Business Law for Managers

Question 1

Partnership

According to Partnership Act 1890 it is relationship between two or more parties for carrying on common business with a view of profit. In this partners are jointly and severally liable as they own property in common. It can be formed through both oral and written agreement (Przewlocki, and et.al. 2006). The minimum number of partners is two and the maximum since 2002 is unlimited. All the provisions of the Act are applied to partnership organization until and unless it is expressly or impliedly excluded by deed of the partners. As per the rights provided by the Act each member is entitled to -

• Participate in management
• Not be expelled by other partners
• Get an equal share of profit
• Indemnity in respect of liabilities assumed in the course of business

Partnership ends with the death of member and all partners are jointly and severally liable for the others debts. There is no provision of limited liability.

The legal regulation surrounding the creation of partnership.

• There should be two or more members
• Reservation of name
• Formation of agreement (oral or written)
• If written deed is prepared by parties then it should be registered with regulatory authority.

Contents to be included in deed

• Name and address
• Duration of partnership
• Objective of partnership
• Contribution and compensation of each partner
• Dismissal and admission of partner
• Method to handle dispute
• There is no requirement of agreement if partnership is formed through implied conduct of partners.
• To exclude provision described by Partnership Act 1890 proper clauses should be inserted in the partnership deed (Figueroa, and et.al. 2008).

Advantages of partnership

Capital- As per the nature of partnership funds and assets are contributed by the partners for the business capital. Thus member can generate sufficient funds for business from internal sources without paying financial cost to lenders or banking institutions. It provides better flexibility and more potential for growth.

Formality- The main advantage of partnership is lack of formality in establishment. For initiation of partnership organization generally an agreement either in oral or written. Such agreements can be implied by conduct in which no expressed agreement is required between the members. Partnership can be ceased by will of partners without any complex formalities. It allows right to each partner to leave the organization at any time for any reason.

Secrecy and disclosure- Documentation of partnership organization can be kept confidential as it is not required to disclose it to public unlike a company where all confidential documents are available for public inspection.

Shared responsibility- Responsibility is shared between partners for conducting operational activities of business. Objective of partnership is not allocating work equally it is allocation of work as per the skills of members for better results.

Disadvantages of partnership

Unlimited liability- There is unlimited liability of each partner for the financial risks of the business. It means if assets of business are not sufficient for the repayment of debt then personal assets of members can be forfeited for the repayment.

Taxation- Partnership organizations are required to pay higher tax return in comparison to company. They are required to submit return similar to the sole traders thus each member has to submit self assessment tax return each year (Przewlocki, and et.al. 2006). Along with this members are also required to register as self employed with HM Revenue & Customs.

Profit sharing- Equal distribution of profit in business can lead to inconsistent and unfair treatment because efforts in management and capital contribution by partners are not equal (Kieffer, and et.al. 1995).

Disagreements- Conflicts in partnership are most obvious disadvantage of partnership. Disagreements and disputes will harm relationship of partners along with the financial loss.

Company

According to the Companies Act 2006, company is structured entity formed and registered under this Act. It has a separate legal entity from its members. Present Act of regulation of company activities is amendment of previous Companies Act 1985. In such organization member are liable to the extent of investment. Personal property of members cannot be used for the repayment of the debt of the company. Company had distinct identity from its members (Salomon v A Salomon and Co Ltd [1897] AC 22) thus company can avail TIN (Tax Identification Number), open a bank account and conduct business operations on their own name.

It can be incorporated as private or public company. The difference between public and private company is of public issue. Public companies are allowed to raise funds from general public through equity issue and Private companies are not allowed for the same (Berguer, Morasch, and Kline, 1998). Company is funded by investment of members (i.e. shareholders) and operated by directors. Right and obligations of members and directors are described in Articles of Association. Limited Liability Company is mixed form of operational flexibility of partnership and limited liability and tax efficiencies of a corporate entity. Both natural and artificial (company, legal association, partnership entity etc) person can become members of Limited Liability Company.

The legal regulation surrounding the creation of Limited Liability Company

All limited companies are required to be registered with Companies house. For this purpose members should fulfill following requirements-

• Name of company- It should be available in eyes of law i.e. it should not similar or resembling to the name of existing organization.
• Official address of company for postal communication
• Minimum one director
• Minimum one shareholder
• Memorandum of association- It is charter of company in which agreement of initial shareholders (i.e. subscribers) is described
• Statement of capital- It is detail information of right and shares of company.
• Articles of association- Written rules regarding operational activities and management of company.

Once the company is registered members will get Certificate of Incorporation (Elkington, and Fennell, 2000). It is evidence of legal existence of company which shows company number and date of formation.

Advantages of Limited Liability Company

Limited liability- In comparison to partnership there is less risk in company due to limited liability. Members are liable to the extent of investment. Personal property of members cannot be used for the repayment of the debt of the company.

Tax advantage- Assets and the belongings of the company can be used strategically for tax planning. Usually there is misconception of advantage of use of company’s property for personal use. Instead of this personal assets can be used by the directors in commercial work to take advantage of deduction of personal expenses (Broady-Preston, and Williams, 2004). For example if housing assets are used by directors for commercial purpose then they can deduct personal expenditure from business profit to show less profit to tax authorities.

Tax rate- Comparatively companies pay tax at lower rate from partnership. They have to pay tax at rate of 21% and there is no additional requirement of personal taxation. In partnership taxation rate can be increased up to the rate of 40% (Dyer and Singh, 1998). In addition to this, directors are allowed to take deduction of minimum wage and personal allowance of £ 6475.

Easy decisions- Usually members and directors of company are same person thus there are less conflicts in such organizations regarding decision making. Easy decisions can be made without facing hurdles and restrictions.

Disadvantages of Limited Liability Company

Complex formalities- Formation of Limited Liability Company is complex because member are required to fulfill statutory formalities. This process is cost and time consuming which is not suitable for the small enterprises.

Restrictions of capital issue- Member of company cannot increase the amount of capital more than described in MOA. If additional funds are required company has to avail funds from debt financing which reduces profit of the organizations (Figueroa, and et.al. 2008).

Regulatory provisions- Members of company are required to follow accounting procedure described by Company house which is rigid and complex. In addition to this they are required to publish annual report in regular time intervals which reduces confidentiality of business.

On the basis of above description it can suggested to client to set up business as company to achieve all factors i.e. capital, control and minimum risk. In company client can be director and shareholder by which they can invest and control the operations of business (Broady-Preston and Williams, 2004). Along with this liability of client will be extent to the investment made by them.

Question 2

Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha (1962)

It is a landmark English Contract Law case in which concept of Innominate terms as introduced between warranties and conditions. In this case it was emphasized that terms of contract either lead to termination of contract as a remedy or entitlement of damages (Clarkson, 2010). In this case it was held damages should not be provided on the basis of bifurcation of warranty and condition instead of impact of breach should be considered for the remedy.

Facts of the case

In this case ship was hired by Hong Kong Fir Shipping under a two-year time charter party (hire agreement) to Kawasaki Kisen Kaisha. In the agreement a term was included that ship would be seaworthy throughout the period of hire. Meanwhile problem developed in the engine of the ship and crew was incompetent to resolve it. Consequently ship was out of order for five weeks and then for 15 weeks (Chadwick, 2011). Due to the breach of this term defendant repudiate the contract. Claimant sue defendant for wrong termination by saying that term seaworthiness cannot be considered as condition of the contract.

Court decision

It was held by the court that defendant will be liable for wrongful repudiation of contract. To clear complication of condition and warranty approach of innominate term was introduced through this case (Young, 2010). Instead of bifurcating terms as condition or warranty, court should consider effect of breach for the damages that breach has substantially deprived the innocent party of the whole benefit of the contract. Thus in this case it was held that out of years, only 20 weeks ship was out of service so defendant cannot terminate the contact.

Innominate terms

It is an intermediate term according to English Contract Law which cannot be defined as either a condition or a warranty.
Would it not be better to place all contractual terms in category of Innominate term as it gives the court greater flexibility in dealing with breaches of contract?

Entire contractual terms cannot be categorized as innominate terms as it reduces certainty in the contract by which fair judgment cannot be provided. According to clause of warranties and conditions terms are specifically described in the deed of the contract and consequence of breach of such terms is pre-determined (Jefferson, 2008). If all terms will be categorized as Innominate terms then main and ancillary obligations of individuals cannot be define properly. This approach was criticized by various legal practitioners due to sacrificing certainty in the deed of contract. In addition to this innocent party may be held liable for wrongful repudiation of the contract if they treat it is an end due to breach of terms. Conditions are the ultimate terms which go to the root of the contract.

Through the condition main objectives of agreement are defined by the party for which contract is formed. If conditions of the contracts are not satisfied innocent party is entitled to repudiate the contract (Company law cases. N.d.). Warranties are ancillary to the main conditions of the contract. It is less important than main conditions. If warranties of the contract are not satisfied then aggrieved party is entitled for damages they cannot terminate the contract else it will be considered as wrongful termination of contract for which they will be liable to pay damages (Broady-Preston, and Williams, 2004). If all terms of the contract will categorized as Innominate terms then it will be unfair for innocent party in some cases as according to court party to the breach was deprived of substantially the whole benefit of the contract.

It is matter of fact where conditions and warranties in the contract of contract are not properly classified and there is lack of certainty then approach of innominate terms should be applicable (Kelly, 2009). It is not essential that the advantage of innominate terms over the traditional classification of terms will always provide a fair conclusion to the aggrieved party. From the above explanation it can be said terms should be categorized as Innominate terms whereby breach of term may deprives an injured party of substantially the whole benefit of the contract then the party will be entitled to treat the contract as repudiated. Innominate terms consider flexibility more than certainty thus all terms cannot be categorized in it.

Question 3

Law of negligence

Negligence is conduct that falls below the standards of behavior established by law for the protection of other against the unreasonable risk of harm. Actions of negligence are considered where there is absence of contractual relationship between parties (Elements of negligence case. 2014). The modern law of negligence was established through the case study of Donoghue v Stevenson [1932] AC 562. In order to claim damages under negligence claimant should satisfy following conditions-

• The defendant must owe duty of care to claimant
• There should be breach of duty by the defendant
• Primary reason of injury should be breach of duty
• The damage should not be too remote for the claim

Negligence is governed through Tort law. It includes psychiatric harm, personal injury, and economic loss, interference with the enjoyment of land (nuisance) or ruining reputation (defamation).

The law seeks to put claimant in the position that negligence act was not occurred by him or her. Therefore claimants are usually entitled to avail full compensation for the injury due to negligent act (Stanton, 2005). For this purpose defendant are usually insured and better able to bear the burden of compensation. Due to this provision law is lenient and more in favor of claimant where the defendant would usually be able to bear the burden of a potentially expensive claim.

Analysis of how far the law of negligence imposes a duty not to cause economic loss?

Negligence imposes duty on an individual for reasonable care to prevent possibility of injury of innocent party through their first principle of duty of care. According to the negligence law duty of care is moral and legal obligation for assurance of safety and well-being other (Topp v London Country Bus [1993] 1 WLR 976). In support of this law vicarious liability is imposed on employers in which they are liable for the negligence acts of employees conducted in course of employment.

Duty of care is applied on those circumstances and relationships in which there is possibility of injury to other parties. Objective of duty of care is to prevent economic loss of society. Failure of such duty make defendant obliged to pay damages to the injured party as a consequence of their breach of duty of care (Home Office v Dorset Yacht Co Ltd [1970] AC 1004). The existence of this duty for personal and property injury was established through the neighbor principle by Lord Atkin in the case of Donoghue V Stevenson. In this case claimant went to the café and order ice-cream and ginger beer. In her drink a decomposed snail emerged out. Claimant was injured due to the negligence of defendant. Claim was held successful in the court and principle of neighbor love was established (Anns v Merton London Borough Council [1978] AC 728).

According to this principle an individual should take care of his action to prevent injury of neighbors. As per this principle neighbor is persons who are so closely and directly affected by their act that they ought reasonably to have them in contemplation as being so affected when they directing their mind to the acts or omissions (Neyers, 2005). In the case of Donoghue V Stevenson, Stevenson was manufacturer of drink thus he should take care of his manufacturing process to prevent injury of consumers. Stevenson failed to do so he was held liable to pay damages. Thus from the above description it can be said that the law of negligence imposes a duty on individual to not to cause economic loss to other parties.

Conclusion

From the present project report it can be concluded that business law provides mechanisms that allow business individuals to determine how they will participate in business ventures and how much risk they will bear. By considering capital, control and minimum risk factors it has been recommended to client to set up business as company. Through the structure of company client can be director and shareholder by which they can invest and control the operations of business. Along with this liability of client will be extent to the investment made by them. Entire contractual terms cannot be categorized as Innominate terms as it reduces certainty in the contract by which fair judgment cannot be provided by the court in each case. Law of negligence imposes duty of individual to take reasonable care of their action to prevent economic loss of society.

References

• Berguer, R., Morasch, M. D., and Kline, R. A. 1998. Transthoracic repair of innominate and common carotid artery disease: immediate and long-term outcome for 100 consecutive surgical reconstructions.Journal of vascular surgery.
• Broady-Preston, J., and Williams, T., 2004. Using information to create business value: City of London legal firms, a case study. Performance Measurement and Metrics.
• Chadwick, A., 2011. The English Legal System. Straightforward co Ltd.
• Clarkson, K.W., 2010. Business law. Text and Cases: Legal. Cengage learning.
• Dyer, J. H., and Singh, H. 1998. The relational view: cooperative strategy and sources of interorganizational competitive advantage.
• Elkington, J., and Fennell, S. 2000. Partners for sustainability. InTerms for endearment: Business, NGOs and sustainable development.

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