Question 1

Form of business organization is a pertinent decision while considering about

starting a business. Three forms of business organization usually exist for the
persons who want to trade or wish to change their current organizational
structure namely sole trader, partnership and an incorporated company. If a
person wants to set up his/her own business solely then sole trader is the
required type. Two or more persons seeking to start a business together may
commence a partnership with one another whereas company is an artificial legal
person run by a number of persons.

Each of these three forms of business

organization has their own implications regarding formation, administration,

taxation and succession. The type of business organization is also decisive in the
rights and duties of the persons involves in setting up a business.
As our clients are seeking advice about whether to start a partnership or a
company, hence we will be discussing the salient features of the two in detail
with the perspective of control, risk minimisation and capital required.
Partnership Act 1890 in section 1(1) defines partnership as a relation which
exists between persons undertaking a business in common with the notion of
earning profit. By in common it means that all partners not only participate in
business activities but also mutually work with the intention of profit earning.
Partnership may be simple or a limited liability partnership. According to section
1(1) of Companies Act 2006 a company means company formed and registered
under this act. Companies may be unlimited, private or public limited or limited
by guarantee or shares.
The relative advantages and disadvantages of the partnership and company are
as under.
Legal personality
A company has its own separate legal identity meaning that it can sue and be
sued in its own name. It can enter into contracts with its own capacity. It has a
common seal. Contrast to company an ordinary partnership does not have a
separate legal existence. But a limited liability company (LLP) formed under the
limited partnership act 1907 posses its own legal identity. An LLP is a partnership
where liability of its participants known as members is limited unlike simple

partnership. The characteristic of separate legal identity from the members of

the company was seen in Macaura v Northern Assurance Ltd [1925]. In this case,
an owner of a timber mill sold timber to his own company as a creditor. He
insured that timber on his own name. When timber was destroyed by fire he
claimed the insurable interest but the insurance company rejected his claim on
grounds that Macaura and company both were separate legal entities.
Liability
The liability of the members of a limited company and an LLP is limited to the
extent of their investment i.e. up to their investment in shares or guarantee or
proportion of investment in capital though the liability of LLP itself is unlimited.
The personal assets of members cannot be sold to settle the obligations of a
company. The partners in an ordinary partnership cannot enjoy the benefit of
limited liability. In case of fulfilling an obligation their personal assets are subject
to risk of sale. Partners are also liable for the tort or crime of other partner
conducted in the ordinary course of business. The case of Salomon v Salomon &
Co. Ltd [1897] strengthened the limited liability concept of limited company. Mr
Salomon had a successful leather business as a sole trader. Later he decided to
change the status of the business from sole trader to company. He duly
registered it as a company and sold the business to this newly formed company
for 39,000. He retained 10,000 from it and provided a personal loan to the
company as a mortgage debenture. In future when the company went into
liquidation, it was left with only assets of worth 6,000. Salomon and other
creditors claimed their money. The House of Lords settled the case in favour of
Salomon that he was entitled to remaining money as a secured creditor and
company has its separate legal identity from members whose liability is limited.
In some cases law does not allow separation of members from company known
as lifting the veil of incorporation as in Jones v Lipman [1962].
Succession
An ordinary partnership comes to an end in case of any dispute or due to death
of any partner. A company and an LLP have got perpetual succession meaning
they are not influenced by the death of any member. Both of them retain their
existence unless they are wound up subject to law. If a director or a member
leaves a limited company it does not pose any threat to its existence.

Risk
Partnership is less risky as compared to a sole trader because the risk is spread
among all the partners. But it is comparatively more risky in relation to a limited
company. A company as compared to a partnership subsists indefinitely;
members change and transfer risk to other persons due to transferability of
shares but company is a going concern. More regulations and compliance
measures have been placed on the companies whereas partnerships are not that
much scrutinized so with the point of view of risk a company is comparatively
safer place to invest.
Capital
In case of raising finance a company is in a better position to do that. Company
can raise more money by issuing more shares and making more members
anytime whereas in partnership existing partners contribute this amount or
borrow from a bank by arranging a loan with a charge on assets. It is not possible
for a partnership to go for new partners when there is need of finance. Lenders
are more willing to advance loan to a company because of its regulations rather
than a partnership which is more risky.
Ease of Formation
Partnership is easier to set up in comparison to a company. There are no legal
formalities to commence an unlimited partnership. Two or more persons willing
to begin a business with a common goal may start it anytime. It is preferable for
the partners to agree on a binding legal agreement commonly known as
partnership deed in order to avoid any misunderstanding or dispute for future
purposes. The partnership deed contains the objective of the business, duration
of partnership if brought for a special purpose, names of partners, proportion of
investment, share in profits, duties of partners and further important clauses. It
can be wound up anytime by the partners. On the other hand an LLP has to
obtain a certificate of incorporation after registering the incorporation document
and statement of compliance with the Registrar of Companies. Legal formalities
have to be fulfilled for the dissolution of LLPs.
A company for a lawful purpose can be formed by the promoters by paying a fee
along with the submission of certain documents to the Registrar of Companies.

Registrar acts on behalf of the Department of Trade and Industry and is the head
of Companies House. According to the Section 9 (1) of Companies Act 2006
memorandum of association, an application of registration, further documents
required according to the nature of company by this section and a statement of
compliance are sent to Registrar. The application must state the companys
suggested name, proposed registered office, liability of the company either
limited or unlimited, if limited then limited by shares or guarantee, company
either would be public or private limited etc. If Registrar is satisfied with all the
documents, he issues a certificate of incorporation. From that date, company can
exercise its powers as a corporate body. A company needs to be shut down
legally with the procedure in the eyes of corporate law.
Control/Management
Partnership is managed by the partners who contribute different expertise within
the firm. It has been stated in Section 24 (5) of the Partnership Act 1890 that
each partner equally participates in running of the firm. However partnership
agreement may define clearly the role of each partner. All partners get profits
equally with the proportion of their investments and share the losses as well. In a
limited partnership, some partners known as limited partners do not take part in
management unlike general partners. Companys management is different from
a partnership. A company is run by the board of directors on behalf of
shareholders. The first directors are usually selected before registering the
company. The subsequent directors may be chosen by an ordinary resolution.
Public companies must have two directors whereas atleast one director is
required for a private company. Directors employ managers to manage the
company as agents. These employees run the day to day activities of the
company. A company is required to prepare annual accounts which have to be
submitted to the Registrar of Companies house. An auditor is also needed to
provide fair accounts.
Hence both partnership and companies have advantages and disadvantages of
their own. In order to be benefitted from advantages persons must decide the
organization structure according to the resources available, risk they want to
bear and management of the company.
Question 2

Terms of a contract are so pertinent to the person with whom the contract is
made that if they are not decided, the contract would not have come into
existence (Mckendrick, 2009). In Couchman v. Hill [1947] a heifer was offered for
sale without any warranty. The buyer told the seller that he is not going to buy if
heifer was in calf. He was informed that it is not in calf. Few weeks later the
heifer died due to miscarriage. The claimant took it as breach of contract and
won because the statement that heifer was unserved was held as a term of
contract by claimant.

Different terms of the contract have got different

significance. Breach of some terms ceases the contract but breach of others just
enables the innocent party to claim for the damages.
Terms in a contract may be condition or warranties. A condition is a major term
of contract under which one party to the contract promises to the other to do a
certain thing and failure on his part to perform the contract leads to breach. For
example in Poussard v Spiers [1876] the contract was dismissed on grounds of
serious breach because of singer absence from opera. Same decision was held
in Lombard NorthCentral plc v Butterworth [1987] the failure of a hirer to make
punctual instalments for computer lease allowed the claimant to terminate the
contract. A warranty is a subsidiary term breach of which does not lead to
termination of contract but establishes the claimants right to claim damages.
For instance in Bettini v Gye [1876] the absence of singer in rehearsals was
taken as a minor breach enabling claimant to claim for damages only.
Some terms are not classified as a condition or warranty at the time of formation.
Hence the consequences of breach of these terms vary and depend on the
seriousness of breach. According to Dickson (1989) Lord Diplock stated these
terms as wait and see or innominate terms or intermediate terms. Whether to
treat breach of such contracts as a breach of a condition or warranty is decided
by judiciary. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962]
gave origin to the innominate terms. In this case a ship was chartered for two
years with the term that the ship was seaworthy. Unfortunately it required repair
of twenty weeks. The defendants terminated the contract classifying it as a
breach of contract. The claimants went to court which decided that the
aggrieved party was only able to claim damages because the breach didnt
involve a complete loss.

Hong Kong approach was followed in Hansa Nord [1976] as well as Reardon
Smith Line Ltd v Hansen-Tangen [1976] where the court held that the innocent
party would be compensated only for damages.
This approach was appreciated as it tends to provide more flexibility in contracts
and adds an element of justice to them as some contracts are repudiated only
because of breach of predefined minor terms. Lord Diplock commented that this
approach avoids injustice in pursuit of the rigid rules which leads to injustice. On
the basis of it, unfairness such as occurred in Arcos v Ronaasen [1933] could
have been restricted. But at the same time justice does not come free. In
decreasing the element of injustice, the element of certainty has to be sacrificed.
Parties do not know that what will be the consequences if a breach occurs. Either
the contract would have to rescind or they would be entitled to claim only
damages. But it has been seen that if terms are classified even then sometimes
they are not conclusive as in Schuler AG v Wickman Machine Toll Sales Ltd
[1974]. The Hong Kong case was in depth scrutinized in Mihalis Angelos [1971]
where the court rejected it on the grounds that it is very pertinent in commercial
law that terms should be specified in advance for the predictability of
consequences. The stress on certainty was also confirmed in Bunge Corporation
v Tradax [1981] as well as in Awilko v Fulvia SpA di Navigazione [1981].
Hence a conflicting situation arises between certainty and justice while using
innominate terms. If justice is favoured then innominate terms are justified. On
the other hand, terms must be predefined if uncertainty has to be avoided and
consequences of the breach would be clear. What approach courts should favour
is not vivid but they must strive to attain a balance depending on circumstances.
Question 3
Sir John Salmond defines tort as
A civil wrong for which the remedy is common law action for unliquidated
damages and which is not exclusively the breach of contract or the breach of
trust or other merely equitable obligation.
Tort of negligence is very significant in tort law. It is concerned with
compensating those who have endured damages due to the negligence of
others.

The claimant has to satisfy three things for the formation of tort of

negligence that the offender owed him a duty of care, that duty was breached
and damage is foreseeable. The law evolved in three steps based on the duty of
care. The first stage is centred on Donoghue v Stevenson [1932] where ginger
beer manufacturer was sued by customer for being careless in manufacture of its
product. This case led to the development of neighbourhood principle by Lord
Atkins in terms of proximity. This established the fact that a duty of care is owed
to persons who are directly influenced by ones acts. The duty of care was
refined in the Anns v Merton London Borough Council [1978] where it was
established that the neighbourhood principle would be pursued unless there are
policy considerations for ignoring it. The scope of duty of care was further
enhanced in Caparo v Dickman (1990). This case affirmed that not every breach
of duty of care would be compensated implying proximity, foreseeability and
fairness. Floodgates argument emerged which means that if court allowed duty
of care in every case it would bring an intense rise in litigation.
In case of negligence claimants can sought compensations for personal injury,
damage to property and economic loss.

The court permits the claims for

economic loss such as claims brought about by a person whose house was burnt
due to negligence and he does not have any place to reside. Example of claim of
economic loss can be viewed in British Celanese v A H Hunt Ltd [1969]. But the
court usually denies any compensation for a pure economic loss e.g. a person
brought a defective product but that does not produce any harmful effect to him
or his property. The reasons suggested by the law are that the contractual law is
a means for claiming economic loss and the flood gates argument.
Pure economic loss was first recognized

in Candler v Crane, Christmas & Co

[1951] where a firm of accountants was sued by a third party because of relying
information they produced for their clients. The court rejected claims on the
basis that accountants only owed a duty of care to the client. Hedley Byrne & Co
Ltd v Heller & Partners Ltd [1963] is also important case in this aspect though it
overruled the above precedent case. Here the Court held that the pure economic
loss could be claimed if the defendant knowingly and purposefully made a wrong
statement due to which the claimant suffered the loss and there was a business
relationship between the parties. Hedley Bryne approach was followed in Dean v
Allin and Watt [2001] and in Royal Bank of Scotland v Bannerman Johanstome
Maclay [2005].

Contrary to Hedley Byrne it was seen in Spartan Alloy v Martin [1972] where the
claimant suffered loss in their furnace factory due to negligence of defendant
resulting in power cut. The claimants demanded for the damage to metal, loss on
its sale and also for time waste due to power cut. The court agreed on the
compensation of the first two claims but the third was rejected on the grounds of
pure economic loss. The same decision was held in Muirhead v Industrial tank
Specialists [1986] where the lobsters of the claimant died due to inappropriate
motor pump purchased from firm.
In Murphy v Brentwood [1990] the House of Lords set the example that no duty
of care is owed for economic loss caused in respect of defective buildings.
Though an exactly opposite decision was made in Anns v Merton [1978] and
Junior Books v Veltchl [1983] where claimants claims were settled for the
economic loss.
Hence from the above examples it can be concluded that generally claims of
economic loss are not allowed unless they cause injury or damage to property.
But in some situations claims in pursuit of pure economic losses can be settled if
there are negligent misstatements and negligence is made on advices in case of
business context rather than in a social setting as happened in Chaudry v
Prabhakar [1988].