Business & Contract Flashcards
Quick Q:
Assume that it is 30 September. A company’s up-to-date balance sheet shows current assets of £10,000, current liabilities of £20,000, and net assets of £1,500. In August the same year a creditor obtained judgment against the company for £1,000, and has tried to enforce that judgment, but the debt still has not been paid.
Is the company insolvent?
Yes, because a creditor has obtained judgment against the company, and has tried to enforce that judgment, but the debt still has not been paid in full or at all.
Option D is correct. Section 123 (b) of the Insolvency Act 1986 provides that a company is deemed to be unable to pay its debts, and therefore is insolvent, when a creditor has tried to enforce a judgment but the debt remains unpaid in whole or part.
Option A is wrong. The balance sheet actually suggests that the company is insolvent on the cash-flow test (as its current liabilities are greater than its current assets). However, a balance sheet is always only a snapshot, and it isn’t possible to know for certain if a company is insolvent from the balance sheet alone.
Option B is wrong. Although the balance sheet shows that current assets are greater than the amount of the judgment debt, the form of those assets is unknown. They might not be available to pay the judgment debt (e.g. the current assets might be stock). In any event, under s.123(b) of the Insolvency Act 1986 the test is whether the judgement remains unpaid despite attempts to enforce it.
Option C is wrong. Although the balance sheet suggests that the company is insolvent on the cash-flow test, this is not conclusive. A balance sheet is always only a snapshot, and it isn’t possible to know for certain if a company is insolvent from the balance sheet alone.
Option E is wrong. Although one way of establishing that a company is insolvent is through statutory demands, it is possible to use other routes (see the explanation for Option D).
A customer entered into a contract with a sole trader to build a shed in his garden.
The contract provided that payment would be made as follows:
-Clearing the ground - £250
-Laying concrete foundations - £200
-Building the shed itself - £550 (including the supply of wood at £150)
TOTAL - £1000
The sole trader cleared the ground well but then did a very poor job of laying the concrete. The customer ordered the sole trader off the job and paid him nothing.
The customer then contracted with a building company to finish the job. The building company repaired the concrete at a cost of £100 and used the wood left on site by the sole trader to finish the shed. The company charged £550 (£100 for concrete repair, £450 to build the shed), which the customer paid.
The sole trader admitted that his concrete work was terrible but thought he should get at least some payment for his effort and for clearing the ground.
How much could the sole trader claim?
A-The full contract price of £1,000, minus some amount to reflect his poor workmanship.
B-£250 for clearing the ground and £200 for laying the concrete.
C-£250 for clearing the ground and £150 for the wood.
D-£450 as that amount plus the £550 paid to the building company would equal the contract price of £1,000.
E-Nothing as there has been a total failure of consideration.
Option C is correct. This is a divisible contract and so the sole trader can claim for stages which he completed satisfactorily, ie for clearing the ground. He can also claim a reasonable price for the use of his materials by the building company (voluntary acceptance of part performance, see Sumpter v Hedges), ie the wood in this case.
Option A is wrong. He is not entitled to the full contract price since he did not complete the contract precisely (Cutter v Powell).
Option B is wrong. Though it is a divisible contract, he cannot claim for laying the concrete since he did not perform this to an acceptable standard.
Option D is wrong. The total amount paid out by the customer to eventually get the job done is only relevant to the sole trader inasmuch as the sole trader may be liable to pay damages if the total paid by the customer exceeds the original contract price.
Option E is wrong. As this is a divisible contract and the first stage (clearing the ground) has been done satisfactorily, there has been some consideration and not a total failure. The sole trader can thus claim a payment for stage 1.
A woman is considering how to expand her cosmetics business, which she currently runs as a sole trader. She has six employees, operates from leasehold premises and made a profit of £900,000 last year. The woman wants two of her key employees to assume a more prominent role, which could include taking a financial stake in the business. She is happy to allow the two employees to run the business day to day whilst she focuses on bringing in new clients. The woman does not want to reveal the state of the finances of the business to the general public. She does want to retain a right of veto over major decisions affecting the business, and would like to proceed with her plans as soon as possible.
Which of the following statements best explains which business medium would be suitable for her?
A-A limited liability partnership because the partners would have limited liability.
B-A limited company as the shareholders would have limited liability and could record confidential matters in a shareholders’ agreement.
C-A limited liability partnership because she can have a veto over certain decisions and the accounts need not be published.
D-A general partnership because it is quick to set up and the accounts need not be published.
E-A limited partnership because she is happy to leave the day to day running of the business to the other two partners.
Option D is the correct answer. A general partnership allows the woman to keep the finances of the business private, and can be created very quickly, without preventing her from achieving any of her other objectives.
Option A is a correct statement, but is not the best answer on the facts as a limited liability partnership would require the publication of financial information.
Option B is a correct statement, but is not the best answer on the facts as a limited company would also require the publication of financial information (the ability of the shareholders to enter into a shareholders’ agreement cannot change the company’s obligation to publish accounts).
Option C is a wrong answer as a limited liability partnership would require accounts to be published.
Option E is a wrong answer as limited partnerships are not widely used outside specialised financial businesses, and the same objective of having others do the day to day running can be achieved with other business models.
A customer visits a shop to buy a scarf for her father as a birthday present. The shop assistant at the till asks the customer whether she is buying the scarf as a present. The customer tells the shop assistant that she is buying the scarf as a present for her father. The shop assistant asks whether the customer would like a gift receipt. The customer confirms that she would. The customer gives the scarf to her father as a gift and also gives her father the gift receipt. The father notices that the scarf is frayed at one end and wishes to take it back to the shop himself for a replacement.
Can the father take the scarf back to the shop himself and obtain a replacement?
A-No, because gift receipts are not enforceable in law. The customer would have to go back to the shop themselves and seek a remedy for the defective goods.
B-Yes, because the father is one of the parties to the contract and, if needed, he could sue under the general rules governing breach of contract as a party to the contract.
C-Yes, because direct contractual rights were conferred on the father when the gift receipt was obtained, and so the father can take the scarf back to the shop and seek a remedy.
D-No, because it is not possible to confer contractual rights to a third party, and, as the customer no longer owns the scarf because they have gifted it to the father, there is no remedy available.
E-Yes, because the contract was never between the customer and the shop, but was always between the father and the shop, and so the father can use the normal rules concerning breach of contract.
Option C is the correct answer, as the Contracts (Rights of Third Parties) Act 1999 allows for direct contractual rights to be conferred onto the recipient of a gift in this sort of scenario.
Option A is wrong because it fails to appreciate the existence of the Contracts (Rights of Third Parties) Act 1999 and so suggests that contractual rights cannot be conferred.
Option B is wrong because it suggests that the father is a party to the contract rather than a third party upon whom contractual rights are conferred.
Option D is wrong. Whilst generally only the actual parties to a contract have rights and obligations under it, this option fails to appreciate that the Contracts (Rights of Third Parties) Act 1999 allows third parties to acquire rights in certain situations.
Option E is wrong because it suggests that the father directly contracted with the shop which is unsupportable on the facts.
A farmer contracts with a builder to build a new farmhouse for him. The work is to be done in three stages, with payment being made by the farmer to the builder at each stage. The first two stages are undertaken successfully and the farmer makes the required payments. However, at stage three, the builder uses some defective materials which undermine the structure of the whole farmhouse, causing it to collapse. The farmer has not yet made the payment for stage three.
Which of the following statements best describes the farmer’s available options in contract?
A-The farmer can choose whether to terminate the contract. If the farmer does choose to treat the contract as at an end, he does not have to pay any further sum to the builder and the builder does not have to do any more building work. The farmer may also have a claim in damages against the builder.
B-The farmer is now obliged to terminate the contract. Having terminated the contract, the farmer has to make the remaining payment, but can force the builder to finish the building work. The farmer will not have a claim in damages against the builder.
C-The farmer can choose whether to terminate the contract, but has to pay the remaining amount which was agreed to the builder. However, the farmer can then claim this sum back as part of a claim in damages.
D-The farmer has no possible grounds on which he could terminate the contract, and must insist that the builder finishes the work. The farmer must also make the remaining payment. The farmer’s only possible claim could be a claim in damages.
E-The farmer can choose whether to terminate the contract. If the farmer does choose to treat the contract as at an end, he does not have to pay any further sum to the builder and the builder does not have to do any more building work. The farmer will not however have a claim in damages against the builder.
Option A is correct – the event which has occurred clearly gives the farmer the option of termination or affirmation of the contract. If he chooses to terminate, this ends future obligations, but there might be a claim in damages depending on the cost of remedying the work and subject to mitigation of loss.
Options B and D are wrong as they suggest (amongst other reasons) that the farmer has no choice whether to terminate or affirm.
Option C is wrong because it suggests that a future payment will still have to be made.
Option E is wrong because it excludes the possibility of a future claim in damages against the builder.
A lease of a warehouse was entered into between a lessor and lessee on 1 August for a period of 18 months, with the rent payable by the lessee monthly in advance. There are no other relevant terms. On 30 August a fire broke out in the warehouse, and the warehouse was almost completely destroyed. A report produced on 29 September into the cause of the fire found that neither the lessor nor the lessee was responsible. At the same time, it was also established that the warehouse could be repaired, but the best estimate was that this would take 15 months to complete. The lessee gave notice to the lessor on 1 October terminating the lease.
Is it possible for the lessee to rely successfully on the doctrine of frustration to argue it is excused from its obligation to pay the rent due for the remaining period of the lease following the fire?
A-No, because the lessor or lessee could have protected itself by insurance against the risk of fire, so the lease cannot be frustrated.
B-Yes, because the fire is likely to operate as a frustrating event and will terminate the lessee’s obligation to pay the rent as from 1 October, the date it gave notice to terminate.
C-No, because a lease of property cannot be frustrated and the lessee must completely perform all its obligations under the lease.
D-Yes, because the fire is likely to operate as a frustrating event and will automatically terminate the lessee’s obligation to pay the remaining rent.
E-No, because the warehouse can be repaired within the agreed 18 month period of the lease.
Option D is correct. By the doctrine of frustration, where an unforeseen event occurs after the contract was formed, then generally, if the parties are not at fault and such an event renders the performance of the contract very different, or even impossible, to perform, the contract is automatically brought to an end and both parties are excused from future performance of their respective obligations. It is an exception to the general rule that requires complete performance of obligations to avoid being in breach of contract.
The lessee can therefore claim on the facts that the lease has been frustrated by the fire, especially as the warehouse will not be repaired until after (at best) month 17 of the 18-month lease. For the parties to resume their obligations under the lease in such circumstances is likely to be considered to be very, or radically, different from what they envisaged at the time they entered into the contract.
A contract is automatically terminated at the time the frustrating event occurs. On the facts, that will be 30 August. From that date, the lessee will be released from its obligation to pay rent for the remaining period of the lease.
Option A is wrong: the availability of insurance is no bar to a claim of frustration.
Option B is wrong because the effect of a frustrating event is to automatically terminate the contract at the time the event occurs (see above), without therefore the need for notice to be given.
Option C is wrong because it is possible for a lease of land to be frustrated. The mere fact that the contract is in the form of a lease does not automatically mean that the parties must completely perform their obligations or be in breach of contract if they do not.
Option E is wrong. The court will consider that, although the warehouse can be repaired, the fact that this will not happen until month 17 of an 18-month lease, makes it both possible and likely that the lease will be held to have been frustrated.
A new general partnership has been formed by five partners. The business of the partnership is to work as painters and decorators. There is a written partnership agreement but none of its terms deal with decision making by the partners.
Which of the following votes in a partnership meeting is validly taken?
A-A vote to expand the business by offering car repair services, with four in favour and one against.
B-A vote to change paint supplier, with three in favour and two against.
C-A vote to admit a new partner, with three in favour and two against.
D-A vote to amend the partnership agreement, with four in favour and one against.
E-A vote to expel a partner, with four in favour and the partner facing expulsion against.
The partnership agreement does not deal with decision making by the partners. All the options therefore have to be evaluated against the default rules that apply to general partnerships.
Option B is correct. Changing a supplier of goods is an ordinary business decision and can be taken by a simple majority of partners.
Option A is wrong. Any change to the nature of the partnership business, such as expanding the type of work that the partnership will do into new areas, requires the consent of all partners.
Option C is wrong. Admitting a new partner to a partnership requires the consent of all the partners.
Option D is wrong. Although a partnership agreement can be varied by the partners, it requires consent of all the partners to do so.
Option E is wrong. A partner cannot be expelled from a partnership by a majority vote, which means the partner to be expelled would also have to vote in favour for the decision to expel to be valid.
Quick Q:
A private limited company has five shareholders, a painter, a carpenter, an accountant, a saleswoman and a plumber, all of whom are also directors of the company. Their shareholdings are as follows:–
-The painter has 50,000 shares.
-The carpenter has 20,000 shares.
-The accountant has 100,000 shares.
-The saleswoman has 15,000 shares.
-The plumber has 15,000 shares.
The company has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association. The company is considering a proposal to loan £75,000 to the plumber. The carpenter, the accountant, the saleswoman and the plumber are all in favour of the proposal. The painter is against the proposal. At the board meeting where it was proposed to put this to the shareholders, the resolution was passed with the carpenter, the accountant and the saleswoman voting for the resolution and the painter voting against. The plumber did not vote as she had an interest in the proposed transaction. A general meeting is held for the shareholders to approve the grant of the loan to the plumber. Assume that all shareholders will attend other than the accountant, who is ill.
Will the loan to the plumber be approved by the shareholders and on what basis?
No, because the painter can demand a poll vote and has sufficient voting power to prevent the necessary ordinary resolution from passing.
Option C is the correct answer. An ordinary resolution of the shareholders is required to approve a loan to a director (s197 Companies Act 2006 (CA06)). The painter has sufficient shares to demand a poll vote where one share equals one vote as she holds at least 10% of the shares (s321 CA06, model article 44(2)). A majority of over 50% of those present and voting is required to pass an ordinary resolution (s282 CA06). The accountant does not attend. This means that the painter’s shares represent exactly 50% of the shares of those who attend the general meeting, meaning the other shareholders cannot reach the threshold of more than 50% in favour required to pass the ordinary resolution.
Option A is wrong because an ordinary resolution only requires a simple majority to pass.
Option B is wrong because board meetings and general meetings are legally separate meetings, and the voting at one meeting will not count towards the other meeting.
Option D is wrong because a director’s interest in a proposed transaction is irrelevant when that director is acting in her capacity as a shareholder at a general meeting.
Option E is wrong because there is no requirement that voting at general meetings must be by show of hands (model article 42). The painter can demand a poll vote and block the ordinary resolution (see above). If the voting had taken place on a show of hands, the ordinary resolution would have been passed.
Quick Q:
An employer is working to meet a deadline to tender for a new business client. Seven days prior to the deadline, the employer asks the employee to work extra hours to assist him with completing the tender. In return the employer offers the employee overtime money. The employee agrees and the tender is completed on time. The tender is also won. The employee was not paid the promised overtime money and is now looking to sue the employer.
Which of the following best describes whether the employer must pay the overtime monies?
The employer is obliged to pay the overtime monies because the employee conferred a practical benefit.
Option D is correct because the employee working extra hours has allowed the employer to secure the tender. There has therefore been a practical benefit to the employer. The employer offered the employee overtime monies so that his tender could be completed, and the client won the tender. The employer gained this benefit. The practical benefit is therefore good consideration (Williams v Roffey Bros).
Option A is wrong because the employee agreed to work extra hours outside of their contractual hours. The employee was not therefore performing their existing contractual duties.
Option B is wrong because, although the employee agreed to work overtime, they did so in exchange of the promise of overtime money. Furthermore, the employer gained a benefit from the employee working overtime and the employee therefore provided consideration to support the promise of overtime money.
Option C is wrong because promissory estoppel (which prevents a party from reneging on an agreement they have previously made) can only be used as a defence. The employee cannot use estoppel as the basis of bringing a claim to secure the overtime money.
Option E is not the best answer because not all agreements to vary a contract are automatically binding. A variation will only be binding in the presence of sufficient consideration (which did exist on the facts).
Quick Q:
Two years ago a company entered into a loan agreement with a bank to purchase new warehouse premises. The loan was secured by way of a fixed charged over the premises and a floating charge over all its other assets. Companies House recorded an earlier floating charge over the same assets.
Last week, a liquidator was appointed to wind up the company. The bank has now been made aware that its solicitor correctly registered the floating charge but omitted to register the fixed charge.
Which of the following best describes the advice you would give to the bank?
The bank will have no priority over the proceeds of sale from the warehouse.
Option C is correct because failure to correctly register the fixed charge renders the charge void against a liquidator of the company and against the company’s other creditors (s859H Companies Act 2006). Although the floating charge is valid, it does not cover the warehouse premises; therefore, the bank has no priority over the proceeds of sale of the warehouse.
Quick Q:
A builder requires all his customers to sign his standard terms and conditions before he starts work. Clause 7 of those terms states: “the builder will not be liable for any defects in the goods supplied or for any injury or damage to property caused by defective workmanship”.
The builder has recently entered into two signed contracts: one with a consumer and another with a restaurant owner.
The builder supplies faulty window frames when fitting double glazing for the consumer.
The builder is employed by the owner of the restaurant to repair the roof. After the work is finished, a slate falls off the roof and injures the owner. An expert confirms the builder was negligent when doing the repairs.
The consumer and the restaurant owner each claim breach of contract and seek damages from the builder.
Will clause 7 of the builder’s standard terms protect him from having to pay damages?
No, because a supplier cannot exclude liability when supplying faulty goods to a consumer or when providing a negligent service to a business that causes physical injury.
The builder is in breach of s9 of the Consumer Rights Act 2015 (CRA) in supplying goods that are not of a satisfactory quality to a consumer. The builder is also in breach of s13 of the Supply and Goods and Services Act 1982 (SGSA) for failing to provide a service with reasonable care and skill to the owner of a business.
Option B is correct. Section 31 of the CRA provides that liability for supplying faulty goods to a consumer cannot be excluded. Section 2 of the Unfair Contract Terms Act 1977 (UCTA) provides that any attempt to exclude liability for negligence (which includes breach of s13 SGSA) causing personal injury is void. Consequently, the clause will not be legally effective and will not protect the builder in either claim. Based on this reasoning, Option D is wrong.
Option A is wrong because although the clause is validly incorporated by signature into both contracts and its wording clearly covers the claims being made, the statutory controls mean that the clause is ineffective and it will not prevent the claims being successful.
Option C is wrong. This option refers to the contra proferentem rule which works to construe ambiguity against the person seeking to rely on the clause. However, there is no ambiguity in the wording of clause 7.
Option E is wrong on two counts. Firstly, on the facts, the consumer’s claim relates to faulty goods (not a poor service) and the restaurant owner’s claim is for poor service (and not faulty goods). Secondly, as a matter of law, if the restaurant owner had been claiming for receiving faulty goods, then the clause is not automatically void. It may be effective if it is reasonable in all the circumstances to incorporate it into the contract.
Quick Q:
On Monday, a farmer visited a company dealing in agricultural equipment in order to hire a combine harvester. She explained that she needed it urgently in order to carry out her harvest the following week. The farmer explained that she could only afford to pay £2,000 for a week’s hire. The company’s representative, however, stated that they could not hire the combine harvester for less than £2,500, and the farmer decided to look elsewhere.
Later in the week, the company had not managed to hire out the combine harvester, so emailed the farmer, stating:
“We are now able to offer the combine harvester for £2,000 for next week. Do let us know if you don’t want it, otherwise we will assume that you want it for next week at that price.”
The farmer did not reply to the email, having sourced a combine harvester from elsewhere.
Which of the following statements correctly describes whether a contract has been formed between the farmer and the company?
No contract has been formed because the farmer’s silence does not constitute an acceptance of the offer, notwithstanding the stipulation in the offer that it should do so.
Option D is correct, as the facts fall within the general rule that silence does not give rise to an acceptance of an offer even if the offer stipulates that it should. As the farmer’s silence cannot constitute acceptance, there is no contract.
Option A is wrong, as the facts do not fall outside of the general rule above, as silence is not the sort of conduct which alone would give rise to acceptance.
Option B is wrong. An estoppel generally prevents a party from going back on their word when another party, having relied on their statement, will suffer detriment if they were allowed to do so. No estoppel will arise from the farmer’s previous conduct during the parties’ negotiations.
Option C is wrong, as the terms of the offer are clearly intended in the circumstances of their previous negotiations to relate to the hire rather than the sale of the combine harvester.
Option E is wrong because bilateral offers can be accepted by conduct, even if on the facts this did not occur.
Quick Q:
A client ends the retainer with a firm of solicitors, but refuses to pay the firm’s outstanding fees. The client complained that the fees agreed upon instructing the firm were, in hindsight, too high, but the firm has refused to reduce the fees. The firm has raised an invoice and has indicated that it will take action to recover the outstanding fees from the client. The client replied by telling the firm that he would raise a formal complaint, and demanded the immediate release by the firm of the client’s file of papers. The firm demands payment of the outstanding invoice be made by the client before releasing the client’s file of papers.
Which of the following correctly describes whether the law firm is required to release the client’s papers?
The firm may choose to retain the file until payment has been received, due to the lien the firm can exercise over the file of papers.
Option D is correct. The firm of solicitors may choose to exercise its lien over the client’s property until the outstanding fees are paid, but it does not have to do so.
Quick Q:
A writer enters into a contract with a famous actor, to write his life story (to be published as the actor’s autobiography). Similar autobiographies have resulted in profits of £500,000, though others have been spectacular failures. The rights in the book will belong to the actor. The actor agrees to pay a fixed fee of £100,000 to the writer. The writer completes his research, at his own expense, spending £12,000 in total. At that point, the actor changes his mind and, in breach of contract, cancels the deal. The actor finds another author, publishes his autobiography and makes profits of £400,000. The writer sues for breach of contract.
Which is the best estimate of the damages the writer may receive?
£100,000
Option D is correct. Had the contract been properly performed, the writer would have received £100,000. Note that the writer expected to incur some expenses and therefore expected to gain £88,000 by way of net profits; but given that he has already incurred the expenses (in the sum of £12,000), he therefore needs £100,000 to get him back to the expected net profit position. This is his loss on the “expectation loss” measure (Robinson v Harman). Since it is possible to use this measure of loss, there is no need to resort to reliance loss.
A private company limited by shares has six directors and five shareholders. One of the directors is also a minority shareholder. The other shareholders who together own the majority of the issued shares in the company wish to remove the director from the board. The other directors on the board are supportive of the director and oppose his removal. The director has a fixed term service contract of two years with one year left unexpired. The company has adopted the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association.
Which of the following best describes the procedure for removing the director from the board?
A-The majority shareholders cannot remove the director as his service contract has not yet expired.
B-The majority shareholders cannot remove the director as he is a minority shareholder, and the articles give him weighted voting rights to prevent his removal on any shareholder vote to remove him.
C-The majority shareholders cannot remove the director as only the board can call a general meeting of the shareholders and the board are supportive of the director and unlikely to call the general meeting.
D-The majority shareholders will have to give special notice of an ordinary resolution proposed by them to remove the director.
E-The majority shareholders will have to give special notice of a special resolution proposed by them to remove the director.
Option D is the correct answer as special notice is required of a resolution to remove a director (s168(2) Companies Act 2006 (CA06)), which under s168(1) CA06 is an ordinary resolution.
Option A is wrong as a director can be removed by ordinary resolution of the shareholders notwithstanding anything in any agreement such as a service contract (s168(1) CA06) but the director will not be deprived of any rights to claim compensation or damages in respect of the termination of his appointment.
Option B is wrong as the company has model articles which do not contain any provision giving a director/shareholder weighted voting rights on a shareholder vote to dismiss him as a director.
Option C is wrong as the majority shareholders can at the same time as giving special notice of the resolution to remove the director also requisition a meeting as they have at least 5% of the paid-up capital carrying voting rights (s303 CA06). Being majority shareholders they must have over 50%.
Option E is wrong because, whilst special notice is required, the resolution to remove is an ordinary resolution ( see above in answer to D).
