key aspects of the law of contract and the tort of negligence

7/25/2019 Key Aspects of the Law of Contract and the Tort of Negligence

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KEY ASPECTS OF THE LAW OF CONTRACT AND

THE TORT OF NEGLIGENCERELATED 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 contractsare 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.
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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 isHadley 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 isVictoria 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 priceandquantum 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 sellerreceives 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 trafficaccident. 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.


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A useful case in this respect isCaparo 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.)

InCaparo, 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.

Caparois 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 inHedley 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.

InHedley Byrneitself, 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


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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 isBarnett 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. InThe 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,

inJolley 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, sinceThe Wagon

Moundfocuses on foreseeability of the type of damage whereasJolley v Suttonfocuses 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

Dickmanis a useful illustration of this: it might be foreseeable that existing shareholders would rely on an audit reportin 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 thedefendant 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 isSayers 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


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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:

Contractualliability

Liability innegligence

Relationship

between the

parties

The relationship is created and

governed by the contract. The

parties enter the relationship by

mutual consent.

The relationship is non-

contractual and is

imposed by law. The

defendant must owe the

claimant a duty of care.

Nature of

obligation

The parties must comply with the

terms of the contract.

The defendant must act

according to the standard

of care expected of the

reasonable man or the

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.

Possiblereduction of

damages

Damages may be reduced by the

amount that could have been

mitigated if the claimant fails totake reasonable action to

mitigate the loss.

Damages may be reduced

by the relevant percentageif the claimants conduct

contributed to the loss.

Written by a member of the Paper F4 examining team


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ICC INTRODUCES NEW INTERNATIONAL

COMMERCIAL TERMSRELATED LINKS


This article discusses International Commercial Terms or Incoterms which are often found ininternational 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. Forexample, 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 Ex Words

FCA Free Carrier

CPT Carriage Paid To

CIP Carriage and Insurance Paid To

DAT Delivered at Terminal

DAP Delivered at Place

DDP Delivered Duty Paid


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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.


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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 2010RELATED 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


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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 aroundsix 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.


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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

LEGISLATIONRELATED LINKS


AND OTHER RELATED ASPECTS OF RELATED CORPORATE LAW


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Relevant to Paper F4 (RUS)

This article goes into more detailed knowledge than is expected from Paper F4 candidates. Please read

theSyllabusandStudy Guidein 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.


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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 concludedwithin 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


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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 paymentsiii) 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


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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 notcovered 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 DSTARELATED LINKS


SPANDECK ENGINEERING V DEFENCE SCIENCE AND TECHNOLOGY AGENCY

(DSTA)

Relevant to Paper F4 (SGP)


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This article focuses on the impact of the case ofSpandeck 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 FACTSBriefly, 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 ofCaparo 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 ofpsychiatric 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


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the concern of indeterminate liability being imposed on the defendant (see reference 9). In England, cases

likeMurphy v Brentwood(see reference 10) have strongly reaffirmed the applicability of the general exclusionary rule.

However, in Singapore, ever since the cases ofRSP Architects Planners & Engineers v Ocean Front Pte Ltd(see

reference 11), andRSP 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 two-

stage 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 situationsin 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 innegligence. 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:


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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 ofcare 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 accountthe 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 ofPacific

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).


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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 byHedley Byrne & Co

Ltd v Heller & Partners Ltd [1964] AC 465grounds 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.


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 defendantwhich 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 PlanNo 1075 at [31], per Thean JA).






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18. Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007]4 SLR 100 at [75-6].


20. 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 inSutherland Shire Council v Heyman

(1985)60 ALR 1.




24. 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.


26. [1990] 1 QB 993.

27. 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.

28. Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007]4 SLR 100 at [99-100].


30. 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.



DAMAGESRELATED 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 agreedthat 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


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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 whenGoodbyemagazine 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 withGoodbyemagazine.

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 inFigure 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
http://www.accaglobal.com/content/dam/acca/global/satechnical/damagesFig1.gifhttp://www.accaglobal.com/content/dam/acca/global/satechnical/damagesFig1.gif


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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 breachingDunlop 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 perRuxley 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. 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.

2. Claim for 200,000 this is not a normal loss and so damages will only be payable under the second test

inHadley 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.

3. 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.4. 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.

5. 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.


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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 COURTRELATED 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 theexistence 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 ofparliamentary

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:


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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, inDavidson 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, thedanger 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


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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 theSupreme Court website


THE TORT OF NEGLIGENCERELATED 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 inparticular, 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 ofDonoghue 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
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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 clos

key aspects of the law of contract and the tort of negligence

Documents