Chapter 1: The legal system

In reading law reports, students need to be able to split binding precedents from obiter dicta.

Translating works of civil law into common law can be very difficult, as you can not simply replace Dutch words with English words for example. To be able to use English legal terminology in the right way, you will have to be a bit familiar with the common law system as well.

The English legal system is a common law system; it works with the doctrine of binding precedent, which means that if a judge made a decision in the past, it should be followed by judges in cases with similarities with the preceding case. The common law system is also in place in the USA, Canada and Australia for example. The common law is different from the civil law system; the civil law system uses code systems, with laws in written form. However, common law is not as different from civil law as one might think, common law is heavily depend on legislation; written laws passed by a legislative body (parliament or congress).

Court structure in England

The following section describes the courts and their competence. The English system had been changed over time to fit the needs of today. There are superior and inferior courts, superior are: the House of Lords, the Court of Appeal, the High Court and the Crown Court. The most important inferior courts are the County Courts and the Magistrates’ Courts. The distinctions are important looking at the doctrine of binding precedent.

• House of Lords: decisions made are binding to all courts below. House of Lords is not bound by its own previous decisions.

• Court of Appeal: bound by own previous decisions, unless exceptions apply, and is bound by the decisions of the House of Lords.

• High Court: bound by above, but not by itself.

• Crown Court: position of the Crown Court in the hierarchy of the doctrine of binding precedent has not been authoritatively determined.

• County Courts: jurisdiction of these courts has increased over recent years.

• Magistrates’ Courts: decisions are not binding on any court.

Note 1: There still are a number of other courts and tribunals besides the abovementioned structure. For example there is the Coroner’s Court and the Employment Tribunal

Note 2: The UK is part of the European Union. As such, the highest court is the European Court of Justice.

Note 3: Under the Constitutional Reform Act 2005, the House of Lords will disappear and as from October 2009 on the Supreme Court will take its place. The Supreme Court will be similar to the US Supreme Court.

Note 4: There is no parallel separate system of administrative courts. The High Court deals with these matters

Senior Courts of England and Wales: Court of Appeal, High Court and Crown Court (from October 2009)

USA

Federal Courts may be seen as the creation of the constitution, they have powers conferred on them by this constitution. State Courts, however, have more general competence, to hear most legal controversies, either state or federal, within their own geographical area of jurisdiction, unless federal legislation explicitly states otherwise. Sometimes both courts could be used; then forum shopping is used; parties select court they believe is most favourable.

• US Supreme Court: composed of Chief Justice, and 8 Associate Justices. There is no absolute right to be heard by this court, it only hears a limited number of cases. An application to be heard must be made certiorari. This court has extensive powers of judicial review; they have the power to throw out legislation.

• US Court of Appeal: hears appeals from District Courts and reviews decisions made by federal administrative agencies. Court also has a nationwide jurisdiction to hear appeals from specialised courts, such as patent laws.

• District Courts: trial courts of the federal court system for all matters of federal law, at least one District Court in each state. Cases may be heard by a single judge, or a judge and jury.

• US Bankruptcy Courts: federal court has exclusive jurisdiction over bankruptcy cases.

• US Tax Court: a tax cases court.

• US Claims Court: hears claims against the US, has a nationwide jurisdiction.

• Court of International Trade: Specialises in cases that involve international trade.

It must be noted that every state has its own court system. State courts deal with the vast majority of the court cases in the United States

It isn’t always possible use English or American Court Names to for example Dutch, Spanish, German or another countries’ courts due to the differences in structures. Therefore it makes more sense to either give a shirt description of the court or use general terms. Important courts can be named: high/superior/senior courts and courts of lesser importance can be named low/inferior courts. Court of first instance can be used to describe a court in which proceedings are initiated.

Besides the court systems in both countries, there are alternatives like agencies, tribunals, and alternative dispute resolution (ADR). ADR was initiated to be less formal, quicker and less expensive.

There are 3 types of ADR:

• Mediation: An independent third party (mediator) helps the arguing parties to reach a satisfactory agreement.

• Conciliation: An independent third party (conciliator) offers a non-binding opinion for both parties.

• Arbitration: An independent third party (arbitrator) delivers a binding opinion for both parties.

The legal profession

In the Netherlands there are two main stands in the legal profession: notaries (notarissen) and advocates (advocaten). Where the English legal profession is split into solicitors and barristers, the competence of solicitors and barristers is divided differently than that of the notaries and advocates.

England: in England a lawyer may not act as a solicitor as well as a barrister. Because of this rule, barristers lost the monopoly over the right of audience in the higher courts.

A solicitor can be seen as a general legal adviser, his main tasks are: conveyancing (law and procedure with respect to the purchase and sale of property), probate (procedure to verify a document), the negotiating and drafting of commercial and company contracts, and litigation (court cases). A solicitor must be a member of the Law Society. A barrister must belong to 1 of the 4 Inns of Court. A barrister provides legal opinions, drafts the pleadings and acts as an advocate in court. Barristers work together in Chambers. A clerk acts as a business manager, also referred to as practice manager, and is the most important person in chambers. When representing a party in court, the barrister is referred to as counsel.

The difference between solicitors and barristers is often compared between the family doctor and the hospital specialist. For most legal matters, one seeks a solicitor. When expert advice is required or when the client’s case becomes a court case, a barrister is called in.

USA: a practicing lawyer in the US is an attorney, he only has the right to practice law in the state to which he has been admitted. To become an attorney-at-law, a bar examination must be passed in the state the lawyer wants to practice law. Lawyers who work for companies in their legal departments or for a government agency are known as in-house counsel or staff attorneys.

Judges in the common law system

In the common law system the judge is neither an adviser, nor a investigator. The judge acts as a referee, he must look ad the evidence presented in court, apply existing rules of law to those facts, and reach a decision. One function of a judge is judicial review; examination of a decision made by an inferior court, or of decisions made by public authorities that affect the rights of individuals. In England senior judges are appointed from barristers who have more then 10 to 15 years of experience.

The Constitutional Reform Act 2005 has changed the position of the Lord Chancellor. The Lord Chief Justice has taken over the position of the Lord Chancellor of being the head of the judiciary. The first Ministry of Justice became operational in May 2007.

There are different levels of judges. The Supreme Court level, the Senior court level and at the bottom we can find the magistrates. People sitting in the Magistrate Court often are respected locals who are assisted by magistrate clerks (law graduates or people with special clerk diplomas).

The attorney-general is an adviser to the Crown, he has political duties which include advising governmental departments. His permission is also needed to bring certain criminal proceedings.

The jury

In England jury appearance is now rare, there is no right to jury trial for most civil cases. In criminal cases only the most serious cases are heard before a jury. A jury consists of 12 jurors (petit-jury), who represent a cross section of the community, they have to reach a verdict: guilty or not guilty. In the USA many civil trials are held before a jury, but if both parties agree to do it without a jury, the case will be dealt with by the judge. In some US states there is a grand-jury, of up to 23 jurors.

Voir dire (USA): examination by the court or by the attorneys of prospective jurors (in England: Jury Vetting). Jurors can be challenged either by the defence or the prosecution.

Operation of a common law system

A common law system is based on: common law, equity, and legislation. Other sources that played a role in the forming of the common law system are: canon law, or ecclesiastical law, certain textbooks and custom. Canon law is the law of the church. It affected the criminal and matrimonial laws of the system and also the development of equity in moral content. There are only nine textbooks that have affected the system which may be mentioned in court. Counsel may adopt their arguments and these arguments are persuasive, which means that they should be taken into account, but are not binding. Finally, some customs are valid, customs are unwritten laws that are legally valid if a practice can be shown to have been continuously in operation since time memorial.

Legislation

The English as well as the American system are common law based, but legislation (written laws passed by a legislative body) plays an important role in law making. The use of statutes, a form of written law passed by a legislative body, is considerably increasing.

In England today, legislation is more often responsible for new principles of law, than are the judges in court (e.g.: tax law).

In the US uniform law has been created, to cut down differences between states (e.g.: Uniform Commercial Code (UCC)).

The English system

The legislative body is composed of the House of Commons and the House of Lords, with laws being approved by the Crown. The doctrine of parliamentary sovereignty means that supreme power is invested in parliament. Until recently only Parliament could make or revoke any law by statute. This had to change because of England’s membership of the EU, and the concept of EU law supremacy above that of national law. A statute is a piece of written law; an Act of Parliament is called a bill before it has been approved formally.

An Act of Parliament is divided up as follows:

• A heading setting out the aim of the Act.

• The Act is divided into parts.

• Each part is divided into sections.

• Each section is divided into subsections and paragraphs.

• At the end of the Act come the schedules.

Delegated legislation means that the Parliament gives subordinate authorities the power to make laws. The most important form of delegated legislation is the statutory instrument, which gives ministers the power to make laws.

USA system

Legislation takes place at 2 levels: federal and state. Federal is superior to state legislation: it is said to pre-empt state legislation where there is a conflict. Federal is headed by the president, with the congress as its body. State is headed by the governor, have their own legislatures, and have jurisdiction over matters not reserved to the federal competence.

Equity

Historically equity developed as a separate system of law in England as the common law was too rigid. The court of equity developed its own principles of fairness and its own legal remedies. Now all courts may apply principles of equity alongside those of the common law. There is a difference in legal title and equitable title: person with legal title may be holding property for the benefit of an individual with equitable interest, for instance where there is a trust. To set up a trust, a settler gives a person A property with the intention that he will hold it for the benefit of a specified third person B. Person A would have the legal title and be the trustee, while person B would be the beneficiary and have the equitable title.

The equity court provided remedies that were not available in common law courts with damages as the main remedy, and other remedies such as the injunction and specific performance. However, remedies cannot be claimed as a right; equitable remedies have remained discretionary, which means that it depends upon the consideration of the court.

Case law: refers to the decisions made by judges applying legal principles form legislation and binding precedent to the circumstances of the particular disputes before them.

Binding precedent

When a judge comes to try a case, he must always look how judges dealt with previous cases involving similar facts in that area. The judge is expected to make a decision consistent with the decisions made before, this is called the doctrine of binding precedent (latin: stare decisis). Precedents set by the senior courts are always binding on all lower courts. It ensures flexibility while giving legal certainty, which protects the expectations of individuals by ensuring that laws are applied consistently and predictably. If a case can be distinguished, the precedents don’t have to be followed. A fact or facts must be different in an important way: these facts are called material facts (Americans use the term key here).

Case reports

Law reports can be traced back to the 17^th century. In England cases are reported in:

• Law reports: Appeal Cases (A.C.), Queens Bench(Q.B.), Chancery(Ch) and Family(Fam.);

• Weekly Law Reports (W.L.R);

• All England Law Reports (All E.R.);

• All decisions of the crown court, high court, and above are stored on legal databases.

Each case is given a reference, the form will depend on if it is a criminal or a civil case.

Criminal case: R v Smith, where the R stand for Rex or Regina, the criminal prosecution is brought in the name if the crown. DPP v Smith is also possible, here DPP stand for Director of Public Prosecutions. In the USA the notations depends on whether the criminal prosecution is brought by state or federal level. In State cases: Commonwealth of Massachusetts v Smith, federal: United States v Smith. In civil cases the names of both parties are used as a reference: John Smith v Jane Doe, here John is the plaintiff or claimant and Jane is the defendant.

Each case report sets out:

1. Material Facts

2. The statement of the principle of law applicable to the legal problems disclosed by the facts. This is called the ratio decidendi (in the USA known as a holding). It is the ground for the decision.

3. The judgement based on 1 and 2

Only the ratio decidendi are binding, everything outside the ratio decidendi is called obiter dicta: things said by the way. Obiter dicta are persuasive as these comments can be used to help establish legal principles in a future case. When judges agree with each other they are said to concur. When a judge disagree with the majority decision, he is said to dissent. A dissenting judgement is also published in full but it is classed as obiter dicta.

Appeal

A decision is reversed when a higher court on appeal comes to the opposite conclusion than that of the lower court. The higher court can overrule a principle that has been established in a previous case.

Chapter 2: Civil procedure

Depending on variables like the nature, complexity and sums of money involved, civil proceeding sin England begin in the Magistrates’ court, county court or the high court.

3 so called tracks to be allocated to:

1: small claims track for cases under 5,000 pounds

2: Fast track for most cases less than 15,000 pounds

3: multi-track for most cases over 15,000 pounds and cases where the remedy sought is other than damages, for example injunction. Most commercial actions will follow multi-track.

Civil courts in England

Below an outline is given of the competence of the civil courts of England.

Magistrates’ court

Low level, but it is nonetheless a substantial civil jurisdiction. They enforce the community charge (tax per person), rates (local taxes) and VAT (value added tax). Proceedings are quasi-criminal in nature, because the court can impose prison sentences where there has been serious default. Also family proceedings court, can enforce financial provisions following a breakdown, and can make orders relating children.

County court

Work of county court is concentrated on debt collection and personal injury claims. Also deals with tort, contract, race relations, bankruptcy (where it applies to individuals), insolvency (where it implies to companies), property disputes and more complex cases related to children.

High court

High court is together with court of appeal part of the Supreme Court of Judicature. It is divided in three Divisions: Queen’s Bench division, Family division and Chancery Division.

Queen’s Bench division

Has a general contract and tort competence. Divided into three courts:

• Commercial court: judges with special commercial experience, hearing cases of commercial nature.

• Admiralty court: Shipping and aircraft, and particulars as collisions and cargo.

• Technology and Construction court: disputes of highly technical nature (e.g.: cases dealing with information technology issues).

The Chancery Division

Sale of land, mortgages, trusts, estates of deceased people, bankruptcy, the dissolution of partnerships and intellectual property matters are dealt with in this court. Also contains 2 special courts:

• Companies Court: constitution and liquidation of companies.

• Patents court: acts as court of first instance and on appeal.

Family division

This division deals with matrimonial issues, in particular the more complex cases. Its divisional court hears appeals from the Magistrates and County courts concerning family law matters.

The Appeal courts

Court of Appeal hears most appeals in civil cases, from both the County court and High court. Most of the civil appeals now require permission before a civil case can be appealed. The final national court of appeal is the House of Lords, which will be known as the Supreme Court from 2009. In some court systems there is a difference between appeal and cassation courts. Appellate court acts as a court of second instance, where cassation deals with the legality of the decision. England does not have a court of cassation, The Netherlands do.

Other civil courts

• Ecclesiastical courts: court deals with matters concerning the church of England.

• Court of Protection: administers the estate of a person of unsound mind.

• Restrictive Practices court: deals with restrictive trade practices.

• Employment Appeal Tribunal: hears appeals from employment tribunals relating to such matters as unfair dismissal, equal pay and redundancy.

• Immigration Appeal Tribunal

Civil procedure reform in England
Aim of the new Civil Procedure Rules (CPR): Simplification of civil procedure. All High Court actions governed by CPR are commended by a claim form. Certain specialist proceedings remain discernable: when an action to wind up a company is commended, this document is filed as a petition.

• Part 20 claim: covers counterclaim and 3^rd party proceedings for an indemnity or contribution

• Part 36 payment: the old payment into court

Commencing proceeding in the high court

The one bringing an action to court is now called a claimant (formerly a plaintiff).Where the claimant claims a remedy to which 2 or more persons are entitled; there may be a joinder of parties. In a representative action, claimant not only represents individual interest, but also of those similarly affected. Group actions are more popular than representative action, since in the latter case damages ore usually not awarded.

It must be noted that group actions can’t be compared to the American class action.

Bringing an action

Most proceedings in high court are commenced by a claimant filling out a claim form. Particulars of claim can be endorsed on the claim form or served as a separate document within 14 days of the claim form. Claimant or his counsel must sign a statement of truth, and the claim form must be served on the other party.

Defending an action

The defendant is the one against who a claim is made. Defendant should file an acknowledgement of service if he wishes to defend. Defendant must serve a defence within a certain time; otherwise there will be judgement in default. The claimant can than file a reply to the defence. However, according to the CPR, parties may not file other statements after a reply.

• Defence of Set-off: defendant claims he is owed money by the claimant which he intends to set off against the claimants claim

• Counterclaim: a cross-action which is not a defence, but the defendant’s own particular claim.

• Third party proceedings: the introduction of third parties to a claim.

A party wishing for further information must first have served a written request (for further information or clarification) to the other party. Response must also be written, and a statement of truth must appear on the bottom.

Statements of case

Under the CPR the term statements of Case covers the claim form, particulars of claim, a defence, any reply to the defence, request for further information and the so-called Part 20 claim. Prior to the CPR, all these documents were referred to by the collective term pleadings. Court has the power to strike out a statement of case in whole or in part. This is done because: no grounds are present for bringing or defending the case; it is an abuse of the court process; there is a failure to comply with a rule, practice direction or court order.

Summary judgement: enables claimant or defendant to obtain judgement on the whole claim or on a particular issue without going to full trial.

Settlement: parties avoid going to trial by reaching agreement on the claim. (Part 36 offers).

Without prejudice privilege: whatever passed between the parties during settlement negotiations is confidential and will not be disclosed during trial.

Case management

A case management conference will be set up if the case is allocated to the multi-track, with this the judge can make sure the claim is clear, the issues have been identified and all the agreements that can be reached between the parties have been reached.

Pre-trial review: a review of matters prior to the trial in order to manage the action and prepare for trial.

Order for disclosure of documents

There is a duty to disclose documents relevant to disputes in the English proceedings.

Document: anything in which information of any description is recorded. If a party want to use a document in trial, this document must be made available to the other party; Disclosure.

Privilege: the right of a party to refuse to produce documents or answer questions on the ground of some special interest recognised by law.

Interim remedies

• Interim payment: Payment made before the trial to a person claiming a money judgement; prevents prolonged economic hardship to a claimant.

• Freezing injunction: stops a party removing or disposing of assets before trial. Court must be satisfied that there is a real risk that there will be disposing off assets. Not limited to England.

• Interim injunctions: a temporary court order, either mandatory or prohibitory.

• Search order: Authorises the representatives of the applicant to enter the defendant’s premises for the purpose of preserving evidence.

Trial

Today most trials are heard by judges, but typically the English trial is still composed of oral and written submissions. A skeleton arguments (written document summing submissions to be put forward during trial) is normally required from both parties.

The trial timetable

- Opening speech: this is optional.

- Witnesses may be called by the claimant and the defendant.

- Examination of the witnesses called by the claimant. Defence may cross-examine the witness.

Examination-in-chief: direct examination
- Re-examination of witnesses.

- Examination of the defendant’s witness

- Re-examination

- Closing speech by the counsel for the defence

- Closing speech by the counsel for the claimant

- Judgement

- Order for costs

Evidence

• Oral evidence: given by witnesses during trial. A witness must take an oath or make an affirmation that what he says is true. If he deliberately gives false evidence, he is guilty of perjury.

• Real evidence: Evidence of physical nature, such as material objects.

• Documentary evidence: all evidence under the definition of a document.

• Circumstantial evidence: evidence that can be inferred from the facts.

Pre-trial, written evidence is the norm, which is now usually in the form of a witness statement rather than an affidavit (a written, sworn statement of evidence). Witness statements, whether as to facts or in the form of expert opinions, must be signed, include a statement of truth and be served on the other party prior to the hearing. When evidence is given before the hearing, the person who gives the evidence is called a deponent and the evidence is referred to as a deposition.

A witness summons is issued when a witness is compelled to come to trial. A letter of request may be issued to compel a witness outside the courts’ jurisdiction. Improperly obtained evidence is evidence acquired in an unlawful way.

Burden of proof: In general it is the claimant who must prove all the elements required for his claim against the defendant. In criminal cases the prosecution must prove the guilt beyond a reasonable doubt, in civil cases the standard is on the balance of probabilities.

Appeal

Court must give permission to bring appeal in a civil case.

Appellate court: court that can hear appeals, an appellate is the one bringing the appeal and the other party is the respondent. An appeal is usually heard by the next case in the hierarchy, when it raises an important point of principle it can be taken straight to the Court of Appeal. The House of Lords is the final (national) appellate court (note that in 2009 the House of Lord will be replaced by a Supreme Court).

Costs

The value of the claimants claim can be much less than the costs of the action.

Cost shifting rule: whoever loses the case has to pay his own costs, and the costs of the other party. The person who has to pay is called the paying party, while the one receiving payment is the receiving party.

Wasted costs order: can be obtained to impose liability on lawyers whose conduct has been improper, unreasonable or negligent.

A standard cost award means that the receiving party will get legal cost reasonably incurred paid.

Indemnity costs rather than standard costs will be awarded only in certain situations.

Legal fees

People who cannot afford a lawyer can call upon the Common Legal Service Fund. Another option is to enter confidential fee agreements with a lawyer; no win-no fee agreement (in America: contingency fees).

Enforcement of judgements

Judgement creditor: party awarded with a money judgement by court, the other party then is the judgement debtor. A fieri facias (writ of execution) authorises the sheriff to seize the goods of the debtor. A third party debt order (garnishee order) can order for example the bank of the debtor to pay the judgement debt from the debtor’s account.

Charging order: this order can be granted over the judgement debtor’s land

Stop order: can be obtained to prohibit the judgement debtor from dealing with securities

Equitable receivership: receiver has the right to demand payment from rent due to the judgement debtor from his tenants, income from a trust fund, a legacy or payment from sale of land.

Contempt of court: a party is guilty if he does not abide by an injunction issued by the court. If after committal proceedings the party is found guilty, he can be imprisoned or fined.

Judicial review

The court has the right of judicial review. However, this only arises where the decision, act or omission is by a body performing a public function. The applicant will not be given permission to proceed with his claim for judicial review if he does not have standing (Latin: locus standi), which means that the potential claimant must be able to show that he has a sufficient interest in the matter to entitle him to commence proceedings.

Judicial review takes place by a High Court judge, which can issue the following orders:

• Mandatory order: orders a public body to carry out a legal duty.

• Prohibitory order: stops a public body from acting in excess of its authority

• Quashing order: to quash a decision by either a public body or an inferior court.

Civil procedure in the USA

Civil proceedings may be heard in federal and state courts. Within certain statutory and constitutional limitations, the federal district courts have jurisdiction over almost all categories of federal cases. State court has jurisdiction over state law, and some federal court matters. Below we will discuss the proceedings in federal courts, since this is most used by foreigners.

The plaintiff

The plaintiff (petitioner, complainant) is the one bringing the action. When one or more plaintiffs sue on behalf of a larger group this is called a class action. Class actions can be brought for damages, or other forms of relief such as injunction.

Bringing an action

Proceedings start with the plaintiff filing a complaint; this is a simple document and does not need a detailed statement of the plaintiff’s claim. The other party should only be given a general idea of the claim, this lack of detail means that the pleading sin the federal system are so-called notice pleadings.

Defending an action

The defendant has 2 options: he can file an answer, here he must deal in short and plain terms with the allegations made by the plaintiff. He may admit or deny the allegations, or state that he has not enough information to do either of these (Responsive pleading).

The other option is to file a counterclaim, which is the defendant’s own cause of action against the plaintiff. There are two types of counterclaims:

• Compulsory counterclaim: Arises from the plaintiff’s original claim.

• Permissive counterclaim: one that does not arise from the present claim.

A second option is to ask the court via a document called a motion to have the complaint dismissed.

Cross claim: a claim brought by one joint party against the other joint party. This however is not a counterclaim, but a claim against a co-plaintiff, co-defendant or even a third party. The plaintiff can give a reply to a counterclaim if permitted by the court.

Pleadings: all the documents exchanged between the parties setting out their claims and defences.

Summary Judgement: it enables a claimant or defendant to obtain judgement on the entire claim or on a particular issue without going to full trial when it is clear that either the claimant or defendant has no real chance of success at trial.

Pre-trial

Pre-trial conferences take pace to facilitate settlement, to manage the action and prepare for trial.

Discovery: a pre-trial procedure by which one party gains information held by the other party.

Interrogatory: written request to the other party to answer certain questions under oath

Requests for production: requesting the other party to documentary or other forms of evidence relevant to the claim.

Deposition: written evidence given by a witness under oath.

Trial

Most cases are settled or have been disposed of by a motion of dismiss or summary judgment. There is a right to jury trial in civil cases, but parties may also opt to have the case tries by a judge.

Appeal

In the USA appeal courts do not review facts in general. An appeal court may however hear a case de novo; as if the case has never been heard before. If a court of appeal concludes that there was a error of law, a new trial before jury will usually be ordered.

The enforcement of judgements is about equal to that in England, some terminology is however different:

• Seizure of goods: is effected by a writ of execution directed to the sheriff of the county.

• Garnishment: this allows the judgement creditor to seize the property of the judgement debtor which is in the possession of a third party.

The American Rule: is that the parties pay their own costs, whether they win or lose. There are only a few statutory exceptions.

Chapter 3: European Union Law

The legal system of the European Union is a supranational system, its concepts and institutions are equal in all member states. Since January 2007 the EU consists of 27 members, the number of languages officially recognised by the EU counts 23. Problems can arise when students familiar with legal terminology in their own language, need to work with EU law, which is described in English terminology. This chapter is meant to provide the most important English terminology with respect to the EU. You should keep in mind however, that when the European constitution comes through, the terminology will be affected.

Historical background

The first reason why a supranational organisation was set up after the Second World War was to foster peaceful cooperation through economic activity. In 1952 the European Coal and Steel Community was set up (ECSC). Then in ’57 the European Atomic Energy Community Treaty was initiated to create a stable market for this energy (EURATOM).

Also in ’57 the European Economic Community (EEC) was created, meant to create a common market between the member states. Remarkable was that member states would also be bound by Community law. In 1992 the European Union was created, consisting of three main pillars:

1. The European Community (including the ECSC and EURATOM)

2. Foreign and security policy

3. Cooperation in judicial and criminal matters

In june 2004 constitution for the European Union was initiated, but this has not yet come through: France and The Netherlands voted against it in referendums during 2005.

The Main sources of EU Law; the founding treaties

The EU was found on particular treaties, the major ones form a primary source of EU law

• ECSC Treaty (Treaty of Paris): to create a common market for coal and steal products;

• EURATOM Treaty (Treaty of Rome): to create a specialist market for atomic energy;

• EC Treaty: to set up the European Economic Community and create a common market;

• Merger Treaty: all three communities now have the same institutions;

• Single European Act: the first major amendment for the EC treaty. It included the creation of an internal market programme, greater powers for the European parliament and the creation of the court of first instance;

• Treaty on European Union (Treaty of Maastricht): amendment to the EC Treaty, creating a European Union with the three pillars named before.

• Treaty of Amsterdam: amended the TEU

• Treaty of Nice (2000): to facilitate the enlargement of the EU.

Secondary sources; secondary legislation

Today, competence with EU lawgiving includes company law, consumer protection, data protection, environmental protection, intellectual property rights and employment law. This type of legislation is made under authority of the treaties, and is regarded as secondary legislation. Only the European Court of Justice can declare EU measures invalid, but not national courts. Criminal law, family law and the law of inheritance for example, are outside the EU legal competence.

Three types of binding acts that may be classed as EU legislation:

1. Regulations: set out general rules that are applicable throughout the EU. They are binding in their entirety and directly applicable in all Member States. Individual members of EU states have the right to call upon these regulations in national courts.

2. Directives: are binding as to the result to be achieved. It lays down an objective, and then leaves it to the individual Member State to decide how best to achieve it. A time limit is given to every directive.

3. Decisions: are binding in their entirety on those to whom they are addressed. Decisions are mostly used when an undertaking is acting contrary to EU competition policy.

Also two measures not classed as legislation because they are not binding, although they do have persuasive authority:

1. recommendations;

2. opinions

Recommendations and opinions are usually addressed to Member States, setting out a view or guidelines on a particular issue. The European Court of Justice stated that it expects national judges to take recommendations into account.

General principles of EU law

This term covers principles derived from international law, national legal systems of member states and from decisions made by the European Court of Justice. The European Court of Justice adopted from other treaties, and from national laws of member states. These laws do not have to be common across all member states; when the EU implies them, these laws are applicable to all member states.

Proportionality: A general principle of EU law stating that a public authority may not impose obligations on a citizen except to the extent to which they are strictly necessary or proportionate to the aim to be achieved.

Legal certainty: covers two aspects: retroactivity and legitimate expectations. The first states that legislation is interpreted with the presumption that it is not expected to have a retroactive effect, it may also not be altered once adopted. The idea of legitimate expectations is one common in the civil law traditions.

EU measures should not frustrate the valid expectations of those concerned, unless there is a matter of public interest at stake.

Procedural rights: reflect the principle of the right to be heard and of due process.

Due process refers to the regular course of the law through the courts.

The right to be heard refers to giving the accused person notice of what he is accused and an opportunity to be heard.

Principle of equality: prohibits discrimination on the grounds of nationality and between employees on the grounds of sex and others.

Protection of human rights: Every member state has signed the European Convention on Human Rights.

Relationship between EU law and National law

This relationship is characterized by 2 principles: principle of supremacy and the principle of subsidiarity. The first states that where there is EU competence, EU law cannot be overridden by national legal provisions regardless of whether these provisions were drawn up earlier or later that the EU law. The latter states that the EU has only the right to deal with those matters that fall within the exclusive EU competence. Matters that are not covered by the EU competence remain the prerogative of the individual Member States.

Direct applicability: a provision becomes operative in a member state immediately without the need for the national legislature to pass implementing the legislation to incorporate it into national law.

Direct effect: The EU legal order differs from international law in that it can create rights for citizens that are enforceable before national courts. Where there is vertical direct effect there is an obligation in an organ of state, with a corresponding right of individuals.

Horizontal direct effect means that an individual may call upon an obligation owed by another individual.

Direct effect of Treaty provisions

There are certain criteria that must be met if a provision is to have direct effect. The provisions must:

• be clear and unambiguous

• be unconditional

• not require further action by the EU or a national authority

Direct effect of regulations

A regulation is directly applicable. The enforcement of provisions is immediate since it meets the abovementioned criteria. However, if the European Court of Justice decides that a regulation is too vague. The direct effect is cancelled until proper legislation is created.

Direct effect of directives

A directive is not directly applicable since national legislation is required. A directive could have direct effect when it proves to be sufficiently clear, unconditional and precise. It could have direct effect when there isn’t adequate implementation into national law. This revolves around the principle that a state organisation should not be able to take advantage of the failure of a national government to implement a directive. Directives only can have vertical direct effect not horizontal according to case law.

Changes in terminology upon the implementation of the European Constitution

The limits to EU competence are governed by the principles of conferral, subsidiarity and proportionality. The first means that the EU can only act within the limits set up by the constitution.

European law would replace the term regulations, and European framework law would replace the term directive. The term European regulation would be used to describe a non-legislative act of general application for the implementation of legislative acts and certain specific provisions. The terms recommendations and opinions remained and retained their former meaning as guidelines without binding force.

European Union Institutions

• The European Commission: Commissioners are nominated by member state governments. The TEU has made the commission responsible to the European Parliament and the appointment of the commissioners is subject to the approval of that body. The EU must be a commissioner’s first priority, not his home nation interests. The commission acts as executive of the EU: responsible for policies decided by the Council and the EU Parliament. The Commission also initiates EU legislation: proposals to the Council. Finally the commission ensures the compliance of member states.

• The Council: One member from each member state, this member may vary considering the issue being discussed. Voting is usually by qualified majority (large countries have more votes than smaller ones). The council is the main decision making body, it largely exercises its legislative power in co-decision with the EU Parliament.

• The European Parliament: Members of European Parliament (MEPs) are chosen by national citizens from political parties, so not national blocks are created, but ideologist blocks (socialist, liberal etc.). Its competence includes:

• Supervisory function: the Commission is accountable to the parliament, Parliament may censure the Commission and even has the right to dismiss the Commission as a whole;

• Consultation procedure: The Commission sends a draft of proposed legislation to parliament for its consideration and advice;

• Co-operation procedure: Parliament may propose amendments to draft legislation submitted to Council;

• Co-decision: this is a joint decision process by the Parliament and the Council. Both must accept the legislation in order for it to go through.

• Assent procedure: for certain matters, usually involving questions of a more constitutional nature, the Council may only adopt a measure if it has the express approval of the parliament;

• Budgetary supervision: Parliament exercises joint control over the budget with the council, although the Council has the final say on compulsory expenditure.

• Court of Auditors: Examines the revenue and expenditure of the EU. Must draw an annual report.

• European Court of Justice: Ensures that EU law is observed. It can give preliminary ruling in references from any national court or tribunal that exercises a judicial function concerning questions of interpretation of the treaties and secondary legislation as well as questions concerning the validity of secondary legislation. Each member state provides a judge for the ECJ, who together select a President of the Court. Court is also assisted by Advocates General; they give reasoned submissions on cases brought before court as to the application of EU law.

Procedures: European Court of Justice procedures are more in line with the civil law system than with the common law system:

• Pleadings: written proceedings are started with the applicant filing an application, with the defendant serving a defence in reply, and it is possible for the applicant to serve a reply to the defence.

• Preparatory inquiry: the case is first assigned to one of the judges to act as ‘rapporteur’. The judge rapporteur must then produce a preliminary report. An advocate general is also assigned to the case, the preliminary report together with the views of the advocate general help the court to determine the issues to be addressed.

• Court proceedings: oral proceedings are held in open court. The advocate general delivers his opinion to court, this is not binding.

• Judgment: only one judgment is given in the ECJ. There is no dissenting judgment (see CH. 1), but if the opinion of the advocate general is not followed, this is sort of the case.

• Court of First Instance: has the competence to hear all direct actions brought by private parties against EU institutions and EU personnel cases.

The Civil Service Tribunal

This is established in 2005, and it is a judicial panel attached to the Court of First Instance. It is composed of seven judges, who have taken over from the Court of First Instance the hearing of disputes involving the civil service of the European Union. Appeals from the tribunal may be heard by the Court of First Instance.

Subsidiary institutions:

• European ombudsman: may hear complaints from any citizen of the Union about EU institutions;

• Committee of permanent Representatives: diplomats who liaise with government ministries as a preparation for the Council

• Economic and Social Committee: advisory committee, not binding but persuasive

• European Council: not to be confused with the Council. Plays a part in deciding the future political direction.

Proposed Institutional changes

The main institutional framework under the European Constitution consisted of:

• The European Parliament: acts jointly with the Council of Ministers to enact legislation and supervise the budget, as well as having a general political control function.

• The European Council: continues in its function in defining the Union’s political direction and priorities.

• The Council of Ministers: responsible for carrying out policymaking and coordination as well as its legislative function together with the Parliament.

• The European Commission: retains its executive functions and Union legislative acts can only be adopted on the basis of a Commission proposal.

• The Court of Justice: includes the European Court of Justice, the High Court, and specialised courts. It rules on actions brought by Member States, institutions and individuals and give preliminary rulings.

The common market

The common market, or internal, or single market was laid down by the treaty of Rome. Essential for this common market are the free movement of goods, the free movement of workers, the freedom of establishment and the freedom to provide services and the free movement of capital.

Free movement of goods

The term goods mean anything that can have a monetary value and can constitute the object of commercial transactions. The primary aim in setting up the EC was to achieve economic integration, which could not be achieved without the free movement of goods. International trade barriers had to vanish, and a unitary commercial front should be maintained. Customs duties where abolished between member states, as where national taxes that affected customs duties. Genuine taxes, however, fall outside this scope of prohibition. The EC treaty also prohibits quantitative restrictions, like quotas and the like.

Dassonville formula: “All trading rules enacted by member states which are capable of hindering, directly or indirectly, actually or potentially, intra community trade are to be considered as measures having effect equivalent to quantitative restrictions.”

Distinctly applicable measures: only applicable to imports.

Indistinctly applicable measures: applicable to domestic and imported products alike.

Cassis de Dijon principle (rule of reason): Even where a measure does not discriminate against imports from other Member States, it may still be prohibited if it restricts trade. An exception is made if the measure was necessary to satisfy the mandatory requirements of the Member state with regard to fiscal supervision, protection of public health, the fairness of commercial transactions and the defence of the consumer.

Mutual recognition principle: it is presumed that goods that have been lawfully marketed in one member state will already comply with the mandatory requirements of other member states.

Derogation: Partial release from law.

Common customs tariff: applies to all products imported from outside the European Union. Once paid, the products will be in free circulation in the Member States.

Free movement of Workers

In the EC Treaty the free movement of workers is also important, creating a common market in manpower. A worker in one member state has the right to accept work in another member state.

Residence permit: gives a person the legal right to live in a country other than the country of which he is a citizen. This permit is also given to the family of the worker, and will also be valid if the worker is involuntarily unemployed. Independent rights are for the worker, dependent rights for his family.

Freedom of establishment and the freedom to provide services

The right of establishment gives individuals and legal persons (companies) the right to set up a business in a member state.

Harmonisation policy: to bring the laws of different member states into line.

Competition Law

In the USA this law is called the Antitrust Law. Its aim is to create fair competition, efficiency, consumer protection and integration within the European Community.

Article 81: restrictive practices: to prohibit agreements, horizontal or vertical, that would restrict, prevent or distort competition within the common market. It prohibits all agreements between undertakings, decisions by associations of undertakings, and concerted practices that will affect trading between the member states. The term agreement is not defined, but its application seems to be a general one, covering even informal arrangements. In general: agreements fix prices, limit production and disadvantage certain trading parties. An undertaking is also not defined, but from case law it would seem it is also used in a general sense to mean any legal or natural person involved in commercial activity. Associations of undertakings are usually trade associations. Concerted practices have been defined by the ECJ as a form of co-operation between undertakings where there is no formed agreement to work together but practical co-operation has replaced the risks of competition. Exemptions may be granted where the agreement, decision or concerted practice contributes to improving the production or distribution of goods or promoting technical or economic progress, while not acting unfairly to the detriment of the consumer. Block exemptions have also been issued, meaning that certain categories of agreement will be covered by an exemption and will not constitute an infringement.

Article 82: abuse of a dominant position: to prevent an undertaking that has a commanding position in the market from abusing that position. The first requirement is a dominant position (the power to exclude effective competition). It is important to note that a dominant position in itself is not prohibited, but the abuse of that dominant position is prohibited.
Anti competitive abuses:

• Unfair pricing: a price that is not related to the economic value of the product. Predatory pricing is when products are priced too low in order to drive out competitors. Discriminatory prices arise where different customers are charged different prices for the same product.

• Limiting production: the available markets or technical development may be restricted to the detriment of consumers.

• Unfair contract terms: for example, contracts which prohibits the buyer from buying from other sellers. Fidelity rebates encourages buyers to buy all or a very large part of the necessary supplies from the dominant undertaking otherwise they will not receive a discount. Tying applies where a condition of entering into a contract is that supplementary obligations are entered into as well.

• Refusal to supply: for example when the dominant undertaking refuses to supply another undertaking with the intention of driving it out of business.

Chapter 4: Tort

The law of tort belongs to the law of obligations, together with contract law and unjust enrichment. A tort is a civil wrong, rather than a criminal wrong. This law is concerned with the protection of certain private interests against certain types of wrongful conduct. Tort is a civil action, when it goes to trial, this is referred to as to sue, or to bring an action, and it follows the civil procedures. In the USA, in the burden of proof, it is the claimant who must show fault on the part of the defendant. The standard of proof, as in all civil cases, is on the balance of probabilities. The American formulation for civil actions is a preponderance of evidence or in certain cases clear and convincing evidence.

Parties

In tort cases the defendant is referred to as the tortfeasor, who may be a natural person or a legal person. Joint and several liability describes the situation where more than one person combined to cause harm to the claimant, so the claimant may sue for damages from all or any one of them for the full amount. Vicarious liability is where the ‘master’ is held responsible for the acts of the ‘servant’. This can be translated to the employer being responsible for the acts of the employee committed in the course of employment. Wrongful acts by an independent contractor do not give rise to vicarious liability.

In the USA, reference is often made to vicarious liability in the context of “master-servant” under the doctrine of respondeat superior.

Intentional torts to person and property

The term trespass denotes a tortuous, intentional interference with the claimant’s interests.

When this intentional interference is directed to the person this is also called trespass to the person. The main forms are: battery, assault and false imprisonment.

• Battery: The defendant interferes with the claimant’s person, there must be some form of contact, but physical injury is not necessary.

• Assault: An assault is committed if the defendant causes the claimant to fear that he is going to commit a battery against him.

• False imprisonment: This tort is committed by intentionally and directly placing a total restraint on the liberty of the claimant.

Intentional interference with property

This covers both interference with property or land. Land is Real property. All other, in particular goods and chattels, are personal property. The term chattels covers all tangible property. A civil action in trespass can be brought to court to protect land and chattels, the tort of conversion only covers chattels. A real chattel is the term for a leasehold.

Incorporeal chattels: intangible personal property that is of value but has itself no inherent value, for example a grant of patent.

Conversion: the tort is committed when a person deals with personal property in a way that is inconsistent with another person’s right to the possession of that property. That interference goes so far as to amount to a denial of the claimant’s right to possess the chattel.

Defences to the intentional torts

• Consent: this may be either express, for example giving someone the right to enter your land, or implied, for example the usual type of physical contact that can be expected in sports.

• Inevitable accident: as when a person comes onto the claimant’s property as the result of a accident.

• Defence of the person: a person may use reasonable force to protect himself.

• Defence of property: a person may use reasonable force to protect his property.

• Necessity: it is lawful to protect someone or his property from threats of harm, for example, to administer medical treatment to someone who is unconscious and cannot, therefore, give his consent.

• Lawful arrest, search and seizure also fall under this defence.

Negligence

Negligence is the word to describe a careless act, or lack of attention, that causes harm to another. The English legal tem negligence is far more specific; the tort of negligence is not merely carelessness. The defendant must have breached the duty of care, and this must have caused the claimant loss or injury.

A claimant must show 3 requirements are satisfied:

1. A duty of care must be recognised in law.

2. There must be a breach of the duty of care.

3. There must be damage resulting from that breach. That damage must not be too remote a consequence of the breach.

Duty of care at common law

Duty of care is a duty binding on one party to avoid acts or omissions, which could reasonably be foreseen as likely to injure the other party.

Neighbour principle: in the tort of negligence, this principle helps to determine whether the defendant owed the claimant a duty of care. It states that you must take reasonable care to avoid acts or omissions which you could reasonably foresee would be likely to injure your neighbour, a neighbour being defined as one who would be so closely and directly affected by your act that you should have him in mind.

At present day there are three criteria for looking if there is a duty of care:

1. Reasonable foresee ability

2. Proximity

3. Whether it would be fair, just and reasonable to impose a duty

Nervous shock: where psychiatric harm has been suffered by the claimant. Emotional distress or grief is insufficient to constitute psychiatric harm for this purpose. The English courts have been reticent to allow for claims for nervous shock or psychiatric injury, unless it connected to a claim of physical injury. Proximity may be taken into account in assessing whether the nervous shock suffered was reasonably foreseeable. Case law also indicates that an action can be brought even if the claimant was not at the scene of the accident or in the vicinity but was confronted with the immediate aftermath of the accident and the claimant witnesses this directly with his own unaided senses.

Duty of care and economic loss

Economic loss that results from negligent misstatements or negligent act, even if a person could foresee such harm he will not be necessarily liable to the claimant. There must be a special relationship between claimant and defendant, so that the claimant could reasonably be expected to rely on statements made by the defendant (this special relationship of reliance arises typically in a quasi-contract setting). In England a duty may be owed because of a voluntary assumption of duty.

Instead of referring to financial or economic loss, the term pecuniary may be used.

Some duties of care are now written down in statute form. There may be strict liability where there is a statutory duty of care. Strict liability means liability even without fault. The defendant may neither have acted intentionally nor negligent, yet he will still be held responsible.

Breach of duty

Determining whether the duty of care has been breached is done via an objective test. Reasonableness is the standard in this test: did the defendant act as a reasonable man (reasonable person)?

Factors a judge will take into account:

• The degree of risk the claimant created by the defendant’s conduct;

• The seriousness of the harm the claimant may suffer;

• The social utility of the defendant’s action, for example, was he a fireman or a policeman;

• The expense and practicability of taking precautions against the risk

The burden of proof rests on the claimant. Now he must show on the balance of probabilities that the defendant was negligent and this negligence caused injuries.

Res ipsa loquitur: an important rule in negligence cases. It means ‘the facts speak for themselves’. This rule of evidence applies where it would be hard to explain how the claimant was injured unless the defendant was negligent. The evidential burden of proof is then reversed, as the defendant must now prove that his negligence did not cause the claimant’s injury.

Causation and remoteness of damage

Causation: there must be a clear link between the claimant’s loss and the defendant’s conduct. The claimant must show that the harm would not have incurred if there would not have been negligence by the defendant.

But for test: the claimant must show but for the act of the defendant he would not have suffered the injury.

If a link can be established than the injury must also not be too remote, the defendant is only liable for damage that was reasonably foreseeable.

Thin skull rule: if the claimant could reasonably foresee the type of injury, then he is liable for the full extend of that injury, even though he could not foresee that full extend because he was unaware of some peculiarity of the claimant.

Novus actus interveniens: an intervening act that breaks the chain of causation.

Defences

If the claimant has provided all 3 elements necessary for negligence, one possible line of defence is contributory negligence: a defence established where it is proved that an injured party failed to take reasonable care of himself, thus contributing to his own injury. In England, the defence of contributory negligence no longer means that the claimant cannot recover damages, but that the amount of damages recoverable will be less. In the USA, the concept of comparative negligence emerged, which means that the negligence of the plaintiff is compared to the negligence of the defendant.

Another line of defence is that of volenti not fit injuria: There is no cause of action in negligence for a person who has consented to taking risk of injury. This defence now has a limited application. The defence of volenti is often referred to in the USA by the phrase assumption of the risk.

Statutory Product Liability

There now is strict liability for a defective product, which means that if the consumer uses statutory product liability, he does not have to show fault, but is he required to show:

• A product: product is defined in the statute as anu goods or electricity and includes property that forms a part of another piece of property, either as a component or as raw material.

• Damage: by way of death, personal injury or damage to other personal property above a fixed minimum value.

• A defect or defects in the product, making the product not safe.

• Causation in that the defect in the product caused the damage.

The producer is held responsible, not the supplier. A possible defence for the producer is the state of art defence: given the state of scientific knowledge at the time, it is argued that the defendant could not possibly have known that the product was defective.

Occupier’s Liability

An occupier owes a duty of care to all visitors in general. The basic test for this is to see if he controls all the premises. Duty of care here means that the occupier must take reasonable care to see that the visitors are reasonably safe using the premises.

Nuisance

This tort relates to land. Private nuisance is where the defendant has interfered in an unreasonable way with an individual’s use or enjoyment of his land. This tort is caused by indirect interference. The nuisance could cause actual physical damage to the property, for example by a fire spreading from the neighbours land.

Amenity damage: the nuisance does not cause physical damage to the property, but it does interfere with the claimant’s enjoyment of his property. Many traditional common law nuisances, like noise and fumes, are now also classed as statutory damage.

Public nuisance is an act or omission which materially affects the reasonable comfort of a group of people. In order to bring an action in tort, the claimant must be able to show that he has suffered particular damage, more so than the rest of the group. This special damage must be a foreseeable consequence of the nuisance.

Discrimination torts

Sexual, racial and disability discrimination have been regulated in statutes. An employer may be vicariously liable for discrimination during the course of employment, unless he can show that he took reasonable precautions to prevent such discrimination.

Defamation

Defamatory statements are statements which have lowered the reputation of the claimant in the eyes of right thinking people. There are 2 types of defamation: slander and libel:

• Slander is usually an oral defamatory statement

• Libel is where the defamatory statements are in a more permanent form, such as in the form of writing.

Requirements:

1. Vulgar abuse is not necessarily a defamatory statement, it is defamatory if the statement ‘lowered the plaintiff in the estimation of right-thinking people’.

2. The defamatory statement must have referred to the claimant. Or the claimant’s reputation must be damaged by the use of a fictitious name by the defendant.

3. The statement must have been published. This means that the statement must have been brought to attention to a third party.

Defences

1. • Justification: if the defendant is simply telling the truth, there is no defamation.

   • Fair comment: this finds a balance between the freedom of speech, and the protection of people’s reputations. Defence can claim the words were of fair comment upon a matter of public interest.

   • Absolute privilege: this is a complete defence, examples are defamatory statements made in the course of parliamentary proceedings, judicial proceedings or between husband and wife.

   • Qualified privilege: privilege will be lost if claimant can show that the defendant was malicious in making his statements. This privilege may be called upon if the defendant has a legal, moral or social duty to make the statement, and the other party has the duty to receive it.

   • Unintentional defamation: statutory law to protect publishers. If they inadvertently published a defamatory statement, the publisher must only make amends by placing a correction and an apology.

Economic torts

Unfair competition is the violation of accepted fair trade practices. There are some common law torts a claimant can call upon for protection:

1. • Deceit: defendant must have made a fraudulent misrepresentation to the claimant. Either knowingly or recklessly.

   • Malicious falsehood: also injurious falsehood. Here a defendant must make a false statement about the claimant or his property that is calculated to cause damage to the claimant.

   • Passing-off: This is where a competitor passes off his own goods or services as being those of the claimant, infringing the claimant’s trademark for example.

   • Interference with contract: Inducing a breach of contract is the term for a action brought against the defendant who has induced or persuaded a party to a contract to breach that contract.

   • Intimidation: the defendant has threatened to commit an unlawful act.

   • Conspiracy: it is unlawful to associate with other with the purpose to cause injury to another person.

Remedies in tort

The limitation period is that certain time in which claim must be brought. When claims are brought after that specified time, they are said to be statute barred, and will not be heard.

The goal of compensation in tort is to restore the injured party to the position he would have been in if the tort had not been committed. The injured party is under a duty to mitigate which means he must do all that is reasonable to avoid making more losses than necessary.

Damages

Damages is one of the most common and important remedies in tort and civil actions. It refers to the financial compensation awarded to the claimant for the injury he has suffered. Damages may be awarded in the form of one lump sum or a structured settlement.

Damages awarded for personal injury fall into two categories: straightforward pecuniary loss (loss of earnings and expenses) and non-pecuniary loss (loss of enjoyment in life, physical and mental pain, and loss of amenity).

Most damages are compensatory damages, which means that the award is calculated to recompense the claimant for the harm suffered.

Other sorts of damages are:

• Nominal damages: these are awarded where the claimant has been successful but has suffered very little damage.

• Contemptuous damages: here the claimant has been technically successful, but the claim had little merit.

• Exemplary or punitive damages: to punish the defendant or make an example of him (English court).

• Aggravated damages: defendant has behaved intentionally and has caused the claimant distress.

Injunction

An injunction is an equitable remedy and therefore discretionary.

• Prohibitory injunction: prohibits a person from doing something.

• Mandatory injunction: requires the direct performance of a positive act.

• Interim injunction: is granted before the outcome of a trial.

• Perpetual or permanent injunction: a final injunction, which may be granted upon the completion of a trial.

Chapter 5: Contract law

English contract law is looked upon as hard and rigid, where the contract law of their neighbours is too vague and discretionary. Common law is primarily concerned with the need for legal certainty in interpreting contractual terms. English courts look at contracts more objective, interpreting contracts literally and strictly. When the Dutch look at contracts, they take into account reasonable expectations of the parties given the nature of the contract an what would be fair and reasonable.

A contract’s form

A contract may be defined as an agreement between two or more parties that is binding in law. So this agreement generates rights and obligations that may be enforced in the courts. Contracts can be by word of mouth, written, or both. A simple contract refers to a contract that does not have to comply with any requirements of form. In England a deed (written document, signed by the parties and witnessed) is needed to transfer a legal title in land from one party to the other.

The formation

For the formation of a contract, three elements are needed:

1. offer and acceptance

2. intention to create a legally binding relationship

3. the presence of consideration

Offer and acceptance

There must be a consensus ad idem: a meeting of minds. IT must show agreement on the fundamental terms of the contract.

Offer

The person making the offer is called the offeror, the person to whom the offer is made is the offeree. An offer is a statement of willingness to contract according to the terms proposed with the intent that it will become a binding contract if accepted. Must comply with:

• must be unequivocal;

• must be communicated

• terms must be certain

• must not have terminated

Invitation to treat: a stage in negotiations where one party is inviting others to make an offer, which he is free to accept or reject. An invitation to treat is not an offer.

Tender: an offer to provide goods or services for a specified price. An invitation to tender is usually not an offer but an invitation to treat.

If a term is uncertain in the contract it will depend on how fundamental that term is to the contract, if the contract will fail.

An offer is terminated when it has been revoked, or it has lapsed or been met with a counter-offer. The revocation of an offer means that the offer has been withdrawn by the offeror. An offer is said to lapse after the time limit for the offer has expired or after a reasonable interval when there was no time limit. It is also terminated where the offeree does not accept all the terms of the offer and instead makes a counter-offer.

Acceptance

There must be unconditional assent. A counter offer is a rejection of the original offer, and there can be no contract until the counter offer is accepted.

The postal rule states that acceptance is complete when the letter is posted, even when it never reaches the offeror. The ‘battle of the forms’ means that both parties have different standards in how to print the contract. A good solution is the last shot rule, which means that the conditions laid down in the acceptance will govern the contract.

Creating legal relations

When it is concluded that the intention of the agreement was not to create a legal relationship, then there is no contract. In different social relations it is agreed upon that agreements are not intended to be legal, for example between parents and children. This presumption can be rebutted if there is clear evidence of an intention to create a contractual relationship.

Honour clause: this clause makes clear that there is no intention to create legal relations

Letter of comfort: usually written in support of someone who is applying for a loan and offers the potential offeror reassurance.

Letter of guarantee: takes the form of a declaration to guarantee the payment of a debt incurred by another if that other fails to repay.

Another important question is if there was ant intention to create legally binding relations in a pre-contractual phase. It is quite usual to draw agreements to agree such as a letter of intent, meant to put a preliminary understanding into written form.

The principle of good faith takes into account honesty and fairness during negotiations and contractual relations. The intention is to carry out contractual obligations, and with no intention to seek an unfair advantage or purposefully act to the detriment of the other party. When the doctrine of good faith is recognised, breaking off contractual negotiations may give rise to legal consequences.

Consideration

The bargain: each party gives value to the other either by exchanging promises or by a promise given in exchange for an act. A one-side promise is not a binding contract. To make a promise enforceable, the promise should either be exchanged for nominal consideration, or be made in the form of a deed.

Executory consideration: refers to an exchange of promises to perform acts in the future. Executed consideration is where one party performs an act in fulfilment of a promise made by the other.

Past consideration: not valid, as it refers to a promise to do something that has already been done before the promise was made.

The value of the consideration by one party does not have to be equal to the value given by the other party. Consideration does not have to be adequate. Courts will not defeat a contract because one party has made a bad bargain.

Peppercorn rent is where nominal consideration has been given to make the agreement legally binding. The Rule in Pinnel’s case: payment of a lesser amount than is owed cannot discharge the obligation to pay the full amount, even if the creditor had expressly agreed to release the party from original obligation and accepts a lesser amount.

It could be the case that there is an inequality if bargaining power between parties in a contract. One party may have a dominant position. However there is no remedy for this occurrence in English law/

Promissory estoppel: this is an equitable principle. It may take a one-sided promise binding where there is an existing legal relationship and the promisor has promised not to enforce a legal right. Having induced reliance on this promise, it would be inequitable not to enforce the promise.

In the contract law, the term capacity refers to the ability of a natural or legal person to enter into a contract. There are three special cases with respect to contractual capacity: corporations, persons, of unsound mind and minors.

In general, rules are that no one is entitled or bound by the terms of the contract if he is not an original party (doctrine of privity of contract).

A contract’s contents

A contract is made up of promises parties have made to each other, these are legal obligations and are legally enforceable. The undertakings stipulated in a contract are grouped together under the word terms, which can be oral or written. Terms may be express or implied and will determine the extent of the party’s rights and duties.

The parol evidence rule (four corners rule): Where a contract is embodied in a written document, then extrinsic (parol) evidence is not admissible to add to, vary, subtract from or contradict the terms of the written document. The rights and duties created by the written agreement must be looked for only within the four corners of the writing itself.

Collateral contract: one party enters into the main contract on the basis of a promise made by the other party. A collateral contract must have all elements of an independent valid contract.

A representation is the name given to a statement that induces the contract but does not itself become part of it. A remedy for false representation will lie in misrepresentation, and not in a breach of contract, since it was not part of the contract.

The terms of a contract

• A condition is a fundamental term of the contract. If it is breached the innocent party may not only claim damages but may opt to treat the contract as ended.

• Warranty: is a term of lesser importance than above. Its breach would not give the innocent the option to breach the contract, but it would give the innocent party the right to claim damages. In the USA, warranty is used in the sense of warranties and indemnities and in particular in the context of the sale of goods where representations made by the seller, either express or implied, become part of the contract of sale.

• Innominate term: a term is classed as innominate where it is uncertain whether it is to be treated as a condition or as a warranty.

• Express terms: terms explicitly stated by the parties, either oral or written.

A term can be incorporated into a contract reflecting local custom or trade usage in a particular industry if the contract is silent on the matter.

Statutory implied terms are particularly important in contracts for the sale of goods.

In general, the court will not read terms into a contract but only interpret the terms that are there. An implied term will be given the transaction so-called business efficacy when the court implies a term because the agreement was clearly intended to create a legal relationship and the nature of the contract itself requires the term because otherwise the contract cannot function.

Exclusion causes

This is a clause to exclude the liability of a party for breach of the contract, misrepresentation or negligence. A variant is the limitation clause which does not seek to exclude a party from all liability, but limits it, usually by a financial limit on the liability of the party.

Judicial rules

These rules were developed by the common law. In English law a rule of construction is supposed to give effect to the parties’ intention by interpreting the contract, whereas a rule of law must be applied whether it gives effect to the parties’ intention or not.

• Incorporation: the exclusion clause must have been incorporated. If a person signs a contract with an exclusion clause, this will be binding, even if he did not read it.

• Contra proferentem rule: If an exclusion clause has been incorporated, it must still cover the breach in question.

• Main purpose rule: an exclusion clause may fail if it defeats the main purpose of the contract.

• Fundamental breach: this is a rule of construction.

When an exclusion clause has survived the common law rules, this can still fail to comply with statutory provisions. English legislation on unfair contract terms regulates the use of exclusion clauses. Exclusion clauses must be reasonable.

In addition, the English law distinguishes between contracts involving non-consumers and contracts involving consumers. This consumer protection has become increasingly important in legislation.

Setting aside a contract

A vitiating factor is one that can invalidate the contract. The contract may be void or voidable, a void contract is one that was never legally valid or with no legal effect. A voidable contract can have legal effect but could be made void if the representee rescinds it.

Misrepresentation

A representation is a statement that was made to induce the representee to enter into the contract but does not itself become part of the contract. A misrepresentation is a false representation. Misrepresentations can be fraudulent, negligent or innocent. It can only be classed this way if it is a statement of fact, and if it was made before or during the forming of the contract. A statement of opinion is not a misrepresentation.

The Latin term uberrimae fidei means of the utmost good faith. In contracts that are uberrimae fidei there is a duty of full disclosure.

There are three types of misrepresentation:

1. Innocent misrepresentation: here the maker of the statement had reasonable grounds for believing it was true

2. Negligent misrepresentation: a lack of reasonable care was taken in making the statement.

3. Fraudulent misrepresentation: the person knew that the statement was untrue, or was reckless as to whether it was true.

Remedies

1. • In equity: the innocent party can rescind the contract: setting aside the contract,

the contract is void and the parties are put back in the position they where before the contract was made. There are bars to rescission: if the contract has been affirmed the right to rescind is lost, or if it is impossible to go back to the original position, or where third party rights have intervened.

1. • In common law: rescission is also possible to sue for damages in tort if the

representee was induced to enter into a contract by a fraudulent or negligent misstatement.

1. • Legislation: under statue, damages can be claimed for negligent and innocent

misrepresentations.

In common law, contracts can be set aside if they where written under duress or undue influence:

• Duress: Violence or threats in order to make someone enter into a contract. The contract is arguably void from the outset. If it is seen voidable it can be set aside.

• Undue influence: refers to improper pressure other than violence to make someone enter into a contract.

Some type of mistakes will not affect the validity of the contract, the rule of caveat emptor (let the buyer be aware) still applies in private sales, where the parties are bargaining equals.

• Non est factum: In general persons are bound by the term in the contract they signed. An exception exists when the signatory believed he signed a document fundamentally different than the one shown.

• Mistakes as to identity: a mistake where one party is mistaken as the identity of the other party.

• Common mistake and mutual mistake: both parties are mistaken. The mistake is common where both parties mistakenly believed the same thing.

A contract will not be enforced if its purposes where illegal (criminal purposes, and those injurious to society). Contracts that restrict freedom of trade are prima facie void, at first sight.

Discharge of contractual obligations

After discharge parties are free of their mutual obligations. This can be achieved through various ways: by performance, express agreement, breach or under the doctrine of frustration.

• Discharge by performance: The rule is only a complete performance, exact and precise, will discharge a party from its contractual obligations. There are 2 exceptions to complete performance: Substantial performance, which means that the contractual obligations are as good as fulfilled, except for a few minor aspects. Divisible contract when a contract can be divided into a number of specific, separate parts.

• Discharge by agreement: Parties can agree that the original contract should end automatically if some event occurred or after a fixed period of time. Or when there is a new agreement that replaces the old one. There is bilateral discharge where both parties exchange promises not to enforce the original contract.

• Discharge by breach: where a party has failed to perform his obligations under the contract, or has performed them defectively.

The innocent party has the right to treat the contract as discharged where there is:

• Repudiation: the party defaulting has repudiated the contract by announcing he will not carry out his obligations under the contract.

• Fundamental breach: the defaulting party has breached a term of the contract that is of fundamental importance.

Discharge by frustration: parties are excused from the contract if, through no fault of either party, after the formation of the contract it becomes impossible to carry out the contract or the contract has become commercially sterile or futile.

The commercial purpose of the contract is said to be defeated where there is no physical destruction of the subject matter, but the essential commercial purpose no longer exist. This rule is referred to as frustration of the common venture.

Remedies for breach of contract

Damages in contract law are out in place to put the claimant in the position he would have been in if the contract had been performed properly. Full expectation damages means that a claimant can claim for a loss in the sense that the claimant expected to have it (expected profit).

There are two types of clauses that can be included in a contract concerning damages:

• Liquidated damages clause: Parties agree on costs to be paid to each other in the case of a breach. To avoid having to go to court. For losses that would occur.

• Penalty clause: where one party intends to punish the other party for breach of contract.

To prevent damages spiralling out of control, there must be a cut off point for remoteness. Damages must be proximate. The rules in English law on remoteness of damage are based upon the case of Hadley v Baxendale 1854, which laid down the certain rules.

A victim of breach can recover for losses in two instances:

• For those naturally arising from the nature of the contract.

• If the losses do not arise naturally from the contract, they may be reasonably supposed to have been in the contemplation of both parties at the time they made their contract as the probable result of the breach. Special notice must have been given to show that the parties were aware that losses could result. The term consequential loss is often used to refer to unusual or special losses.

Quantum meruit is a claim for reasonable remuneration, which can be made where partial performance was voluntarily accepted by the other party, or where one party has been prevented by the other from completing performance.

Specific performance is an order to make a party perform his obligations under the contract.

The court can prohibit a person from doing something. This is then called a prohibitory injunction. When the court requires a person to do something, then it is called a mandatory injunction.

Other types of injunction are: freezing injunction, interim injunction and final injunction.

In civil law systems, such as the French, German and Dutch, the innocent party has the right to suspend performance where the other party is in default. This is the principle of exception non adimpleti contractus: suspension of performance in the event of breach.

Chapter 6: Company law

English company law has been affected by EU harmonisation in several ways. Nonetheless there are still differences between member states. The word company is used differently by English and US lawyers. In England word denotes an incorporated entity, a registered company. In the USA the term company may be used in a more general way. The word company is used to cover private corporations, joint stock companies and partnerships. In English law a firm is not an incorporated entity.

Unincorporated business organisations

When a business is incorporated this makes the business a legal person. A person can choose to be unincorporated in the form of a sole trader or a partnership.

• Sole trader: basically a one-man business, where the owner has usually supplied the start up money. The sole trader carries full responsibility. He is also entitled to the profits and losses. In the USA called a sole proprietorship.

• Partnership: this is the term used to describe the relationship between persons carrying on a business in common with a view to profit. In England referred to as firms. In a deed or articles of partnership rules for the set-up of the company can be written.

The partnership’s legal structure

A partnership is not a separate person in law; it is formed by the individual partners. A partnership does not have to go to legal formalities, like being registered. In English law, every partner is an agent of the firm and can act to bind the firm and his other partners for the purpose of the business of the partnership. A partner has an agent’s power to bind the partnership by his acts carried out within the ordinary course of the business.

Partners pay income tax on the basis of their shares of profits and losses.

If one partner breaches a contract or commits a tort, all partners are liable. Partners may be jointly and severally liable. Partnership property is property owned jointly by the partners.

Registered companies

A company is an association of persons formed for the purposes of an undertaking or business carried on in the name of the association. It must be registered and then legally incorporated. When a company is registered, it becomes a legal person on its own.

Three types of registered company:

1. Limited by shares: the shareholders’ liability is limited to any amount that has not yet been paid for their shares;

2. Limited by guarantee: the shareholders’ liability is limited to the amount they have guaranteed to contribute if the company is wound up;

3. Unlimited: here the shareholders are fully liable for the debts of the company if the company is wound up.

Limited liability company: The most usual form of a trading company, shareholders cease to incur liability to contribute to the debts of the company once the shares held by the members have been fully paid up.

Three separate pillars: the company, its membership and its management. As a legal person a company can own property, commit crimes and torts and conclude contracts.

Holding company (parent company): the business of a holding company consists wholly or mainly in holding shares or securities in one or more companies within the group, which are its subsidiary companies. It must produce group accounts.

Corporate veil: the legal recognition of the company’s independence from it’s owners and management. The process by which the court looks behind the veil of corporate secrecy is called lifting the veil (USA: piercing the veil).

A company’s formation

A promoter is the one who organises the setting up of a new company. He owes fiduciary duties he is promoting, this is the obligation to exercise his powers for the benefit of the company and not for his own benefit. He owes a general duty of trust, honesty and integrity towards the company. The promoter will deal with thing like registering the memorandum and articles of association. But he can also acquire capital for the company and enter into preliminary agreements. Pre-incorporation contracts are contracts where a person enters into a contract on behalf of a yet unformed company.

A number of documents must be delivered to the register if association:

• The company’s memorandum of association

• The company’s articles of association

• A statement giving particulars of the company’s first directors and secretary

• A statutory declaration by a solicitor or a person named as director or secretary that the statutory regulations for registration have been complied with.

Once all of this has been done, the company will be issued a certificate if incorporation. A private company may then commence business, but a public company has to wait for a trading licence.

A public company must have a minimum subscribed share capital. It may seek finance by offering its shares and debentures to the public. If it is a public limited company, it is one incorporated with limited liability. A private company may not offer its shares or debentures to the public.

The company’s constitution

This is governed by 2 main documents: the memorandum and the articles of association:

The memorandum of association is primarily concerned with the external regulation of the company, it contains these clauses:

• The name of the company, whether it is a limited liability company and the suffix denoting whether it is a private or public limited company;

• The location of the registered office;

• The objects clause: this states the business or the purpose for which the company was incorporated;

• The nominal capital of the company and its arrangement of shares.

Ultra vires: Latin phrase meaning to act in a way which exceeds legal powers or authority. Contracts outside the scope of the objects clause used to be ultra vires and therefore void. This position was changed by EU law.

The Articles of association deal with the internal administration of the company. It includes articles regulating general meetings, the appointment and powers of directors, the types of shares that can be issued and the class rights attached to shares. Articles are binding, but they may be changed by a special resolution (75% majority).

Capital

Money and other property of the company:

• Share capital.

• Authorised share capital: the total nominal value of shares that may be issued by a company, fixed in the company’s memorandum.

• Issued capital.

• Unissued share capital.

• Called up share capital: the sum that shareholders have already paid in return for shares.

• Uncalled share capital.

• Reserve capital: a part of the uncalled share capital set aside as a fund for paying unsecured creditors should the company wound up.

• Loan capital: capital that has been obtained on credit.

Shares

Shares are the interest held by shareholders in a company, measured by a sum of money in order to asses the shareholder’s liability and dividend rights. A shareholder also becomes a member in the company. Two common types of shares:

• Preference shares: pays a dividend at a fixed rate, paid out before ordinary shareholders are paid dividend

• Ordinary shares (Equity shares): entitled to be paid dividend once the above have been paid. This will fluctuate on the basis of how well the company is doing.

Prospectus: document in which shares or debentures are offered to the public for the first time

Listing particulars: a document offering shares or debentures to the public where the company is already listed.

If a company wants to issue new shares, it may be necessary to change the share capital clause in the memorandum. A court can order a company to buy its own shares if minority shareholders need to be bought out.

English companies don’t need to maintain an authorised share capital any more, although shares are still required to have a nominal value.

Insider dealing or insider trading happens when a person uses confidential information about the company in order to buy or sell the securities advantageously.

The recent changes to English company law make share transactions easier than before. Share capital can be reduced if a special resolution is passed.

Loan capital is the money borrowed by a company, in its capacity as a legal person. A bond is a certificate issued by a public company promising to repay borrowed money at a fixed rate of interest at a specified time.

Although debentures do not have to be registered, if a loan is to be secured by a charge on the property, that charge must be registered. A charge can take several forms:

• Fixed charge: this is either equitable or legal, and is similar to an ordinary mortgage.

• Floating charge: this type of charge attaches to a class of assets, which in the ordinary course of a company’s business would be changing from time to time.

A charge may crystallise because of an event of default. Specified events implied by law are the winding up of a company and the appointment of a receiver. After crystallisation, the company may no longer deal with the assets under the floating charge.

A contract for a floating charge normally has express provisions that stipulate that:

• A company will not deal with the assets otherwise than in the normal course of business.

• A company will not grant a further charge over the charged asset which would rank in priority ahead of the floating charge. This is known as negative pledge clause. It prohibits the issuer from pledging any assets in the future if it would be to the detriment of the debenture holder’s security.

A Company’s management

Corporate governance: term used to describe the way in which companies are directed and controlled. In law, the company, its management and ownership are 3 different entities.

In practice, the term director stands for anyone who is responsible for the management of a company. There are various types of directors:

• Executive director: usually a full time officer of a company. Powers are determined by the board of directors.

• Non-executive director: not a salaried employee, not responsible for day to day management. They are usually chosen for their expertise or public recognition. They are entitled to director’s remuneration and business expenses.

• Chairman: is an appointed director who presides over meetings of the board of directors and general meetings. He has no special powers but he may have second or casting vote. He may be (does not have to be) the managing director (CEO).

• Alternative director: a person appointed by a director to act in his place, when he is not there.

• Shadow director: he controls the other directors, even though he is not officially a director of the company.

Board of directors: comprises the individual directors. It is the ultimate decision-making body of a company and determines the delegation of power.

Directors’ duties: still largely governed by common law and equity, although statute has laid down a number of statutory duties.

English law now refers to seven general duties:

1. Duty to act within powers

2. Duty to promote the success of the company

3. Duty to exercise independent judgment

4. Duty to exercise reasonable care, skill and diligence

5. Duty to avoid conflict of interest

6. Duty not to accept benefits from third parties

7. Duty to declare interest in proposed transactions or arrangements

Duty of care and skill: the so called business judgement rule means that a director must not be negligent in the management of his company, but that he will not be liable for mere errors of judgement.

Fiduciary duties: a director is under an obligation to exercise his powers for the benefit of the company and not for his own benefit. He owes a general duty of trust, honesty and integrity towards the company.

Conflict of interest rule: where there is a conflict of interest between a director’s personal interests and those of the company, those of the company must prevail.

Self-dealing rule: if a director has an interest in a contract between the company and a third party, he must disclose this to the company, as a possible conflict of interest situation.

In England every company must have a company secretary, who is responsible for the administration of the company’s affairs. It is responsible for the preparation and keeping of minutes, dealing with share transfers, maintaining a register of members and debenture holders, a register of directors’ share interests and sending notices of meetings.

Auditing is the process by which the financial situation of the company is examined in order to draw up the annual accounts. All company accounts have to be audited unless the company qualifies for an exemtion, for example because it falls under the category of a ‘small company’.

A membership contract creates contractual rights and obligations between the company and its members, and between members themselves. The doctrine of privity of contract means that individuals do not have any rights or obligations arising from a contract to which they were not original parties.

Meetings

The directors are responsible for the daily running of the company, but important points that can affect the company must be represented to the shareholders in the general meeting. Public companies must hold an annual general meeting (AGM), while private companies are not required to hold an AGM. Extraordinary general meetings may also be called to vote on special business if required by a sufficient number of the members. A class meeting is where a class of shareholders meet to decide matters which affect their particular class of shares. Also, a member can appoint a proxy, who need not be a member, to vote in his place at a general meeting. Moreover, every company must keep minutes of the proceedings of its general meeting and directors’ meetings.

Resolutions

There are various types of resolutions:

• Special resolution: 75% majority needed, would be used, for example, to change a company’s articles of association.

• Ordinary resolution: Simple majority vote, for example to remove a director before the end of this term

• Written resolution: This dispenses with the need for a meeting by a private company.

Event of default: an event specified by statute or specified in a debenture document that means that a charge on property secured by the debenture is activated.

Receiver: when the company has failed to repay a debt to a creditor a receiver will take control of the property in question for the benefit of the creditor. He is not appointed to wind up a company.

There are several different types of receiver. Only some receivers have to be a qualified insolvency practitioner, such as in English law liquidators, administrators and administrative receivers.

A company does not need to go into liquidation after the appointment of a receiver. If it does, the receiver may become the provisional liquidator on winding up. The creditors then meet to decide upon a permanent liquidator, while an official receiver may act as an interim receiver until the liquidator has been appointed.

Insolvency practitioner: is someone qualified to conduct the affairs of companies that are in default or insolvent, for example an administrative receiver or a liquidator.

Dissolution

Dissolution means bringing a business to an end. The most actual reason for dissolution is because the business is insolvent; it can no longer pay its debts. A company is wound up and remains in existence only until the process of liquidation is complete.

There are various ways in which a registered company may be dissolved:

• Cancellation of the registration

• By an order of court where the company is transferring its undertaking to another company under registration

• By the registrar is the company is defunct

• By winding up

There are 2 forms of winding up:

• Voluntary winding up: a company can make a voluntary arrangement with its creditors for repayment, if supervised by a qualified insolvency practitioner.

• Compulsory winding up: is by court order. A winding up petition is submitted to court by the company itself or a creditor who establishes a prima facie case or by a contributory.

A liquidator is an insolvency practitioner who is appointed to wind up the company. His role is to take control of the company, gather in the assets belonging to the company, realise them and pay off the creditors according to the fixed order of priority.

Creditors with fixed charges may realise their charges on the company property. Then preferential creditors are paid off, followed by floating charge holders and unsecured trade creditors.

The liquidator may set aside transactions that were intended to defraud the creditors. He can apply to the court to recover assets that were disposed of by the company within a fixed period before the insolvency.

A director can be held liable for fraudulent or wrongful trading. Fraudulent trading is where a company knows it will not be able to pay its debts when due and the business is carried on with the intent to defraud creditors. A director who is guilty of such conduct may be liable to contribute assets. Wrongful trading is where a director ought to have realised that the company could not pay its debts. Here, the director could also be required to contribute to the assets of the company.

The following legal constructions have been developed to circumvent the order of priorities of paying out creditors:

• Retention of title: it is also known as reservation clause or Romalpa clause. The purpose of this clause is to affect priority, as a supplier of goods with a valid retention of title clause will rank above a creditor secured by means of a registered charge in the event of receivership or liquidation.

• Lien: acts as a charge on the property of another as security for the performance of an obligation.

• Trust device: Funds that have been given to the company for a specific purpose may be held on trust, therefore they are not part of the assets that the liquidator may call upon to distribute to creditors.

Winding up the company is not always the best option for the creditors. In some cases, the best option for all concerned may be to rescue the company:

• Voluntary arrangement: legally binding voluntary arrangement between the company and its creditors. In a composition, an agreement is made with the creditors to settle a debt immediately by repaying only part of it. In a scheme of arrangement, a plan is drawn up to offer a way of paying debts and avoiding insolvency.

• Administration order: this creates a moratorium, or suspension of payments, for a fixed period so that no-one can deal with the assets in that specified period. The administrator, who must be a qualified insolvency practitioner, then runs the business.

Source

This summary is written in 2012-2013 and summarizes the book by H. Guby; 3th edition - 2011