Chapter 11 The Law of Contract: specific contracts Flashcards
11.2 Contract of agency
A non-resident UK company is within the charge for CT if it carries on a trade in the UK through a UK permanent establishment. A company has a permanent establishment if they either have a fixed place of business there or is an agent acting on behalf of a company with having authority to do business on behalf of the company.
One person is an agent of the other if they have entered into a contract of agency. An agent is given power to act on behalf of their principal to deal with third parties. The agent itself acting on behalf of another is not bound in contract with the third party and incurs no rights under the contract that binds their principal, as long as the third party knew the person was an agent. If they do not disclose this the agent is treated as the principal and they themselves are bound to the contract and if the agent does not fulfil the contract, the third party can sue them.
The power of an agent – the power to bind their principal is referred to as the authority of the agent. Express authority can be given to them. The rule on implied authority permits the agent to perform the subordinate and incidental acts to express their authority.
Where the principal represents their agent to the third party and the third-party deals with the agent, the agent is said to act with apparent or ostensible authority. The principal and the third party are treated as being in a legal relationship as if they had dealt directly with each other. For an agent to have apparent power to bind their principal, three requirements must be met:
• The principal must have made representation by words that they have authority to act on their behalf
• The representation must be made by the principal to the third party
• The third party must have relied on the representation made to them
11.2 Contract of agency (2)
Where a person has no authority to act on behalf of another, any contract they purport is not binding, but will become binding if the principal ratifies it.
The rights and duties between principal and agent:
• To obey the lawful instructions of their principal
• To perform their duties with due diligence and skill
• To account to the principal by keeping accurate books and keeping their own money separate from the principal’s money
• To act in good faith
• Not to make a secret profit from acting on behalf of the principal
• Not to delegate their authority
• Not to disclose confidential information or documents entrusted to them
The duties of a principal are:
• To pay the agent the commission or other remuneration agreed
• To indemnify the agent for acts lawfully done and liabilities incurred by them in the execution of their authority. The agent does lose their right if they act negligently or outside their authority
The principal is jointly and severally liable with their agent regarding torts committed within the scope of their authority.
11.3 Contract of guarantee
A person who makes a payment under a guarantee does so as they entered into a contract of guarantee imposing a duty on them to make the payment. There are two contracts in this situation: a principal contract between the principal creditor and the principal debtor. There is a collateral contract (the contract of guarantee) between all three parties where the guarantor agrees to discharge the debtor if they do not do so. This is a tri-partite contract. The guarantor only has a secondary liability as regards the principal creditor. The principal debtor has the primary liability.
The contract of guarantee must be in writing and signed by the guarantor. The guarantor may request the principal creditor sue the debtor before they rely on the guarantee. Once the guarantor has paid the guarantee they become a creditor against the former principal debtor and can seek to recover the sum paid with interest. If they do not receive this, they realize a loss for the purposes of the capital tax regime.
11.4 Contract for the hire of chattels
This is a contract allowing a person to obtain the right to possession and use of a chattel in return for a payment of rent to the owner. The ownership of the leased chattel does not change. The owner may not resume possession of the item during the time that the hire contract runs. In return for the right to possess the chattel, the hirer is under a duty to pay rent to the owner.
11.5 Contract of hire purchase
This is a contract which possession of goods is delivered to a person who makes periodical payments by way of hire, with an option of buying the goods after the stated hire instalments have been paid. The three parts of the contract are:
• There is a contract of bailment under which the hirer obtains possession and use of the goods from the owner
• There is an option contract enabling the hirer to purchase the goods at the end of the hire term
• There is a contract of sale if the hirer exercises their option.
This is different to a contract for sale as this puts the purchaser under an immediate obligation to buy. Special provisions are made for hire purchases under the 2001 Capital Allowances Act. The hirer becomes the owner of the machinery in order to be entitled to tax allowances on their expenditure. However, the provision of machinery under a contract for the hire of chattels does not receive this treatment as the lessee never becomes the owner.
11.6 Contract of loan of money
This is a contract where the lender agrees to pay money (the principal sum) to the borrower and the borrower promises to repay that sum on demand or conditionally upon an event which is certain to happen. Failure to repay is a breach of contract.
This contract creates a debtor/creditor relationship. The borrower (debtor) becomes the owner of the money and the creditor only has a contractual claim for the repayment. A contract of loan of money does not have to provide for interest. It is important to distinguish contracts for lending money from contracts not for lending money but which create an indebtedness. These transactions are:
• Trade debt – not a loan of money as the debtor (buyer) is to pay a money price and the right of the creditor (vender) is to receive a money price. The debt relates to sale of goods
• A contract for the hire of chattels
• Company declaring dividends – a debt created between the company and shareholder
• Where a company sells an asset with a credit period
Also contracts for other commercial transactions must be distinguished. The distinction is important for tax purposes are the transactions above are not within the loan relationship regime.
The basic duty of the lender under a contract for the loan of money is to put the funds under the control of the borrower. Loans are also created when a bank customer goes into an overdraft or where a company issues loan note. The primary effect of a contract of loan of money is to pass ownership of the principal to the borrower.
11.7 Contract of option
A contract is formed when one person makes an offer to another and that person accepts the offer. Until the offeree accepts the offer, the offeror is at liberty to withdraw their offer, sometimes they are legally prevented from withdrawing their offer, this is a contract of option.
A contract of option is a contract where the grantor of the option offers to enter into a major contract with another person and makes a separate contract of option to keep their offer open. If the grantee exercises their option they then enter into the major contract.
Once the exercise is granted there are always two contracts. The option contract and the major contract which becomes unconditional and it a bi-lateral contract as both parties have duties under it. Contracts of options are either call options or put options:
• Call option – binds the grantor to sell an asset. When the option is in place, the grantor of the option will be both the disponor of the option right and the disponor of the land under the major contract. The grantee of the option will come to acquire the land under the major contract
• Put option – binds the grantor to buy an asset. The grantor of the option will be the disponor of the option right but the disponor of the land under the contract is the grantee of the option. The grantor of the option will come to acquire the land under the major contract so the CGT issue that arises from their perspective is the base cost of the land that they have acquired under the major contract.
Where an option is granted in respect of land, the grantee acquires an interest in land, this is not the case with chattels. A contract of option is different from a right of pre-emption. A right of pre-emption arises where the owner of property contracts with others that if the shareholder decides to sell their shares, they must first offer them to the other shareholders in preference and does not impose any obligation on the shareholder to sell their shares.
11.8 Contract of partnership
A person may enter into a contract of partnership to carry on a business.
11.9 Contracts of service and contracts for services
Any individual may render service to another person either as an employee or an independent contractor. The difference is fundamental to the way the persons are taxed.
