Contract Law and the Civil Justice System - Essay Example

Contract Law and the Civil Justice System Introduction Many of the UK laws including contract laws have been interpreted by the English old club boys, and hence it remain unfair to the majority of the UK citizens, and it favours both multinational companies and rich individuals in UK. This research essay will investigate how various provisions of English contract laws are interpreted to the favour of rich individuals and big companies and also stress the need to revamp the century-old contract laws. Analysis Pre-incorporation Contracts The English contract law remains unfair and this can be demonstrated in the case of pre-incorporation contracts entered by the promoters of a company to be formed. Pre-incorporation contracts are those contracts which are entered by the founders of a company before its existence or before its incorporation. As the company is not in existence, the company cannot be sued or can initiate legal action, may not purchase or own assets in its own name before its incorporation. Thus, promoters will be acting as the agents of the company to be incorporated while entering into a pre-incorporation contract. However, there arises a question how one can make principal and agent’s relationship when the company itself is not in existence. Thus, despite the fact that the claim by a promoter is acting on behalf of the prospective company, the promoters and not the proposed company will be held personally accountable for all contracts entered into by them on behalf of the prospective company1. The legal status of the pre-incorporation contracts under English common law is that it is illegal and cannot be approved or ratified or adopted the advantages of the contract which has been entered into on its behalf before its incorporation. Any outsiders who enter into a pre-incorporation contract witness an aggregate negative impact under English common law as it is either enforceable in court or it can be ratified .Thus , outsiders have to witness a risky scenario where they enter into pre-incorporation contract with a company yet to be incorporated. In Kelner case, 2 it was held that the supplier of goods to a non-existence company could not sue it for the recovery of the outstanding for the supply of products as the company could not make a valid contract before its incorporation as it was not a legal person then. In Natal Land case3 , a pre-incorporation of contract was entered between the agents of the appellant namely Rycroft with one Mrs de Carrey where she was given a right to demand for a lease of the coal -mining privileges on the plaintiff’s property. It was held by the court that the contract entered between parties cannot not be adopted or ratified by the company as it was entered on behalf of the company before its incorporation. In Phonogram Ltd case4, it was held that pre-incorporation contract entered by Lane on behalf of “Fragile Management Ltd” before its incorporation was invalid and Lane was personally liable to make payment to the appellants. In Newborne case5, it was held that pre-corporation contract entered into by a promoter of a company in the name of the company was invalid6. Thus, the status of pre-incorporation contracts demonstrates that the English contract law is fundamentally handicapped by the narrow range of backgrounds from which English judges are drawn. This is mainly because the position of a supplier of products or services to a company before its incorporation is totally handicapped as the pre-incorporation contracts under English common law cannot be ratified, and the third parties or outsiders cannot either claim the outstanding from the company or the they cannot sue the promoters who acted as the agent of the company. This is different in other jurisdictions as the company can either ratify the contract after its incorporation or make a novation of the same contract. This demonstrates how the English contract law will remain unfair to all but to companies yet to be formed. Piercing the Corporate Veil In Salomon case7, Salomon was a successful boot manufacturer who carried on the business as a sole trader for nearly thirty years. Later, he decided to form a company, mainly to take over his sole trading business. In the new company formed, Salomon, his wife and his five children were the only members. The company acquired the Salomon business for £ 39,000 out of which 20000 shares of each £1 was allotted to Salomon and £10000 debentures, which had a floating charge on the assets of the company, were allotted to Solomon. Balance, £ 9000 was remained as unsecured loan by Salomon. Due to the financial predicament, the company went into liquidation. The unsecured creditors of the company argued that the company was a sham and hence, Salomon should not be given priority for his debentures over the unsecured creditors while repayment of the debts. High Court was of the view that the company was the brain child of Salomon and was a sham as Salomon had incorporated the company , mainly to shift his liability to it and hence, the company and Salomon were one and the same and the company was in actual parlance was his agent and hence, Salomon as principal was accountable for debts payable to unsecured creditors. However, the House of Lords turned down the decision of the High Court’s findings of fraud and agency unanimously as Salomon and the company were different legal entity, the company is different from the promoter and has a distinct and separate legal entity. The verdict in Salomon case has come under heavy censure both by critics and commentators. It was alleged that corporate form could be used to engage in frauds and to cheat the creditors of the company8. In case of parent and subsidiary companies, the same legal separation principle is being applied, and even if they are wholly owned, courts have regarded them as a separate entity and will not hold the parent liable for the acts of its subsidiaries. In Re International Tin Council9 case, the House of Lords reaffirmed the principle laid down in Salomon case as it was in 1896. This was also reaffirmed in Adams v Cape Industries Plc10 case, where the Court of Appeal was asked to pierce the corporate veil so as to treat parent company and its 100% owned subsidiaries as a single entity, and the court declined to do so by citing the dictum held in Salomon case11. Is UK’s Employment Law Favours Employers It is alleged that the British employment law, as regards to unfair dismissal of an employee area mainly favours the British employers. Thus, it is claimed that if an employer functions within the “ambit of adequate responses” in any given scenario and adheres with proper procedures like carrying out internal enquiry before the dismissal, then, dismissal of an employee will not be regarded as unfair. The Royal Commission Report of 1968 states that in the vision of law, both employee and employer are at liberty and equal parties to contract of employment. Despite the fact that there exists a strong employment contract between an employer and an employee, still the employer has the legal authority to terminate the employment contract whenever he wishes and for whatsoever reasons , provided, he has to give appropriate notice to the employee in this regard12. In Western Excavating (ECC) Ltd v Sharp [1978] 1 QB 761(CA) , an employee resigned voluntarily on the ground that the employer declined to pay holiday wages in advance and substantiated the same as a constructive dismissal. However, the Court of Appeal decided in favour of employer by finding that infringement of an employment contract should be of basic in nature, which should touch upon the founding stone of the employment contract thereby declaring the termination of employment as unfair. In this case, the Court of Appeal viewed that repudiatory demeanour had to be demonstrated if the employee wanted to succeed his claim13. In A J Dunning & Sons (Shopfitters) Ltd case14, the defendant Jacomb, who was a contracts manager who was not able to collaborate the clients of the business and as a result, the plaintiff’s business suffered. The Employment Tribunal found that employer had acted fairly in dismissing the Jacomb as he was unable to carry out all of his employment contract obligations15. In Creed16 case, an employer considered an employee’s demeanour of throwing a piece of fat as dangerous practice as it could end up in horseplay and accidents and dismissed the concerned employee after carrying out proper domestic investigation. EAT found the dismissal as fair as the employer’s action resulted in the prevention of risk of injury to the other17. How UK’s Tax Laws Favours the Rich People Rich people in UK are using offshore funds intended to shun unjust taxes who are travelling frequently and have intricate tax transactions across many nations. Further, by investing in ISA products and pension funds, these rich people devise strategies the returns on investment being not taxed as these are exempted under UK tax laws. Thus, rich people in UK are engaged in shady demeanour planned to minimise taxes as they think that it is inevitable in a scenario where tax structures are so intricate and government attempting to dig out maximum tax revenues from their own citizens18. How Big Companies in UK are trying to minimise their tax burden Large multinational companies in UK like Starbucks, Google, and Microsoft by employing the special allowance provisions in tax laws to minimise their tax burdens and for this purpose, they enter into some contractual arrangements with tax heavens. For instance, as a tax planning measure, X company through its subsidiary at Isle of Man, which is a tax heaven (where tax rates are comparatively low as compared to UK tax rates) could enrol its intellectual property at Isle of Man and enter into a contract with its holding company registered at UK. Usually , as a tax planning measure ,the Irish subsidiary will charge high price to its UK holding company for buying such intelligent property rights so that tax burden will be less as Isle of Man as it is having low corporation tax rates as compared to UK tax rates. Thus, by making suitable contractual relationships, the tax incidence of X company is being reduced to the minimum through transfer pricing contracts, which will be drafted in accordance with the existing rules19. Inclusion of unfair terms in the contract In Evans case20, the plaintiff regularly imported from Italy by employing the services of the defendants. There was an oral promise by the defendant that the imported machines would be stored below the deck of the ship .On one occasion, the defendant stored the same on the deck, and it was slid into the sea. In this case , the Court of Appeal viewed that defendant could not bank upon an exception clause in the contract as the oral promise constituted part of the contract and opined it countermanded the written exclusion clause and treated the same as unfair. In this case, even though, there was no written promise, the Court of Appeal went to the extent of saving the appellant even without a written term in the contract21. In George Mitchell case22, a farmer claimed damages of £60000 for the supply of defective cabbage seeds from the defendant. The defendant relied on limitation clause in the contract and restricted the damages to £201.60. The Court of Appeal viewed that limitation clause was found to be unreasonable as the damages caused due to the negligence of the seller as the seller could have covered insurance against the loss of crops if any due to supply of defective seeds. In this case, thus, the House of Lords ignored the limitation clause and went beyond the contract provision and held that defendant was liable to pay damages irrespective of limitation clause in the contract which deemed to be unfair23. Other Instances where a Contract was held to be unenforceable In Re Mahmoud case,24 it was held that a contract to supply products was not implementable since the buyer made an offence by buying the products without licence as needed by the Defence of the Realm Regulations as it amounted to statutory criminal offence25. In Fender case26 , it was held that a pledge given by one spouse whom he will marry a third party no sooner if an absolute degree was passed was viewed by the court to be valid27 . In Mahmoud and Ispahani case28, the plaintiff consented to deliver linseed oil to the defendant. But the as per the terms of the plaintiff licence, he was allowed to sell only to those who have license to deal with linseed. Though the defendant did not have any license, but he provoked the plaintiff to enter into a supply contract. Later, the defendant declined to take possession of the linseed, and the plaintiff tried to implement the contract in an action for damages for non-acceptance. It was held by the court of appeals that the contract was unenforceable as it was barred by statute. This case demonstrates how rich persons under English law can escape from the contractual liability even though they have indulged in fraudulent misrepresentation. Adhering to Strict Time Tables in Submitting Claims with Courts in cases of Employment Tribunals UK courts have followed a strict time schedule for the filing of claims or suit but in some cases, this has been considered to be out of proportion. In Vinos case29 and in Godwin case30, it was held that a claim form in case of an employment dispute should be filed within the time set out under CPR, else the court may decline to remedy the wrong. Though, the courts have discretion to disregard the late service of claim form, but this has been exercised by the English courts in rare cases31. Woolf Reforms Lord Woolf wished that parties to a dispute should approach the courts as a last resort and disputes should be resolved through the non-court process like mediation or through arbitration32. Conclusion This research essay has found that there is an urgent need to revamp the UKs contract law on the basis of Woolf recommendations on a war footing basis so that it remains fair to all the citizens. I fully agree with the statement that the English contract law is basically incapacitated by the constricted range of settings from which English judges are drawn. The rules of contract law should mirror the demeanours of ordinary members of society and dominated by the old boy’s club. Thus, there is an urgent need that English judiciary should be represented by judges from the middle class and if not, then, English contract law will remain unfair to all but large companies and rich individuals. Bibliography Books Bourne, N, Bourne On Company Law (6th edition, Routledge 2013) Carter, D& Palmer M, Roles and Perspectives in the Law: Essays in Honour of Sir Ivor Richardson. (1st edition, Victoria University Press 2002) \ Dignam, A& Lowry, J, Company Law (7th edition, Oxford University Press 2012) Huxley –Binns & Martin J, Unlocking the English Legal System (3rd edition, Routledge 2012) Moffat, J, Employment Law ( Oxford University Press 2011) Painter, R & Holmes Ann, Cases and Materials on Employment Law (9th edition, Oxford University Press 2012)382 Sealy, R L & Worthington, S, Cases and Materials in Company Law (8th edition, Oxford University Press 2007) Journal Articles Adams, J. N., “Exemption Clauses Overboard! Oral Assurance and Written Exemptions. Which Wins?” [1977]The Modern Law Review 40.2 ,223-226 Fentiman, R,” The Validity of Marriage and the Proper Law." [1985] The Cambridge Law Journal 44.02, 256-279 Ramsay, I, “Consumer law and the search for empowerment.” [1991] Can. Bus. LJ 19, 397 Reith T, “The effect of pre-incorporation contracts in German and English company law.” International and Comparative Law Quarterly [1988] 37.01 109-130 Williams, G L, “The Legal Effect of Illegal Contracts.” [1942] The Cambridge Law Journal 8.01, 51-69 News Paper Articles BBC News, ‘Tax Avoidance: Individual’s Common Schemes’ BBC News (London 26 April 2013) Philip Booth,’ Tax Havens are Essential and do us all a Favour ‘The Telegraph (London, 11 November 2012 Case Laws A J Dunning & Sons (Shopfitters) Ltd v S Jacomb 1973] IRLR 206 Adams v Cape Industries Plc [1990] 2 W.L.R 657 (C.A) Creed v KMP Co-Op Society Ltd [1991] ELR 140 Evans v Andrea Merzario [1976] 1 WLR 1078 Fender v St John-Mildmay [1938] AC 1 George Mitchell v Finney Lock Seeds Ltd [1983] 2 AII ER 747 Godwin v Swindon Borough Council [2001] EWCA Civ 1478 Incomes Data Services , IDS Brief (1st edn, Cornell University 2011)41 Kelner v. Baxter (1866) LR 2 CP 174 at 183 and 185 Mahmoud and Ispahani, [1921] 2 KB 716 Natal Land and Colonization Company Limited v. Pauline Colliery and Development Syndicate Limited [1904] AC 120 (PC) [2.30] 93 Newborne v. Sensolid (Great Britain) Ltd [1954] 1 QB 45 Phonogram Ltd v. Lane [1982] QB 938 Re International Tin Council [1987] 2 AII E.R.890 Re Mahmoud v Ispahani [1921] 2 KB 716 Salomon v Salomon Co Ltd [1897] A.C. 22 Vinos v Marks and Spencer Plc [2001] 3 AII ER 784 List of Statutes Civil Procedure Rules (CPR) English Contract Law The Companies Act, 2006 The Employment Rights Act, 1996 The Unfair Contract Terms Act 1977 Read More