Law of Contract - Terms in a Contract (Part 3)

Boilerplate clauses

There are a number of terms that sophisticated commercial people will always try to incorporate in their contracts. This may be done by incorporating them in their standard terms and conditions.

Many of these are in a standard form and can be found in precedent books or on electronic databases. In practice, a solicitor will take a precedent and adapt it for each particular client rather than draft a new clause from scratch.

The following are examples of Boilerplate clauses.

Choice of law clause

Many professionally drafted contracts contain a choice of law clause. In many situations it is up to the parties to agree which law they wish to govern the agreement. This is particularly important when the parties are in different countries. Traditionally, due to the high regard that English law was held in, English law governed a large proportion of international contracts.

Jurisdiction clause

A jurisdiction clause stipulates which country’s courts will hear litigation arising from the contract.

Please note this is not the same as a choice of law clause. It is quite possible for the High Court in London to have jurisdiction whilst French law governs the contract. 

Exclusion clause

Clauses which seek to exclude or limit liability. 

Force Majeure clause

These are clauses that stipulate what the consequences are of unexpected events which render the contract impossible to perform. Although it is outside the ambit of this syllabus, please note that the effect of this clause is to override the doctrine of frustration.

Liquidated damages clause

These clauses stipulate how much an offending party should pay in the event of a breach of contract. These can be very useful devices because they can save a good deal of time when it comes to litigation. They must however be a genuine covenanted pre-estimate of damage and not a disproportionate sum. If the courts believe that the clause is a penalty clause it will be unenforceable. (Dunlop Pneumatic Tyre Co. v New Garage & Motor Co. Ltd [1915] AC 79)

Arbitration Clauses

Many contracts contain arbitration clauses. Arbitration is an alternative to litigation. This is important – arbitration and litigation do not co-exist.

Historically it was considered desirable to go to arbitration for a number of reasons. Arbitration avoids the harmful publicity of litigation, it can be more flexible and it is sometimes cheaper and quicker.

It is important to note that the advantages of arbitration are today not quite as obvious as in previous years. Since the Woolf reforms (the Civil Procedural Rules) litigation is more streamlined and in many cases may be the cheaper and quicker option. In addition, forms of alternative dispute resolution – mediation in particular - are increasingly popular.

Retention of Title Clauses

These are sometimes referred to as Romalpa (Aluminium Industrie Vaasen BV v Romalpa Aluminiul Ltd [1976] 1 WLR 676) clauses after the case that introduced retention of title into English law. These are used in virtually every standard sale of goods contract. The seller reserves title (ownership) in the goods until the seller has paid him. This means that if the buyer becomes insolvent before the seller has been paid, the buyer can reclaim the goods. 

 

see further: textbooks

Law of Contract - Terms in a Contract (Part 2)

Terms implied by statute

Because of the doctrine of supremacy, Parliament can enact any statute it desires. It can therefore imply terms into any contract.

The implied terms you are most likely to encounter are those contained in S12-15 Sale of Goods Act 1979.

S 12 implies a term into all sales of goods that the seller is legally entitled to sell the goods. (In other words – that he has good title to the goods.)

S.13 implies a term that where there is a sale by description, the goods will match the description.

S.14 (2) implies a term that goods will be of a satisfactory quality.

S.14 (3) implies a term that if goods are sold for a particular purpose they will be fit for that purpose.

In practice these terms are extremely important. It will usually be much easier to rely on these terms than any express terms that may also be in the contract.

Conditions and warranties
Historically it was believed that all terms (implied or express) were either warranties or conditions. This classification is vitally important as it defines the extent of the available remedies in the event of a breach of contract.

Conditions

Conditions are terms that go to the heart of the contract. Because of the importance of this type of term, the consequence of a breach of condition is that the innocent party will be able to terminate the contract and/or claim damages.

Warranties

Warranties are terms of lesser importance. In the sale of goods act they are defined as terms “collateral to the main purpose of the contract.”

Because warranties are not so important, the consequence of a breach of warranty is that the innocent party is only entitled to claim damages.

Innominate Terms

In 1962, the Court of Appeal decided that there was a further group of terms that could not be classified as either warranties or conditions. Innominate terms are those terms which if breached could have serious or minor consequences.

In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd,( [1962] QB 26) Lord Justice Diplock considered the contractual obligation that a ship should be seaworthy. Lord Diplock decided that the term itself when put into the contract was an intermediate or innominate term - it could only be assessed whether it was a warranty or condition once a breach had occurred.

This makes sense when you try to define “seaworthy”. Seaworthy could mean that the ship must be tidy and well presented. It could also mean that it can put out to sea without sinking! 

 

see further: textbooks

Law of Contract - Terms in a Contract (Part 1)

“The terms of a contract give substance to a parties’ obligation.” (Taylor & Taylor. Contract Law Directions (2007))

Every contract contains terms. The nature and extent of these terms defines each party’s obligations and rights under the contract.

It can sometimes be difficult to decipher what are the terms of a contract. This is particularly so with oral contracts. The problem is that not all pre-contractual statements are terms. They could be representations or mere “puffs”. 

Mere puffs

A mere puff is a statement often associated with advertising. Another way of explaining this is “salesman’s hype” or hyperbole. These are statements that plainly exaggerate and are not intended to be taken seriously. The important point about them is that they have no contractual effect and no legal consequences.

Representations

A representation is a statement that is intended to induce someone into a contract. It is not a term of the contract; therefore it does not have contractual force. Unlike a mere puff, representations do have legal consequences. The area of misrepresentation is outside the ambit of this syllabus, but you will study this on the LLB.

How to distinguish between terms, puffs and representations

Unfortunately, there is no set formula to identify terms. The courts will make a decision using the objective approach to assess the intentions of the contracting parties.

“The intention of the parties can only be deduced from the totality of the evidence, and no secondary principles of such a kind can be universally true.”( Heilbut, Symons & Co. v Buckleton [1913] AC 30)

Express terms and implied terms

Many contracts are made up of a mixture of express and implied terms.

Students often make the mistake of thinking that express terms have to be written. This is not the case. An express term is one that is expressed in some way.

Terms can be implied into a contract in a variety of ways. Probably the most important in practise are those implied by statute. 

see further: textbooks

Law of Contract - Modern Technology and Contract Formation (Part 2)

Internet ‘acceptance’

When making a purchase online, the company will send you a confirmation of order document, detailing the products purchased and the prices. At the very least, you will have opportunity to view your goods in a ‘virtual shopping basket’. At this stage you would be able to withdraw from the agreement.

There is no doubt that contracts can be completed by electronic means. In 2000, the European Union published the Directive on Electronic Commerce 2000/31/EC. Article 9 of this Directive stated that: “Member States shall ensure that their legal system allows contracts to be concluded by electronic means”. However, what is less clear – and is not answered by this Directive – are the acceptance mechanisms involved.

The question is therefore, how do the traditional acceptance rules fit into contemporary communication methods?

Two main arguments have been put forward. First, that all Internet communication is instantaneous and thus subject to the acceptance rule advocated in Entores and Brinkibon. The rationale for this is that Internet communications take place along telephone lines.

Second, that email communication is not instantaneous, because there are no direct links between the two people communicating by email, as all communication goes through a server (perhaps similar to a post box?). Furthermore, once you have pressed the send button on your email, there is nothing that you can do to retrieve the email (perhaps similar to putting a letter into a post box?).

A third way?

Over the past couple of decades, there has been a slight move away from traditional contractual formation rules, instead preferring to use a more subjective approach to contract formation. Cases such as: Butler Machine Tool v Ex-Cello Corp [1979] 1 All ER 965, Gibson v Manchester City Council [1979] 1 All ER 972 and Holwell Securities Ltd v Hughes [1974] 1 All ER 161 suggest a move away from traditional contractual formation rules and a move towards a more subjective ‘intention of the parties involved’. Is this practical? What problems/advantages would this have?

For instance, in Gibson Lord Diplock stated:
…there may be certain types of contract, though I think they are exceptional, which do not fit easily into the normal analysis of a contract as being constituted by offer and acceptance, but a contract alleged to have been made by an exchange of correspondence between the parties in which the successive communications other than the first are in reply to one another is not one of these.

Furthermore, Master of the Rolls, Lord Denning stated in Butler Machine Tool:
In many cases our traditional analysis of offer, counter-offer, rejection, acceptance…is out of date. The better way is to look at all the documents passing between the parties and glean from them or from the conduct of the parties whether they have reached an agreement on all material points.

It could be argued that a more subjective approach to contract formation in relation to modern technology would be more appropriate, as it would allow more flexibility and freedom.

Remember that there have been no specific cases in this area, so there is a large scope for argument and interpretation. 

 

see further: textbooks

Law of Contract - Modern Technology and Contract Formation (Part 1)

Introduction

Although it may appear to be somewhat tedious, the exact moment a contract is formed is of utmost importance. Once there is a valid acceptance, the right of the offeror to withdraw the offer ends. It can also be of assistance in deciding which jurisdiction the contract should be within should a dispute arise. Furthermore, a valid acceptance may demonstrate where taxation liabilities lie.

The common law has established some fairly clear rules in relation to traditional forms of communication, for instance, the Postal rule and the instantaneous communication rule. (These were covered in Session one). The question to ask is whether (or how) these rules apply to newer forms of technology like email, the Internet and mobile phones. To date, there has been no case deciding definitively on this area, so we have to proceed by comparison.

Internet ‘Offers’

The Internet has opened a range of new possibilities to the consumer, who can buy virtually any item they want online. The first question to ask is that if a person goes to a website, for instance ‘tesco.com’, are the goods displayed on ‘offer’ (merely requiring the offeree to accept), or an invitation to treat, as was seen in the case of Fisher v Bell (1974) and requiring the consumer to make the offer, which in turn the seller would accept.

In general, considering the usual set-up of a website, the context is said to be that of an invitation to treat, although this does not discount the possibility of an unilateral offer being made, as was the case in Carlill v Carbolic Smoke Ball Co. [1892], thus meaning that if accepted a contract would be in existence.

The Argos experience

The company Argos is a United Kingdom based catalogue company that has stores all around the country. In 1999, Argos advertised a television worth £299.99 for only £3.00. Needless to say, Argos received thousands of orders for this deal, the total value was reported to be worth over £1m. Once the error came to light, Argos refused to honour the agreement, saying that they had clearly not intended to sell the television at £3.00, and in any case the display of a product on a website does not amount to an offer, and is merely an invitation to treat. No legal action materialised from this, but it does demonstrate the somewhat uncertain context that the law within this area finds itself. 

 

see further: textbooks

Law of Contract - Consideration (Part 3)

6. Part Payment of a debt
In Foakes v Beer ((1883-84) L.R. 9 App. Cas. 605, HL ), the House of Lords upheld the ancient rule in Pinnel’s Case ((1602) rep 117a ) that part payment of a debt was not good consideration for the remainder of the debt.

Pinnel’s Case itself contains several exceptions to this rule:

“The gift of a horse, hawk, robe, &c. in satisfaction, is good. Payment of part before the day, and acceptance, may be in satisfaction of the whole; so payment of part at a different place.”

Also: “An acknowledgment of satisfaction by deed is a good bar without any thing received.”

Although the rule against part payment has stood unchanged since Pinnel’s Case, it has been subject to considerable criticism. Even in Foakes v Beer Lord Blackburn seemed to suggest that it was out of touch with commercial reality.

“All men of business....recognise and act on the ground that prompt payment of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this is often so. Where the credit of the debtor is doubtful it must be more so.”

In Re Selectmove ([1995] 1 WLR 474), it was argued that part payment could be good consideration for the entire debt provided that the creditor obtained a practical benefit from the part-payment.

The court held that the “practical benefit” test did not apply to part payment of a debt. One of the main reasons given for this was that by its very nature, part-payment of a debt would always provide a practical benefit – therefore to extend the Williams v Roffey exception to Part-Payment cases would deprive the rule in Pinnel’s Case of its efficacy.

It is worth pointing out that the court in Re Selectmove pointed out that it was not within its power to overrule Foakes v Beer that was a decision of the House of Lords.

The salient points are covered in the following extract from Re Selectmove. 
 
“When a creditor and a debtor who are at arm’s length reach agreement on the payment of the debt by instalments to cover to accommodate the debtor, the creditor will no doubt always see a practical benefit to himself in so doing. In the absence of authority there would be much to be said for the enforceability of such a contract. But that was a matter expressly considered in Foakes v Beer yet held not to constitute good consideration in law. Foakes v Beer was not even referred to in Williams v Roffey, and it is in my judgment impossible, consistently with the doctrine of precedent, for this court to extend the principle of the Williams case to any circumstances governed by the principles in Foakes v Beer. If that extension is to be made, it must be made by the House of Lords or, perhaps even more appropriately, by Parliament after consideration by the Law Commission.” (Per Peter Gibson LJ ) 

 

Promissory Estoppel 
 
A chapter on consideration would not be complete without some mention of the doctrine of promissory estoppel.

This is probably the most important exception to the rule in Pinnel’s Case.

Lord Denning resurrected this doctrine in the case of Central London Property Trust v High Trees House Ltd. ([1947] KB 130 )

Promissory estoppel can be an exception to the rule that part-payment is not good consideration for the entire debt.

Estoppel refers to the prevention of a party from relying on some legal right. There are various types of estoppels. The two most common are proprietary estoppels (involving land) and promissory estoppels (involving promises).

For estoppel to apply there must be:

A representation made. This must be a clear and unambiguous statement by the creditor that his legal right will not be enforced.

Reliance on that representation by the debtor.

It must be inequitable for the creditor to go back on his promise.

In addition, proprietary estoppel cannot be used to bring an action, only as a defence. “It is a sword not a shield.” (Combe v Combe 2 KB 215)

New Developments

Please note that a recent case appears to have wide ramifications for this whole area of law. In Collier(Collier v P & MJ Wright (Holdings) Ltd), the Court of Appeal considered both the rule in Foakes v Beer and also the doctrine of promissory estoppel. The court took such a liberal view of the doctrine of estoppel that the part-payment rule was effectively by-passed. It remains to be seen whether this approach will be followed.

“The facts of the case demonstrate that, if 1) a debtor offers to pay part only of the amount he owes; (2) the creditor voluntarily accepts the offer, and (3) in reliance on the creditor’s acceptance the debtor pays that part of the money he owes in full, the creditor will, by virtue of the doctrine of promissory estoppel, be bound to accept that sum in full and final satisfaction of the whole debt. For him to resile will of itself be inequitable.”

Law of Contract - Consideration (Part 2)

3. The consideration must not be past

If party “A” voluntarily performs an act, and party “B” makes a promise afterwards, the consideration for the promise is said to be in the past.

Re McArdle ([1951] 1 All ER 905).

A wife and her three grown-up children lived together in a house. The wife of one of the children did some decorating and later the children promised to pay her £488 and they signed a document to this effect.

It was held that the promise was unenforceable, as all the work had been done before the promise was made and was therefore past consideration.

There are several exceptions to this rule. The most memorable exception derives from the ancient case of Lampleigh v Braithwait ((1615) Hob. 105).

Braithwait killed someone and then asked Lampleigh to get him a pardon. Lampleigh got the pardon and gave it to Braithwait who promised to pay Lampleigh £100 for his trouble.

It was held that although Lampleigh's consideration was past (he had got the pardon) Braithwaite's promise to pay could be linked to Braithwaite's earlier request and treated as one agreement, so it could be implied at the time of the request that Lampleigh would be paid.

Treitel derives the following principles from this case:
 

An act done before a promise was made can be consideration for it if three conditions are satisfied:

The act must have been done at the request of the promisor.

It must have been understood that payment would be made.

The payment must have been legally recoverable

4. Consideration must not be the performance of an existing public duty.

Where a party already has an existing duty to perform an act, he will not be able to enforce a promise made to him in return for performing that act.

This sounds complicated – it is best explained by the following example.

Collins v Godefroy ([1831] 1 B & Ad 950)

Godefroy promised to pay Collins if Collins would attend court and give evidence for Godefroy. Collins had been served with a subpoena (a court order telling someone they must attend). Collins sued for payment. It was held that as Collins was under a legal duty to attend court he had not provided consideration. His action therefore failed.

If a party exceeds his public duty, this can be good consideration (Glasbrook Bros. Ltd v Glamorgan C.C. [1921] A.C. 270).

5. Consideration must not be the performance of a pre-existing contractual duty.

This rule originates from the case of Stilk v Myrick ((1809) 2 Camp. 317. also (1809) 6 Esp. 129).
Two sailors deserted from a ship when it docked in a Baltic port. The captain of the ship promised to divide the two sailors’ wages amongst the rest of the crew if they sailed the ship back to London.

It was held that this promise was not binding as the crew were already under a contractual duty to sail the ship home. The crew were unable to claim the extra wages.

Although this case remains good law, a more recent case has brought considerable confusion into this area.

Williams v Roffey Bros. (Ltd [1990] 1 All ER 512)

Roffey had a contract to refurbish a block of flats and had sub-contracted the carpentry work to Williams. After the work had begun, it became apparent that Williams had underestimated the cost of the work and was in financial difficulties. Roffey, concerned that the work would not be completed on time and that as a result they would fall foul of a penalty clause in their main contract with the owner, agreed to pay Williams an extra payment per flat. Williams completed the work on more flats but did not receive full payment. He stopped work and brought an action for damages. In the Court of Appeal, Roffey argued that Williams was only doing what he was contractually bound to do and so had not provided consideration.

It was held that where a party to an existing contract later agrees to pay an extra "bonus" in order to ensure that the other party performs his obligations under the contract, then that agreement is binding if the party agreeing to pay the bonus has thereby obtained some new practical advantage or avoided a disadvantage. In the present case there were benefits to Roffey including (a) making sure Williams continued his work, (b) avoiding payment under a damages clause of the main contract if Williams was late, and (c) avoiding the expense and trouble of getting someone else. Therefore, Williams was entitled to payment.

The principle behind Williams v Roffey is that if a “practical benefit” is conferred, performance of a pre-existing duty can be good consideration.

Please note that although Stilk v Myrick and Williams v Roffey appear to contradict each other, they both remain good law.

Law of Contract - Consideration (Part 1)

Under classical contract law, even if the contracting parties have come to an agreement, this agreement can only be enforced if it is supported by consideration.

The classic definition of consideration was stated by Lush J. in 1875:

“a valuable consideration in the sense of the law, may consist of either in some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.” ((1875-1876) L.R. 1 App. Cas. 554, HL )

The doctrine of consideration is highly controversial. Many academics believe that the law of contract would operate perfectly well without it. (Not all jurisdictions recognise it.) The doctrine consists of the following highly technical rules.

1. Consideration must be sufficient but need not be adequate

This confusing phrase means that the consideration must be of some value (sufficient). The consideration does not have to be equal (adequate). The courts are not interested in whether the contracting parties have made a good or fair bargain.

The following case demonstrates this principle.

Chappell & Co Ltd v The Nestle Co Ltd [1960] AC 87

As part of a special offer/promotion – Nestle offered to sell at a discount a record of the song called “Rockin’ Boots” to anyone who sent in 3 Nestle chocolate wrappers.

Chappell owned the copyright to “Rockin’ Boots”. Under the Copyright Act 1956 Nestle were required to pay Chappell royalties of 6.25 % of the ordinary retail price. Nestle offered to pay Chappell 6.25% of the money they had received for the records sold. Chappell brought an action, arguing that the chocolate wrappers should also part of the consideration for the sale of the record.

The House of Lords held (in a split decision) that the chocolate wrappers did constitute good consideration.

This case should be compared to Lipkin Gorman v Karpnale ([1989] 1 WLR 1340), where the House of Lords held that gaming chips in a casino were not valid consideration.

2. Consideration must move from the promisee

As a general rule, a person who wishes to enforce the contract must show that they provided consideration. It is not enough to show that someone else provided consideration (Tweddle v Atkinson (1861) 1 B.& S. 393).

Law of Contract - Acceptance (Part 2)

The postal rule

The origin of the postal rule is the case of Adams v Lindsell ((1818) 1 B & Ald 681 (KB)). Where acceptance is made by post, it takes effect the moment the letter is put in the post box. This means that the contract will have been formed before the offeror learns of the acceptance.

The postal rule can apply even if the letter is lost in the post and the offeror never receives the acceptance.

It is important to recognise that the postal rule is not always applied. It will not apply if it has been excluded by the terms of the offer or if its application would be manifestly absurd (Holwell Securities V Hughes). For example, if all the previous negotiations had been carried out using a different mode of communication (such as by telephone), it may be considered absurd to apply the postal rule. In addition if the offeror says “let me know if you accept my offer” – this could be enough to disapply the rule.”

Extending the postal rule?
The courts have not extended the rule to modern, instantaneous forms of communication such as telephone, telex or fax (Entores v Far East Miles – The position regarding Faxes is slightly more complicated.).

Entores v Miles Far East Corp ([1955] 2 QB 327)

The plaintiffs in London made an offer by Telex to the defendants in Holland. The defendant's acceptance was received on the plaintiffs' Telex machine in London. The plaintiffs sought leave to serve notice of a writ on the defendants claiming damages for breach of contract. Service out of the jurisdiction is allowed to enforce a contract made within the jurisdiction. The Court of Appeal had to decide where the contract was made.

Denning L.J. stated that the rule about instantaneous communications between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offeror: and the contract is made at the place where the acceptance is received. The contract was made in London where the acceptance was received. Therefore service could be made outside the jurisdiction.

But when exactly does receipt occur?

The Brimnes ([1975] QB 929)

The defendants hired a ship from the plaintiff ship owners. The ship owners complained of a breach of the contract. The ship owners sent a message by Telex, withdrawing the ship from service, between 17.30 and 18.00 on 2 April. It was not until the following morning that the defendants saw the message of withdrawal on the machine.

Edmund-Davies L.J. agreed with the conclusion of the trial judge. The trial judge held that the notice of withdrawal was sent during ordinary business hours, and that he was driven to the conclusion either that the charterers' staff had left the office on April 2 'well before the end of ordinary business hours' or that if they were indeed there, they 'neglected to pay attention to the Telex machine in the way they claimed it was their ordinary practice to do.' He therefore concluded that the withdrawal Telex must be regarded as having been 'received' at 17.45 hours and that the withdrawal was effected at that time.

Note: Although this is a case concerning the termination of a contract, the same rule could apply to the withdrawal and acceptance of an offer.

Silence?
Normally silence cannot be taken for acceptance. In the case of Felthouse v Bindley, Felthouse made an offer to his nephew to buy a horse for £30.15. The letter ended:

“If I hear no more about him, I consider the horse mine at £30 15 s.”

The nephew did not reply. The horse was subsequently sold at auction to a third party. Felthouse brought an action against the auctioneer claiming that he had a valid contract and the horse was his. The court held however that the nephew’s silence meant that he had not accepted Felthouse’s offer.

Acceptance by conduct
A valid acceptance can be made by conduct. This is demonstrated by the following case.

Brogden v Metropolitan Railway Co. ([1877] 2 App Cas 666)

B supplied coal to MRC for many years without an agreement. MRC sent a draft agreement to B who filled in the name of an arbitrator, signed it and returned it to MRC's agent who put it in his desk. Coal was ordered and supplied in accordance with the agreement but after a dispute arose B said there was no binding agreement.

It was held that B's returning of the amended document was not an acceptance but a counter-offer that could be regarded as accepted either when MRC ordered coal or when B actually supplied. By their conduct the parties had indicated their approval of the agreement.

Another, more common exception is the acceptance in a unilateral contract. Essentially this is a “promise for an act.” The case of Carlill v Carbolic Smoke Ball is useful again as an authority here.

Law of Contract - Acceptance (Part 1)

“An acceptance is a final and unqualified expression of assent to the terms of an offer.” - Treitel

As with offers it can sometimes be difficult to distinguish an acceptance from other responses to offers.

Counter offers

If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance.

A counter-offer destroys the original offer. The following case is the classic authority for this point.

Hyde v Wrench
Mr Wrench offered to sell his farm to Hyde for £1,000. Mr Hyde at first made a counter offer of £950, but then two days later agreed to pay £1,000. Wrench refused to complete the sale and accordingly Hyde brought an action demanding that the contract be enforced. However, the court ruled that the effect of the counter offer was to destroy the original offer (Hyde v Wrench [1880] 5 QBD 346).

Requests for information
In the course of negotiations it is important to distinguish a counter offer from a request for more information. Although such a request will not make an acceptance, unlike a counter offer, it does not destroy the original offer (Stevenson v Mclean (1880)).

Examples
1. Offer:

Will you sell me your car for £500?

Counter offer:

I will take £750 for it.

IN THIS EXAMPLE THE COUNTER OFFER HAS NOW DESTROYED THE ORIGINAL OFFER.

2. Offer:

Will you sell me your car for £500?

Request for information:

Well, I was looking for more – would that be £500 cash?

IN THIS EXAMPLE, THE REQUEST FOR INFORMATION HAS NOT DESTROYED THE ORIGINAL OFFER. IT CAN STILL BE ACCEPTED.

Communication of acceptance

The general rule is that an acceptance must be communicated to the offeror. Until and unless the acceptance is so communicated, no contract comes into existence.

The acceptance must be communicated by a person with authority.

Powell v Lee ([1908] 99 LT 284)

The plaintiff applied for a job as headmaster and the school managers decided to appoint him. One of them, acting without authority, told the plaintiff he had been accepted. Later the managers decided to appoint someone else. The plaintiff brought an action alleging that by breach of a contract to employ him he had suffered damages in loss of salary. The county court judge held that there was no contract as there had been no authorised communication of intention to contract on the part of the body, that is, the managers, alleged to be a party to the contract.

The receipt rule

The general rule is that the acceptance will only take effect when the acceptance has been received by the offeror. This is known as the receipt rule. This rule is subject to a very odd exception where an acceptance is posted.

Law of Contract - Offer (Part 2)

Displays of Goods in Shop Windows & Supermarket Shelves

As a general rule these are both invitations to treat.

The two leading cases in this area are Fisher v Bell ([1961] 1 Q.B. 394) and PSGB v Boots Cash Chemists ([1953] 1 Q.B. 401).

Fisher v Bell involved the attempted prosecution of a shop keeper. The Restriction of Offensive Weapons Act (1959) made it an offence to offer for sale certain knives. The court held that the shopkeeper was not guilty of “offering for sale” a flick knife even though it was displayed in his shop window with a price tag on it.

The following extract explains the courts reasons:

“According to the ordinary law of contract, the display of an article with a price on it in a shop window is merely an invitation to treat.” - Per Lord Parker CJ (Fisher v Bell)

In some ways this is a remarkable decision. The court chose to construe the statute according to the strict literal approach.

PSGB v Boots Cash Chemists

The issue in this case was where exactly in the shop was the contract made. This was significant because statute required medicines to be sold under the supervision of a qualified pharmacist. If the contract was formed when the medicines were picked up the customer from the shelf – there was no supervision. The court held that the contract was formed at the cash till. The display of goods was an invitation to treat; the customer made the offer by taking the medicines to the till and finally; Boots accepted the offer by taking the money for the medicines.

Please note that it is only a presumption that displays of goods are invitations to treat. It is possible that the court will place a different construction if circumstances indicate that the shop owner/advertiser demonstrates an intention to contract.

In the remarkable case of Lefkovitz v Great Minneapolis Stores (86 NW 2d 689 (1957)), Mr Lefkovitz saw an advertisement for a fur coat stating:

“Saturday 9AM sharp, 3 Brand New Fur Coats, worth $100 – First Come First Served”

Mr Lefkovitz was first in line but the store refused to sell him the coat because he was a man! Mr Lefkovitz brought an action for breach of contract. The court held that the advertisement/display of goods was in fact an offer (a unilateral one similar to that in Carlill) that Mr Lefkovitz had accepted. The store was in breach of contract and Mr Lefkovitz was awarded damages.

Auctions

In an auction, the auctioneer's call for bids is an invitation to treat, a request for offers. The bids made by persons at the auction are offers, which the auctioneer can accept or reject as he chooses. Similarly, the bidder may retract his bid before it is accepted (Payne v Cave. Now codified by s.57(2) Sale of Goods Act (1979)).
The situation is different where an auction is held “without reserve” (Barry v Davies (2002) also Warlow v Harrison – this decision however was only obiter). In the case of Warlow v Harrison it was suggested (obiter) that an advertisement for an auction to be held “without reserve” contained a collateral offer to sell to the highest bidder. As the case was decided on different grounds this principle was not binding on later courts. Amazingly it took over 100 years before the courts finally decided this point in Barry v Davies.

Mere Statement of price

A mere statement of the minimum price at which a party is willing to sell does not amount to an offer ([1893] AC 552 also Gibson v Manchester County Council [1979] 1 All ER 972).

An offer should be made on definite terms

Generally speaking, the courts will not enforce offers that are vague and indefinite.

In the case of Loftus v Roberts an actress was offered of a role in a play - the salary was to be “at the West End rate”. The court held that this was too uncertain to be an offer and a valid contract had not been formed.

It must be aware that the courts have demonstrated considerable flexibility in this area.

In Hillas & Co. Ltd v Arcos Ltd ((1932) LT 503), the House of Lords upheld a contract for the sale of a “fair specification” of timber. Although it was argued that this phrase was too vague and imprecise. The court held that the contract was between parties who were experienced in the timber trade and who;

“undoubtedly attributed to the words….. some meaning which was precise or capable of being made precise.” - Per Lord Tomlin

McKendrick excellently sums up this complex area:

“On the one hand, the judges do not wish to be seen to be making the contract for the parties. On the other hand, they are reluctant to deny legal effect to an agreement that the parties have apparently accepted as valid and binding.” (McKendrick, E. Contract Law, Text Cases and Materials 2003 OUP First Edition )

Law of Contract - Offer (Part 1)

What is an Offer?

“An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed.” - Treitel

Generally speaking, an offer must be definite (Loftus v Roberts, Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256). It can be made to a particular person, to a group of people or to the world at large.

Contracts are usually formed after a certain amount of negotiation. Often, many statements are made prior to the contract being formed. It can be difficult distinguishing the offer from other statements made during the negotiation.

The main difficulty for a lawyer is identifying which statements are offers and which are merely invitations to treat.

It is a vitally important distinction to make. Unlike an offer, an invitation to treat is not legally binding.

How to distinguish between offers and invitations to treat

This is an important area. Real life scenarios often hinge on this distinction.

The general difference between an offer and an invitation to treat is that an offer is a statement by which a person is willing to contract, whereas if a person is merely seeking to start negotiations, then that is deemed to be an invitation to treat.

The most important factor is whether the court decides that one party “intended” to make a legally binding offer. To assess whether there is intention – the courts will use the objective approach (Smith v Hughes). In practice it can sometimes be very difficult to determine whether it is an offer.

The courts employ a number of presumptions to assist their interpretation.

Advertisements

As a general rule, advertisements are invitations to treat (Partridge v Crittenden [1968] 2 All ER 421).

This is possibly the most logical option. Imagine a situation where a shop advertises the sale of coats at £12.00 each. At some point he may run out of coats to sell. If a customer then arrives and asks to buy a coat, the shop will be unable to supply it. If the advertisement were an offer, the customer would be accepting the offer and a contract would have been formed. Because the shop could no longer supply the coat, it would be in breach of contract.

Construing the advertisement as an invitation to treat solves this problem. Under normal conditions, the customer makes the offer when he asks for the coat. In our situation, the shop owner is perfectly at liberty to accept or reject the offer. He has not yet entered into a legally binding agreement.

Although this is the general presumption, it can be rebutted.

It is however, possible for an advert to be an offer. In Carlill v Carbolic Smoke Ball the advertisement was held to be a unilateral offer which was accepted by Mrs Carlill’s conduct.

A unilateral offer is a promise made in exchange for an act. The most obvious example of a unilateral offer is a reward poster.

Carlill is a memorable case mainly due to its unusual facts. It is also a very important case in contract law. It can be cited as an authority for various different principles: An offer must be on definite terms, there must be an intention to create legal relations and also that an advertisement can be an offer.

Law of Contract - Introduction (Part 3)

The objective approach

Throughout legal studies, it is often to see reference to the “objective” or the “subjective” approach. These terms are often confusing and can be rather misleading. Unfortunately their use is so widespread that every lawyer must be aware of them.

The general rule in the law of contract is that the courts will use the objective approach to decide whether a contract has been formed. The classic authority for this principle is the case of Smith v Hughes (1871) L.R. 6 QB):

“If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”

In essence the objective approach means that the courts will base their decision on how the words and conduct of the contracting parties would appear to a reasonable man. The courts will not be basing their judgment on what the contracting parties claim was in their minds at the time.

This approach is rationalised by Treitel as follows:

“This objective principle is based on the needs of commercial convenience. Considerable uncertainty would result if A, after inducing B reasonably to believe that he (A), had agreed to certain terms, could then escape liability merely by showing that he had no “real intention” to enter into that agreement.”

From which perspective is the objectivity assessed?

Professor Howarth, in a well-known article (The Meaning of Objectivity in Contract (1984) 100 LQR 265) explored the objective approach. In particular he questioned from which perspective the intention of the parties was assessed.

He considered that there were 3 options:

1. Promissor objectivity

This means that the promise (which could be the offer or the acceptance) is understood from the point of view of a reasonable person standing in the position of the promisee. (The party making the promise.)

2. Promisee objectivity

This is from the point of view of a reasonable person in the position of the promisee (the person to whom the promise is made).

3. Detached objectivity

Here the reasonable person is in the position of a third party, independent to the promisor and promisee.

Please not that there are academics that have disagreed with Professor Howarth’s classification (Vorster J. “A comment on the meaning of objectivity in contract” (1987) 103 LQR 274). The important point to note however is that there is clearly more than one way of looking “objectively” at a contract law situation (McKendrick).

Requirements for a valid contract in English law

Under English law, there are three principal requirements for a valid contract.

1. Agreement

2. Consideration

3. The Intention to Create Legal Relations.

Finding agreement - The doctrine of offer and acceptance

The normal test for ascertaining agreement is to apply the doctrine of offer and acceptance.

The doctrine of offer and acceptance has been criticised by some commentators as rigid and excessively formalistic.

The rationale for the use of this doctrine is the desire of the courts for commercial certainty.

Please note that there are cases in which the courts have simply not applied the doctrine (Percy Trentham v Archital Luxfer [1993] 1 Lloyd’s Rep25). In other instances the application of the doctrine appears to be highly artificial (Clarke v Earl of Dunraven (The Satanita) [1897] AC 59 HL). 

See further, textbooks:

Law of Contract - Introduction (Part 2)

Competing Ideologies

It should be clear that there are competing ideologies within contract law. Adams and Brownsword explored this aspect of contract law in a 1987 article. Adams and Brownsword identified two basic philosophies, Market-individualism and Consumer-welfarism.

Market-individualism

This theory recognises the function of the market place as a venue for “competitive exchange.” The laws of contract facilitate competitive bargaining.

Although Adams and Brownsword recognise that it is not “the law of the jungle,” contract law does not require full disclosure of all pertinent facts to the other contracting party. This theory encapsulates the principles of freedom of contract and also caveat emptor.

One example of this is in purchasing a house. The seller is not legally obliged to tell the buyer about matters that may materially affect the value of the property (e.g. impending developments in the neighbourhood.)

The other aspect of market-individualism is that contracting parties should be free to make their own bargains without the interference of the court. This idea encapsulates the idea of the sanctity of a contract and also the laissez faire approach of the court.

Consumer-Welfarism

This theory is completely different. It makes the fundamentally different assumption that contracts should be regulated. This means in particular, consumer contracts, but it also includes commercial contracts. Important features of this theory are the potential for stronger parties to abuse their position-therefore the law should favour the weaker party.

An oral contract – is it worth the paper it isn’t written on?

The majority of contracts formed each day are made orally and are perfectly valid.

The law only requires certain contracts to be made in writing.

Under S.2 (1) Law of Property (Miscellaneous Provisions) Act 1989 a contract for the sale of any interest in land can only be made in writing.

Under S.4 The Statute of Frauds 1677 an agreement for guaranteeing an amount due under a debt or some other obligation must be in writing. Therefore an oral guarantee is not enforceable.

Contracts made by Deed

Under S.52 (1) Law of Property Act 1925, all conveyances of land must be made by deed.

Please note – the use of deeds is not restricted to conveyancing. It can useful for many important transactions. For contracts under deed there is no requirement that both parties provide consideration.

The role of the courts – the desire for certainty

If there were only one word to describe the rationale behind the courts’ attitude to contract law – that word would have to be certainty.

The courts have adopted a variety of different methods, doctrines and rules, all of which are intended to ensure that people can enter into agreements with the certainty that these agreements can and will be enforceable in the courts.

Although this approach has been significantly adapted (mostly by statute) to cater for the modern day consumer, the desire for certainty still lies at the heart of contract law.

See further, textbooks:

Law of Contract - Introduction (Part 1)

Contract is arguably the most pervasive and important subject that a lawyer will study.

An understanding of contract law is essential before areas such as commercial law, company law or international trade law can be studied properly.

The law of contract underpins all our everyday commercial transactions. Although the substantive law may vary from one jurisdiction to another, it is difficult to conceive of a system that does not have the law of contract at its heart.

To a large degree, the law of contract could be described as “Judge made”. The fundamental principles stem from a plethora of judgments- many of which date from the 19th Century and earlier.

Although these fundamental principles remain important; in the last 50 years, Parliament has enacted a variety of statutes which have affected this area significantly.

The most significant statutes are the Unfair Contract Terms Act 1977 and the Sale of Goods Act 1979.

What is a Contract?

There are various ways to define a contract. Chitty states that there are two main competing definitions. One defines a contract as follows:

“A promise or a set of promises that the law will enforce.”

The second definition is most clearly stated by Treitel:

“A contract is an agreement giving rise to obligations which are enforced or recognised by law.”

Where does contract law fit within the law?

Contract law is part of the law of obligations. Within this area are also the law of tort and the law of restitution.

Unlike tort, contract law is based on “voluntary obligations that are assumed in exchange for a benefit.”

Tort is based on non-voluntary obligations imposed by law to prevent wrongs.

Freedom of contract

Caveat emptor is a Latin term that means, “Let the buyer beware”.

Laissez-faire is a term of French origin that is used by contract lawyers to mean free enterprise or non-interventionism.

These terms are often stated in relation to the traditional attitude of the courts to contract law. They reflect the doctrine of freedom of contract. The rationale for this doctrine is that parties, dealing at “arms length” should be free to enter into any agreement without the interference of the courts. The courts role was to uphold valid contracts and prevent contracting parties from evading their contractual obligations merely because they had made a bad bargain.

This doctrine is most clearly explained by the chapter on exclusion clauses. Such clauses were (and are) placed into contracts to enable one party to avoid liability in the event of a breach of contract. (A breach is where one party fails to do something that he is contractually obliged to do.)

Under the justification of the freedom of contract doctrine, such clauses could easily be incorporated into contracts and were often upheld. The difficulty with this judicial approach was that many contracting parties were able to evade their contractual obligations by merely inserting these clauses in a contract. This created a potential for abuse by parties who were in a strong bargaining position.

The 20th Century saw the development of the consumer society – a consequence of the sale of mass-produced manufactured goods to an increasingly affluent population. A consumer contract is markedly different from the type of contract envisaged by the courts of the Victorian era (two parties dealing at arms length free to agree whichever terms they like.) In reality a consumer has little influence over the terms of the contract – it is very much a case of “take it or leave it.”

By developing various rules of interpretation (discussed later in the course), the courts went some way to curb the worst excesses, but it was only the actions of Parliament that gave modern day consumers the protection they needed. In relation to Exclusion clauses the most important development was the enactment of the Unfair Contract Terms Act 1977.

It has been said that today the “consumer is king” and we have moved from a position of Caveat Emptor to that of Caveat Venditor (Let the Seller Beware).

See further, textbook:

Company Law - Shares and Dividends (Part 3)

Potential to circumvent class protection

Again, it may be possible to utilise these provisions to circumvent the protection provided to class right-holders.

The court has held that a reduction which removes a class is not a ‘variation’ or ‘abrogation’ of those class rights, and so does not need the specific consent of that class – Re Saltdean [1968] 1 WLR 1844. Therefore, it is possible to treat different classes of shareholders differently – e.g. to reduce the whole of one class and none of another.

However, members within each class should be treated equally (Re Jupiter House Investments [1985] 1 WLR 975).

It is also necessary to obtain the consent of the court, which will only be provided if the reduction is ‘fair and equitable’ (Re Old Silkstone Collieries [1954] Ch 169).

Dividends

The Companies Act 2006, Part 23 uses the alternative term ‘distributions’.

A dividend is a payment of the profits of the company to the shareholders, and is assumed to be each member’s share of the profits to be divided (Henry v Great Northern Railway Co (1887) 1 De G & J 606).

There is no need for an express power to be contained in the memorandum of association in order to pay a dividend, but equally there is no rule that all profits must be distributed (Burland v Earle [1902] AC 83). If paid, it must be in cash unless the articles provide otherwise (Wood v Odessa Waterworks Co (1889) 42 ChD 636).

Which assets may be distributed?

When distributing the profits of the company, it is important for the directors to respect the ‘maintenance of capital’ doctrine. In addition, because the company’s assets will be in a constant state of flux, assets must be identified which may be safely distributed:

s.829 (1) CA 2006: “A company may only make a distribution out of profits available for the purpose”.

s.829(2) CA 2006: “A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made”.

Public companies are subjected to further restrictions contained in s.831 Companies Act 2006.

The process of declaring a dividend:

For each financial year of the company, the directors must prepare a directors’ report (s.234(1) Companies Act 1985/s.415 Companies Act 2006), and this must state the amount (if any) that the directors recommend should be paid by way of a dividend (s.234ZZA(1) Companies Act 1985/s.416 Companies Act 2006).

In doing this, the directors should have regard to all classes of shareholders, and not favour one over another (Henry v Great Northern Railway Co (1887) 1 De G & J 606).

Once the directors have made their recommendation, the shareholders have the power to declare a dividend:

Art.102, Table A: “Subject to the provisions of the Act, the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors”.

Art.105, Table A: “A general meeting declaring a dividend, may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of assets…”

However, no dividend is payable until it is declared, even for preference shareholders (Bond v Barrow Haematite Steel Co [1902] 1 Ch 353), and once it is declared it is treated as a debt owed by the company.

See further, textbook:

Company Law - Shares and Dividends (Part 2)

Potential to circumvent class protection

Under the topic of "Share capital and issuing shares", class right-holders are given additional protection to prevent the overall majority of shareholders removing class rights (s.125/s.127 Companies Act 1985 and s.630/s.633 Companies Act 2006). However, it may be possible to circumvent this protection by creating extra shares with the same class rights following the procedure outlined above. If enough shares are issued, it is possible to push the original class shareholders into a minority of less than 15% thereby rendering the extra protection useless.

The reason why this is possible is that the statutory protection applies to a ‘variation’ or ‘abrogation’ of class rights. However, the courts have held that diluting the original class shareholders’ voting power (by creating more shares with the same rights) is NOT a variation or abrogation, and so the consent of the class is NOT required to issue the extra shares:

“There is to my mind a distinction, and a sensible distinction, between an affecting of the rights and an effecting of the enjoyment of those rights” – White v Bristol Aeroplane Co Ltd ([1953] Ch 65).

Once the extra shares are issued to a party who agrees to vote in favour of abolishing the class rights (this agreement can take the form of a shareholders’ agreement, rendering it contractually binding – Russell v Northern Bank [1992] 1 WLR 588, it is possible to call a class meeting under s.125 Companies Act 1985/s.630 Companies Act 2006. Because this class meeting is now under control of the party in favour of the abolition or variation, the resolution will succeed.

Furthermore, provided the original class shareholders have been pushed into a less than 15% minority, the additional protection of s.127 Companies Act 1985/s.633 Companies Act 2006 will be unavailable.

Reduction of share capital

In contrast to the above example, there may be times when a company wishes to reduce the number of shares. This could occur where it has a surplus of assets – essentially it is possible to hand some of this back to the members in exchange for their shares. Alternatively, it could reflect a diminution in the value of its assets.

 

Maintenance of share capital

There is a general rule that a company must ‘maintain’ its share capital. This doctrine was developed to protect creditors. “The creditor… gives credit to the company on the faith of the representation that the capital shall be applied only for the purposes of the business, and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders, though it may which he cannot enforce otherwise than by a winding up order” – Re Exchange Banking Co., Flitcroft’s Case (1882) 21 Chd 519. It ensures that capital is maintained as a secure fund which cannot be distributed to shareholders except on winding up – essentially, the liability of members is limited but not absolute – i.e. members are still liable up to the amount they paid for the shares.

However, there are limits on this doctrine:

- capital need only be maintained so far as ordinary business risks allow. If it is lost through bad luck or even negligence, there has been no breach of the doctrine;

- there is no requirement that debt is taken in proportion to capital – therefore, a company with an authorised share capital of 1,000 shares of £1 each could, in theory, take out a loan of £1,000,000;

- there is no basic requirement that the company is adequately capitalised.

The practical effect of this is that there are times where capital may be paid to, or returned to, members.

One such example is found in the companies legislation:

Reduction of share capital

s.135 (1) Companies Act 1985: “Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having share capital may, if authorised to do so by its articles, by special resolution reduce its share capital in any way”.

Art.34 Table A: “Subject to the provisions of the Act, the company may by special resolution reduce its share capital in any way”.

The phrase ‘in any way’ gives the company wide powers of reduction:

British and American Trustee v Couper [1884] AC 399

“The statute has not prescribed the manner in which the reduction is to be carried out, nor has it prohibited any method of effecting that object”.

Ex Parte Westburn Sugar Refineries Ltd [1951] AC 625

“The general rule is that the prescribed majority of the shareholders are entitled to decide whether there should be a reduction of capital and if so in what manner and to what extent it should be carried into effect”. 

See further, textbooks:

Company Law - Shares and Dividends (Part 1)

Introduction – the alteration of share capital

Even once a company is up and running, it may desire to alter its share capital. There are two primary ways in which this can take place: an increase of share capital, or a reduction of share capital

Increase of share capital

The company may wish to increase its share capital in order to attract further investment and expand. Although this is a perfectly legitimate action, there is the possibility that this could be abused.

Increase of share capital

The first step in issuing extra shares is to identify whether there are any authorised, unissued shares. If there are not, then it becomes necessary to increase the authorised share capital of the company:

s.121 (1) Companies Act 1985: “A company… if so authorised by its articles may… (a) increase its share capital of such amount as it thinks expedient”.

Art.32 Table A: “The company may by ordinary resolution (a) increase its share capital… of such amount as the resolution proscribes”.

s.617 Companies Act 2006 provides a similar mechanism.

Give the directors the power to allot the shares

Once there are authorised, unissued shares available, it becomes necessary to give the directors the power to issue (or allot) them.

s.80 (1) Companies Act 1985: “The directors… shall not exercise any power… to allot… unless they are authorised to do so by (a) the company in a general meeting; or (b) the company’s articles”.

s.80 (4): “The authority must state the maximum amount… that may be allotted, and the date on which it will expire, which must not be more than 5 years”.

Similar provisions are found in s.551 Companies Act 2006.

Pre-emption rights

A danger of issuing shares to new members is that the existing members may lose their influence within the company. For example, if a member holds 75 out of 100 shares, they will be in a position to pass both ordinary and special resolutions. However, if a further 100 shares are issued to others; suddenly the member will only hold 75 out of 200 shares, meaning they will not even have sufficient influence to pass an ordinary resolution.

In order to combat this danger, the companies legislation provide for rights of pre-emption – essentially, that if new shares are to be issued, they should first be offered to existing members in proportion to their existing shareholding to at least give them the opportunity to preserve their voting power.

s.89 (1) Companies Act 1985: “A company proposing to allot equity securities:

(a) shall not allot any of them… unless it has made an offer to each person who holds relevant shares… to allot to him on the same or more favourable terms a proportion of those securities which is as nearly practicable equal to the proportion… held by him;

(b) shall not allot any of those securities… unless the period [21 days] during which any such offer may be accepted has elapsed”.

Similar provisions are found in s.561 Companies Act 2006.

Removal of the right to pre-emption

It may be that members do not wish to purchase additional shares, and indeed may be inexpedient to wait for the 21-day period to expire. As such, it is possible to remove the right of pre-emption:

s.95 Companies Act 1985: “[directors] may be given power by the articles or by special resolution to allot [shares] as if… s.89 (1) did not apply”.

A similar provision is found in s.570 Companies Act 2006.

Issue shares

At this point, there are unissued shares available, the directors have the authority to allot them, and there is no need to offer them to existing members. Therefore, the directors may by ordinary resolution resolve to issue the shares.

See further, textbooks:

Company Law - Share Capital and Issuing Shares (Part 2)

Types of class right

Essentially, a class right is any right enjoyed by some members but not others. The case of Cumbrian Newspapers v Cumberland ([1986] 2 All ER 816) has identified three different types of class right, but only two of these are enforceable:

1) rights or benefits which are annexed to particular shares. For example:

- The right to a preferential dividend (aka ‘preference share’);

- The right to a preferential dividend plus a share of the ordinary dividend (aka participating preference share);

- The right to a preferential return of capital upon winding up.

2) rights or benefits conferred on individuals not in the capacity of members [invalid as an ‘outsider’ right as per Hickman];

3) rights or benefits that, although not attached to any particular shares are nonetheless conferred in the capacity of member

- this includes Bushell v Faith and Cumbrian Newspapers clauses.

Protection of class rights

Often, the holders of a preference share represent a minority within the company, or may even hold shares which do not have the right to vote (this will depend upon the specific terms of the class, most likely set out in the articles). Despite this, they may be treated in a preferential manner compared to the ‘ordinary’ majority.

As a result, there is a big incentive for the majority to remove these class rights. Ordinarily, the alteration of the articles requires a special resolution (s.9 Companies Act 1985/s.21 (1) Companies Act 2006) done bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656). 
 
Therefore, in order to provide greater protection, if the variation involves varying or abrogating a class right, then the consent of the class is required (s.125 Companies Act 1985/s.630 Companies Act 2006). Generally, this requires a special resolution of that class.

Even if this is passed, a class minority of 15% or more may still apply to the court to have the variation disallowed if it can be shown that it would ‘unfairly prejudice’ the class (s.127 Companies Act 1985/s.633 Companies Act 2006).

Voting rights

Unlike directors, shareholders are not subject to fiduciary duties when voting:

“The shareholders are not trustees for one another and, unlike directors; they occupy no fiduciary position and are under no fiduciary duties”. (Dixon J, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457)
As a result, they may vote in their own interests:

“The right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage”. (Dixon J, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457)

In addition, the shareholder is not subject to the ‘no conflict’ rule:

“Every shareholder has a perfect right to vote upon any… question, although he may have a personal interest in the subject matter opposed to, or different from, the general interests of the company”. (North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589) Indeed, it has been said that “a man may be actuated in giving his vote by interests entirely adverse to the interests of the company as a whole”.(Pender v Lushington (1887) 6 ChD 70) 
 
Limits 
 
Despite the above, there are some limitations on how a shareholder may vote on a particular issue:

- When exercising the power to amend the articles under s.9 Companies Act 1985/ s.21(1) Companies Act 2006, it must be done bone fide in the interests of the company as a whole;( Allen v Gold Reefs [1900] 1 Ch 656)

- An appointment of a director must be made for the benefit of the company as a whole and not for an ulterior purpose;( Re Harmer Ltd [1959] 1 WLR 62)

- At a class meeting, the majority must vote for the benefit of the class as a whole; (Re Holder’s Investment Trust Ltd [1971] 1 WLR 583)

- When voting on whether the company should take legal proceedings regarding an illegal, fraudulent or ultra vires matter, the vote must be bona fide in the interests of the company and not for some other purpose (e.g. to protect the proposed defendant). (Taylor v NUM (Derbyshire) [1985] BCLC 237) 

See further, textbooks:

Company Law - Share Capital and Issuing Shares (Part 1)

Introduction

One of the ways that a company raises finance is by issuing shares. When a person purchases shares he or she becomes a shareholder or member of that company.

What is a share?

Farwell J, Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279

“A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place and interest in the second, but also consisting of a mutual set of covenants entered into by all the shareholders inter se”

s.182 (1) CA 1985:

“Shares… 

 
(a) are personal estate… 

 
(b) are transferable in a manner provided by the company’s articles, but subject to the Stock Transfer Act 1963… and… s.207 of the Companies Act 1989”

If you hold a share in a company it means that you own a piece of that company. Your reasons for purchasing shares would normally be that: 

 
- the shares could appreciate in value and you would therefore make a profit when you sell them (although of course shares can just as easily lose value); 

 
- if the company makes a profit it may reward you for your investment by giving you a share of the profit – otherwise known as a dividend; 

 
- share ownership allows you to vote at general meetings thereby giving you a say in how the company is run.

Your power as a shareholder will depend on how many shares you hold in proportion to the other shareholders.

Terminology

Table B Companies Act 1985 provides a sample memorandum of association, which is as follows: 

 
1 The company’s name is… 

 
2 The company’s registered office is in Wales. 

 
3 The company’s objects are to [carry on business as a general commercial company]. 

 
4 The liability of the members is limited. 

 
5 The company’s share capital is £50,000 divided into 50,000 shares of £1 each… we agree to take the number of shares as shown [below]:

Thiery… 1 share;
Marlon… 1 share

Authorised share capital

This is the total nominal value of shares that may be issued. In the example above, the authorised share capital would be 50,000 shares.

Issued share capital

This is the part of the authorised share capital that has actually been issued to shareholders. In the example above, the issued share capital would be 2 shares (1 each to Thiery and Marlon).

Unissued share capital

The remaining authorised share capital that has not been issued. In the example above, the unissued share capital would be 49,998 shares (i.e. the authorised share capital of 50,000 minus the two shares already issued).

It should be noted that the capital clause does not really reflect the true value of the company. If, in the example above, all of the shares were issued the company would receive £50,000. However, soon the company would start trading and so spend some of this on wages, and equipment. This may cause the true value of the company’s assets to be less than £50,000. Soon after, the company may become profitable, and so it becomes worth more than £50,000. In addition, it can get more complex if not all of the authorised share capital is issued, or indeed paid for, at the same time.

Classes of shares

Prima facie, all shares rank equally [Birch v Cropper (1889) 14 AC 525]. However, a company may wish to issue different types of shares, for example to protect the voting power of the initial shareholders, or to make the new shares more attractive to investors.

The company has the power to issue different classes of shares, provided that the articles authorise it (Andrews v Gas Meter Co [1897] 1 Ch 361). Often, these shares are divided into ‘ordinary’ and ‘preference’ shares (see below).

Art.2 Table A states that “subject to the provisions of the Act and without prejudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine”.

These rights may be contained in the memorandum of association, the articles of association or even in a separate shareholders’ agreement (Harman v BML [1994] 2 BCLC 674). 

See further, textbook