. In cases of
psychiatric harm or negligent misstatement causing pure economic loss (see reference 5), for example, different tests
are used to establish duty of care (see reference 6).
Negligence cases are also differentiated according to the type of loss that the defendants actions cause the plaintiff
to suffer. The general rule in England is that a duty of care would be recognised only where the plaintiff had suffered
physical damage (see reference 7), and not where the loss suffered was purely economic in nature.
One of the main reasons for this exclusionary rule (see reference 8) against claims involving pure economic loss was
the concern of indeterminate liability being imposed on the defendant (see reference 9). In England, cases
like Murphy v Brentwood (see reference 10) have strongly reaffirmed the applicability of the general exclusionary rule.
However, in Singapore, ever since the cases of RSP Architects Planners & Engineers v Ocean Front Pte Ltd (see
reference 11), and RSP Architects Planners & Engineers v MCST Plan No 1075 (see reference 12), this rule has
been less strictly adhered to. The plaintiffs in these two cases were the management corporations of condominium
developments who were claiming for pure economic loss. This was suffered as a result of defects in the buildings
which were caused, in one case, by the negligence of the defendant developers and, in the other case, by the
negligence of the defendant architects. In both cases, the court allowed the claims, even though the loss suffered by
the plaintiff was pure economic loss. The test that was used in these cases to establish a duty of care was a twostage process (see reference 13). Hence, in Singapore, the attitude of the courts is less restrictive than in England
and it is possible to recover for pure economic loss in cases other than negligent misstatement cases if the two-stage
test is satisfied (see reference 14).
THE EFFECT OF SPANDECK ON THE LAW OF NEGLIGENCE

It will be seen from the previous section that before Spandeck, the law of negligence in Singapore, as well as in
England, required different tests to be used in the determination of duty of care, depending on the different situations
in which the damage arose (see reference 15). The Court of Appeal in Spandeck held that this situation was
undesirable and that it was preferable, instead, to use a single test to determine the imposition of a duty of care in all
claims arising out of negligence, irrespective of the type of damage claimed, and that this should include claims for
pure economic loss, whether they arise from negligent misstatements or from acts and or omissions (see reference
16).
The Court of Appeal then went on to consider what this single applicable test should be. It held that the test to
determine the existence of a duty of care should take the form of a two-stage test based on proximity and policy
considerations, together with a preliminary requirement of factual foreseeability. The preliminary requirement of
foreseeability was explained by the Court of Appeal as simply meaning that the defendant ought to have known that
the claimant would suffer damage from his (the defendants) carelessness (see reference 17). The court saw this as
a threshold question that had to be answered, and this question is therefore essential to the success of any claim in
negligence. However, as the question is very wide ranging, and will be satisfied in almost all cases, the court did not
see a practical need to include it in a legal formulation of the test (see reference 18). The test itself was therefore
formulated to include only two stages, proximity and policy.
Proximity
The first stage of the test for the determination of duty of care requires that there must be sufficient legal proximity
between the claimant and the defendant. This stage of the test therefore looks at the closeness of the relationship
between the parties (see reference 19). In discussing what this notion of proximity encompassed, the Court of Appeal
agreed that proximity embraced:
physical proximity (in the sense of space and time) between the person or property of the plaintiff and the
person or property of the defendant
circumstantial proximity such as an overriding relationship of employer and employee, or of a professional

man and his client
causal proximity in the sense of the closeness or directness of the causal connection between the
defendants act and the loss sustained by the plaintiff (see reference 20).
The Court of Appeal also stated that this analysis of proximity included the twin criteria of:
the voluntary assumption of responsibility by the defendant to take care to avoid causing loss to the plaintiff
and
the reliance by the plaintiff upon the defendant to take such care in circumstances where the defendant knew
or ought to have known of that reliance (see reference 21).
The court saw these two criteria as essential factors in establishing proximity (see reference 22). If this stage of the
test was passed, and the preliminary requirement of factual foreseeability was also fulfilled, then a prima facie duty of
care would arise.
Policy
At this point in time, the second stage of the test would then become relevant. This stage requires the court to take
policy considerations into account to ascertain whether or not the prima facie duty that had been established should
be negated. An example of a relevant policy consideration is the existence of a contractual matrix which defines the
rights and liabilities of the parties as well as their relative bargaining positions (see reference 23).
The Court of Appeal stressed that the test it had formulated should be applied incrementally such that, in both stages
of the test, decided cases in analogous situations should be referred to in order to see how previous courts had ruled
on the matters of proximity and/or policy. However, the Court of Appeal added that in situations where there were no
factual precedents, the court could still extend liability where it was just and fair to do so, having taken into account
the concern of indeterminate liability (see reference 24).
THE DECISION ON THE FACTS

The Court of Appeal in Spandeck unanimously dismissed the appeal and held that the respondent did not owe the
appellant a duty of care. It arrived at this decision after applying the two-stage test as set out above and considering
the threshold issue of factual foreseeability. Specifically, the court found that the preliminary requirement of factual
foreseeability was satisfied because it must have been foreseeable to the respondent that any negligence in its
certification would directly deprive the appellant of moneys he would otherwise have been entitled to, and that if it had
been paid the correct amounts, it might not have got into financial difficulties (see reference 25).
The Court of Appeal then looked at the first stage of the test relating to proximity. It found the facts of Pacific
Associates Inc v Baxter (Pacific Associates) (see reference 26) to be materially the same as those in the Spandeck
case, in that the contract between the claimant contractor and the employer in Pacific Associates had also contained
clauses providing that the defendant engineer would not be personally liable for acts under the contract, and providing
for arbitration of disputes between the contractor and the employer (see reference 27). In view of these contractual
provisions, the court in Pacific Associates had found that the defendant engineer could not be found to have held
himself out as accepting a duty of care outside of the contractual framework, or that the claimant contractor had relied
on such an assumption of responsibility. As such, there was no voluntary assumption of responsibility by the
defendant nor any reliance by the claimant on such an assumption (see reference 28).
Following this reasoning in Pacific Associates, the Court of Appeal in Spandeck found that, in view of the arbitration
clause in the Contract, there was no legal proximity between the appellant and the respondent (see reference 29).
Even though the Court of Appeal had found that the requirement of proximity had not been satisfied, it nevertheless
went on to consider whether, if there had been proximity and a prima facie duty of care had been established, there
would have been any policy considerations that would have negated this prima facie duty of care. In considering this
second stage of the test, the Court of Appeal shared the view of Russell LJ in Pacific Associates (see reference 30)
that a duty of care should not be superimposed on a contractual framework and, for this reason, held that policy
considerations would have, in any case, negated any prima facie duty of care even if the appellant had managed to
establish the necessary proximity (see reference 31).
Having found against the appellant on the issue of duty of care, the court found it unnecessary to consider whether
there had been a breach of duty or causation, as well as remoteness (see reference 32).
CONCLUSION
Spandeck represents a very important development in the law of negligence in Singapore because it consolidates,
into one single test, the different tests that have traditionally been used to determine the existence of a duty of care.
This means that the same test can be used to establish a duty of care regardless of the type of negligent act and
regardless of the kind of loss that the negligence has caused the plaintiff to suffer. Hopefully, this bold step taken by
the Singapore Court of Appeal will make this rather complicated area of law easier to understand and to apply.
Kit Wye Lim-Lum is a teaching fellow at Nanyang Business School, Nanyang Technological University
References
1.
[2007] 4 SLR 100.
2.
Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [21].
3.
The three-part test required that, in addition to the foreseeability of damage, there should also be sufficient
proximity in the relationship between the plaintiff and the defendant, and that the situation should be one in
which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon
the latter for the benefit of the former (see Para 39).
4.
[1990] 2 AC 605.
5.
For cases of negligent misstatement causing pure economic loss, the test laid down by Hedley Byrne & Co
Ltd v Heller & Partners Ltd [1964] AC 465 grounds liability for the maker of the statement on an assumption of
responsibility towards the recipient of the statement in question and reliance by him on its accuracy (see Para
44). Pure economic loss is where the loss suffered by the plaintiff is purely financial in nature and is not
connected to any kind of physical damage.
6.
7.
Physical damage refers to injuries to the plaintiff himself or damage to his property.
8.
One important exception to this rule against claiming for pure economic loss was where the pure economic
loss had been caused by the defendant negligent misstatement. In such cases, a duty of care would be
recognised so long as the plaintiff was able to fulfil the test for determining duty of care in negligent
misstatement cases.
9.
The fear here is that imposing a duty of care on the defendant would expose him to liability in an
indeterminate amount for an indeterminate time to an indeterminate class (Ultramares Corporation v Touche
(1931) 255 NY 170 at 179, per Cardozo CJ).
10.
[1991] 1 AC 398.
11.
[1996] 1 SLR 113.
12.
[1999] 2 SLR 449.
13.
The first stage of this process required the court to examine and consider the facts and factors to determine
whether there was a sufficient degree of proximity in the relationship between the plaintiff and the defendant
which would give rise to a duty of care on the part of the latter to avoid the kind of loss sustained by the former.
If such a degree of proximity was found, the second stage of the process then required the court to consider
whether there was any material factor or policy which precluded such duty from arising (RSP Architects
Planners & Engineers v MCST Plan No 1075 at [31], per Thean JA).
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [75-6].
Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [78]. In
holding this, the Court of Appeal was adopting the view of Deane J in Sutherland Shire Council v Heyman
(1985) 60 ALR 1.
Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [73]. For
an explanation of the fear of indeterminate liability, see Reference 9.
[1990] 1 QB 993.
This is similar to the arbitration clause in the Contract which provided for arbitration of any dispute between
the employer and the appellant as to any certificate or valuation by the respondent.
Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [99-100].
Russell LJ had held that it was not just and reasonable to impose on the defendant a duty which the claimant
had been content not to make contractual because it had sufficient protection in the event of under-certification
under the arbitration clause in his contract with the employer.
DAMAGES
RELATED LINKS
Relevant to Paper F4 (ENG), (IRL), (SCT)
A focus on how the law of damages operates in respect of contract law
A likely consequence of a breach of contract is a claim for damages from the injured party. This article aims to
illustrate how the law of damages operates in respect of contract law.
THE SCENARIO
Carlos Kickaball is the South American superstar player of the Premier League team Scouse City. As the end of
another successful season draws to a close Carlos decides to treat himself to an upgrade of his Cheshire mansion.
Carlos contracts with John Wayne Builders Ltd (JWB) to perform the following alterations:
alteration of the swimming pool to include a five-metre deep end and diving platform
construction of a 12-lane ten-pin bowling alley
construction of a 60-seat cinema.
During discussions between himself and John, the owner of JWB, Carlos enthused about the proposed diving pool
pointing out that it would help improve his already renowned diving technique.
A total contract price of 125,000 was agreed along with a four-week deadline for completion. The parties also agreed
that the contract price would be reduced by 1,000 a day in the event of late completion. During final negotiations
Carlos revealed to John that he was planning to pay for the work out of a 200,000 bonus he would receive from his
club for making 50 appearances that season, adding that he had played in every match so far this season and
needed to play just twice more in the last six matches to qualify for payment.
Initially, construction was ahead of schedule and the pool alterations were completed within a fortnight. After checking
with John that the pool was fit for use Carlos threw himself off the diving board in trademark fashion only to suffer
severe head and facial injuries when he hit his head on the bottom of the pool. It transpired that JWB had not
deepened the pool from its original depth of two metres when fitting the diving board, as agreed in the contract.
Unfortunately Carlos was unable to play in the Cup Final the following day due to his injuries and was advised by his
doctor that he would also miss the remaining fixtures, leaving him stranded on 49 appearances for the season.
Carlos was even more upset when Goodbye magazine rang him in hospital to cancel the photo shoot planned at his
mansion to celebrate the completion of his building works, saying that his face would scare its readers. The stress of
the accident caused John to temporarily stop working, and as a result the remaining construction was
completed five days behind the agreed schedule.
John has now received a letter from Doowe Cheetah and Howe, a legal firm representing Carlos. The letter detailed
the following claims against JWB:
1.
A claim of 5,000 for the late completion of the construction work.
2.
A claim for 200,000 for the loss of the appearance bonus.
3.
A claim for 1m for the mental anguish suffered by Carlos as a result of missing the Cup Final.
4.
A claim of 12,000 to rectify the depth of the swimming pool.
5.
A claim of 100,000 for the loss of the photo shoot contract withGoodbye magazine.
Advise JWB as to their liabilities in respect of the claims by Carlos.
HOW TO ANSWER THIS QUESTION

In order to answer questions in a Paper F4 exam you will need two things:
a knowledge of the law
an ability to apply the law.
Each of these will be illustrated below.
LEARNING LEGAL KNOWLEDGE

A good way of learning legal principles is to construct diagrams and mind maps. These should contain all of the legal
facts, principles and cases relevant to an area of law. Once constructed you should then practise recreating these
diagrams until you can do so accurately.
At this point you should notice that jotting down one word such as damages will trigger a lot of associated words
helping you recall all of the legal facts and cases associated with a topic. An example of a diagram for damages is
shown in Figure 1.
APPLYING LEGAL KNOWLEDGE HOW TO ANSWER A QUESTION

Having seen above how to learn legal facts you now need to apply these to questions in the exam. To do this well
work through our scenario using the ISAC (issue, state, apply, conclusion) approach.
State the issue state the area of law that is at issue to provide the context of your answer.
The issue here is whether or not John is liable to pay the damages being claimed by Carlos.
State the law now transpose the relevant areas of law from your diagram into your answer. Remember, in the Paper
F4 exam you must write in proper English sentences, so you should not use the bullet points and notes that appear in
this illustrative example.
A full answer would cover the following points:
damages are an automatic common law right following breach of contract
damages are compensatory in nature
damages may be agreed by the parties in contract (liquidated) though these will not be upheld if they are
penalty clauses designed to discourage either party breaching Dunlop v New Garage (1915)
unliquidated damages are court determined and the injured party may sue for either:
- losses putting them where they expected to be Expectation interest
- losses as a result of relying on the other party Reliance interest
(Anglia TV v Reed) (1972)
damages must not be too remote (Hadley v Baxendale) (1854):
- arise as a natural consequence of the breach or else
- be in the contemplation of both parties when the contract was formed (Victoria Laundry v Newman Industries)
(1949)
normally actual financial losses are recoverable, however the claimant must take reasonable steps to
mitigate their losses (Payzu v Saunders) (1919)
non-financial losses may be recovered in certain circumstances including:
the cost of restitution is too high per Ruxley Electronics v Forsyth (1995)
the contract was for the provision of enjoyment (Jarvis v Swan Tours) (1973)
For each relevant point of law/case you include in your answer you will be awarded one mark.
Apply the law apply your legal knowledge to the issues in the scenario, restating the facts in legal terms. This stage
will lead you towards your conclusions.
1.
2.
3.
4.
5.
Claim for 5,000 this is an example of liquidated damages and will only be upheld if they are a genuine
pre-estimate of losses rather than a penalty clause per the Dunlop case. In this instance the amount seems
reasonable and will probably be upheld.
Claim for 200,000 this is not a normal loss and so damages will only be payable under the second test
in Hadley v Baxendale, otherwise they will be too remote. It would appear that Carlos made John aware of this
bonus during negotiations and as such it was reasonably in his contemplation. It is likely therefore that this claim
will also be upheld as it was only the injury to Carlos caused by JWB that prevented him playing and earning
this money.
Claim for 1m damages are generally awarded for actual financial losses only. A claim for mental distress
will not be upheld as it does not fit the exceptions outlined in the Ruxley and Jarvis cases.
Claim for 12,000 this amount will be upheld if it is not disproportionate as it reflects the cost of cure in
rectifying the breach by JWB in respect of the swimming pool depth. The case of Ruxley does not apply, as in
that case the damages claimed were in excess of the original contract price.
Claim for 100,000 this is not a normal loss and will be deemed too remote unless Carlos can prove that
JWB was aware of this when the contract was agreed (see second test in Hadley case earlier). It does not
appear on the facts of the scenario that JWB had any knowledge of this contract.
Conclusion state your advice. This should be consistent with your earlier analysis.
JWB is likely to be liable to Carlos in respect of the claims for late completion, loss of appearance bonus and pool
rectification. The other losses will not be upheld, either being non-financial in the case of mental distress, or too
remote for the magazine contract.
FINAL WORDS
At the end of this article you should be able to do the following:
Understand how to structure your revision and learning through the use of diagrammatic techniques. These
should improve your knowledge retention and understanding of how the law operates in discreet areas.
Understand how to answer problem questions in the exam using the ISAC technique. Be aware that the
example used was longer and more complex than an actual Paper F4 exam question as it was designed to
explore a wider range of issues than a Paper F4 exam question.
Have a clear understanding of the topic of contract law damages in the context of the Paper F4 syllabus.
Dave Halford is course design specialist and tutor at BPP Professional Education
THE SUPREME COURT
RELATED LINKS
On 1 October 2009, the House of Lords was replaced by a new Supreme Court as the highest court within the
English legal system
The House of Lords, as the upper chamber of parliament, continues to exist, but its membership has been reduced by
the 12 Law Lords who previously sat there, and who now sit as justices in the new Supreme Court.
THE SEPARATION OF POWERS

The idea of the separation of powers, which can be traced back to ancient Greek political philosophy, is based on the
existence of three distinct functions of government (the legislative, executive and judicial functions) and the conviction
that these functions should be kept apart in order to prevent the centralisation of too much power.
The legislature is the body within the constitution in which the power of making law is located. Under
democratic constitutions the body will normally be elected. In the UK, Parliament is bicameral and is made of
the House of Commons and the House of Lords. It is also worth stating that in countries with a written
constitution and a strong separation of powers, there are limits to the power of the legislature to make law, in
that it is not permissible for laws to be made which conflict with the rights provided under the constitution. If any
such law is passed, it is open to challenge in the courts, which may strike it down as being unconstitutional.
However, the UK has no written constitution as such and functions under the doctrine of parliamentary
sovereignty. This effectively means that Parliament is not just the ultimate source of law, but it can make such
law as it determines, which cannot be challenged in the courts as to its content. Even the Human Rights Act
1998, which introduced the European Convention of Human Rights and Fundamental Freedoms into UK law,
maintains the doctrine of parliamentary sovereignty to the extent that the courts cannot declare primary
legislation to be invalid on the grounds that it conflicts with the convention. Courts may issue a declaration of
incompatibility, but such a declaration does not invalidate the legislation in question and any action to remedy
the conflict must be undertaken by the legislature.
The executive, as its name suggests, is the institution that executes the law, ie carries it into effect. It is
essentially the government operating through the instrument of the state, such as the civil service and other
state functionaries. In theory, the executive implements, rather than creates, the law and is subject to the
scrutiny of the legislature and the judiciary.
The judiciarys role is to decide issues in relation to the law of the state in which they are located. A corollary
of this description is the conclusion that it is not the function of the judges to make law.
The fact that, before October 2009, the highest court in the UK was located in, and constituted part of, the countrys
legislative body was always considered at least somewhat anomalous. Such a situation was clearly contrary to any
idea of the separation of powers and one that was not lost on Lord Falconer, the former Lord Chancellor, who in 2005
explained the need for reform thus:
The present position is no longer sustainable. It is surely not right that those responsible for interpreting the law
should be able to have a hand in drafting it. The time has come for the UKs highest court to move out from under the
shadow of the legislature.
The relevance of Lord Falconers argument was given added power by the decision of the Scottish Court of Sessions,
the equivalent of the Court of Appeal, in Davidson v Scottish Ministers (No 2) (2002). The case involved a challenge
to a previous court decision, on the grounds of Article 6 of the ECHR, for the reason that one of the judges in the
earlier case, the former Lord Advocate Lord Hardie, had spoken on the issue before the court while a member of the
Scottish Assembly.
The Court of Sessions held that Lord Hardie should at least have declared his previous interest in the matter and that,
in the light of his failure to do so, there was at least the real possibility of bias, and ordered the case to be retried.
The enormous historical change involved in remedying the unsustainable situation was brought about by the
implementation of Part 2 of the Constitutional Reform Act 2005, which provided for the following:
The establishment of the new independent Supreme Court, separate from the House of Lords with its own
independent appointments system, its own staff and budget and its own building: Middlesex Guildhall. This new
Supreme Court should not be confused with the old Supreme Court, which was the title previously given to the
High Court and Court of Appeal. In future those courts will be known as the Senior Courts of England and
Wales.
The 12 judges of the Supreme Court are titled Justices of the Supreme Court and will no longer be allowed
to sit as members of the House of Lords. As a matter of fact, all of the present members are life peers and as a
result will be able to sit in the House of Lords on their retirement from their judicial office, but this may not always
be the case in the future.
The immediately previously serving Law Lords became the first Justices of the Supreme Court, and Lord
Phillips, the former Lord Chief Justice, was appointed the first President of the Supreme Court. In fact, only 11
of the previous Lords of Appeal in Ordinary have taken positions as Justices of the Supreme Court, Lord
Neuberger, instead, taking the position of Master of the Rolls in the Court of Appeal.
As has been stated above, in other constitutional systems, both civil, as in France, or common law, as in the US, not
only is there a clear separation of powers between the judiciary, the executive and the legislature, but there is also a
distinct Constitutional Court with the power to strike down legislation on the grounds of its being unconstitutional.
It has to be emphasised that the UK Supreme Court will not be in the nature of these other supreme courts, in that it
will not be a constitutional court as such and it will not have the powers to strike down legislation. Consequently,
although the proposed alterations clearly increase the appearance of the separation of powers, the doctrine of
parliamentary sovereignty remains unchallenged.
It remains to be seen, however, whether under the changed circumstances of the contemporary constitution the
Supreme Court, as the highest court in the land, will simply assume the previously limited role of the House of Lords,
or whether it will, with the passage of time, assume new function and increased powers as are consonant with
Supreme Courts in other jurisdictions. This issue arose in September 2009 when the former Law Lord, Lord
Neuberger, who gave up his position in the House of Lords to become Master of the Rolls, spoke on a BBC radio
programme expressing the opinion that the advent of the Supreme Court was not unproblematic. As he put it, the
danger is that you muck around with a constitution like the British constitution at your peril because you do not know
what the consequences of any change will be. And that there was a real risk of judges arrogating to themselves
greater power than they have at the moment.
Former Lord Chancellor, Lord Falconer, also expressed the view that the Supreme Court will be bolder in vindicating
both the freedoms of individuals and, coupled with that, being willing to take on the executive, but Lord Phillips the
President of the Supreme Court was more conciliatory towards the executive expressing the view that, although he
could not predict how the court would function in the future, he did not foresee it changing in the way suggested by
Lord Neuberger.
The changes will make little practical difference to the student of law; the previous decisions and precedents of the
former House of Lords will still be binding and the previous rules of law and procedure for hearing appeals from lower
courts will continue to operate. Consequently, the shift from House of Lords to the Supreme Court should be
seamless and unproblematic.
More information cane be found on the Supreme Court website
THE TORT OF NEGLIGENCE
RELATED LINKS
Relevant to Paper F4 (IRL), (SCT) and (UK)
If theres one area of the F4 syllabus that students appear to struggle with, its the tort of negligence. (For Paper F4
(SCT) a tort is a delict.) The examiners reports indicate that students do not understand the subject very well in
particular, the various elements that a claimant must prove in order for the defendant to be found negligent. This
article addresses each of the key elements in turn, but we begin with an explanation of why tort developed.
Torts are legal wrongs that one party suffers at the hands of another. Negligence is a form of tort which evolved
because some types of loss or damage occur between parties that have no contract between them, and therefore
there is nothing for one party to sue the other over.
In the 1932 case of Donoghue v Stevenson, the House of Lords decided that a person should be able to sue another
who caused them loss or damage even if there is no contractual relationship. Donoghue was given a bottle of ginger
beer by a friend, who had purchased it for her. After drinking half the contents, she noticed that the bottle contained a
decomposing snail and suffered nervous shock as a result. Under contract law, Donoghue was unable to sue the
manufacturer because her friend was party to the contract, not her.
However, the House of Lords decided to create a new principle of law that stated everyone has a duty of care to their
neighbour, and this enabled Donoghue to successfully sue the manufacturer for damages.
Lets consider a hypothetical case and use it to demonstrate how the tort of negligence works. Harry is involved in an
accident in which his car is hit by one driven by Alex. As a consequence of the accident Harry breaks a leg and is
unable to work for two months. Can Harry sue Alex for damages?
On the face of things the answer seems obvious. Harry was injured as a result of Alex driving into his car and so it
seems fair that he should be able to sue him. However, think of the situation from Alexs point of view, is it fair that
Harry should be able to sue him just like that? People have accidents everyday should they all be able to sue each
other for every little incident? If they are then the courts would be overwhelmed with cases.
Thankfully, in order to prove negligence and claim damages, a claimant has to prove a number of elements to the
court.
These are:
the defendant owed them a duty of care
the defendant breached that duty of care, and
they suffered loss or damage as a direct consequence of the breach.
Even if negligence is proved, the defendant may have a defence that protects them from liability, or reduces the
amount of damages they are liable for.
ELEMENT 1 THE DUTY OF CARE

As we saw earlier, the concept of a duty of care was created in the Donoghue case. The House of Lords stated that
every person owes a duty of care to their neighbour. The Lords went on to explain that neighbour actually means
persons so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so
affected. This is a very wide (and complicated) definition that could include almost anyone if still in operation today
the courts would most certainly be overrun with cases.
The later cases of Anns v Merton London Borough Council (1977) and Caparo Industries plc v Dickman
(1990) restricted the definition a little by introducing proximity and fairness.
Proximity simply means that the parties must be sufficiently close so that it is reasonably foreseeable that one
partys negligence would cause loss or damage to the other. Fairness means that it is fair, just and reasonable for
one party to owe the duty to another.
What does this mean for Harry? I think youll agree that Alex owes him a duty of care. There is sufficient proximity (ie
Alex drove into Harrys car); it is reasonably foreseeable that a collision between the cars could cause Harry some
injury, and it seems fair, just and reasonable for Alex to owe a duty of care to Harry (and indeed all other road users).
ELEMENT 2 BREACH OF DUTY OF CARE

In many cases brought before the courts it is evident that a duty of care exists between the defendant and the
claimant. The real issue is whether or not the actions of the defendant were sufficient to meet their duty. To determine
this, the court will set the standard of care that they should have met. This standard consists of the actions which the
court considers a reasonable person would have taken in the circumstances. If the defendant failed to act reasonably
given their duty of care, then they will be found to have breached it.
This reasonable standard may be adjusted given the actual circumstances of the case. For example, if the claimant
is vulnerable, such as being disabled or frail, it is reasonable to expect the defendant to have paid them special
attention or taken extra care over them as compared to someone who is fit and healthy.
Other circumstances which may be taken into account include whether:
The actions the defendant took are in line with common practice or industry recommendations. If they were,
then it is likely that the defendant will be found to have met their duty unless the common practice itself is found
to be negligent.
There was some social benefit to the defendants actions. If there was, then the court may consider it
inappropriate for them to be found to have breached their duty.
The defendants actions had a high probability of risk attached to them. If they did, then the court will expect
them to show they took extra precautions to prevent loss or damage.
There were practical issues that prevented reasonable precautions being taken, or unreasonable cost would
have been involved in taking them. If there were, then the court is unlikely to expect the defendant to have taken
them in order to meet their duty of care.
The defendant is a professional carrying on their profession. If they were, then the court will judge their
actions against a reasonable professional in their line of work, rather than just any ordinary person. If
professional guidelines are in place then the court will judge the defendants actions against these rather than its
own expectations.
Back to the case of Harry and Alex. In determining whether or not Alex broke his duty of care, a court will consider
whether or not, given the circumstances, he drove as a reasonable person would have. For example, if it was foggy or
wet at the time, he would be expected to show that he drove cautiously. In determining whether Alexs actions were
reasonable, evidence may have to be taken from witnesses and expert analysis of the crash may be required. For
now, lets assume Alex was not driving reasonably.
RES IPSA LOQUITUR

In extraordinary cases, the facts may be so overwhelmingly in favour of the claimant that the court decides the
defendant should prove that they were not negligent. The legal term for this is res ipsa loquitur (meaning the facts
speak for themselves). It applies in circumstances where the cause of the injury was under the control of the
defendant and that the incident would not have occurred if they had taken proper care. It is often applied in medical
cases, for example in Mahon v Osborne (1939), a surgeon had to prove it was not negligent to leave a swab inside a
patient.
ELEMENT 3 LOSS OR DAMAGE AS A RESULT OF THE BREACH

In this element the claimant simply has to prove that the loss or damage was a direct consequence of the defendants
breach of duty of care. In other words that there is a chain of causality from the defendants actions to the claimants
loss or damage. A simple test, called the but for test is applied. All the claimant has to prove is that if it were not but
for the actions of the defendant then they would not have suffered the loss or damage.
Where there is more than one possible cause of the loss or damage, the defendant will only be liable if it can be
proved that their actions are the most likely cause.
A good case which illustrates how the but for test operates is Barnett v Chelsea and Kensington HMC (1969)
another medical case. A casualty department doctor negligently sent a patient home the patient died. However, the
doctor was not found liable for damages because the patient was suffering from arsenic poisoning and would have
died no matter what the negligent doctor could have done.
The loss itself must not be too remote. It is an important principle that people should only be liable for losses which
they should have reasonably foreseen as a potential outcome of their actions. The Wagon Mound (1961) is a case
often cited in explanation of this principle. Oil leaked out of the defendants boat within Sydney harbour and came into
contact with some cotton waste which had fallen into the water. The oil was of a particular type which would not
foreseeably catch fire on water. However, the cotton ignited and this in turn set the oil ablaze causing damage to the
claimants wharf. The defendants were not found liable for fire damage as the actual cause of the fire was held too
remote.
NOVUS ACTUS INTERVIENIENS

Other events, which are outside the control of the defendant, may intervene in the chain of causality adding some
confusion to the outcome of a case. The good news is that there are some simple rules to remember that deal with
them.
At all times you should bear in mind that the defendant will only be liable if their actions are the most probable cause
of the loss or damage. They will not be liable if an intervening act becomes the real cause. Examples of intervening
acts which remove liability from the defendant include:
Actions of the claimant which are unreasonable, or outside what the defendant could have foreseen in the
circumstances.
Actions of a third party which become the real cause of the loss or damage. The defendant is only liable for
damages up until the point when the third party intervened.
Unforeseeable natural events natural events which the defendant could have reasonably foreseen do not
affect things.
Lets return to Harry and Alex. It is entirely possible for the accident to be caused by a third party driving into Alex,
forcing him into Harry. It is also possible that Harry himself was an intervening factor maybe he was driving
erratically. Either of these factors could mean that Alexs breach of duty is not the real cause of Harrys injuries.
For now, lets assume that no third party is involved and that any actions Harry took are not enough to take the blame
for the cause of the accident away from Alex. The court will therefore find Alex liable for negligence to Harry.
DEFENCES
There are two defences a defendant can use where they are found liable for negligence. One will exonerate them
completely; the other reduces the level of damages they are liable for.
Volenti non fit injuria simply means the voluntary acceptance of the risk of injury. If a defendant can prove the
claimant accepted the risk of loss or damage, they will not be liable. Acceptance can be express (usually by a consent
form being signed) or implied through the claimants conduct.
Contributory negligence takes part of the blame away from the defendant if it can be proved the claimant
contributed in some way to their loss or damage. The defendant is still liable, but will face a reduced damages payout.
In Harry and Alexs case, volenti is not an issue in no way did Harry consent to the accident. However, if his actions
contributed in some way to his injuries, maybe by not wearing a seatbelt, then he may find the amount of damages he
receives is reduced.
USE OF CASES IN EXAM ANSWERS

Finally, a brief word about using cases in exam answers. Students are often concerned about how many cases they
should quote, or what happens if they cannot remember a case name. The simple fact is that students fail this exam
because they do not know the law not because they cannot remember a case name.
My advice on cases is:
1.
2.
3.
Get to grips with the principles of law first, then learn case names if you have time. By learning the law you
will probably find that you remember the major cases anyway.
Dont try to learn every case in your textbook the majority are there to illustrate how the law was applied in
a particular set of circumstances. Instead, go for the major ones in each syllabus area and learn those.
All you need to learn is the case name and the principle of law it created you do not need to learn and
regurgitate all the background to the case in the exam.
4.
If you forget a case name in the exam, dont let this stop you from explaining the principle of law, just write In
a case it was decided that... and continue with the principle.
As an example, consider this article only six cases were mentioned. See if you can remember their names.
Stephen Osborne is a technical author at BPP Learning Media
UNDERSTANDING CORPORATE CAPACITY
RELATED LINKS
Relevant to Paper F4 (SGP)
One of the things which determines whether a transaction entered into by a company is valid and binding on the
company is the companys legal capacity to enter into that particular transaction. In the case of individuals, the
question of capacity is determined by the persons age and by their ability to understand the nature of the obligation
undertaken. Thus, a lack of capacity is seldom raised in contracts entered into between most normal adults. Although
a company is not a person, it is nevertheless conferred legal personality and status by the Companies Act (Cap 50).
Section 19(5) provides that upon incorporation, a company shall be capable of suing and being sued and having
perpetual succession and a common seal with power to hold land. But what determines a companys legal capacity?
The answer depends on the provisions of the companys memorandum of association, the operation of the doctrine of
ultra vires, and the impact of relevant statutory provisions.
THE OBJECTS CLAUSE AND THE DOCTRINE OF ULTRA VIRES

Prior to the amendments made to the Companies Act in 2004, the contractual capacity of a company was defined and
limited by a statutorily mandated objects clause in the companys memorandum of association. Section 22(1) required
that the objects for which the company was incorporated should be stated in the memorandum. This statement, which
typically stipulated the type of commercial activities that the company would be involved in, came to define the
companys capacity. It then provided the premise on which the doctrine of ultra vires operated.
According to the doctrine of ultra vires, any act which fell outside those specified in the objects clause was beyond the
companys capacity, ie ultra vires. In other words, the company was incapable of doing anything that went beyond its
statement of objects. As Lord Cairns LC put it, the memorandum of association is... the area beyond which the action
of the company cannot go (see reference 1). This, it was explained, was a consequence of the benefit of limited
liability conferred on companies registered under the Companies Act; it was for those who dealt with and extended
credit to the company, and who had no recourse against anyone else except the company, so that they should at least
be entitled to know the scope of the companys legitimate activities so as to decide whether or not to transact with the
company.
Under common law, ultra vires transactions are nullities and have no legal effect. Neither party to the transaction
would be able to enforce it, and any benefits transferred would have to be restored. Lord Cairns LC explained: The
question is not as to the legality of the contract; the question is as to the competency and power of the company to
make the contract... if it was a contract void at its beginning, it was void because the company could not make the
contract. (See reference 2)
As the ultra vires contract was void ab initio, the common law was clear that it could not be ratified or authorised by
the shareholders, not even by a unanimous decision.
Clearly then, the doctrine was capable of operating harshly, especially for outsiders who dealt with the company. The
inequities of the consequences were exacerbated as the operation of the doctrine did not depend on whether a party
contracting with the company had actual knowledge of the companys lack of capacity. Indeed, by the doctrine of
constructive notice, anyone who dealt with a registered company was deemed to have had notice of the contents of its
memorandum and articles of association. This meant that whenever a person contracted with the company, that
person was treated as if they had seen and read the objects clause and was therefore fully cognizant of the limits
placed on the companys capacity. The risk of the transaction turning out to be ultra vires thus fell squarely on the
person dealing with the company.
FULL CAPACITY STATUTORILY CONFERRED

The 2004 amendments to the Companies Act removed the requirement for objects to be stated in a companys
memorandum. Section 23(1) provided that a company has full capacity to carry on or undertake any business or
activity, do any act or enter into any transaction. Obviously, this provision is meant to exclude the applicability of the
doctrine of ultra vires.
The exclusion is, however, incomplete because Section 23(1A) preserves the option of having objects included. The
incorporators of a company may therefore choose to have an objects clause included in the memorandum.
Furthermore, Section 23(1B) allows the inclusion of a clause in the memorandum of provisions that restrict the
companys capacity and powers. As the operation of Section 23(1) is expressly qualified by, inter alia, the provisions
of the memorandum or articles of the company, it would appear that for those companies exercising the option to
restrict capacity, the doctrine of ultra vires remains relevant.
CONSTRUCTION
When would an act of a company be considered outside of its capacity? The answer to this question depends on a
proper construction of the companys objects clause. In this regard, it is important to distinguish between a companys
objects and the powers conferred on the company to carry out those objects. The objects provide the purposes for
which a company exists, while the powers are the means by which these purposes are to be achieved.
It is only when the act is outside the companys objects (as opposed to its powers) that the act is ultra vires. However,
this does not mean that all transactions falling outside the companys stated objects are necessarily void.
In Attorney-General v The Great Eastern Railway Co Ltd (see reference 3), the House of Lords held that a company
had the implied capacity and power to enter into transactions that were necessarily incidental to the carrying out of
the authorised objects, even if those transactions did not fall strictly within the objects expressly provided for in the
companys memorandum.
The company in question was authorised to construct a railway and to provide and maintain all the rolling stock and
locomotive power necessary for the working of the railway. A contract entered into by the company to offer locomotive
engines and other rolling stock for hire was held not to be ultra vires. Lord Selborne LC stated that the ultra vires
doctrine ought to be reasonably, and not unreasonably, understood and applied, and that whatever may fairly be
regarded as incidental to, or consequential upon, those things which the [memorandum] has authorised, ought not
(unless expressly prohibited) to be held, by judicial construction, to be ultra vires. (See reference 4).
Often, a companys memorandum states both its objects and its powers. In Rolled Steel Products (Holdings) Ltd v
British Steel Corp (see reference 5), Browne-Wilkinson observed that not all the activities listed or mentioned in the
objects clause are necessarily objects in the strict sense explained previously. Some of these may really only be
ancillary powers, existing not as independent objects, but to enable the company to achieve its stated objects.
The power to create a security over the companys assets would be such an ancillary power, as would the power
(unless the company was a bank) to borrow money. Vinelott observed as follows:
The question whether a stated object is truly an independent object or purpose is always a question of construction.
Even borrowing and lending monies are activities capable of being pursued as independent objects for instance in
the case of a bank or finance company; but commonly, where a sub-clause of the memorandum of association of a
company states that one of the objects of the company is to lend or advance or to borrow and raise money, it is
artificial to construe the sub-clause as anything other than a power conferred for the furtherance of what are, in truth,
its substantive objects or purposes. (See reference 6)
Additionally, a company would have a number of powers (even if they were not expressly provided for in the
memorandum) implied as being reasonably incidental to the achievement of its objects. For example, a trading
company would have an implied power to lease premises, even if this power was not explicitly provided for.
LEGITIMATE POWER, WRONGFUL EXERCISE

How should an act be treated if it fell within the powers of the company, but was entered into to further a purpose that
was not within the companys objects?
In Rolled Steel Products (Holdings) Ltd v British Steel Corp, the courts held that as long as the company legitimately
possessed the power which had been exercised, the fact that the purpose for which that power was exercised was
outside of the companys objects, or was used for some improper purpose, did not render the exercise of the power
ultra vires. This wrongful exercise of a corporate power had nothing to do with the capacity of the company but
everything to do with the authority of the agents (usually the directors) who exercised the power on the companys
behalf. Therefore, the resulting transaction was not void, but was voidable at the option of the company and only if the
other contracting party had notice of the wrongdoing or breach of duty.
The question that must be asked is whether the corporate power being examined could have been exercised in
pursuit of the companys objects. If the answer is yes, the exercise of the power is not ultra vires. The facts of the
Rolled Steel case provide a useful illustration. The memorandum of Rolled Steel empowered it to give guarantees.
The board of directors caused it to guarantee the obligations of a company controlled by a majority shareholder and
director of Rolled Steel.
On the question of whether the guarantee was void as it was ultra vires, the English Court of Appeal held that it was
not. It was clear the company had the capacity to give guarantees. The fact that the giving of the guarantee was an
abuse of power did not mean that the transaction was ultra vires.
This view of ultra vires transactions (often referred to as the narrow view) was approved by the Singapore Court of
Appeal in Banque Bruxelles Lambert v Puvaria Packaging Industries (Pte) Ltd (see reference 7), and goes some way
towards eroding the applicability of the ultra vires rule. In addition, Section 25 of the Companies Act has the effect of
further ameliorating the common law consequences of the doctrine, as follows:
No act or purported act of a company... shall be invalid by reason only of the fact that the company was without
capacity or power to do such an act or to execute or take such conveyance or transfer.
Where a party dealing with a company is concerned, the sting of the doctrine of ultra vires has been effectively
removed as the transaction can no longer, by that reason only, be void. It should be noted that the doctrine of
constructive notice, which up to now has worked hand in hand with the ultra vires doctrine to the detriment of those
contracting with companies, has been abolished by Section 25A. A person is therefore not deemed to have notice or
knowledge of the contents of the companys memorandum just because it is a registered document available for
inspection. However, although weakened, the doctrine is not quite dead and buried, for Section 25(2) preserves the
right of a member to apply to court for an order to restrain the ultra vires act.
Unlike the position in common law, an ultra vires transaction is not automatically void. Whether the allegedly ultra
vires act will be restrained (and hence to that extent avoided) or not will depend on the court being satisfied that it
would be just and equitable for the act to be restrained. Arguably, factors such as the potential damage or loss
suffered by the outsider, the outsiders state of knowledge, and whether other third party rights are affected, could be
considered by the court when deciding whether to grant the order.
The fact that an act is outside the capacity of the company may also be asserted or relied upon in proceedings
against the companys directors who, in causing the company to enter into an ultra vires transaction, would be likely to
be in breach of their own directors duties.
CONCLUSION
Where outsiders are concerned, the legislative provisions are to be welcomed as they go some way towards
moderating the drastic consequences of the ultra vires doctrine. Nevertheless, the doctrine has not been fully
abolished. In the case of companies that retain a statement of objects in their memorandum, the doctrine continues to
apply, albeit reincarnated as a mechanism for internal control, ie in the form of restrictions on the directors exercise of
powers. In this regard, an understanding of the doctrine remains useful.
Pearlie Koh Ming Choo is associate professor at Singapore Management University
References
1.
Ashbury Railway v Riche (1875) LR 7 HL 653, 671.
2.
Ashbury Railway v Riche (1875) LR 7 HL 653, 672.
3.
(1880) 5 App Cas 473.
4.
Ibid, 478.
5.
[1986] Ch 246.
6.
Rolled Steel Products (Holdings) Ltd v British Steel Corp [1982] Ch 478, 497 (at first instance).
7.
[1994] 2 SLR 35.
COMPANIES ACT 2006
RELATED LINKS
Relevant to Paper F4 (ENG) and (SCT)
This is the first of two articles on the Companies Act 2006 (CA 2006). Due to the size of the CA 2006, it is not
possible to provide a detailed review, so this article focuses on the aspects that are most important for Paper F4
(ENG) and (SCT) students. Please note that although these topics are important, and hopefully interesting, the
content of these articles may not be examined in the near future.
This article deals with the following topics:
types of companies
company formation
share capital
company resolutions.
Unless otherwise stated, all references are to the CA 2006.
TYPES OF COMPANIES
Sections 3 to 6 of CA 2006 provide for the establishment of different types of companies.
Section 3: Limited and unlimited companies
This section restates Section 1(2) of the 1985 Act; as previously, a company may be limited by shares or by guarantee
as follows:
If the liability of shareholders is limited to the amount, if any, unpaid on the shares held then it is a limited
company.
If the liability is limited to the amount that the members undertake to contribute to the assets of the company
in the event of its being wound up, the company is limited by guarantee. Companies limited by guarantee are
specifically prohibited from registering with share capital (s5).
If there is no limit on the liability of its members, it is an unlimited company.
Section 4: Private and public companies

Section 4 merely restates the provisions of Section 1(3) of the 1985 Act. Thus a private company is defined as any
company that is not a public company, and one that may not offer shares to the public. A public company, on the
other hand, is a company whose certificate of incorporation states that it is a public company. Section 4 does refer to
Part 20 of the Act, which sets out the key differences between public and private companies; for example, before it
can begin to start its business activities, a public company must secure a trading certificate from the Companies
Registry (s761). To obtain the necessary certificate, the public company must meet the minimum share capital
requirement (the authorised minimum), which is currently set at 50,000 (as stated in s763) and which remains
unchanged under CA 2006. The authorised minimum can be stated in sterling or the euro equivalent to the prescribed
sterling amount. In addition, any shares issued must be paid-up to at least one quarter of their nominal value (s586).
Section 6: Community interest companies
Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 established a new company
form, the community interest company or CIC. Such enterprises were designed for use by social enterprises, and
although registered under the Companies Act, they have to complete certain additional formalities and are subject to
certain additional elements of regulation. As they are not business forms as such, they will not be considered in any
detail.
COMPANY FORMATION
Section 7 sets out the method for forming a company, which is that one or more persons must subscribe their name to
a memorandum of association and comply with the requirements of the provisions of the Act as to registration. It
should be noted that the Act allows a single person to form any type of company, either public or private. Subsection
(2) simply restates the requirement that a company may not be formed for an unlawful purpose. Under Section 9, two
documents must be delivered to the registrar: the memorandum of association and the application for registration.
The memorandum of association
Although CA 2006 retains the previous requirement for individuals wishing to form a company to subscribe their
names to a memorandum of association, it significantly reduces the importance of the memorandum, and, as a
consequence, it will not be possible to amend or update the memorandum of a company formed under CA 2006.
Nonetheless, the memorandum of association, which must be in the prescribed form, remains an important document
to the extent that, as required by Section 8, it provides evidence of the intention of the subscribers to the
memorandum to form a company and become members of that company on formation. Also, in relation to a company
limited by shares, the memorandum provides evidence of the members agreement to take at least one share each in
the company.
Under Section 28, provisions in the memorandum of existing companies will be treated as provisions in the articles of
the company if they are of a type that will not be included in the memorandum of companies formed under the Act.
Section 9: Registration documents
This section sets out the information, or documents, that must be delivered to the registrar when an application for
registration is made. In all cases, the application for registration must state the following:
The companys proposed name.
Whether the companys registered office is to be situated in England and Wales (or Wales), in Scotland or in
Northern Ireland.
A statement of the intended address of the companys registered office (that is, its postal address as
opposed to the preceding statement confirming the jurisdiction in which the companys registered office is to be
situated).
Whether the liability of the companys members is to be limited and if so, whether it is to be limited by shares
or by guarantee.
Whether the company is to be a private or a public company.

A statement of capital and initial shareholdings or a statement of guarantee (ss10 and 11 set out the detailed
provisions in these regards see below).
A statement of the companys proposed officers (s12 see below).
A copy of any proposed articles to the extent that the company does not intend to use the model articles (this
issue is covered in the second part of this article).
A statement of compliance (s13 see below).
Section 10
This section sets out the contents of the statement of capital and initial shareholdings.
This statement essentially provides a snapshot of a companys share capital at the point of registration. For public
companies, this requirement is linked to the abolition of authorised share capital (see below for more on this). The
statement of capital and initial shareholdings must contain the following information:
The total number of shares of the company to be taken on formation by the subscribers to the memorandum.
The aggregate nominal value of the shares.
For each class of shares:

(a) the prescribed particulars of the rights attached to those shares
(b) the total number of shares of that class
(c) the aggregate nominal value of shares of that class.
The amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the
nominal value of the shares or by way of a premium).
Such information as may be prescribed for the purpose of identifying the subscribers to the memorandum of
association.
With respect to each subscriber to the memorandum, it must state:

(a) the number, nominal value (of each share), and class of shares to be taken on formation
(b) the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the
nominal value of the share or by way of premium).
Where a subscriber to the memorandum is to take shares of more than one class, the information required under
Subsection (4)(a) is required for each class.
Section 11
This section sets out the contents of the statement of guarantee that must accompany the application for registration
where it is proposed that a company will be limited by guarantee on formation. The statement of guarantee must
contain the information to identify the subscribers to the memorandum.
Section 12
This section, which relates to the statement of the companys proposed officers, requires the submission of particulars
relating to the following:
The person or persons who is or are to be the first director or directors of the company. The details are set
out in Sections 163 to 166. The main change is that a service address must be provided for each director who is
a natural person, in addition to the requirement for the usual residential address.
The person or persons who is, or are, to be the first secretary.
As private companies are no longer required to appoint company secretaries (see s270(1)), this information is only
required if the company actually appoints someone to that role.
Section 13
This section concerns the requirement of a statement of compliance. Such a statement does not need to be
witnessed and may be made in either paper or electronic form. Under Section 1068, the registrar is authorised to
specify the rules relating to, and who may make, such a statement. Section 1112 makes it a criminal offence to make
a false statement of compliance, as is the case in relation to all documents delivered to, or statements made to, the
registrar.
If the registrar is satisfied that the requirements of CA 2006, as to registration, are complied with, then the documents
delivered shall be registered and, on registration, the registrar shall issue a certificate that the company is duly
incorporated.
The registration certificate must state:
the name and registered number of the company
the date of its incorporation
whether it is a limited or unlimited company, and if it is limited whether it is limited by shares or by guarantee
whether it is a private or a public company
whether the companys registered office is situated in England and Wales (or in Wales), in Scotland, or in
Northern Ireland.
As before, once issued, the certificate is conclusive evidence that the requirements of the Act as to registration have
been complied with and that the company is duly registered under the Act.
SHARE CAPITAL
The word capital is used in a number of different ways in relation to shares.
Statement of capital and initial shareholdings
Under the provisions of CA 1985, the memorandum of a limited company with a share capital was required to state
the amount of the share capital with which the company proposed to be registered, and the nominal amount of each
of its shares. This was known as the authorised share capital and set a limit on the amount of capital which the
company could issue, subject to increase by ordinary resolution. Section 9 of CA 2006 removes the concept of
authorised capital and replaces it with the requirement to submit an application to register the company.
The statement of capital and initial shareholdings is essentially a snapshot of a companys share capital at the point
of registration. Section 10 requires the statement of capital and initial shareholdings to contain the following
information:
The total number of shares of the company to be taken on formation by the subscribers to the memorandum.
The aggregate nominal value of those shares.
For each class of shares:

(a) the prescribed particulars of the rights attached to those shares
(b) the total number of shares of that class
(c) the aggregate nominal value of shares of that class.
The amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the
nominal value of the shares or by way of a premium).
The statement must contain such information as may be required to identify the subscribers to the memorandum of
association. With regard to such subscribers, it must state:
the number, nominal value (of each share), and class of shares to be taken by them on formation
the amount to be paid up and the amount (if any) to be unpaid on each share.
Where a subscriber takes shares of more than one class, the above information is required for each class.
Issued capital
This represents the nominal value of the shares actually issued by the company; public companies must have a
minimum issued capital of 50,000 or the prescribed euro equivalent (s763).
Called-up capital
This is the proportion of the nominal value of the issued capital actually paid by the shareholder (s547). It may be the
full nominal value, in which case it fulfils the shareholders responsibility to outsiders; or it can be a part payment, in
which case the company has an outstanding claim against the shareholder. Shares in public companies must be paid
up to the extent of at least a quarter of their nominal value (s586).
Once established, the nominal value of the share remains fixed and does not normally change. However, the value of
the shares in the stock market may be subject to daily fluctuation depending on a number of interrelated factors, such
as the profitability of the company, the prevailing rate of interest or prospective takeover bids. Thus the market value
of a share of 1 nominal value may be as much as 5 or higher, or as low as one penny.
COMPANY RESOLUTIONS
Under the provisions of CA 2006 there are three types of resolutions: ordinary resolutions, special resolutions, and
written resolutions.
Ordinary resolutions
Section 282 defines an ordinary resolution of the members (or class of members) of a company as a resolution that is
passed by a simple majority.
If the resolution is to be voted on a show of hands, the majority is determined on the basis of those who vote in
person or as duly appointed proxies. Where a poll vote is called, the majority is determined in relation to the total
voting rights of members who vote in person or by proxy.
Special resolutions
A special resolution of the members (or of a class of members) of a company means a resolution passed by a
majority of not less than 75%. This is determined in the same way as for an ordinary resolution (s283). If a resolution
is proposed as a special resolution, it must be indicated as such, either in the written resolution text or in the meeting
notice. Where a resolution is proposed as a special resolution, it can only be passed as such, although anything that
may be done as an ordinary resolution may be passed as a special resolution (s282(5)). There is no longer a
requirement for 21 days notice where a special resolution is to be passed at a meeting.
Where a provision of the Act requires a resolution, but does not specify what kind of resolution is required, the default
provision is for an ordinary resolution. However, the companys articles may require a higher majority, or, indeed, may
require a unanimous vote to pass the resolution. The articles cannot alter the requisite majority where the Act actually
states the required majority, so, if the Act provides for an ordinary resolution, the articles cannot require a higher
majority.
Written resolutions
Private limited companies are no longer required to hold meetings and can take decisions by way of written
resolutions (s281). The Act no longer requires unanimity to pass a written resolution. It merely requires the
appropriate majority of total voting rights, a simple majority for an ordinary resolution (s282(2)) and a 75% majority of
the total voting rights for a special resolution (s283(2)).
Section 288(5) states that anything which, in the case of a private company, might be done by resolution in a general
meeting, or by a meeting of a class of members of the company, may be done by written resolution with only two
exceptions the removal a director, and the removal of an auditor.
These both require a general meeting of shareholders to be called. A written resolution may be proposed by the
directors or the members of the private company (s288(3)). Under Section 291, in the case of a written resolution
proposed by the directors, the company must send or submit a copy of the resolution to every eligible member. This
may be done either by:
sending copies to all eligible members in hard copy or electronic form or by means of a website
submitting the same copy to each eligible member in turn, or different copies to each of a number of eligible
members in turn
by a mixture of the above.
The copy of the resolution must be accompanied by a statement informing the members both how to signify
agreement to the resolution and the date by which the resolution must be passed if it is not to lapse (s291(4)). It is a
criminal offence not to comply with the above procedure, although the validity of any resolution passed is not affected.
The members of a private company may require the company to circulate a resolution if they control 5% of the voting
rights (or a lower percentage if specified in the companys articles). They can also require a statement (of not more
than 1,000 words) to be circulated with the resolution (s292). However, the members requiring the circulation of the
resolution will be required to pay any expenses involved, unless the company resolves otherwise.
Agreement to a proposed written resolution occurs when the company receives an authenticated document, in either
hard copy or electronic form, identifying the resolution and indicating agreement to it. Once submitted, agreement
cannot be revoked.
The resolution and accompanying documents must be sent to all members who are entitled to vote on the circulation
date of the resolution. The companys auditor should also receive such documentation (s502).
COMPANIES ACT 2006
RELATED LINKS
Companies Act 2006 (part 1)
The Companies (Model Articles) Regulations 2007
Relevant to Paper F4 (ENG) and (SCT)
This second article on the Companies Act 2006 (CA 2006) deals with the new provisions of the Act as they relate to
articles of association.
As was stated in the previous article (see 'Related links'), in future, a companys memorandum of association will be a
very simple document of purely historic significance, providing evidence of the intention to form a company.
Section 17 of the CA 2006 specifically states that references in the Act to a companys constitution include the
companys articles, resolutions, and agreements: it makes no mention of the memorandum of association. The
articles of association are consequently to be recognised as the main element of a companys constitution and, in
effect, they are the rules which govern a companys internal affairs and matters such as the allocation of powers
between the members of a company and its directors. Companies are free to make such rules about their internal
affairs as they think appropriate, subject to the proviso that any such rules must not contain anything that is either
contrary to the general law, or the specific provisions of the Act.
As before, the articles of association form a statutory contract between the company and its members, and between
each of them (now s33) and the previous common law will continue to be applied as appropriate.
Section 18 continues the requirement that all registered companies must have articles, and Section 19 gives the
Secretary of State the power to prescribe default model articles for the different types of company and these
regulations will apply to companies where they have not registered any articles of their own, or have not specifically
excluded the operation of the model article in question.
Under the previous legislation, the Secretary of State was only able to prescribe default model articles for companies
limited by shares; under the new provisions, private companies limited by guarantee will have the option of not
registering articles but relying on the model articles for their regulation. As before, the articles must be contained in a
single document and must be divided into consecutively numbered paragraphs (s18(3)).
ALTERATION OF ARTICLES
Section 21(1) restates previous provisions and permits a company to alter its articles by special resolution. The
common law rules relating to such alterations still apply.
ENTRENCHMENT OF ARTICLES
The previous legislation allowed companies to entrench certain elements of their constitution by putting them in their
memoranda and stating that they could not be altered. Section 22 of the CA 2006 replaces that practice, but allows its
effective continuation by permitting companies articles to provide that certain provisions may be amended or
repealed only if certain conditions are met, and that those conditions are more restrictive than would apply in the case
of a special resolution.
Such a provision, referred to as a provision for entrenchment, may only be made in the companys articles on
formation, or by an amendment of the companys articles agreed to by all members of the company. However, any
such provision for entrenchment does not prevent alteration of the companys articles by agreement of all members of
the company, or by order of a court or other authority which has power to alter the companys articles.
Nor, of course, does such a provision affect the power of a court to alter a companys articles. As a result of the above
provisions, companies will not be permitted to state, in their articles, that an entrenched provision can never be
repealed or amended.
Section 23 introduces a new requirement for a statement of compliance a notice of the existence of any
entrenchment to be made known to the companies registrar. Similarly, notice is also required if the company alters its
articles to remove a provision for entrenchment, or if the articles are altered by order of a court or other authority to
remove a provision for entrenchment or any other restriction on the power of the company to amend its articles.
The declared purpose of Sections 23 and 24 is to ensure that the registrar, and any person searching the public
register, is made aware of the articles that contain entrenching provisions and that special rules therefore apply to the
companys articles.
EFFECT OF ALTERATION OF ARTICLES ON A COMPANYS MEMBERS

Section 25 restates Section 16 of the 1985 Act, which maintained the principle that members of a company are not
bound by any alteration to the articles which require them to increase their liability to the company or to take more
shares in the company. A member may, however, give written consent to such an alteration and will subsequently be
bound by it.
If a company alters its articles, Section 26 states that a copy of the altered articles must be sent to the registrar not
later than 15 days after the alteration takes effect. Should a company fail to comply with this requirement, the
company (and every officer of the company who is in default) commits an offence. In addition, if the registrar becomes
aware of a failure to comply with Section 26 then, under Section 27, the registrar may give notice to the company
requiring it to rectify the breach within 28 days. If the company complies with the notice, it will avoid prosecution for its
initial failure to comply. However, if the company does not comply, it will be liable to a civil penalty of 200,
recoverable by the registrar as a debt, in addition to any criminal penalty that may be imposed.
EXISTING COMPANIES REGISTERED UNDER PREVIOUS LEGISLATION

Existing companies will continue to be subject to the version of the model articles in force when they were originally
registered, although the current model articles have been changed to reflect the changed provisions on resolutions,
meetings and electronic communications.
The Companies (Tables A to F) (Amendment) Regulations 2007 (SI 2007 No 2541) took effect from 1 October 2007,
and it is possible that further revisions may have to be made in April 2008 when other parts of the CA 2006 come into
effect. However, existing companies will be free to adopt, wholly or in part, the new model articles established under
the CA 2006 once they are confirmed.
Finally, the memoranda of existing companies will contain constitutional information which will, in future, be set out in
the articles. Section 28 provides that such material is to be treated, in the future, as part of the companys articles.
Also, where the memorandum of an existing company contains a provision for entrenchment, then Section 28 states
that the provision will be deemed to be in the companys articles.
DRAFT MODEL ARTICLES OF ASSOCIATION

Although the model articles have not as yet been introduced, the Government has issued Draft Model Articles for
Public Companies for consultation purposes see 'Related links' for a draft of the expected regulations.
The general structure of the regulations for public limited companies are set out below, and the structure of the
proposed regulations for other types of companies may be seen at the Department for Business Enterprise and
Regulatory Reform website.
Part 1, Article 1, simply sets out the definitions and interpretation to be applied in the articles. Part 2 deals with
directors. Articles 25 specifically deal with directors powers and responsibilities:
2 Directors general authority
3 Members reserve power
4 Directors may delegate
5 Committees.
Articles 618 relate to decision making by directors:
6 Directors to take decisions collectively
7 Calling a directors meeting
8 Participation in directors meetings
9 Quorum for directors meetings
10 Meetings where total number of directors is less than quorum
11 Chairing of directors meetings
12 Voting at directors meetings: general rules
13 Chairmans casting vote at directors meetings
14 Alternates voting at directors meetings
15 Conflicts of interest
16 Proposing directors written resolutions
17 Adoption of directors written resolutions
18 Directors discretion to make further rules.
Sections 1923 deal with the appointment of directors:
19 Methods of appointing directors
20 Retirement of directors by rotation
21 Termination of a directors appointment
22 Directors remuneration
23 Directors expenses.
Articles 2426 deal with alternate directors:
24 Appointment and removal of alternates
25 Rights and responsibilities of alternate directors
26 Termination of an alternate directorship.
Part 3 relates to decision making by members. Articles 2732 deal with the organisation of general meetings:
27 Members can call a general meeting if not enough directors
28 Attendance and speaking at general meetings

29 Quorum for general meetings
30 Chairing of general meetings
31 Attendance and speaking by directors and non-members
32 Adjournment.
Articles 3340 deal with voting at general meetings:
33 Voting: general
34 Errors and disputes
35 Demanding a poll
36 Procedure on a poll
37 Content of proxy notices
38 Delivery of proxy notices
39 Amendments to resolutions
40 No voting of shares on which money owed to company
41 Class meetings. Part 4 deals with shares and distributions.
Articles 4244 deal with the issue of shares:
42 Powers to issue different classes of share
43 Payment of commissions on subscription for shares
44 Company not bound by less than absolute interests.
Articles 4548 deal with share certificates:
45 Certificates to be issued except in certain cases
46 Contents and execution of share certificates
47 Consolidated share certificates
48 Replacement share certificates.
Articles 49 and 50 deal with shares not held in certificated form:
49 Uncertificated shares
50 Share warrants.
Articles 5161 deal with partly paid shares:
51 Companys lien over partly paid shares
52 Enforcement of the companys lien
53 Call notices
54 Liability to pay calls
55 When call notices need not be issued
56 Failure to comply with call notices: automatic consequences
57 Notice of intended forfeiture
58 Directors power to forfeit shares
59 Effect of forfeiture
60 Procedure following forfeiture
61 Surrender of shares.
Articles 6268 deal with the transfer and transmission of shares:
62 Transfer of certificated shares
63 Transfer of uncertificated shares
64 Transmission of shares
65 Transmittees rights
66 Exercise of transmittees rights

67 Transmittees bound by prior notices
68 Procedure for disposing of fractions of shares.
Articles 6976 deal with distributions:
69 Procedure for declaring dividends
70 Calculation of dividends
71 Payment of dividends and other distributions
72 Deductions from distributions in respect of sums owed to the company
73 No interest on distributions
74 Unclaimed distributions
75 Non-cash distributions
76 Waiver of distributions.
Article 77 deals with the authority to capitalise and appropriation of capitalised sums. Part 5 deals with miscellaneous
provisions.
Articles 7880 deal with communications:
78 Means of communication to be used
79 Addresses and other contact details
80 Failure to notify contact details.
Articles 8184 deal with administrative arrangements:
81 Company seals
82 Destruction of documents
83 No right to inspect accounts and other records
84 Provision for employees on cessation of business.
Articles 85 and 86 deal with directors indemnity and insurance:
85 Indemnity
86 Insurance.
COMPANY DIRECTORS DISQUALIFICATION ACT

1986
RELATED LINKS
by David Kelly
04 Feb 2005
This article examines the way in which the law tries to prevent unsuitable individuals from acting as company
directors. Such an individual can be disqualified from acting as a director for up to 15 years under the Company
Directors Disqualification Act 1986 (CDDA).
The Act was introduced in an attempt to prevent the misuse of the company form. One of its specific aims was the
control of the 'phoenix company'. This is a company set up by a director of a very similar company which ceased
trading due to extensive debts. The new company carries on essentially the same business, but with no liability to the
creditors of the former company. Such behaviour is reprehensible and is clearly an abuse of limited liability. The
CDDA1986 seeks to remedy this practice by preventing certain individuals from acting as company director, but the
ambit of the Act's control is much wider than this one instance.
Categories of conduct
The CDDA1986 identifies three distinct categories of conduct which may, and in some circumstances must, lead the
court to disqualify certain persons from being involved in the management of companies. These are:
a. General misconduct in connection with companies
Misconduct is defined as:
- a conviction for an indictable offence in connection with the promotion, formation, management or liquidation of a
company or with the receivership or management of a company's property (S2 of the CDDA1986). The maximum
period for disqualification under S2 is five years where the order is made by a court of summary jurisdiction, and 15
years in any other case.
- persistent breaches of companies legislation in relation to provisions which require any return, account or other
document to be filed with, or notice of any matter to be given to, the registrar (S3 of the CDDA1986). Section 3
provides that a person is conclusively proved to be persistently in default where it is shown that, in the five years
ending with the date of the application, he has been adjudged guilty of three or more defaults (S3(2) of the
CDDA1986). This is without prejudice to proof of persistent default in any other manner. The maximum period of
disqualification under this section is five years.
- fraud in connection with winding up (S4 of the CDDA1986). A court may make a disqualification order if, in the
course of the winding up of a company, it appears that a person:
- has been guilty of an offence for which he is liable under S458 of the Companies Act 1985, that is, that he has
knowingly been a party to the carrying on of the business of the company either with the intention of defrauding the
company's creditors or any other person or for any other fraudulent purpose
- has otherwise been guilty, while an officer or liquidator of the company or receiver or manager of the property of
the company, of any fraud in relation to the company or of any breach of his duty as such officer, liquidator, receiver or
manager (S4(1)(b) of the CDDA1986). The maximum period of disqualification under this category is 15 years.
b. Disqualification for unfitness
This covers:
- disqualification of directors of companies which have become insolvent, who are found by the court to be unfit to be
directors (S6 of the CDDA1986). Under S6, the minimum period of disqualification is two years, up to a maximum of
15 years
- disqualification after investigation of a company under Pt XIV of the CA1985 (S8 of the CDDA1986).
A disqualification order may be made as the result of an investigation of a company under the companies legislation.
Under S8 of the CDDA1986, the Secretary of State may apply to the court for a disqualification order to be made
against a person who has been a director or shadow director of any company, if it appears from a report made by an
inspector under S437 of the CA or Ss94 or 177 of the Financial Services Act 1986 that 'it is expedient in the public
interest' that such a disqualification order should be made. Once again, the maximum period of disqualification is 15
years.
The CDDA1986 sets out certain particulars to which the court is to have regard where it has to determine whether a
person's conduct as a director makes them unfit to be concerned in the management of a company (S9). The detailed
list of matters to be considered is set out in Schedule 1 to the Act.
In addition, the courts have given indications as to what sort of behaviour will render a person liable to be considered
unfit to act as a company director. Thus, in Re Lo-Line Electric Motors Ltd (1988), it was stated that: 'Ordinary
commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct
complained of must display a lack of commercial probity, although... in an extreme case of gross negligence or total
incompetence, disqualification could be appropriate.'
A 'lack of commercial probity', therefore, will certainly render a director unfit, but, as Vinelott J stated in Re Stanford
Services Ltd (1987): '...the public is entitled to be protected, not only against the activities of those guilty of the more
obvious breaches of commercial morality, but also against someone who has shown in his conduct of a company a
failure to appreciate or observe the duties attendant on the privilege of conducting business with the protection of
limited liability.'
Consequently, even where there is no dishonesty, incompetence may render a director unfit. Thus, in Re Sevenoaks
Stationers Ltd (1990), the Court of Appeal held that the director was unfit to be concerned in the management of a
company on the basis that: 'His trouble is not dishonesty, but incompetence or negligence in a very marked degree,
and that is enough to render him unfit; I do not think it is necessary for incompetence to be "total" to render a director
unfit to take part in the management of a company.'
c. Other cases for disqualification
This relates to:
- participation in fraudulent or wrongful trading under S213 of the Insolvency Act 1986 (S10 of the CDDA1986)
- undischarged bankrupts acting as directors (S11 of the CDDA1986)
- failure to pay under a county court administration order (S12 of the CDDA1986).
Disqualification orders
For the purposes of most of the CDDA1986, the court has a discretion to make a disqualification order. Where,
however, a person has been found to be an unfit director of an insolvent company, the court has a duty to make a
disqualification order (S6 of the CDDA1986).
The precise nature of any such order is set out in S1, under which the court may make an order preventing any
person (without leave of the court) from being:
a director of a company
a liquidator or administrator of a company
a receiver or manager of a company's property

in any way, whether directly or indirectly, concerned with or
taking part in the promotion, formation or management of a company.
However, a disqualification order may be made:

i. with leave to continue to act as a director for a short period of time, in order to enable the disqualified director to
arrange his business affairs (Re Ipcon Fashions Ltd (1989))
ii. with leave to continue as a director of a named company, subject to conditions (Re Lo-Line Electric Motors Ltd
(1988))
iii. with leave to act in some other managerial capacity but not as director (Re Cargo Agency Ltd (1992)).
Period of disqualification
With regard to the period of disqualification, in Re Sevenoaks Stationers (Retail) Ltd (1990), Dillon LJ in the Court of
Appeal divided the potential maximum 15 year period of disqualification into three distinct brackets:
i. over 10 years for particularly serious cases (for example, where a director has been disqualified previously)
ii. two to five years for 'relatively not very serious' cases
iii. a middle bracket of between six and 10 years for serious cases not meriting the top bracket.
Penalty for breach of a disqualification order
Anyone who acts in contravention of a disqualification order is liable for either:
i. imprisonment for up to two years and/or a fine, on conviction on indictment

ii. imprisonment for up to six months and/or a fine not exceeding the statutory maximum, on conviction summarily
(S13 of the CDDA1986).
Under S14 where a company is guilty of an offence under S13, then any person who consented or contributed to its
so doing will also be guilty of an offence. In addition S15 imposes personal liability for company debts arising during a
period when a person acts as a director while disqualified, either under an order or while personally bankrupt. The
Secretary of State is required to maintain a register of disqualification orders which is open to public inspection (S18).
Re Uno, Secretary of State for Trade and Industry V Gill
The operation of the CDDA1986 was considered extensively in Re Uno, Secretary of State for Trade and Industry v
Gill (2004). This case related to a group of two furniture companies which, although in severe financial difficulties,
continued to trade while the directors investigated possible ways of saving the businesses. During this period one of
the companies, Uno, continued to raise its working capital from deposits taken from customers to secure orders that
were never to be met, as the company eventually went into liquidation.
Although the directors were advised that they could have safeguarded the deposits by placing the money in a trust
account for the customers, they decided not to do so, as they needed the money to keep the business going in the
short term. An application from the Department of Trade and Industry for the disqualification of the directors on the
basis of this behaviour was unsuccessful. In refusing the application, the court emphasised the fact that in order to
justify disqualification there had to be behaviour that was either dishonest, or lacking in commercial probity. Moreover,
that behaviour had to be such as to make the person concerned unfit to be involved in the management of a
company. Under the circumstances of the case the court found that the directors had pursued realistic opportunities to
save the businesses and consequently were blameless for the eventual failure of the businesses and the loss to the
customers.
David Kelly is examiner for Paper F4
UNFAIR PREFERENCE BY COMPANIES
RELATED LINKS
by Dr Low Kee Yang
30 Apr 2003
Directors have to choose which creditors to pay and which to stall as requests, or in the case of more aggressive
creditors demands, are made on a company. At times, the considerations that come into play in the decision-making
process may be less than proper. For example, the managing director, in arriving at a decision to pay, may have been
motivated by the fact that a creditor is a very close personal friend. The law frowns upon such conduct, known as
unfair preference.
The subject of unfair preference by insolvent companies under Singapore law is complex and abstruse. There are two
reasons for this. The legal position can only be ascertained by the careful reading and juxtaposing of three different
pieces of legislation: the Companies Act (s.329); the Bankruptcy Act (s.99 to s.102) and the Companies (Application
of Bankruptcy Act Provisions) Regulations (the Regulations). The definition of persons who might be considered as
being connected with the company is broad and intricate.
The aim of this article is to guide readers through the labyrinth of provisions and provide a good overview of the law in
this area.
Interplay of legislative provisions
The starting point is s.329 of the Companies Act. This section provides that any payment, transfer of property or other
act relating to property which would be void or voidable, as against an individual under, inter alia, s.99 of the
Bankruptcy Act, is void or voidable in the same manner in the winding-up of a company. Section 99 deals with unfair
preference. Section 329 therefore borrows a provision from the Bankruptcy Act to deal with unfair preference by an
insolvent company.
Section 99 and s.100 of the Bankruptcy Act state the key elements of unfair preference, while s.101 details definitions
of who may be regarded as associates of an individual. Section 102 deals with the orders that a court may make.
The purpose of the Regulations is to clarify how the Bankruptcy Act provisions apply to companies by:
giving the general guideline that Bankruptcy Act provisions apply to companies with the necessary textual
modifications
providing additional definitions of certain terms
laying down additional legal rules.
The key aspects and issues of unfair preference by a company in the context of the three pieces of legislation are as
follows.
The proscribed conduct
The general principle here is that if a company being wound up has given unfair preference to any person, the
liquidator of the company may apply to the court for an order to restore the position (s.99(1) Bankruptcy Act). The
following scenarios illustrate unfair preference:
1.
The company does something, the act, which has the effect of putting the creditor in a better position in the
event of the winding-up of the company.
2.
The decision to do the act was influenced by the companys desire to put that creditor in the better position.
3.
The company was insolvent at the time of, or as a result of, the act.
4.
The act was done within six months before the commencement of the winding-up of the company or, if done
in relation to a person connected with the company, within two years.
Better position
Unfair preference is described as doing something that puts a creditor in a better position in the event of the
companys winding-up. The implication is clear. The creditor need not prove they have been paid earlier in the
subsequent winding-up, avoiding the prospect of receiving little or no payment. This is a common experience in a
winding-up, since there is usually little money left after the statutorily preferred creditors (s.328 Companies Act) are
paid.
The provision also requires culpability on the part of the company in that the act must be motivated to some degree by
an intention to give preference. The exact words used are influenced by a desire to produce the effect (s.99(4)).
This is a significant shift from the previous provision1 which used the words with a view to giving a preference.
Case law had interpreted with a view to mean with the intention or object, and that such intention should have been
the principal or dominant intention2. The current requirement influenced by the desire is a much lower threshold than
dominant intention. The test appears to be whether the act (e.g. payment) was influenced by the desire to prefer or
whether it was decided on a purely commercial basis.
Insolvency
It is clear from s.100(2) that the desire to prefer and the effect of giving preference are insufficient to constitute the
conduct which the provisions seek to proscribe. Additionally, the company must be insolvent at the time of the act or
as a consequence. Insolvency is defined as either the inability to pay debts as they fall due or a situation where the
amount of the liabilities (including contingent and prospective liabilities) exceeds the value of the assets: s.100(4).
Unfair preference by a company, therefore, occurs when the company does an act with the desire and the effect of
giving preference to a creditor, and the act was done while the company was insolvent or the act resulted in the
company being insolvent.
Catchment period
The provisions set out two different catchment periods six months and two years respectively, from the
commencement of winding-up. The shorter period is for creditors in general while the longer period is for creditors
who are connected with the company (s.100(1)(b), read with Regulation 4). The rationale for a longer, thus earlier,
period is probably that preference usually begins with those creditors who are closer to the company before moving to
other creditors.
Connected persons
Section 101 is complex. It deals with the relationships between the bankrupt individual and those whom the law
deems are close to him and therefore likely to be favoured by him. The term used is associates. The long list of
persons who are considered associates of a bankrupt includes the following:
spouse, including former spouse
relatives, which comprise: siblings; uncles and aunts; nephews and nieces; lineal ancestors (presumably, it
means parents, grandparents and other ancestors of direct lineage) lineal descendants (children, grandchildren
and other direct descendants)
partner in a partnership
employer
employee
director or other officer in the company where he is employed
trustee of a trust in which he is a beneficiary and
company of which the bankrupt, or the bankrupt and his associates, had control of.
Two qualifications are used to ascertain relationships, half-blood relationships are included, and so are step-children,
adopted children and illegitimate children: s.101(7). As for companies, a bankrupt is taken to have had control of a
company if the directors of a company (or of another company having control of it) are accustomed to act in
accordance with his directions or instructions; or if the bankrupt had one-third or more of the voting power of the
company (or of another company having control of it): s.101(9). In this regard, control is therefore either at board level
or shareholder level.
However, in applying the unfair preference provisions to companies, Regulation 4 states that references to an
associate of an individual should be read as a reference to a person connected with a company, except in s.101.
Regulation 2 provides its own definition of a person connected with a company, namely:
a director
a shadow director (s.149(8) of the Companies Act)
an associate (s.101 Bankruptcy Act, as modified by Regulation 5) of a director or shadow director

and
an associate of the company (Regulation 5).
Firstly, the definitions of associate in s.101, which are outlined above, are relevant to unfair preference by
companies. A preference given to a relative of a director, for example, would amount to a preference to a person
connected with a company.
Secondly, Regulation 5 introduces another category of associates an associate of a company. Regulation 5
provides that a company shall be an associate of another company if:
the same person controls both companies
a person controls one company and his associates, or he and his associates, control the other company
or
a group of persons or their associates control both companies.
An associate of a company is therefore a company which is connected by the element of common control.
Viewed as a whole, the picture which now emerges is an elaborate labyrinth of relationships and connections.
Depending on the relationship of the particular creditor with the company or its directors, the ascertainment of
whether the transaction is caught by the provisions can be a Herculean task. The principle of the matter, however, is
simple enough. A company should not give preference to individuals connected to its directors; neither should it give
preference to a company connected to it by reason of being controlled by the same person(s).
Presumed influence
The longer period of catchment for persons connected with the company are outlined above. There is another legal
implication where the creditor is connected with the company. Section 99(4) (read with Regulation 4) provides that
where a company has given a preference to a creditor connected with the company, the company shall be presumed,
unless the contrary is shown, to have been influenced by the desire to prefer. This effectively reverses the burden of
proof instead of the liquidator having to show influence, the burden now rests on the connected person to show that
there was no influence. In practical terms, the difference is very significant.
Conclusion
The provisions surrounding unfair preference by companies can be confusing. However, upon careful reading and
analysis, one can arrive at a clear framework of rules on the subject.
Basically, s.329 of the Companies Act borrows from s.99 to s.102 of the Bankruptcy Act while the Regulations
elaborate on how the bankruptcy sections are to be modified to suit companies; a roundabout process which is less
than ideal. Central to this modification is the use of the term person connected with the company in place of the term
associate. The objective is to spell out situations where a creditor company is regarded as being an associate of a
company. Yet, at the same time, the s.101 definitions of associates of an individual are retained through the inclusion
of the associates of directors in Regulation 2s definition of person connected with a company.
The essence of unfair preference is putting a creditor in a better position, financially, in the event the company is
wound-up. A key element of the current provisions is that the company is influenced by the desire to put the creditor
in a better position. Of critical significance is the fact that where the preference is to a connected person, the influence
is presumed and the catchment period is longer. Another important element is that the company was insolvent when
making the preference or as a result of making the preference.
References
1.
Section 53 of the old Bankruptcy Act (Cap20).
2.
See e.g. Ho Mun-Tuke Don v. Oslo Finans [1990] 3 MLJ 84 and Lin Securities v. Royal Trust Merchant Bank
(Asia) [1995] 1 SLR 97.
Dr Low Kee Yang is Examiner for Paper 2.2 (SGP)

Key Aspects of The Law of Contract and The Tort of Negligence

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Key Aspects of The Law of Contract and The Tort of Negligence

Transféré par

Droits d'auteur :

Formats disponibles

KEY ASPECTS OF THE LAW OF CONTRACT AND

THE TORT OF NEGLIGENCE

they are both areas of civil law

The relationship between the parties

The nature of the obligation

Causation and remoteness of damage

The measure of damages.

KEY ASPECTS OF THE LAW OF CONTRACT

Contract causation and remoteness of damage

either a normal result of the breach, or

KEY ASPECTS OF THE TORT OF NEGLIGENCE

the harm must be reasonably foreseeable

there must be proximity between the claimant and the defendant

JEB Fasteners Ltd v Marks, Bloom & Co (1982)

Morgan Crucible v Hill Samuel Bank Ltd (1991)

James McNaghten Paper Group Ltd v Hicks Anderson & Co (1991)

ADT v BDO Binder Hamlyn (1995)

NRG v Bacon & Woodrow and Ernst & Young (1996)

The relationship is created and

The defendant must act

If the loss is a normal result of

The aim is to compensate the

The aim is to compensate

Damages may be reduced by the

Damages may be reduced

Written by a member of the Paper F4 examining team

ICC INTRODUCES NEW INTERNATIONAL

SALE OF GOODS IN TRANSIT

TERMINAL HANDLING CHARGES

BRIBERY ACT 2010

THE SIX PRINCIPLES

PLEDGE RECENT CHANGES IN RUSSIAN

AND OTHER RELATED ASPECTS OF RELATED CORPORATE LAW

Relevant to Paper F4 (RUS)

EXECUTION BY COURT DECISION

If the pledger is absent and is impossible to locate.

SALE OF PLEDGED PROPERTY

those properties, the sale of which is prohibited by law

residential premises, pre-school institutions and public facilities.

Leased property or property in the safe keeping of the debtor.

reimbursement of court expenses and arbitrage managers fees.

SPANDECK ENGINEERING V DEFENCE SCIENCE AND TECHNOLOGY AGENCY

the defendant owes the claimant a duty of care

the defendants breach has caused the claimant damage

THE LAW OF NEGLIGENCE PRE-SPANDECK

THE EFFECT OF SPANDECK ON THE LAW OF NEGLIGENCE

circumstantial proximity such as an overriding relationship of employer and employee, or of a professional

THE DECISION ON THE FACTS

construction of a 12-lane ten-pin bowling alley

construction of a 60-seat cinema.

HOW TO ANSWER THIS QUESTION

a knowledge of the law

an ability to apply the law.

Each of these will be illustrated below.

LEARNING LEGAL KNOWLEDGE

APPLYING LEGAL KNOWLEDGE HOW TO ANSWER A QUESTION

damages are an automatic common law right following breach of contract

damages are compensatory in nature

THE SUPREME COURT

THE SEPARATION OF POWERS

THE TORT OF NEGLIGENCE

the defendant owed them a duty of care

the defendant breached that duty of care, and