01

technicaL

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 nOw the 12 Law LOrds whO previOusLy sat there nOw sit as justices in the new supreme cOurt.

the supreme
reLevant tO acca QuaLificatiOn paper f4 (eng)
The legislature is the body within the constitution in which the power of making law is located. Under democratic constitutions the body will normally be elected. In the UK, Parliament is bicameral and is made of the House of Commons and the House of Lords. It is also worth stating that in countries with a written constitution and a strong separation of powers, there are limits to the power of the legislature to make law, in that it is not permissible for laws to be made which conflict with the rights provided under the constitution. If any such law is passed, it is open to challenge in the courts, which may strike it down as being unconstitutional. However, the UK has no written constitution as such and functions under the doctrine of parliamentary sovereignty. This effectively means that Parliament is not just the ultimate source of law, but it can make such law as it determines, which cannot be challenged in the courts as to its content. Even the Human Rights Act 1998, which introduced the European Convention of Human Rights and Fundamental Freedoms into UK law, maintains the doctrine of parliamentary sovereignty to the extent that the courts cannot declare primary legislation to be invalid on the grounds that it conflicts with the convention. Courts may issue a declaration of incompatibility, but such a declaration does not invalidate the legislation in question and any action to remedy the conflict must be undertaken by the legislature. The executive, as its name suggests, is the institution that executes the law, ie carries it into effect. It is essentially the government operating through the instrument of the state, such as the civil service and other state functionaries. In theory, the executive implements, rather than creates, the law and is subject to the scrutiny of the legislature and the judiciary. The judiciarys role is to decide issues in relation to the law of the state in which they are located. A corollary of this description is the conclusion that it is not the function of the judges to make law. On 1 October 2009, the House of Lords was replaced by a new Supreme Court as the highest court within the English legal system. The House of Lords, as the upper chamber of parliament, continues to exist, but its membership has been reduced by the 12 Law Lords who previously sat there, and who now sit as justices in the new Supreme Court. The Separation of Powers The idea of the separation of powers, which can be traced back to ancient Greek political philosophy, is based on the existence of three distinct functions of government (the legislative, executive and judicial functions) and the conviction that these functions should be kept apart in order to prevent the centralisation of too much power.

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court
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 fact that, before October 2009, the highest court in the UK was located in, and constituted part of, the countrys legislative body was always considered at least somewhat anomalous. Such a situation was clearly contrary to any idea of the separation of powers and one that was not lost on Lord Falconer, the former Lord Chancellor, who in 2005 explained the need for reform thus: The present position is no longer sustainable. It is surely not right that those responsible for interpreting the law should be able to have a hand in drafting it. The time has come for the UKs highest court to move out from under the shadow of the legislature. The relevance of Lord Falconers argument was given added power by the decision of the Scottish Court of Sessions, the equivalent of the Court of Appeal, in Davidson v Scottish Ministers (No 2) (2002). The case involved a challenge to a previous court decision, on the grounds of Article 6 of the ECHR, for the reason that one of the judges in the earlier case, the former Lord Advocate Lord Hardie, had spoken on the issue before the court while a member of the Scottish Assembly. The Court of Sessions held that Lord Hardie should at least have declared his previous interest in the matter and that, in the light of his failure to do so, there was at least the real possibility of bias, and ordered the case to be retried. The enormous historical change involved in remedying the unsustainable situation was brought about by the implementation of Part 2 of the Constitutional Reform Act 2005, which provided for the following: The establishment of the new independent Supreme Court, separate from the House of Lords with its own independent appointments system, its own staff and budget and its own building: Middlesex Guildhall. This new Supreme Court should not be confused with the old Supreme Court, which was the title previously given to the High Court and Court of Appeal. In future those courts will be known as the Senior Courts of England and Wales. The 12 judges of the Supreme Court are titled Justices of the Supreme Court and will no longer be allowed to sit as members of the House of Lords. As a matter of fact, all of the present members are life peers and as a result will be able to sit in the House of Lords on their retirement from their judicial office, but this may not always be the case in the future. The immediately previously serving Law Lords became the first Justices of the Supreme Court, and Lord Phillips, the former Lord Chief Justice, was appointed the first President of the Supreme Court. In fact, only 11 of the previous Lords of Appeal in Ordinary have taken positions as Justices of the Supreme Court, Lord Neuberger, instead, taking the position of Master of the Rolls in the Court of Appeal. As has been stated above, in other constitutional systems, both civil, as in France, or common law, as in the US, not only is there a clear separation of powers between the judiciary, the executive and the legislature, but there is also a distinct Constitutional Court with the power to strike down legislation on the grounds of its being unconstitutional.

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technicaL
histOricaL cOnstitutiOnaL change thrOugh the institutiOn Of the supreme cOurt may be, tO aLL intents and purpOses, 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.

It has to be emphasised that the UK Supreme Court will not be in the nature of these other supreme courts, in that it will not be a constitutional court as such and it will not have the powers to strike down legislation. Consequently, although the proposed alterations clearly increase the appearance of the separation of powers, the doctrine of parliamentary sovereignty remains unchallenged.

It remains to be seen, however, whether under the changed circumstances of the contemporary constitution the Supreme Court, as the highest court in the land, will simply assume the previously limited role of the House of Lords, or whether it will, with the passage of time, assume new function and increased powers as are consonant with Supreme Courts in other jurisdictions. This issue arose in September 2009 when the former Law Lord, Lord Neuberger, who gave up his position in the House of Lords to become Master of the Rolls, spoke on a BBC radio programme expressing the opinion that the advent of the Supreme Court was not unproblematic. As he put it, the danger is that you muck around with a constitution like the British constitution at your peril because you do not know what the consequences of any change will be. And that there was a real risk of judges arrogating to themselves greater power than they have at the moment.

Former Lord Chancellor, Lord Falconer, also expressed the view that the Supreme Court will be bolder in vindicating both the freedoms of individuals and, coupled with that, being willing to take on the executive, but Lord Phillips the President of the Supreme Court was more conciliatory towards the executive expressing the view that, although he could not predict how the court would function in the future, he did not foresee it changing in the way suggested by Lord Neuberger. The changes will make little practical difference to the student of law; the previous decisions and precedents of the former House of Lords will still be binding and the previous rules of law and procedure for hearing appeals from lower courts will continue to operate. Consequently, the shift from House of Lords to the Supreme Court should be seamless and unproblematic. More information about the Supreme Court may be found at the courts own very informative website: www.supremecourt. gov.uk/ David Kelly is examiner for Paper F4 (ENG)

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TEChniCal

RElEvanT To aCCa QualifiCaTion PaPER f4 (iRl), (SCT) and (uK)

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.
If theres one area of the F4 syllabus that students appear to struggle with, its the tort of negligence. (For Paper F4 (SCT) a tort is a delict.) The examiners reports indicate that students do not understand the subject very well in particular, the various elements that a claimant must prove in order for the defendant to be found negligent. This article addresses each of the key elements in turn, but we begin with an explanation of why tort developed. Torts are legal wrongs that one party suffers at the hands of another. Negligence is a form of tort which evolved because some types of loss or damage occur between parties that have no contract between them, and therefore there is nothing for one party to sue the other over. In the 1932 case of Donoghue v Stevenson, the House of Lords decided that a person should be able to sue another who caused them loss or damage even if there is no contractual relationship. Donoghue was given a bottle of ginger beer by a friend, who had purchased it for her. After drinking half the contents, she noticed that the bottle contained a decomposing snail and suffered nervous shock as a result. Under contract law, Donoghue was unable to sue the manufacturer because her friend was party to the contract, not her. However, the House of Lords decided to create a new principle of law that stated everyone has a duty of care to their neighbour, and this enabled Donoghue to successfully sue the manufacturer for damages. Lets consider a hypothetical case and use it to demonstrate how the tort of negligence works. Harry is involved in an accident in which his car is hit by one driven by Alex. As a consequence of the accident Harry breaks a leg and is unable to work for two months. Can Harry sue Alex for damages? On the face of things the answer seems obvious. Harry was injured as a result of Alex driving into his car and so it seems fair that he should be able to sue him. However, think of the situation from Alexs point of view, is it fair that Harry should be able to sue him just like that? People have accidents everyday should they all be able to sue each other for every little incident? If they are then the courts would be overwhelmed with cases. Thankfully, in order to prove negligence and claim damages, a claimant has to prove a number of elements to the court. These are: the defendant owed them a duty of care the defendant breached that duty of care, and they suffered loss or damage as a direct consequence of the breach. Even if negligence is proved, the defendant may have a defence that protects them from liability, or reduces the amount of damages they are liable for. Element 1 The duty of care As we saw earlier, the concept of a duty of care was created in the Donoghue case. The House of Lords stated that every person owes a duty of care to their neighbour. The Lords went on to explain that neighbour actually means persons so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected. This is a very wide (and complicated) definition that could include almost anyone if still in operation today the courts would most certainly be overrun with cases. The later cases of Anns v Merton London Borough Council (1977) and Caparo Industries plc v Dickman (1990) restricted the definition a little by introducing proximity and fairness.

the tort of

STudEnT aCCounTanT 12/2009

Studying Paper F4? law, regulation and compliance are integrated through appropriate performance objectives

02

negligence
in many CaSES bRoughT bEfoRE ThE CouRTS iT iS EvidEnT ThaT a duTy of CaRE ExiSTS bETwEEn ThE dEfEndanT and ThE ClaimanT. ThE REal iSSuE iS whEThER oR noT ThE aCTionS of ThE dEfEndanT wERE SuffiCiEnT To mEET ThEiR duTy.
Proximity simply means that the parties must be sufficiently close so that it is reasonably foreseeable that one partys negligence would cause loss or damage to the other. Fairness means that it is fair, just and reasonable for one party to owe the duty to another. What does this mean for Harry? I think youll agree that Alex owes him a duty of care. There is sufficient proximity (ie Alex drove into Harrys car); it is reasonably foreseeable that a collision between the cars could cause Harry some injury, and it seems fair, just and reasonable for Alex to owe a duty of care to Harry (and indeed all other road users). Element 2 breach of duty of care In many cases brought before the courts it is evident that a duty of care exists between the defendant and the claimant. The real issue is whether or not the actions of the defendant were sufficient to meet their duty. To determine this, the court will set the standard of care that they should have met. This standard consists of the actions which the court considers a reasonable person would have taken in the circumstances. If the defendant failed to act reasonably given their duty of care, then they will be found to have breached it. This reasonable standard may be adjusted given the actual circumstances of the case. For example, if the claimant is vulnerable, such as being disabled or frail, it is reasonable to expect the defendant to have paid them special attention or taken extra care over them as compared to someone who is fit and healthy. Other circumstances which may be taken into account include whether: The actions the defendant took are in line with common practice or industry recommendations. If they were, then it is likely that the defendant will be found to have met their duty unless the common practice itself is found to be negligent. There was some social benefit to the defendants actions. If there was, then the court may consider it inappropriate for them to be found to have breached their duty. The defendants actions had a high probability of risk attached to them. If they did, then the court will expect them to show they took extra precautions to prevent loss or damage. There were practical issues that prevented reasonable precautions being taken, or unreasonable cost would have been involved in taking them. If there were, then the court is unlikely to expect the defendant to have taken them in order to meet their duty of care. The defendant is a professional carrying on their profession. If they were, then the court will judge their actions against a reasonable professional in their line of work, rather than just any ordinary person. If professional guidelines are in place then the court will judge the defendants actions against these rather than its own expectations. Back to the case of Harry and Alex. In determining whether or not Alex broke his duty of care, a court will consider whether or not, given the circumstances, he drove as a reasonable person would have. For example, if it was foggy or wet at the time, he would be expected to show that he drove cautiously. In determining whether Alexs actions were reasonable, evidence may have to be taken from witnesses and expert analysis of the crash may be required. For now, lets assume Alex was not driving reasonably.

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TEChniCal
in ExTRaoRdinaRy CaSES, ThE faCTS may bE So ovERwhElmingly in favouR of ThE ClaimanT ThaT ThE CouRT dECidES ThE dEfEndanT Should PRovE ThaT ThEy wERE noT nEgligEnT. ThE lEgal TERm foR ThiS iS RES iPSa loQuiTuR (mEaning ThE faCTS SPEaK foR ThEmSElvES).

Res ipsa loquitur In extraordinary cases, the facts may be so overwhelmingly in favour of the claimant that the court decides the defendant should prove that they were not negligent. The legal term for this is res ipsa loquitur (meaning the facts speak for themselves). It applies in circumstances where the cause of the injury was under the control of the defendant and that the incident would not have occurred if they had taken proper care. It is often applied in medical cases, for example in Mahon v Osborne (1939), a surgeon had to prove it was not negligent to leave a swab inside a patient.
Element 3 loss or damage as a result of the breach In this element the claimant simply has to prove that the loss or damage was a direct consequence of the defendants breach of duty of care. In other words that there is a chain of causality from the defendants actions to the claimants loss or damage. A simple test, called the but for test is applied. All the claimant has to prove is that if it were not but for the actions of the defendant then they would not have suffered the loss or damage.

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

novus actus intervieniens Other events, which are outside the control of the defendant, may intervene in the chain of causality adding some confusion to the outcome of a case. The good news is that there are some simple rules to remember that deal with them. At all times you should bear in mind that the defendant will only be liable if their actions are the most probable cause of the loss or damage. They will not be liable if an intervening act becomes the real cause. Examples of intervening acts which remove liability from the defendant include: Actions of the claimant which are unreasonable, or outside what the defendant could have foreseen in the circumstances. Actions of a third party which become the real cause of the loss or damage. The defendant is only liable for damages up until the point when the third party intervened. Unforeseeable natural events natural events which the defendant could have reasonably foreseen do not affect things.

STudEnT aCCounTanT 12/2009

04

Lets return to Harry and Alex. It is entirely possible for the accident to be caused by a third party driving into Alex, forcing him into Harry. It is also possible that Harry himself was an intervening factor maybe he was driving erratically. Either of these factors could mean that Alexs breach of duty is not the real cause of Harrys injuries. For now, lets assume that no third party is involved and that any actions Harry took are not enough to take the blame for the cause of the accident away from Alex. The court will therefore find Alex liable for negligence to Harry. defences There are two defences a defendant can use where they are found liable for negligence. One will exonerate them completely; the other reduces the level of damages they are liable for.

Volenti non fit injuria simply means the voluntary acceptance of the risk of injury. If a defendant can prove the claimant accepted the risk of loss or damage, they will not be liable. Acceptance can be express (usually by a consent form being signed) or implied through the claimants conduct. Contributory negligence takes part of the blame away from the defendant if it can be proved the claimant contributed in some way to their loss or damage. The defendant is still liable, but will face a reduced damages payout.
In Harry and Alexs case, volenti is not an issue in no way did Harry consent to the accident. However, if his actions contributed in some way to his injuries, maybe by not wearing a seatbelt, then he may find the amount of damages he receives is reduced. use of cases in exam answers Finally, a brief word about using cases in exam answers. Students are often concerned about how many cases they should quote, or what happens if they cannot remember a case name. The simple fact is that students fail this exam because they do not know the law not because they cannot remember a case name.

STudEnTS aRE ofTEn ConCERnEd abouT how many CaSES ThEy Should QuoTE, oR whaT haPPEnS if ThEy CannoT REmEmbER a CaSE namE. ThE SimPlE faCT iS ThaT STudEnTS fail ThiS Exam bECauSE ThEy do noT Know ThE law noT bECauSE ThEy CannoT REmEmbER a CaSE namE.

My advice on cases is: 1 Get to grips with the principles of law first, then learn case names if you have time. By learning the law you will probably find that you remember the major cases anyway. 2 Dont try to learn every case in your textbook the majority are there to illustrate how the law was applied in a particular set of circumstances. Instead, go for the major ones in each syllabus area and learn those. 3 All you need to learn is the case name and the principle of law it created you do not need to learn and regurgitate all the background to the case in the exam. 4 If you forget a case name in the exam, dont let this stop you from explaining the principle of law, just write In a case it was decided that and continue with the principle. As an example, consider this article only six cases were mentioned. See if you can remember their names. Stephen Osborne is a technical author at BPP Learning Media

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TECHNICAL

SPANDECK ENGINEERING V DEFENCE SCIENCE AND TECHNOLOGY AGENCY

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.
This article focuses on the impact of the case of Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency (DSTA)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 quantified2. The issue with which the Court of Appeal in Spandeck was primarily concerned related to the first of these elements, ie whether or not DSTA (the respondent) owed Spandeck Engineering (S) Pte Ltd (the appellant) a duty of care. THE FACTS Briefly, the facts of Spandeck are as follows. The appellant was the contractor in a building project commissioned by the Singapore Government (the employer), while the respondent was the superintending officer of the project. As such, the latters duties included the certification of interim payments in respect of the appellants work. The dispute arose because the appellant alleged that the respondent had under-certified the appellants work, leading to underpayment by the employer. The appellants contract with the employer (the Contract) contained an arbitration clause which provided, inter alia, that any dispute between the employer and the appellant as to any certificate or valuation by the respondent could be referred by either of the disputing parties to arbitration. The appellant, however, did not commence arbitration proceedings against the employer in order to resolve the dispute because it had, by that time, already novated the Contract to a third party and had thereby lost the right to this line of recourse. Instead, the appellant claimed against the respondent in negligence on the grounds that: (i) the respondent owed the appellant a duty of care to apply professional skill and judgment in certifying, in a fair and unbiased manner, payment for work carried out by the appellant, so as to avoid causing it any loss due to undervaluation and under-certification of works, and (ii) the respondent had breached this duty by negligently undervaluing and under-certifying the appellants works. THE LAW OF NEGLIGENCE PRESPANDECK 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 test3 laid down in the case of Caparo Industries plc v Dickman4. However, the Court of Appeal in Spandeck noted that this test is not applicable to all cases of negligence. In cases of psychiatric harm or negligent misstatement causing pure economic loss5, for example, different tests are used to establish duty of care6. 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 damage7, and not where the loss suffered was purely economic in nature.

spandeck

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vs dsta
bEFORE SPANDECK, THE LAW OF NEGLIGENCE IN SINGAPORE, AS WELL AS IN ENGLAND, REquIRED DIFFERENT TESTS TO bE uSED IN THE DETERmINATION OF DuTY OF CARE, DEPENDING ON THE DIFFERENT SITuATIONS IN WHICH THE DAmAGE AROSE.
One of the main reasons for this exclusionary rule8 against claims involving pure economic loss was the concern of indeterminate liability being imposed on the defendant9. In England, cases like Murphy v Brentwood10 have strongly reaffirmed the applicability of the general exclusionary rule. However, in Singapore, ever since the cases of RSP Architects Planners & Engineers v Ocean Front Pte Ltd11, and RSP Architects Planners & Engineers v MCST Plan No 107512, 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 process13. 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 satisfied14.

(DSTA) RELEVANT TO ACCA quALIFICATION PAPER F4 (SGP)

THE EFFECT OF SPANDECK ON THE LAW OF NEGLIGENCE It will be seen from the previous section that before Spandeck, the law of negligence in Singapore, as well as in England, required different tests to be used in the determination of duty of care, depending on the different situations in which the damage arose15. 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 omissions16. 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) carelessness17. The court saw this as a threshold question that had to be answered, and this question is therefore essential to the success of any claim in negligence. However, as the question is very wide ranging, and will be satisfied in almost all cases, the court did not see a practical need to include it in a legal formulation of the test18. 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 parties19. 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 plaintiff20.

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TECHNICAL
THE COuRT OF APPEAL IN SPANDECK uNANImOuSLY DISmISSED THE APPEAL AND HELD THAT THE RESPONDENT DID NOT OWE THE APPELLANT A DuTY OF CARE AND ARRIVED AT THIS DECISION AFTER APPLYING THE TWOSTAGE TEST AND CONSIDERING THE THRESHOLD ISSuE OF FACTuAL FORESEEAbILITY.

The Court of Appeal also stated that this analysis of proximity included the twin criteria of: the voluntary assumption of responsibility by the defendant to take care to avoid causing loss to the plaintiff and the reliance by the plaintiff upon the defendant to take such care in circumstances where the defendant knew or ought to have known of that reliance21. The court saw these two criteria as essential factors in establishing proximity22. If this stage of the test was passed, and the preliminary requirement of factual foreseeability was also fulfilled, then a prima facie duty of care would arise. Policy At this point in time, the second stage of the test would then become relevant. This stage requires the court to take policy considerations into account to ascertain whether or not the prima facie duty that had been established should be negated. An example of a relevant policy consideration is the existence of a contractual matrix which defines the rights and liabilities of the parties as well as their relative bargaining positions23.

The Court of Appeal stressed that the test it had formulated should be applied incrementally such that, in both stages of the test, decided cases in analogous situations should be referred to in order to see how previous courts had ruled on the matters of proximity and/or policy. However, the Court of Appeal added that in situations where there were no factual precedents, the court could still extend liability where it was just and fair to do so, having taken into account the concern of indeterminate liability24. 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 difficulties25.

The Court of Appeal then looked at the first stage of the test relating to proximity. It found the facts of Pacific Associates Inc v Baxter (Pacific Associates)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 employer27. 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 assumption28. 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 respondent29.

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04

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.

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 Associates30 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 proximity31. 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 remoteness32.

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. 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.

For cases of negligent misstatement causing pure economic loss, the test laid down by Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 grounds liability for the maker of the statement on an assumption of responsibility towards the recipient of the statement in question and reliance by him on its accuracy (see Para 44). Pure economic loss is where the loss suffered by the plaintiff is purely financial in nature and is not connected to any kind of physical damage. Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [44]. Physical damage refers to injuries to the plaintiff himself or damage to his property. 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 fulfill the test for determining duty of care in negligent misstatement cases.

05

TECHNICAL
THE SPANDECK RESuLT 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.

10 11 12 13

14

15

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). [1991] 1 AC 398. [1996] 1 SLR 113. [1999] 2 SLR 449. The first stage of this process required the court to examine and consider the facts and factors to determine whether there was a sufficient degree of proximity in the relationship between the plaintiff and the defendant which would give rise to a duty of care on the part of the latter to avoid the kind of loss sustained by the former. If such a degree of proximity was found, the second stage of the process then required the court to consider whether there was any material factor or policy which precluded such duty from arising (RSP Architects Planners & Engineers v MCST Plan No 1075 at [31], per Thean JA). Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [59]. Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [50].

16 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [71]. 17 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [75]. 18 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [75-6]. 19 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [77]. 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 in Sutherland Shire Council v Heyman (1985) 60 ALR 1. 21 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [78]. 22 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [81]. 23 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [83]. 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.

25 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [89]. 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]. 29 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [108]. 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. 31 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [114]. 32 Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR 100 at [116]. Kit Wye Lim-Lum is a teaching fellow at Nanyang Business School, Nanyang Technological University

01
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.

TechnicaL

reLeVanT To acca QuaLificaTion paper f4 (enG), (irL), (scT)

A likely consequence of a breach of contract is a claim for damages from the injured party. This article aims to illustrate how the law of damages operates in respect of contract law. The scenario Carlos Kickaball is the South American superstar player of the Premier League team Scouse City. As the end of another successful season draws to a close Carlos decides to treat himself to an upgrade of his Cheshire mansion. Carlos contracts with John Wayne Builders Ltd (JWB) to perform the following alterations: alteration of the swimming pool to include a five-metre deep end and diving platform construction of a 12-lane ten-pin bowling alley construction of a 60-seat cinema. During discussions between himself and John, the owner of JWB, Carlos enthused about the proposed diving pool pointing out that it would help improve his already renowned diving technique. A total contract price of 125,000 was agreed along with a four-week deadline for completion. The parties also agreed that the contract price would be reduced by 1,000 a day in the event of late completion. During final negotiations Carlos revealed to John that he was planning to pay for the work out of a 200,000 bonus he would receive from his club for making 50 appearances that season, adding that he had played in every match so far this season and needed to play just twice more in the last six matches to qualify for payment. Initially, construction was ahead of schedule and the pool alterations were completed within a fortnight. After checking with John that the pool was fit for use Carlos threw himself off the diving board in trademark fashion only to suffer severe head and facial injuries when he hit his head on the bottom of the pool. It transpired that JWB had not deepened the pool from its original depth of two metres when fitting the diving board, as agreed in the contract. Unfortunately Carlos was unable to play in the Cup Final the following day due to his injuries and was advised by his doctor that he would also miss the remaining fixtures, leaving him stranded on 49 appearances for the season. Carlos was even more upset when Goodbye magazine rang him in hospital to cancel the photo shoot planned at his mansion to celebrate the completion of his building works, saying that his face would scare its readers. The stress of the accident caused John to temporarily stop working, and as a result the remaining construction was completed five days behind the agreed schedule. John has now received a letter from Doowe Cheetah and Howe, a legal firm representing Carlos. The letter detailed the following claims against JWB: 1 A claim of 5,000 for the late completion of the construction work. 2 A claim for 200,000 for the loss of the appearance bonus. 3 A claim for 1m for the mental anguish suffered by Carlos as a result of missing the Cup Final. 4 A claim of 12,000 to rectify the depth of the swimming pool. 5 A claim of 100,000 for the loss of the photo shoot contract with Goodbye magazine.

damages

sTudenT accounTanT issue 02/2010

02

afTer consTrucTinG your diaGram, Transpose The reLeVanT areas of Law from iT 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.

The QuesTion Advise JWB as to their liabilities in respect of the claims by Carlos. how to answer this question In order to answer questions in a Paper F4 exam you will need two things: a knowledge of the law an ability to apply the law. Each of these will be illustrated below. Learning legal knowledge A good way of learning legal principles is to construct diagrams and mind maps. These should contain all of the legal facts, principles and cases relevant to an area of law. Once constructed you should then practise recreating these diagrams until you can do so accurately. At this point you should notice that jotting down one word such as damages will trigger a lot of associated words helping you recall all of the legal facts and cases associated with a topic. An example of a diagram for damages is shown in Figure 1 on page 4.

applying legal knowledge how to answer a question Having seen above how to learn legal facts you now need to apply these to questions in the exam. To do this well work through our scenario using the ISAC (issue, state, apply, conclusion) approach. State the issue state the area of law that is at issue to provide the context of your answer. The issue here is whether or not John is liable to pay the damages being claimed by Carlos. State the law now transpose the relevant areas of law from your diagram into your answer. Remember, in the Paper F4 exam you must write in proper English sentences, so you should not use the bullet points and notes that appear in this illustrative example. A full answer would cover the following points: damages are an automatic common law right following breach of contract damages are compensatory in nature damages may be agreed by the parties in contract (liquidated) though these will not be upheld if they are penalty clauses designed to discourage either party breaching Dunlop v New Garage (1915)

unliquidated damages are court determined and the injured party may sue for either: losses putting them where they expected to be Expectation interest losses as a result of relying on the other party Reliance interest (Anglia TV v Reed) (1972) damages must not be too remote (Hadley v Baxendale) (1854): arise as a natural consequence of the breach or else be in the contemplation of both parties when the contract was formed (Victoria Laundry v Newman Industries) (1949) normally actual financial losses are recoverable, however the claimant must take reasonable steps to mitigate their losses (Payzu v Saunders) (1919) non-financial losses may be recovered in certain circumstances including: the cost of restitution is too high per Ruxley Electronics v Forsyth (1995) the contract was for the provision of enjoyment (Jarvis v Swan Tours) (1973) For each relevant point of law/ case you include in your answer you will be awarded one mark.

03

TechnicaL
when answerinG The QuesTion, 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.

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 in Hadley v Baxendale, otherwise they will be too remote. It would appear that Carlos made John aware of this bonus during negotiations and as such it was reasonably in his contemplation. It is likely therefore that this claim will also be upheld as it was only the injury to Carlos caused by JWB that prevented him playing and earning this money.

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: 1 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. 2 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. 3 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

sTudenT accounTanT issue 02/2010

04

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.

fiGure 1: an exampLe of a diaGram for damaGes

Damages

Liquidated Dunlop v New Garage not penalty clauses

Unliquidated court determined

Reliance interest Anglia TV v Reed

Expectation interest

Remoteness Hadley v Baxendale First rule + second rule Victoria Laundry v Newman Industries

Measure of damage

Actual financial losses

Non-financial losses

Duty to mitigate Payzu v Saunders

Restitution too high Ruxley Electronics v Forsyth

Provision of enjoyment Jarvis v Swan Tours

a new act
This is the first of two articles on the Companies Act 2006 (CA 2006). The second article will be published in the March 2008 issue of student accountant and will address the new provisions introduced by the CA 2006 as they relate to companies articles of association. Due to the size of the CA 2006, it is not possible to provide a detailed review, so this article focuses on the aspects that are most important for Paper F4 (ENG) and (SCT) students. Please note that although these topics are important, and hopefully interesting, the content of these articles may not be examined in the near future. This article deals with the following topics: types of companies company formation share capital company resolutions. Unless otherwise stated, all references are to the CA 2006. TYPES OF COMPANIES Sections 3 to 6 of CA 2006 provide for the establishment of different types of companies. Section 3: Limited and unlimited companies This section restates Section 1(2) of the 1985 Act; as previously, a company may be limited by shares or by guarantee as follows: If the liability of shareholders is limited to the amount, if any, unpaid on the shares held then it is a limited company. If the liability is limited to the amount that the members undertake to contribute to the assets of the company in the event of its being wound up, the company is limited by guarantee. Companies limited by guarantee are specifically prohibited from registering with share capital (s.5). If there is no limit on the liability of its members, it is an unlimited company. 54 student accountant February 2008 Section 4: Private and public companies Section 4 merely restates the provisions of Section 1(3) of the 1985 Act. Thus a private company is defined as any company that is not a public company, and one that may not offer shares to the public. A public company, on the other hand, is a company whose certificate of incorporation states that it is a public company. Section 4 does refer to Part 20 of the Act, which sets out the key differences between public and private companies; for example, before it can begin to start its business activities, a public company must secure a trading certificate from the Companies Registry (s.761). To obtain the necessary certificate, the public company must meet the minimum share capital requirement (the authorised minimum), which is currently set at 50,000 (as stated in Section 763) and which remains unchanged under CA 2006. The authorised minimum can be stated in sterling or the euro equivalent to the prescribed sterling amount. In addition, any shares issued must be paid-up to at least one quarter of their nominal value (s.586). Section 6: Community interest companies Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 established a new company form, the community interest company or CIC. Such enterprises were designed for use by social enterprises, and although registered under the Companies Act, they have to complete certain additional formalities and are subject to certain additional elements of regulation. As they are not business forms as such, they will not be considered in any detail. COMPANY FORMATION Section 7 sets out the method for forming a company, which is that one or more persons must subscribe their name to a memorandum of association and comply with the requirements of the provisions of the Act as to registration. It should be noted that the Act allows a single person to form any type of company, either public or private. Subsection (2) simply restates the requirement that a company may not be formed for an unlawful purpose. Under Section 9, two documents must be delivered to the registrar: the memorandum of association and the application for registration. The memorandum of association Although CA 2006 retains the previous requirement for individuals wishing to form a company to subscribe their names to a memorandum of association, it significantly reduces the importance of the memorandum, and, as a consequence, it will not be possible to amend or update the memorandum of a company formed under CA 2006. Nonetheless, the memorandum of association, which must be in the prescribed form, remains an important document to the extent that, as required by Section 8, it provides evidence of the intention of the subscribers to the memorandum to form a company and become members of that company on formation. Also, in relation to a company limited by shares, the memorandum provides evidence of the members agreement to take at least one share each in the company. Under Section 28, provisions in the memorandum of existing companies will be treated as provisions in the articles of the company if they are of a type that will not be included in the memorandum of companies formed under the Act. Section 9: Registration documents This section sets out the information, or documents, that must be delivered to the registrar when an application for registration

technical

companies act 2006 part 1

relevant to ACCA Qualification Paper F4 (ENG) and (SCT)

is made. In all cases, the application for registration must state the following: The companys proposed name. Whether the companys registered office is to be situated in England and Wales (or Wales), in Scotland or in Northern Ireland. A statement of the intended address of the companys registered office (that is, its postal address as opposed to the preceding statement confirming the jurisdiction in which the companys registered office is to be situated). Whether the liability of the companys members is to be limited and if so, whether it is to be limited by shares or by guarantee.

Whether the company is to be a private or a public company. A statement of capital and initial shareholdings or a statement of guarantee (ss.10 and 11 set out the detailed provisions in these regards see below). A statement of the companys proposed officers (s.12 see below). A copy of any proposed articles to the extent that the company does not intend to use the model articles (this issue is covered in the next article). A statement of compliance (s.13 see below).

Section 10 This section sets out the contents of the statement of capital and initial shareholdings. This statement essentially provides a snapshot of a companys share capital at the point of registration. For public companies, this requirement is linked to the abolition of authorised share capital (see below for more on this). The statement of capital and initial shareholdings must contain the following information: The total number of shares of the company to be taken on formation by the subscribers to the memorandum. The aggregate nominal value of the shares. February 2008 student accountant 55

Where a subscriber to the memorandum is to take shares of more than one class, the information required under Subsection (4)(a) is required for each class. Section 11 This section sets out the contents of the statement of guarantee that must accompany the application for registration where it is proposed that a company will be limited by guarantee on formation. The statement of guarantee must contain the information to identify the subscribers to the memorandum. Section 12 This section, which relates to the statement of the companys proposed officers, requires the submission of particulars relating to the following: The person or persons who is or are to be the first director or directors of the company. The details are set out in Sections 163 to 166. The main change is that a service address must be provided for each director who is a natural person, in addition to the requirement for the usual residential address. 56 student accountant February 2008

technical
For each class of shares: a the prescribed particulars of the rights attached to those shares b the total number of shares of that class c the aggregate nominal value of shares of that class. The amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the shares or by way of a premium). Such information as may be prescribed for the purpose of identifying the subscribers to the memorandum of association. With respect to each subscriber to the memorandum, it must state: a the number, nominal value (of each share), and class of shares to be taken on formation b the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the share or by way of premium). The person or persons who is, or are, to be the first secretary. As private companies are no longer required to appoint company secretaries (see s.270(1)), this information is only required if the company actually appoints someone to that role. Section 13 This section concerns the requirement of a statement of compliance. Such a statement does not need to be witnessed and may be made in either paper or electronic form. Under Section 1068, the registrar is authorised to specify the rules relating to, and who may make, such a statement. Section 1112 makes it a criminal offence to make a false statement of compliance, as is the case in relation to all documents delivered to, or statements made to, the registrar. If the registrar is satisfied that the requirements of CA 2006, as to registration, are complied with, then the documents delivered shall be registered and, on registration, the registrar shall issue a certificate that the company is duly incorporated. The registration certificate must state: a the name and registered number of the company b the date of its incorporation c whether it is a limited or unlimited company, and if it is limited whether it is limited by shares or by guarantee d whether it is a private or a public company e whether the companys registered office is situated in England and Wales (or in Wales), in Scotland, or in Northern Ireland. As before, once issued, the certificate is conclusive evidence that the requirements of the Act as to registration have been complied with and that the company is duly registered under the Act. SHARE CAPITAL The word capital is used in a number of different ways in relation to shares. Statement of capital and initial shareholdings Under the provisions of CA 1985, the memorandum of a limited company with a share capital was required to state the amount of the share capital with which the company proposed to be registered, and the nominal amount of each of its shares. This was known as the authorised share capital and set a limit on the amount of capital which the company could issue, subject to increase by ordinary resolution. Section 9 of CA 2006 removes the concept of authorised capital and replaces it with the requirement to submit an application to register the company. The statement of capital and initial shareholdings is essentially a snapshot of a companys share capital at the point of registration. Section 10 requires the statement of capital and initial shareholdings to contain the following information: The total number of shares of the company to be taken on formation by the subscribers to the memorandum. The aggregate nominal value of those shares. For each class of shares: a the prescribed particulars of the rights attached to those shares b the total number of shares of that class c the aggregate nominal value of shares of that class. The amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the shares or by way of a premium). The statement must contain such information as may be required to identify the subscribers to the memorandum of association. With regard to such subscribers, it must state: the number, nominal value (of each share), and class of shares to be taken by them on formation the amount to be paid up and the amount (if any) to be unpaid on each share. Where a subscriber takes shares of more than one class, the above information is required for each class.

technical

Issued capital This represents the nominal value of the shares actually issued by the company; public companies must have a minimum issued capital of 50,000 or the prescribed euro equivalent (s.763). Called-up capital This is the proportion of the nominal value of the issued capital actually paid by the shareholder (s.547). It may be the full nominal value, in which case it fulfils the shareholders responsibility to outsiders; or it can be a part payment, in which case the company has an outstanding claim against the shareholder. Shares in public companies must be paid up to the extent of at least a quarter of their nominal value (s.586). Once established, the nominal value of the share remains fixed and does not normally change. However, the value of the shares in the stock market may be subject to daily fluctuation depending on a number of interrelated factors, such as the profitability of the company, the prevailing rate of interest or prospective takeover bids. Thus the market value of a share of 1 nominal value may be as much as 5 or higher, or as low as one penny. COMPANY RESOLUTIONS Under the provisions of CA 2006 there are three types of resolutions: ordinary resolutions, special resolutions, and written resolutions. Ordinary resolutions Section 282 defines an ordinary resolution of the members (or class of members) of a company as a resolution that is passed by a simple majority. If the resolution is to be voted on a show of hands, the majority is determined on the basis of those who vote in person or as duly appointed proxies. Where a poll vote is called, the majority is determined in relation to the total voting rights of members who vote in person or by proxy. Special resolutions A special resolution of the members (or of a class of members) of a company means a

resolution passed by a majority of not less than 75%. This is determined in the same way as for an ordinary resolution (s.283). If a resolution is proposed as a special resolution, it must be indicated as such, either in the written resolution text or in the meeting notice. Where a resolution is proposed as a special resolution, it can only be passed as such, although anything that may be done as an ordinary resolution may be passed as a special resolution (s.282(5)). There is no longer a requirement for 21 days notice where a special resolution is to be passed at a meeting.

Under the provisions of CA 2006 there are three types of resolutions: ordinary resolutions, special resolutions, and written resolutions.
Where a provision of the Act requires a resolution, but does not specify what kind of resolution is required, the default provision is for an ordinary resolution. However, the companys articles may require a higher majority, or, indeed, may require a unanimous vote to pass the resolution. The articles cannot alter the requisite majority where the Act actually states the required majority, so, if the Act provides for an ordinary resolution, the articles cannot require a higher majority. Written resolutions Private limited companies are no longer required to hold meetings and can take decisions by way of written resolutions (s.281). The Act no longer requires unanimity to pass a written resolution. It merely requires the appropriate majority of total voting rights, a simple majority for an ordinary resolution (s.282(2)) and a 75% majority of the total voting rights for a special resolution (s.283(2)). Section 288(5) states that anything which, in the case of a private company, might be done by resolution in a general meeting, or by a meeting of a class of members of the company, may be done by written resolution

with only two exceptions the removal a director, and the removal of an auditor. These both require a general meeting of shareholders to be called. A written resolution may be proposed by the directors or the members of the private company (s.288(3)). Under Section 291, in the case of a written resolution proposed by the directors, the company must send or submit a copy of the resolution to every eligible member. This may be done either by: sending copies to all eligible members in hard copy or electronic form or by means of a website submitting the same copy to each eligible member in turn, or different copies to each of a number of eligible members in turn by a mixture of the above. The copy of the resolution must be accompanied by a statement informing the members both how to signify agreement to the resolution and the date by which the resolution must be passed if it is not to lapse (s.291(4)). It is a criminal offence not to comply with the above procedure, although the validity of any resolution passed is not affected. The members of a private company may require the company to circulate a resolution if they control 5% of the voting rights (or a lower percentage if specified in the companys articles). They can also require a statement (of not more than 1,000 words) to be circulated with the resolution (s.292). However, the members requiring the circulation of the resolution will be required to pay any expenses involved, unless the company resolves otherwise. Agreement to a proposed written resolution occurs when the company receives an authenticated document, in either hard copy or electronic form, identifying the resolution and indicating agreement to it. Once submitted, agreement cannot be revoked. The resolution and accompanying documents must be sent to all members who are entitled to vote on the circulation date of the resolution. The companys auditor should also receive such documentation (s.502). David Kelly is examiner for Paper F4 (ENG) February 2008 student accountant 57

technical

Companies Act 2006 part 2

relevant to ACCA Qualification Paper F4 (ENG and SCT)

articles of association
This second article on the Companies Act 2006 (CA 2006) deals with the new provisions of the Act as they relate to articles of association. As was stated in the previous article published in the February 2008 issue of student accountant in future, a companys memorandum of association will be a very simple document of purely historic significance, providing evidence of the intention to form a company. Section 17 of the CA 2006 specifically states that references in the Act to a companys constitution include the companys articles, resolutions, and agreements: it makes no mention of the memorandum of association. The articles of association are consequently to be recognised as the main element of a companys constitution and, in effect, they are the rules which govern a companys internal affairs and matters such as the allocation of powers between the members of a company and its directors. Companies are free to make such rules about their internal affairs as they think appropriate, subject to the proviso that any such rules must not contain anything that is either contrary to the general law, or the specific provisions of the Act. As before, the articles of association form a statutory contract between the company and its members, and between each of them (now s.33) and the previous common law will continue to be applied as appropriate. Section 18 continues the requirement that all registered companies must have articles, and Section 19 gives the Secretary of State the power to prescribe default model articles for the different types of company and these regulations will apply to companies where they have not registered any articles of their own, or have not specifically excluded the operation of the model article in question. Under the previous legislation, the Secretary of State was only able to prescribe default model articles for companies limited by shares; under the new provisions, private companies limited by guarantee will have the option of not registering articles but relying on the model articles for their regulation. As before, the articles must be contained in a single document and must be divided into consecutively numbered paragraphs (s.18(3)). ALTERATION OF ARTICLES Section 21(1) restates previous provisions and permits a company to alter its articles by special resolution. The common law rules relating to such alterations still apply. ENTRENCHMENT OF ARTICLES The previous legislation allowed companies to entrench certain elements of their constitution by putting them in their memoranda and stating that they could not be altered. Section 22 of the CA 2006 replaces that practice, but allows its effective continuation by permitting companies articles to provide that certain provisions may be amended or repealed only if certain conditions are met, and that those conditions are more restrictive than would apply in the case of a special resolution. March 2008 student accountant 69

Such a provision, referred to as a provision for entrenchment, may only be made in the companys articles on formation, or by an amendment of the companys articles agreed to by all members of the company. However, any such provision for entrenchment does not prevent alteration of the companys articles by agreement of all members of the company, or by order of a court or other authority which has power to alter the companys articles. Nor, of course, does such a provision affect the power of a court to alter a companys articles. As a result of the above provisions, companies will not be permitted to state, in their articles, that an entrenched provision can never be repealed or amended. Section 23 introduces a new requirement for a statement of compliance a notice of the existence of any entrenchment to be made known to the companies registrar. Similarly, notice is also required if the company alters its articles to remove a provision for entrenchment, or if the articles are altered by order of a court or other authority to remove a provision for entrenchment or any other restriction on the power of the company to amend its articles. The declared purpose of Sections 23 and 24 is to ensure that the registrar, and any person searching the public register, is made aware of the articles that contain entrenching provisions and that special rules therefore apply to the companys articles. EFFECT OF ALTERATION OF ARTICLES ON A COMPANYS MEMBERS Section 25 restates Section 16 of the 1985 Act, which maintained the principle that members of a company are not bound by any alteration to the articles which require them to increase their liability to the company or to take more shares in the company. A member may, however, give written consent to such an alteration and will subsequently be bound by it. If a company alters its articles, Section 26 states that a copy of the altered articles must be sent to the registrar not later than 15 days after the alteration takes effect. Should a company fail to comply with this requirement, 70 student accountant March 2008

technical
the company (and every officer of the company who is in default) commits an offence. In addition, if the registrar becomes aware of a failure to comply with Section 26 then, under Section 27, the registrar may give notice to the company requiring it to rectify the breach within 28 days. If the company complies with the notice, it will avoid prosecution for its initial failure to comply. However, if the company does not comply, it will be liable to a civil penalty of 200, recoverable by the registrar as a debt, in addition to any criminal penalty that may be imposed. EXISTING COMPANIES REGISTERED UNDER PREVIOUS LEGISLATION Existing companies will continue to be subject to the version of the model articles in force when they were originally registered, although the current model articles have been changed to reflect the changed provisions on resolutions, meetings and electronic communications. The Companies (Tables A to F) (Amendment) Regulations 2007 (SI 2007 No 2541) took effect from 1 October 2007, and it is possible that further revisions may have to be made in April 2008 when other parts of the CA 2006 come into effect. However, existing companies will be free to adopt, wholly or in part, the new model articles established under the CA 2006 once they are confirmed. Finally, the memoranda of existing companies will contain constitutional information which will, in future, be set out in the articles. Section 28 provides that such material is to be treated, in the future, as part of the companys articles. Also, where the memorandum of an existing company contains a provision for entrenchment, then Section 28 states that the provision will be deemed to be in the companys articles. DRAFT MODEL ARTICLES OF ASSOCIATION Although the model articles have not as yet been introduced, the Government has issued Draft Model Articles for Public Companies for consultation purposes, and at www.berr.gov. uk/files/file40794.doc a draft of the expected regulations can be found. The general structure of the regulations for public limited companies are set out below,

Although the model articles of association have not as yet been introduced, the Government has issued Draft Model Articles for Public Companies for consultation purposes, and at www.berr.gov.uk/files/ file40794.doc a draft of the expected regulations can be found.

technical

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

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

59 Effect of forfeiture 60 Procedure following forfeiture 61 Surrender of shares. Articles 6268 deal with the transfer and transmission of shares: 62 Transfer of certificated shares 63 Transfer of uncertificated shares 64 Transmission of shares 65 Transmittees rights 66 Exercise of transmittees rights 67 Transmittees bound by prior notices 68 Procedure for disposing of fractions of shares. Articles 6976 deal with distributions: 69 Procedure for declaring dividends 70 Calculation of dividends 71 Payment of dividends and other distributions 72 Deductions from distributions in respect of sums owed to the company 73 No interest on distributions 74 Unclaimed distributions 75 Non-cash distributions 76 Waiver of distributions. Article 77 deals with the authority to capitalise and appropriation of capitalised sums. Part 5 deals with miscellaneous provisions. Articles 7880 deal with communications: 78 Means of communication to be used 79 Addresses and other contact details 80 Failure to notify contact details. Articles 8184 deal with administrative arrangements: 81 Company seals 82 Destruction of documents 83 No right to inspect accounts and other records 84 Provision for employees on cessation of business. Articles 85 and 86 deal with directors indemnity and insurance: 85 Indemnity 86 Insurance. David Kelly is examiner for Paper F4 (ENG) March 2008 student accountant 71

RELEVANT TO ACCA QUALIFICATION PAPER F4 (ENG), (GLO), (SCT)

Bribery Act
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: s.1 Offences of bribing another person It is an offence to offer a financial or other advantage to another person to perform improperly a relevant function or activity, or to reward a person for the improper performance of such a function or activity. s.2 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. s.6 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. s.7 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.

2011 ACCA

2 BRIBERY ACT JUNE 2011 An organisation does, however, have a defence under s.7 if it can prove it had in place adequate procedures designed to prevent bribery. S.9 requires the Secretary of State to publish guidance about adequate procedures. The guidance, which was published in March 2011, states that what counts as adequate will depend on the bribery risks faced by an organisation, and the nature, size and complexity of the business. Further, if there is no risk of bribery, then an organisation will not require any procedures to prevent bribery. The guidance is not prescriptive and is based around six guiding principles. The six principles 1. Proportionate procedures The procedures taken by an organisation should be proportionate to the risks it faces and the nature, scale and complexity of its activities. A small organisation would require different procedures to a large multinational organisation. 2. Top-level commitment The top-level management should be committed to prevent bribery and foster a culture within the organisation in which bribery is unacceptable. 3. Risk assessment Organisations should assess the nature and extent of its exposure to risks of bribery, including potential external and internal risks of bribery. For example, some industries are considered higher risk than others, such as the extractive industries; some overseas markets may be higher risk where there is an absence of anti-bribery legislation. 4. Due diligence The organisation should apply due diligence procedures in respect of persons who perform services for or on behalf of the organisation in order to mitigate bribery risks. 5. Communication The organisation should ensure its bribery prevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training, proportionate to the risks it faces. Communication and training enhances awareness and helps to deter bribery. 6. Monitoring and review

3 BRIBERY ACT JUNE 2011 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