20694988 CIMA Study Systems 2006 Business Law

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CIMA’S Ofﬁcial Study System

Revised edition relevant for 2005/2006

Computer based assessment

Certiﬁcate Level

Business Law

David Sagar

Larry Mead

AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO

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CIMA Publishing An imprint of Elsevier

Linacre House, Jordan Hill, Oxford OX2 8DP 30 Corporate Drive, Burlington MA 01803 First published 2005

No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holder’s written

permission to reproduce any part of this publication should be addressed to the publisher

Permissions may be sought directly from Elsevier’s Science and

Technology Rights Department in Oxford, UK: phone: (⫹44) (0) 1865 843830; fax: (⫹44) (0) 1865 853333; e-mail: [email protected]. You may also complete your request on-line via the Elsevier homepage

(http://www.elsevier.com), by selecting ‘Customer Support’ and then ‘Obtaining Permissions’

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library ISBN 0 7506 6707 9

Typeset by Newgen Imaging Systems (P) Ltd, Chennai, India Printed in Great Britain

For information on all CIMA publications visit our website at www.cimapublishing.com

Important Note

A new edition of the CIMA Official Terminology is due to be published in September 2005. As this is past the publication date of this Study System the page reference numbers for ‘Management Accounting Official Terminology’ contained in this Study System are for the 2000 edition. You should ensure that you are familiar with the 2005 CIMA Official Terminology (ISBN 0 7506 6827 X) once published, available from www.cimapublishing.com

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The CIMA Study System

ix

Acknowledgements ix

How to use your CIMA Study System ix

Guide to the Icons used within this Text x

Study Technique xi

The Business Law syllabus xiii

Learning outcomes and syllabus content xiv

1 The English Legal System

1

Learning Outcomes 1

1.1 Law: criminal and civil 1

1.2 The sources of English law 2

1.2.1 Custom/common law 3

1.2.2 Equity 3

1.2.3 Legislation 3

1.2.4 European Union law 4

1.2.5 Other sources 5

1.3 Judicial precedent and the tort of negligence 5

1.3.1 Judicial precedent 6

1.3.2 The tort of negligence 7

1.3.3 Duty to take care 8

1.3.4 Breach of duty 9

1.3.5 Damage caused by negligence 10

1.3.6 Contributory negligence 10

1.4 Negligence and professional advisers 11

1.5 Summary 12

Readings 13

Revision Questions 31

Solutions to Revision Questions 35

2 Establishing Contractual Obligations

37

Learning Outcomes 37

2.1 Contractual obligations 37

2.1.1 The essential elements of a valid simple contract 37

2.1.2 Form 38

2.1.3 Transactions where a deed is required 38

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2.2 Agreement 39

2.2.1 Offer 39

2.2.2 Acceptance 41

2.3 Consideration 42

2.4 Intention that the agreement should be legally binding 45

2.5 Misrepresentation 46

2.6 Summary 48

Readings 49

3 Performing the Contract

71

3.1 The contents of the contract – the agreement and

incorporation of terms 71

3.1.1 Express terms 72

3.1.2 Implied terms 72

3.2 The status of contractual terms 75

3.2.1 The repercussions of a breach of contract 76

3.2.2 Conditions 76

3.2.3 Warranties 76

3.2.4 How to determine the status of contractual terms 77

3.3 Unfair contract terms 78

3.3.1 Exemption clauses and the courts 78

3.3.2 The Unfair Contract Terms Act 1977 79

3.3.3 Other Acts which restrict unfair terms 80

3.3.4 The Unfair Terms in Consumer Contracts Regulations 1994 80 3.4 Performance of the contract and reasons for non-performance 81

3.4.1 Performance 81

3.4.2 Valid reasons for non-performance 83

3.5 Summary 85

Readings 87

4 Contractual Breakdown

101

4.1 Types of breach 101

4.2 Remedies for breach of contract 102

4.2.1 Discharge for breach 102

4.2.2 Other non-monetary remedies 104

4.2.3 Remedies in sale of goods contracts 104

4.2.4 Requiring payment of the price 105

4.2.5 Damages for breach 105

4.2.6 Limitation of actions 108 4.3 Summary 109 BUSINESS LAW C5 iv CONTENTS 2005.1

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Readings 111

5 The Law of Employment

123

5.1 The employment relationship 123

5.1.1 Employees and contractors 124

5.2 The terms of employment 125

5.2.1 Wages 125

5.2.2 Other duties of employers 126

5.2.3 Statutory rights of employees 127

5.2.4 Implied duties of employees 129

5.3 Occupational safety 130

5.3.1 Legislative controls 130

5.3.2 Civil liability for occupational injuries 131

5.3.3 Social security compensation 132

5.4 Notice and dismissal 132

5.4.1 Termination by notice 133

5.4.2 Summary dismissal and wrongful dismissal 133

5.4.3 Unfair dismissal 134

5.4.4 Which remedy? 136

5.5 Summary 137

Readings 139

6 Company Formation

163

6.1 Introduction 163

6.1.1 Individual traders/practitioners 163

6.1.2 Partnerships (and some comparisons with

companies) 165

6.1.3 The limited liability partnerships Act 2000 168

6.2 Corporations 169

6.2.1 The concept of incorporation 169

6.2.2 Some features of corporate personality 169

6.2.3 Companies: different types 171

6.2.4 ‘Lifting the veil’ of incorporation 174

6.3 Company registration 177

6.3.1 Promoters 177

6.3.2 Registration 177

6.3.3 ‘Off-the-shelf ’ companies 181

6.3.4 The company’s ‘constitution’ 182

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6.4 Corporate capacity to contract 184

6.4.1 Pre-incorporation contracts 184

6.4.2 The ultra vires doctrine: the company’s

capacity 185

6.4.3 Changing the objects 186

6.5 Advantages and disadvantages of companies limited by shares 187

6.5.1 Advantages 187

6.5.2 Disadvantages 188

6.5.3 Other features of companies 188

6.6 Summary 189

Readings 191

7 Corporate Administration

221 Learning Outcomes 221 7.1 Introduction 221 7.2 Board meetings 222 7.3 Meetings of members 223 7.3.1 Types of meeting 223 7.3.2 Resolutions 224 7.3.3 Calling a meeting 226 7.3.4 Conduct of meetings 227

7.3.5 Minutes and registration 228

7.4 Shareholders’ rights and duties 228

7.5 Summary 229

Readings 231

8 Corporate Finance

239

8.1 Shares and share capital 239

8.1.1 The nature of shares 239

8.1.2 Terminology: meaning of ‘share capital’ 240

8.1.3 Types of share 240

8.2 Issuing shares 242

8.2.1 Authority to issue shares 243

8.2.2 Finding buyers 244

8.2.3 Factors to take into account when issuing shares 247

8.2.4 Payment for and value of shares 247

8.2.5 The issue of shares for an improper purpose 248

8.3 Variation and maintenance of share capital 249

8.3.1 Variation 249 8.3.2 Maintenance of capital 249 BUSINESS LAW C5 vi CONTENTS 2005.1

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8.3.3 A company acquiring its own shares 250

8.3.4 The reduction of capital – CA 1985, s.135 253

8.3.5 Provision by a company of ﬁnancial assistance for the

purchase of its own shares 253

8.3.6 A company holding its own shares 254

8.4 Loan capital 254 8.4.1 Whether to borrow 255 8.4.2 Power to borrow 255 8.4.3 Debentures 255 8.4.4 Registration of charges 259 8.4.5 Priority of charges 261

8.4.6 Debentures and debenture stock 261

8.4.7 Rights of debenture holders on default by the company 262

8.4.8 Shares and debentures compared 263

8.5 Summary 264

Readings 265

9 Corporate Management

277 Learning Outcomes 277 9.1 Directors 277 9.1.1 General requirement 277 9.1.2 Appointment 278 9.1.3 Retirement 279 9.1.4 Disqualiﬁcation of directors 280 9.1.5 Removal 281

9.1.6 Registers and information concerning directors 282

9.2 Powers and duties of directors 283

9.2.1 Powers of directors 283

9.2.2 Limits and controls over the powers of directors 283

9.2.3 Duties of directors to the company 284

9.2.4 Directors and employees 286

9.2.5 Liability of directors to the company’s creditors 286

9.2.6 Liability of directors to shareholders 288

9.2.7 Division of powers between directors and shareholders 289 9.2.8 Duty of the board to report to a general meeting 289

9.2.9 Exemption clauses for directors 290

9.3 Protection of minority shareholders 290

9.3.1 Majority rule 290

9.3.2 ‘Derivative’ actions 290

9.3.3 Wrongs to members personally 291

9.3.4 Unfairly prejudicial conduct: Companies Act 1985, s.459 292 9.3.5 Winding up on the just and equitable ground:

Insolvency Act 1986, s.122(g) 292

9.3.6 Other statutory rights and remedies 293

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9.4 The company secretary 293

9.4.1 Appointment 293

9.4.2 Register of directors 293

9.4.3 Qualiﬁcations 293

9.4.4 Functions and status 294

9.4.5 Removal 294

9.5 Summary 294

Readings 295

Preparing for the Assessment

321

Revision technique 321

Planning 321

Getting down to work 321

Tips for the ﬁnal revision phase 322

Format of the assessment 322

Structure of the paper 322

Allocation of time 322

Weighting of subjects 323

Mock Assessment 1

355

Mock Assessment 2

367

Table of Cases

379

Table of Statutes

383

Index

385 BUSINESS LAW C5 viii CONTENTS 2005.1

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Acknowledgements

Every effort has been made to contact the holders of copyright material, but if any here have been inadvertently overlooked the publishers will be pleased to make the necessary arrangements at the ﬁrst opportunity.

How to use your CIMA Study System

This Business Law Study System has been devised as a resource for students attempting to pass their CIMA computer-based assessment, and provides:

● A detailed explanation of all syllabus areas;

● extensive ‘practical’ materials, including readings from relevant journals; ● generous question practice, together with full solutions;

● an exam preparation section, complete with exam standard questions and solutions.

This Study System has been designed with the needs of home-study and distance-learning candidates in mind. Such students require very full coverage of the syllabus topics, and also the facility to undertake extensive question practice. However, the Study System is also ideal for fully taught courses.

The main body of the text is divided into a number of chapters, each of which is organ-ised on the following pattern:

● Detailed learning outcomes expected after your studies of the chapter are complete. You

should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading.

● Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory

text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you may strug-gle to understand later chapters.

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● Readings and activities. Some chapters are illustrated by more practical elements, such as

rel-evant journal articles or other readings, together with comments and questions designed to stimulate discussion.

● Question practice. The test of how well you have learned the material is your ability to tackle

exam-standard questions. Make a serious attempt at producing your own answers, but at this stage do not be too concerned about attempting the questions in exam conditions. In particular, it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would apply in the actual assessment.

● Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to

think that this provides the same beneﬁts as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, and then make your own attempt before referring back to the full solution.

Having worked through the chapters you are ready to begin your ﬁnal preparations for the examination. The ﬁnal section of this CIMA Study System provides you with the guidance you need. It includes the following features:

● A brief guide to revision technique.

● A note on the format of the assessment. You should know what to expect when you

tackle the real exam, and in particular the number of questions to attempt, which ques-tions are compulsory and which optional, and so on.

● Guidance on how to tackle the assessment itself.

● A table mapping revision questions to the syllabus learning outcomes allowing you to

quickly identify questions by subject area.

● Revision questions. These are of exam standard and should be tackled in exam

condi-tions, especially as regards the time allocation.

● Solutions to the revision questions. As before, these indicate the length and the quality of

solution that would be expected of a well-prepared candidate.

If you work conscientiously through this CIMA Study System according to the guidelines above you will be giving yourself an excellent chance of exam success. Good luck with your studies!

Guide to the Icons used within this Text

Key term or deﬁnition Equation to learn

Exam tip to topic likely to appear in the exam Exercise Question Solution Comment or Note BUSINESS LAW C5 x THE CIMA STUDY SYSTEM 2005.1

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Study technique

Passing exams is partly a matter of intellectual ability, but however accomplished you are in that respect you can improve your chances significantly by the use of appropriate study and revision techniques. In this section we briefly outline some tips for effective study during the earlier stages of your approach to the exam. Later in the text we mention some tech-niques that you will find useful at the revision stage.

Planning

To begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject that you face. Remember that you need to allow time for revision as well as for initial study of the material. The amount of notional study time for any subject is the minimum estimated time that students will need to achieve the speciﬁed learning outcomes set out earlier in this chapter. This time includes all appropriate learning activities, for example, face-to-face tuition, private study, directed home study, learning in the workplace, revision time, etc. You may ﬁnd it helpful to read Better exam results by Sam Malone, CIMA Publishing, ISBN: 078066357X. This book will provide you with proven study techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques.

The notional study time for Certiﬁcate level Business Law is 130 hours. Note that

the standard amount of notional learning hours attributed to one full-time academic year of approximately 30 weeks is 1,200 hours.

By way of example, the notional study time might be made up as follows:

xi BUSINESS LAW THE CIMA STUDY SYSTEM Hours Face-to-face study: up to 40 Personal study: up to 65

‘Other’ study – e.g. learning in the workplace, revision, etc.: up to 25 130

Note that all study and learning-time recommendations should be used only as a guideline and are intended as minimum amounts. The amount of time recommended for face-to-face tuition, personal study and/or additional learning will vary according to the type of course undertaken, prior learning of the student, and the pace at which different students learn.

Now split your total time requirement over the weeks between now and the assessment. This will give you an idea of how much time you need to devote to study each week. Remember to allow for holidays or other periods during which you will not be able to study (e.g. because of seasonal workloads).

With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote to revision and ﬁnal question practice.

Prepare a written schedule summarising the above – and stick to it!

The amount of space allocated to a topic in the study material is not a very good guide as to how long it will take you. For example, ‘Summarising and Analysing Data’ has a weight of 25 per cent in the syllabus and this is the best guide as to how long you should spend on

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it. It occupies 45 per cent of the main body of the text because it includes many tables and charts.

It is essential to know your syllabus. As your course progresses you will become more familiar with how long it takes to cover topics in sufﬁcient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus.

Tips for effective studying

1. Aim to ﬁnd a quiet and undisturbed location for your study, and plan as far as possible to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to min-imise interruptions.

2. Store all your materials in one place, so that you do not waste time searching for items around the house. If you have to pack everything away after each study period, keep them in a box, or even a suitcase, which will not be disturbed until the next time. 3. Limit distractions. To make the most effective use of your study periods you should be

able to apply total concentration, so turn off the TV, set your phones to message mode, and put up your ‘do not disturb’ sign.

4. Your timetable will tell you which topic to study. However, before diving in and becom-ing engrossed in the ﬁner points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your books. With experience, you will learn to assess the pace you need to work at. You should also allow enough time to read relevant articles from newspapers and journals, which will supplement your knowledge and demonstrate a wider perspective.

5. Work carefully through a chapter, making notes as you go. When you have covered a suitable amount of material, vary the pattern by attempting a practice question. Preparing an answer plan is a good habit to get into, while you are both studying and revising, and also in the examination room. It helps to impose a structure on your solu-tions, and avoids rambling. When you have ﬁnished your attempt, make notes of any mistakes you made, or any areas that you failed to cover or covered only skimpily. 6. Make notes as you study, and discover the techniques that work best for you. Your notes

may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’, or the writ-ten word, but remember that you will need to refer back to them at a later date, so they must be intelligible. If you are on a taught course, make sure you highlight any issues you would like to follow up with your lecturer.

7. Organise your paperwork. There are now numerous paper storage systems available to ensure that all your notes, calculations and articles can be effectively ﬁled and easily retrieved later.

Computer-based assessment

CIMA has introduced computer-based assessment (CBA) for all subjects at Certiﬁcate level. The website says

Objective questions are used. The most common type is “multiple choice”, where you have to choose the correct answer from a list of possible answers, but there are a variety of other objective question types that can be used within the system. These include true/false questions, matching pairs of text and graphic, sequencing and ranking, labelling diagrams and single and multiple numeric entry.

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Candidates answer the questions by either pointing and clicking the mouse, moving objects around the screen, typing numbers, or a combination of these responses. Try the online demo at http://www. cimaglobal.com to see how the technology works.

The CBA system can ensure that a wide range of the syllabus is assessed, as a pre-determined number of questions from each syllabus area (dependent upon the syllabus weighting for that particular area) are selected in each assessment.

In every chapter of this study system we have introduced these types of questions but obviously we have to label answers A, B, C etc. rather than using click boxes. For conven-ience we have retained quite a lot of questions where an initial scenario leads to a number of sub-questions. There will be questions of this type in the CBA but they will rarely have more than three sub-questions. In all such cases examiners will ensure that the answer to one part does not hinge upon a prior answer.

There are two types of questions which were previously involved in objective testing in paper-based exams and which are not at present possible in a CBA. The actual drawing of graphs and charts is not yet possible. Equally there will be no questions calling for com-ments to be written by students. Charts and interpretations remain on many syllabi and will be examined at Certiﬁcate level but using other methods.

For further CBA practice, CIMA Publishing has produced CIMA Inter@ctive CD-ROMs for all certiﬁcate level subjects. These products use the same software as found in the real Computer-based assessment and are available at www.cimapublishing.com.

Business Law and computer-based assessment

The examination for Business Law is a 60-minute computer-based assessment comprising 40 compulsory questions, with one or more parts. Single part questions are generally worth 1–2 marks each, but two and three part questions may be worth 4 or 6 marks. There will be no choice and all questions should be attempted if time permits. CIMA are continuously developing the question styles within the CBA system and you are advised to try the on-line website demo at www.cimaglobal.com, to both gain familiarity with assessment software and examine the latest style of questions being used.

The Business Law syllabus

Syllabus overview

The Business Law syllabus deals with those aspects of law which affect businesses and which contribute towards establishing the competence of the Chartered Management Accountant. By way of introduction, it covers fundamental elements of The English legal system, and uses professional negligence as the vehicle for demonstrating the sys-tem of judicial precedent. The syllabus then proceeds to look at the essentials of estab-lishing and performing simple contracts and the remedies available in the event of a breach.

As an introduction to company law, the syllabus then proceeds to look at the essential char-acteristics of the various forms of business organisation. Following this introduction, the emphasis is placed upon the company limited by shares and the rules relating to company formation, ﬁnance and management. Students may be required to present their explana-tions in the form of a letter or memorandum.

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Aims

This syllabus aims to test the student’s ability to:

● explain fundamental aspects of the organisation and operation of the English legal system; ● explain the elements of the tort of negligence and the manner in which the tort impacts

upon professional advisers;

● identify and explain the essential elements of a simple contract, what is regarded as

ade-quate performance of the simple contract, and the remedies available to the innocent party in the event of a breach;

● explain the essential differences between sole traderships, partnerships and companies

limited by shares;

● explain the ways in which companies are administered, ﬁnanced and managed;

● apply legal knowledge to business problems and communicate the explanations in an

appropriate form.

Assessment

This subject is assessed by a computer-based assessment. The assessment is 60 minutes and comprises 40 compulsory questions with one or more parts. A varied range of objective test questions are used.

Learning outcomes and syllabus content

3b(i) The English legal system – 10%

Learning outcomes

On completion of their studies students should be able to:

● explain the manner in which behaviour within society is regulated by the civil and the

criminal law;

● identify and explain the sources of English law;

● explain and illustrate the operation of the doctrine of precedent by reference to

the essential elements of the tort of negligence, by which we mean duty, breach and damage/loss/injury;

● explain the application of the tort of negligence to professional advisers. Syllabus content

● The sources of English law. ● The system of judicial precedent.

● The essential elements of the tort of negligence, including duty, breach and

damage/loss/injury.

● The liability of professionals in respect of negligent advice.

3b(ii) Establishing contractual obligations – 10%

● identify the essential elements of a valid simple contract and situations where the law

requires the contract to be in a particular form;

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● explain how the law determines whether negotiating parties have reached agreement; ● explain what the law regards as consideration sufﬁcient to make the agreement

enforceable;

● explain when the parties will be regarded as intending the agreement to be legally

binding;

● explain when an apparently valid agreement may be avoided because of misrepresentations.

Syllabus content

● The essential elements of a valid simple contract.

● The legal status of the various types of statements which may be made by negotiating

parties. Enforceable offers and acceptances, and the application of the rules to standard form contracts and modern forms of communication.

● The meaning and importance of consideration.

● The principles for establishing that the parties intend their agreement to have contractual

force.

● How a contract is affected by misrepresentation.

3b(iii) Performing the contract – 10%

● explain how the contents of a contract are established;

● explain the status of contractual terms and the possible repercussions of non-performance; ● explain how the law controls the use of unfair terms in respect of both consumer and

non-consumer business agreements;

● explain what the law regards as performance of the contract, and valid and invalid

rea-sons for non-performance.

● Incorporation of express and implied terms.

● Conditions and warranties and the nature and effect of both types of terms. ● The main provisions of sale of goods and supply of services legislation.

● The manner in which the law controls the use of exclusion clauses and unfair terms in

consumer and non-consumer transactions.

● The level of performance sufﬁcient to discharge contractual obligations.

● Valid reasons for non-performance by way of agreement, breach by the other party and

frustration.

3b(iv) Contractual breakdown – 10%

● explain the type of breach necessary to cause contractual breakdown;

● describe the remedies which are available for serious and minor breaches of

contract.

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● The remedies of speciﬁc performance, injunction, rescission, and requiring a contract

party to pay the agreed price.

● Causation and remoteness of damage. ● The quantiﬁcation of damages.

3b(v) The law of employment – 10%

● distinguish between employees and independent contractors and explain the importance

of the distinction;

● explain how the contents of a contract of employment are established; ● explain the distinction between unfair and wrongful dismissal;

● demonstrate an awareness of how employers and employees are affected by health and

safety legislation, including the consequences of a failure to comply.

● The tests used to distinguish an employee from an independent contractor. ● The express and implied terms of a contract of employment.

● Unfair and wrongful dismissal.

● An outline of the main rules relating to health and safety at work, sanctions on

employ-ers for non-compliance, and remedies for employees.

3b(vi) Company formation – 15%

On completion of their studies students should be able to

● explain the essential characteristics of the different forms of business organisations; ● explain the concept and practical effect of corporate personality;

● explain the differences between public and private companies;

● explain the distinction between establishing a company by registration and purchasing

‘off the shelf ’;

● explain the purpose and legal status of the memorandum and articles of association; ● explain the ability of a company to contract;

● explain the main advantages and disadvantages of carrying on business through the

medium of a company limited by shares.

● The essential characteristics of sole traderships/practitionerships, partnerships and

com-panies limited by shares.

● Corporate personality and its legal consequences.

● ‘Lifting the corporate veil’ both at common law and by statute. ● The distinction between public and private companies.

● The procedure for registering a company, the advantages of purchasing a company ‘off

the shelf ’, and the purpose and content of the memorandum and articles of association.

● Corporate capacity to contract. BUSINESS LAW C5

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3b(vii) Corporate administration – 10%

● explain the use and procedure of board meetings and general meetings of shareholders; ● explain the voting rights of directors and shareholders;

● identify the various types of shareholder resolutions.

● Board meetings: when used and the procedure at the meeting.

● Annual and Extraordinary General Meetings: when used and the procedure at the meeting. ● Company resolutions and the uses of each type of resolution.

3b(viii) Corporate ﬁnance – 10%

● explain the nature of a share and the essential characteristics of the different types of

share;

● explain the procedure for the issue of shares, and the acceptable forms of payment; ● explain the legal repercussions of issuing shares for an improper purpose;

● explain the maintenance of capital principle and the exceptions to the principle; ● explain the procedure to increase and reduce share capital;

● explain the ability of a company to take secured and unsecured loans, the different types

of security and the registration procedure.

● The rights attaching to the different types of shares issued by companies. ● The procedure for issuing shares.

● The purposes for which shares may be issued.

● The maintenance of capital principle and the ability of a company to redeem, purchase

and provide ﬁnancial assistance for the purchase of its own shares, and the situations in which such powers are useful.

● The rules for the reduction and increase of share capital.

● The ability of a company to borrow money and the procedure to be followed. ● Unsecured loans, and the nature and effect of ﬁxed and ﬂoating charges.

3b(ix) Corporate Management – 15%

● explain the procedure for the appointment, retirement, disqualiﬁcation and removal of

directors;

● identify the powers and duties owed by directors to the company, shareholders, creditors

and employees;

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● explain the rules dealing with the possible imposition of personal liability upon the

directors of insolvent companies;

● identify and contrast the rights of shareholders with the board of a company; ● explain the qualiﬁcations, powers and duties of the company secretary.

● The appointment, retirement and removal of directors. ● Directors’ powers and duties.

● Fraudulent and wrongful trading, preferences and transactions at an undervalue. ● The division of powers between the board and the shareholders.

● The rights of majority and minority shareholders.

● The qualiﬁcations, powers and duties of the company secretary. BUSINESS LAW C5

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The English

Legal System

1

L

EARNING

O

UTCOMES

After completing this chapter you should be able to:

䉴 explain the manner in which behaviour within society is regulated by the civil and the criminal law;

䉴 identify and explain the sources of English law;

䉴 explain and illustrate the operation of the doctrine of precedent by reference to the essen-tial elements of the tort of negligence, that is, duty, breach and damage/loss/injury; 䉴 explain the application of the tort to professional advisers.

The chapter has been arranged into sections based on the learning outcomes as above.

1.1 Law: criminal and civil

Learning Outcome: To explain the manner in which behaviour within society is regulated by

the civil and the criminal law.

Law is necessary in every society, to help the relationships between its members. As population expands, as people live more closely together in towns and cities, and as tech-nology becomes more powerful, law has to become more detailed. Freedom for one person means that the freedom of another must be limited. To protect your right to drive along a motorway, my freedom to park my car in the middle of it must be taken away.

In all modern societies, legal rules fall into two main categories:

● criminal; ● civil.

Criminal law. A crime is regarded as an offence against all of us, and the state, on our

behalf steps in to punish those who transgress. It follows that the purpose of the criminal law is to regulate behaviour within society by outlawing certain types of behaviour. People cannot live together unless murder is forbidden. The same applies to other forms of per-sonal violence. Similarly, it is felt that people should not be able to take the property of oth-ers dishonestly. Therefore, theft and various forms of fraud are forbidden. Offendoth-ers are

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punished, partly as retribution, and partly to deter them and others from such conduct in the future. The same approach applies to all offences, right down to car-parking ones.

Civil law has a different but complementary approach. It exists to enable disputes

between citizens to be resolved peacefully, without turbulent feuds. Civil law sets out the rights and duties of citizens as between themselves. If one party acts in breach of these rules, the person whose rights have been infringed can claim compensation (‘damages’) from the wrongdoer.

It can be seen that indirectly the civil law also serves to regulate behaviour within society. Thus for example, if a man’s driving causes him to accidentally damage another motorist’s car, the civil law makes it possible for the other to obtain compensation. The fact that we know that if we cause damage we may be called upon to pay for it must cause us to think twice as to how we conduct ourselves. This is so, even if there is no possibility of any ﬁne, imprisonment or other form of punishment.

In most countries the criminal courts are separate from the civil courts. The parties and the terms used are different. In the criminal courts in England and Wales, the prosecution is started by public ofﬁcers, such as the Crown Prosecution Service. The decision to pros-ecute is not taken by the victim (if any). A criminal conviction is very serious, and the case against the accused must normally be proved beyond reasonable doubt. In the civil courts, the action is started by the claimant (the victim). Liability in a civil action can usually be proved merely on a balance of probabilities, that is, that the claimant’s case is marginally more probable that the defendant’s. The types of proceeding can be contrasted.

In a criminal prosecution In a civil action

the state the claimant

prosecutes sues

the accused the defendant

to punish the offender for a remedy

by imprisonment or a ﬁne to the government e.g. damages payable to the claimant (if the accused is found guilty) (if the defendant is held liable)

In criminal cases, there need not even be a direct victim. In an unsuccessful theft, no property need have been taken. In an unsuccessful attempted murder, or in a speeding or car-parking offence, no one need have been hurt. Nevertheless, there has been a criminal offence. In civil cases there must normally be a claimant who has suffered loss.

Finally, the same events are often both a criminal offence and a civil wrong. Most types of physical assault and serious fraud are criminal offences by the wrongdoers. However, the fact that the wrongdoers have been ﬁned or imprisoned following conviction for assault or fraud does not provide the victim with any compensation. It follows that assault and fraud are also breaches of the civil law thereby providing the victim with a means of obtaining compensation. It must be said, however, that this is generally only true if the wrongdoer has sufﬁcient funds available to meet any claims for compensation.

1.2 The sources of English law

Learning Outcome: To identify and explain the sources of English law.

The sources of English law are:

● custom/common law; ● equity;

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● legislation; ● European law; ● other sources.

1.2.1 Custom/common law

Custom was an important source of law historically, but is of less practical importance today. Prior to the Norman Conquest in 1066 there was no single body of law applicable to the whole country. After 1066 the Normans attempted to rule the country through the application of local customs. Over time customs considered capable of general application were absorbed and made common to all areas of the country so that there was one law common to all the country, hence the term, the common law. The common law today is made up of past cases which are recorded in law reports. It is still of considerable impor-tance, and develops from case to case in order to reﬂect the changing times. In order to ensure certainty, the legal principles which are pronounced by the higher courts are binding on the lower courts under the doctrine of judicial precedent.

1.2.2 Equity

Again historically, the common law was incomplete, for example the main remedy available was restricted to monetary compensation. Equity was developed by the Court of Chancery to fill in gaps in the common law, for example by the development of non-monetary reme-dies, such as injunctions and orders of specific performance. Equitable remedies are dis-cretionary, and, in the event of a conflict between equity and the common law, equity prevails. Equity has also been responsible for the development of the law of trusts.

1.2.3 Legislation

Acts of Parliament

Legislation is the formal enactment of rules by a body having the constitutional right and power to do so. In the UK, the only body with this inherent power is the UK Parliament. Its legislation takes the form of Acts of Parliament, also known as statutes. The process of passing an Act can be a long one. It must pass through long proceedings in both the House of Commons and the House of Lords, and then receive the (purely formal) Royal Assent. Many Acts contain a section delaying direct effect for a short time to give those affected time to adapt.

Once enacted and in force, a statute remains law unless and until it is repealed or amended by another Act of Parliament. If the government dislikes an earlier Act, the full parliamentary procedure must be used in order to change or repeal the Act in a new one. This can always be done, however, because an Act cannot make itself unrepealable.

The courts cannot generally question the validity of an Act of Parliament. They must obey and apply the words of the statute, because Parliament has ‘legislative sovereignty’. Where the words of a statute are unclear or ambiguous, the courts must interpret the words as best they can. The courts will not ask the government what an Act means because a gov-ernment might give whatever answer is most helpful to it at the time. The courts will, how-ever, try to achieve the purpose for which the statute was enacted, and can look at what the government said in the Parliamentary proceedings before the Act was passed.

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In one exceptional respect the courts can challenge the validity of a provision in an Act. The European Communities Act 1972 made changes required by UK membership of (what is now) the European Union. The UK agreed to be bound by EC law. Therefore if a pro-vision in a UK Act contravenes EU law, the UK court can suspend the operation of the provision.

Delegated legislation

For many reasons, Parliament has delegated some of its legislative powers to other bodies. Usually Parliament passes an ‘enabling’ Act setting out the policy involved and the objec-tives it wishes to achieve. The Act then delegates to some other body the task of ﬁlling in the details. Such a delegation of powers saves parliament time which can then be devoted to more far-ranging and important issues. Also, expertise and where appropriate specialist local knowledge can be used. Rules enacted under such powers are called delegated legisla-tion, and the following are examples:

● The Parliaments of Scotland and Wales have been given some legislative powers on

mat-ters that affect their own regions.

● In the UK the government cannot make law without the authority of Parliament.

However, Parliament has delegated wide powers to government ministers within their own departments. Many rules are too detailed and technical to undergo the full Parliamentary process, and they may need to be changed too frequently. The detailed rules on motor vehicle construction and use are a good example. Therefore, individual ministers and their civil service departments are given the task of making rules within the guidelines set out in the enabling Acts. These regulations are usually in the form of

statu-tory instruments.

● Local authorities have been given wide powers to make by-laws within their own

boundaries.

● The Crown and Privy Council have the power to introduce delegated legislation in times

of emergency in the form of orders in council. Such orders can be introduced quickly. Of further signiﬁcance is the value of this means of law creation where circumstances demand measures be introduced, but at a time when parliament is not sitting.

Many controls exist to prevent abuse of delegated powers. Parliament itself exercises the main supervision, and it can always take away delegated powers by a new Act.

The courts also have supervisory powers over delegated legislation (unlike over statutes). If a delegate body exceeds or abuses its powers, the courts can hold that the regulations, by-laws, etc. are ultra vires (outside of the powers given) and therefore void.

1.2.4 European Union law

In 1972, the UK joined the European Community (EC), now called the European Union (EU). Accession meant that the UK agreed to conform with existing and future EC law, and the UK complied by passing the European Communities Act 1972. There are several sources of EU law:

● The Treaties are the primary source: the Treaties of Paris and Rome (2) that created the ﬁrst

EU bodies, and all subsequent Treaties. The provisions (e.g. on competition) are directly applicable, and have basically legislative effect. They automatically become law in the member states, with no need for further legislation.

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● Regulations by the Commission and Council are similarly directly applicable, with no need

for further legislation.

● Directives by the Commission and Council are generally addressed to the member states,

and require that the states take action within an identiﬁed time period to change their own law so as to comply. In the UK, this may be done by ministerial regulations. Sometimes a full Act of Parliament is used.

● Decisions are addressed to individuals or companies, or to member states, and are directly

binding on those to whom they are addressed. They have no effect on anyone else, how-ever (unlike legislation). The Commission has power to give decisions on various issues.

● Recommendations are self-explanatory; they have no formal legal effect, but considerable

persuasive force.

● The European Court of Justice gives decisions and rulings in disputes involving EU law, and

its decisions are binding on the parties themselves in the UK. They also form precedents and are inﬂuential in building up EU law.

It should be borne in mind that the UK plays an active role in proposing, creating and drafting EU law.

In the Readings section, the article ‘Constitutional matters’ discusses sources of EU law and the possibility for change ahead.

1.2.5 Other sources

It may be that there is no English precedent to apply to a case being decided by the court. In that event the barristers arguing the case may seek to rely on a precedent decided by a court in another common law jurisdiction such as Australia, Canada, Singapore and other Commonwealth countries. Although cases decided in foreign courts are not binding upon English judges, the court may be persuaded to follow the case on the ground that it is an accurate reﬂection of English law. Again in the absence of an English precedent, the court may be persuaded that the hypothesis of a textbook writer accurately states how the law should be applied. Such an event is rare, however, and lawyers will only resort to other sources of law in the absence of the above sources.

1.3 Judicial precedent and the tort of negligence

Learning Outcome: To explain and illustrate the operation of the doctrine of precedent by

reference to the essential elements of the tort of negligence, that is, duty, breach and damage/loss/injury.

A tort is a civil wrong. Action is brought by the victim of wrongful conduct (the ‘claimant’) against the wrongdoer (the ‘defendant’). For most torts – particularly the tort of negligence – the main remedy sought is damages (monetary compensation).

Negligence is the most important of all torts, and occurs when one person causes harm to another by failing to take the care that is legally required. It gives some excellent exam-ples of the doctrine of precedent in operation.

A tort must be distinguished from a breach of contract. A contract is a voluntary agreement. The parties may agree upon a number of stringent obligations which

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each party promises to observe. In the event of default the claimant will be entitled to sue for breach of contract (see Chapters 2–4). In the tort of negligence, however, obligations are not accepted by voluntary agreement but are imposed upon the persons concerned by the state.

1.3.1 Judicial precedent

Essentially the doctrine of judicial precedent means that the decisions of the higher courts are binding on the lower courts. It follows that the doctrine of judicial precedent is intri-cately tied up with the fact that there is a hierarchy of courts, i.e. some courts are superior to others.

An overview of the hierarchy of the courts

The civil courts In practice most civil cases start in the County Court. If a signiﬁcant amount of money is involved the case may start in the High Court which in effect has three branches or divisions, the Queen’s Bench Division, the Family Division and the Chancery Division. Each division specialises in particular areas of law. For example, the Queen’s Bench Division hears cases involving disputes in contract and tort. Appeals may be made from the County and the High Court to the Court of Appeal (Civil Division), and from the Court of Appeal and High Court to the House of Lords, but only where the appeal involves a point of law of general public importance. If the dispute involves issues of European law then any court below the House of Lords may, and the House of Lords must, refer the mat-ter to the European Court of Justice for a ‘preliminary ruling’ as to how European law should be interpreted and applied.

The criminal courts All criminal cases start in the Magistrates Court. The court has a dual role. First, it may try less serious offences itself, and in practice most criminal cases are dealt with by the Magistrates Court. Secondly, so far as the more serious offences are concerned, the court decides whether the accused has a case to answer and, if so, will send the case to the Crown Court to be tried by a judge and jury. Appeal by way of ‘case stated’ from the Magistrates and Crown Court lies to the Divisional Court of the Queen’s Bench Division. In this type of appeal the ﬁndings of fact and law found by the Magistrates and Crown Court are stated in writing and sent to the Divisional Court which decides whether the law has been correctly applied. If it hasn’t, the case will be sent back to the Magistrates or Crown Court which will be obliged to apply the interpretation of the law speciﬁed by the Divisional Court. The Court of Appeal (Criminal Division) hears appeals from the Crown Court, and the House of Lords hears appeals from Court of Appeal or the Divisional Court involving points of law of general public importance.

When a court reaches a decision, the judge does three things:

● he/she examines the facts and states which facts he/she regards as ‘material’, that is,

essential to his/her decision;

● he/she considers the law relating to facts such as these; ● he/she applies the law to the facts and gives his/her decision.

The ratio decidendi and obiter dicta are part of this process.

● The ratio decidendi of a judge is the reasoning vital to his decision: what facts are material

and how the law applies to them.

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● Obiter dicta are other comments that he will make for example, regarding general

princi-ples of law or hypothetical situations.

The importance of a previous case can depend to a substantial extent upon whether it becomes a binding or merely a persuasive precedent. A binding precedent is one which a later court must follow. The court is legally bound to do so. A later court may (and usually will) follow a persuasive precedent, but it is not bound to do so. The rule today basically is that previous decisions of a higher court are binding on lower courts in future cases. Therefore:

● House of Lords decisions are binding on all lower courts in future cases on the same

material facts. The House is free to deviate from its own earlier decisions, but in practice rarely does so. (Note that the House of Lords as a court is very different from the political/ legislative House of Lords chamber of Parliament.)

● The Court of Appeal is bound by decisions of the House of Lords. Generally, it is bound

by its own decisions also. However, if a decision has been reached per incuriam (without due care), or there are contradictory previous decisions then the court will not be bound.

● The High Court is bound by the House of Lords and the Court of Appeal, but not by its

own previous decisions.

● A County Court is bound by all previous decisions of higher courts, but not by previous

County Court decisions. If a previous case went on appeal to the Court of Appeal (etc.), the County Court is bound by the decision of the highest court that heard the earlier case. Notice, however, that not all of a previous judgment – even of a much higher court – will be binding. In a later case, a judge will only be bound by the ratio decidendi of the earlier judge(s). Obiter dicta in the earlier case can only have persuasive inﬂuence.

A case can cease to be a precedent in various ways. In the same case, a higher court can reverse the decision of a lower one if one party appeals. The lower decision then ceases to have any effect as a precedent. In a later case between different parties, a higher court can overrule an earlier lower decision; the lower court judgment remains valid between the par-ties to it, but it ceases to be a precedent. Most importantly, a later court can always

distin-guish the material facts from those of the earlier decision, so that the later court is not

bound. Examples of judicial precedent in action can be seen in the following sections deal-ing with the tort of negligence.

1.3.2 The tort of negligence

Torts of negligence were recognized in many separate and individual situations in the nine-teenth and early twentieth centuries, but the leading case which tried to pull these separate strands together into principles which could apply in all situations was the House of Lords decision in Donoghue v. Stevenson (1932).

In Donoghue v. Stevenson, the claimant, Mrs Donoghue, went into a café with a friend, who bought a bottle of ginger beer and gave it to Mrs Donoghue. The ginger beer was in an opaque bottle which had been sealed by the manufacturer. Mrs D drank half of the con-tents. When she poured the other half, it was found to contain what appeared to be the remains of a decomposed snail. Mrs D suffered shock and stomach pains.

Mrs D did not buy the bottle, otherwise she could have sued the café for breach of con-tract, and recovered full damages even though the café was not at fault. Instead, she had to claim that Stevenson, the manufacturer of the drink, was liable to her for negligence. The House of Lords held that a manufacturer of goods owed a duty not only to the buyer, but

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also to anyone else who should reasonably be foreseen as likely to suffer physical injury from defects in them. The duty was to take reasonable care.

As a wider guideline for the future, Lord Atkin also suggested his famous ‘neighbour’ principle:

You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who then in law is my neighbour? The answer seems to be persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.

In other words, everyone must take reasonable care not to cause foreseeable harm to foreseeable victims.

The House of Lords is the highest court in the UK. It is quite separate from the politi-cal chamber. Cases are usually heard by ﬁve Law Lords, and decisions can be by a majority if need be. Donoghue v. Stevenson was only decided by a 3 to 2 majority. Lord Atkin’s statement was much wider than required for the actual case, and could be regarded as only an obiter

dic-tum. Nevertheless, it had enormous inﬂuence in future cases.

Lord Macmillan, another judge in the case, set out the essential features of the tort. It applies where ‘there is a duty of care and where failure in that duty has caused damage’ to the claimant. These, then, are the three essential elements.

1.3.3 Duty to take care

How do you know whether you owe someone a duty of care? The answer is that if it is rea-sonably foreseeable that your actions are likely to affect someone, then it is likely that you owe that person a duty of care. (In other words, the so-called ‘neighbour test’ set out in

Donoghue v. Stevenson.)

The duty of care was extended in many cases after Donoghue v. Stevenson. One example is

Home Ofﬁce v. Dorset Yacht Co. Ltd (1970), where some ‘Borstal’ boys (youngsters who had

been criminally convicted, were working on an island under Home Office supervision. Some boys escaped and damaged the claimant’s yacht. The House of Lords said that the Home Office could be liable for negligence. Lord Reid said: ‘The time has come when we can and should say that [Lord Atkin’s neighbour rule] ought to apply unless there is some justification or valid explanation for its exclusion.’

It had already been made clear in Bourhill v. Young (1942) (see below) that the rule could apply to cases where the claimant only suffered nervous shock as opposed to other physi-cal harm, and in Hedley Byrne v. Heller and Partners (1963) the House of Lords said in obiter

dicta that the rule could apply to statements (as opposed to acts) and to purely ﬁnancial loss

(as opposed to physical harm); see also Section 1.4 later.

Nevertheless, it was always made clear in later cases that there are limits to the neighbour rule.

● First, there must be sufﬁcient proximity between the person who was careless and the person

suffering harm. The duty cannot be owed over a limitless physical area, or to a limitless number of people.

Examples

In Bourhill v. Young (1942) a lady heard a motor accident some 45 feet away. She did not see it because it was on the other side of a stationary vehicle. Nevertheless she saw blood on the road, suffered severe shock, and lost her unborn

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child. Her claim for damage failed because she was too far from the accident and not within the foreseeable range of harm.

In Alcock v. Chief Constable of South Yorkshire Police (1991), one of a number of cases arising from the Shefﬁeld football disaster where many spectators were killed, an action was brought by relatives of the victims, who saw the tragedy from a distance or on live television. They all suffered nervous shock, and sued the police for negligence. These actions failed.

In Sutradhar v. Natural Environment Research Council (2004) the claimant along with numerous other persons had been poisoned as a result of drinking contaminated water. It was alleged that a duty of care was owed to the claimant by the party who had carried out a water survey and produced a report on findings. It was decided that there was insufficient proximity between the claimant and defendant and so no realistic prospect of establishing that a duty of care was owed. In London Borough of Islington v. University College London NHS Trust (2004) a local authority failed in its claim to recover the costs of providing care to a person who suffered a stroke as a result of receiving negligent medical advice from the defendant. It was decided that no duty of care was owed, as firstly the loss suffered by the claimant was not reasonably foreseeable, secondly there was not sufficient proximity between the claimant local authority and the defen-dant. Further, the loss suffered was due to compliance with a statutory obligation.

● Second, there may be public policy grounds for refusing to apply the neighbour principle. For

example, the rule might cause absurdity or otherwise be grossly undesirable.

Example

In Mulcahy v. Ministry of Defence (1996) it was held that an ofﬁcer does not owe a legally actionable duty of care to a soldier during hostilities.

1.3.4 Breach of duty

The victim only has a valid claim for damages if the person who owes the duty is shown to have broken it. The standard required is that of the reasonable person. Higher duties in the law of tort are placed on those who are in a position of responsibility. Similarly, the more serious the consequences are likely to be, the more care is expected. Greater care is expected towards especially vulnerable victims, such as children. Conversely, normally, a lower duty of care is expected from children.

It may, of course, sometimes be difﬁcult to discover why and how an accident occurred. Since it is for the claimant to prove that his injury or loss was due to the defendant’s breach of duty, this can defeat his claim. Exceptionally, therefore, the courts may reverse the nor-mal burden of proof, and call upon the defendant to prove that he has not been careless. This is contrary to the normal rules of evidence, and it will only be done where:

● the harm would not normally happen if proper care were taken

● there is no (other) explanation for what has occurred – the phrase res ipsa loquitur (the

thing speaks for itself ) – is often used

● the defendant was in control of the situation, and the victim was not.

Example

In Mahon v. Osborne (1939), a patient awoke from an abdominal operation to discover (eventually) that swabs had been left inside him. The normal burden of proof was reversed so that the surgeon was required to prove that this was not due to his negligence. This case can be compared with Fish v. Kapur where a patient, when having a tooth removed suffered a broken jaw. The logical explanation for the injury was negligence on the part of the dental surgeon, so res

ipso loquitur was relevant. The defence, having therefore the burden of proof, brought in evidence of the likelihood of

such injury resulting where the plaintiff had a weak jaw. In consequence, the court rejected the negligence claim.

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1.3.5 Damage caused by negligence

The claimant cannot recover damages for negligence unless he has suffered damage. This can include some or any of the following:

● Personal injury claims, particularly from accidents on the road or at work, constitute a

large proportion of all negligence claims – to such an extent that potential wrongdoers are required by statute to insure against possible liability, so as to ensure that victims will get any damages awarded. Personal injury can include illness from nervous shock if this is clearly caused by the defendant’s negligence.

● Damage to property can be recovered (a wrecked car for instance).

● Financial loss directly connected with personal injury or to property is recoverable (loss

of earnings, repair costs for instance).

● Purely ﬁnancial loss is only recoverable in exceptional situations, such as for professional

liability to an identiﬁed person to whom responsibility was undertaken, as in the cases which followed the Hedley Byrne dicta; see Smith v. Eric S Bush in Section 1.4 later. Otherwise, purely economic loss is unlikely to count.

Example

In Murphy v. Brentwood DC (1990), a local authority’s negligent approval of a site as suitable for house building was

not actionable by an eventual owner whose home subsided. The loss was held to be essentially economic/ﬁnancial.

The harm must also have been clearly caused by the negligence, and only damage which should have been reasonably foreseen at the time of the negligence will be included.

Example

In Boardman v. Sanderson (1964), a driver negligently backed his car from a garage, and injured a young boy. The father, who was known to be nearby, heard the scream and ran to the scene. He recovered damages for his nervous shock. This harm was not too remote, because he was a relative of the main victim and was known to be in the close vicinity. (Compare this case with Bourhill v. Young earlier.)

1.3.6 Contributory negligence

The most important (partial) defence to a claim for negligence also involves causation. The defence of contributory negligence arises if the claimant was partly the author of his own mis-fortune, so that the accident was partly caused by the claimant himself. In these circum-stances, the courts have a discretion to reduce the damages awarded by any percentage which they consider appropriate.

Example

In Sayers v. Harlow UDC (1958) the door of a public toilet had a defective pay-lock. A lady found herself locked in. She tried to climb out, allowing her weight to rest on the toilet roll, which rotated. She fell and was injured. The court (which described her plight as an ‘inconvenience’) held that her injuries were 75 per cent the fault of the local authority and 25 per cent her own fault. Damages were reduced accordingly.

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1.4 Negligence and professional advisers

Learning Aim: To explain the application of the tort to professional advisers.

Despite an initial reluctance, the courts have extended the ‘neighbour’ principle to negli-gent advice and to purely ﬁnancial loss. This has had a profound effect on situations arising when a professional person’s advice is relied upon by a non-client.

The Donoghue v. Stevenson principle was extended dramatically in the case of Hedley Byrne v.

Heller and Partners (1963). A ﬁrm of advertising agents had a client who sought credit from

them. The agents, therefore, sought a credit reference from the client’s bank. The reference was favourable but the bank, which knew the purpose of the reference, expressly disclaimed lia-bility for any error. Nevertheless, relying on the reference, the agents gave credit to their client, and lost a large sum of money when the client became insolvent. The agents sued the bank. They had no contract with the bank, so they relied on Donoghue v. Stevenson and similar cases. The House of Lords held that the bank was not liable because of the dis-claimer which it had made.

However, the judges also said that, contrary to what had previously been believed, the duty of care in Donoghue v. Stevenson could apply to statements as well as to acts or omissions, and could extend to purely ﬁnancial loss as well as to physical injury (plus the monetary con-sequences of that physical injury).

These obiter dicta in the Hedley Byrne case influenced the courts in the following years to hold several times that a professional person can owe a duty of care not only to the client who employs and pays him, but also to any other specific person whom he knows to be rely-ing on his advice, and for whose benefit he knows that the advice will be used. In Smith v.

Eric S Bush (1989), for example, a surveyor was engaged by a building society to value a

house. The surveyor knew that the society would show his valuation to a speciﬁc potential buyer, who would rely on it. The valuation was negligent, and the buyer lost money. The House of Lords held that the surveyor was liable for his negligent statement, for the purely ﬁnancial loss caused to the buyer.

However, the limits on these decisions were shown by the very important case of Caparo

Industries plc v. Dickman (1990), which was an action by a shareholder against the auditors of

a company. The shareholder claimed that the annual audit was negligent and incorrect. In reliance on it, the shareholder had bought more shares and had suffered ﬁnancial loss as a result. When the auditors make their annual report to members, they know that their state-ments will be relied upon by all of the shareholders (possibly hundreds of thousands in number) as well as by possible future investors (equally numerous). The House of Lords held that the auditors’ duty of care could not practicably be owed to so many people, oth-erwise there might be no end to claims.

(Note that the House of Lords in this case was not bound by the obiter dicta in the Hedley

Byrne case; and the previous decisions of the House of Lords in cases like Smith v. Eric S Bush were distinguished, because in the earlier cases the statement was made solely to one

identiﬁed person who the defendant knew would rely on it.)

Caparo Industries v. Dickman was itself distinguished by the High Court in the later case of ADT Ltd v. Binder Hamlyn (1995). In this case, ADT was bidding to take over a company

whose accounts were audited by Binder Hamlyn. At a ‘serious’ business meeting with ADT, the auditors expressly said, without any disclaimer, that the ‘target’ company’s accounts were accurate. The auditors made this statement speciﬁcally to ADT, knowing that ADT would rely on it without further enquiry. The accounts were not in fact reliable, and ADT suffered

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