Business Law in Practice November 2010

Transcription

1 Business Law in Practice November 2010 s and examiner s comments Important notice When reading these answers, please note that they are not intended to be viewed as a definitive model answer, as in many instances there are several possible answers/approaches to a question. These answers indicate a range of appropriate content that could have been provided in answer to the questions. They may be a different length or format to the answers expected from candidates in the examination. Section A 1. (a) Explain the term abbreviated accounts, and explain when abbreviated accounts may be used. Abbreviated accounts are simplified accounts which small or medium sized companies (as defined in law) can prepare and file with Companies House instead of full accounts. Define the role of a director. A director is a person that conducts the affairs of a company. A director includes any person occupying the role of director by whatever name called. (c) What is a voidable contract? A voidable contract is a contract that is capable of being made void at the discretion of the injured party. ICSA, 2011 Page 1 of 8

2 (d) In terms of company law, why is a quorum important? A quorum is the minimum number of people/directors who must attend a board meeting for it to be conducted legally. (e) What is meant by the term libel? Libel is a permanent form (for example, written) of defamation. This question was not very well answered, with low average marks obtained. This would suggest a lack of complete syllabus coverage in preparation for the examination. 2. (a) In terms of insider dealing, define inside information and give a possible example. Inside information is price-sensitive information gained through ones employment. Examples could include awareness of a merger or acquisition. What does goodwill represent? The value or price that a purchaser will pay, above the value of its total assets. Essentially, the purchaser is paying for the name and/or reputation of the business. (c) What is meant by the term estoppel? A rule of evidence that prevents a person from denying the truth of a statement made or from denying facts they have alleged to exist. It is precluded from denying the genuineness of a statement or document. (d) In the context of shares, what is meant by a dividend? A dividend is the return on a share, i.e. a share in the profits of the company, that is paid out as a percentage of the nominal value of a single share. The dividend is determined by the directors and approved at the Annual General Meeting (AGM). ICSA, 2011 Page 2 of 8

3 (e) Explain the term invitation to treat. An indication that one party is willing to listen to offers from interested parties. It differs from an offer in that it is not capable of being accepted as it stands. This question was also not well answered, with a low average score. Many candidates did not provide sufficient information to gain the marks available. This was particularly seen in Questions 2, (c) and (d). Section B Case study Ken Tooley Fried Chicken Kenneth Tooley ( Ken ) has decided to open his own fast food outlet selling fried chicken, fries and other foods. He initially considered creating the business as a limited company but, due to the costs involved, decided not to. He has decided to advertise extensively and has seen other, larger fast food outlets launch new units on the back of a successful advertising campaign. Ken decides to call his shop Ken Tooley Fried Chicken and has decorated it in a bold red and white design. He has also placed outside the shop a picture of an ageing grey-haired man with a white beard, very similar to the logo used by a multi-national chain. As part of the marketing campaign, Ken decides to keep a database of customers using his restaurant. He requests each visiting customer to complete a questionnaire, asking for details of their name, address, income, favourite food, marital status and hobbies. The restaurant starts well, with customers willing to try the new food, and Ken decides to take on his friend, Andy, as a chef. There is no formal contract drawn up but they verbally agree that, if Andy wishes to leave, he must give one month s notice. Ken also buys a new deep fat fryer. Unfortunately, after two weeks of constant usage, the fryer explodes, damaging the kitchen. Ken contacts the supplier that sold him the fryer. As no-one was injured in the incident Ken is claiming only for the cost of the kitchen refurbishment. The supplier states that it is not liable for the loss suffered, as the contract signed by Ken states that they are not liable for any loss or damage caused by the fryer. One of Ken s customers, Mary, claims that she has suffered food poisoning originating from food sold by Ken s restaurant, and is proposing to sue him. On reading about this incident in the local press, the authorities inspect the restaurant and reveal poor hygiene standards. On seeing the reports in the same local newspaper, other customers threaten to sue Ken. Ken has received a letter from a multi-national chain stating that he must stop using the logo, similar to their own, and if he does not do so, they will see him in court. A customer, Walter, has scalded his hand due to the top of a coffee cup not being placed tightly on to it by the staff member serving him. He is claiming compensation from Ken. Finally, Andy tells Ken that he is concerned with the hygiene levels at the restaurant, is leaving immediately and does not intend to work his one month s notice. ICSA, 2011 Page 3 of 8

4 Section B Questions 3. (a) Explain the law relating to trademarks in the UK. (15 marks) This question examined the law relating to trademarks. Trademarks can be registered under the Trade Marks Act 1994 or, if not protected under common law, by the use of a passing off action. There is no requirement to register a trademark. However, a registered trademark gives the owner the exclusive right to use (or assign) that mark and to sue for infringement. To be registerable, a trademark needs to be: Distinctive. Not deceptive. Not similar to any earlier trademarks. Capable of being registered graphically. A trademark is defined as any sign which can distinguish the goods and services of one trader from those of another. Basically, it is a badge of origin, so that customers can recognise the product of a particular trader. By threatening to see him in court, what rights were the multi-national chain alluding to? (10 marks) They are alluding to infringement, which is the unauthorised use of a registered trademark where the public may be confused by a similar mark. Infringement can also occur where an unfair advantage is taken of the trademark s reputation. Before there is infringement, there must be use of the mark by the infringer. Remedies include: An injunction. An order that the infringing goods be delivered up or dealt with in a way so as to ensure that they no longer infringe the trademark. Damages. An account of the profits made by the infringer. If not registered, and a claim for passing off is made, the remedies are just the same as above. This was the most popular question in Section B and was, on the whole, answered well. Many good answers were provided. ICSA, 2011 Page 4 of 8

5 4. (a) Explain the contractually-implied duties that apply between Andy and Ken. (16 marks) Although there is no signed contract between Ken and Andy, there are still terms that apply between them. Ken owes to Andy duties and they include to: Pay Andy. Provide work. Treat Andy with mutual trust and confidence. Take reasonable care for Andy s safety. Deal promptly with grievances. Reimburse Andy for any expenses properly incurred while at work. Write references. Andy owes to Ken duties that include to: Comply with reasonable and lawful orders. Exercise reasonable care and skill at work. Be ready and willing to work. Act in good faith. Take care of Ken s property. What are the contractual implications of Andy leaving the business without giving notice? (9 marks) If Ken has breached an implied term, then Andy has the option of resigning and making a claim for constructive dismissal. Alternatively, he could stay in position and make a claim for damages. However, it is not proven that Ken has breached an implied term and, as such, Ken could either dismiss Andy or sue for breach of contract. Thus, the case very much depends upon the findings of the investigation This was not a popular question and a full range of marks were awarded for answers. Some answers were good and some were weaker. Many candidates appeared to struggle to differentiate between parts (a) and. Some candidates did not appear to identify that part (a) tested the law and part required the candidate to apply the law. 5. (a) Discuss the likelihood of the supplier being able to avoid liability for the damage caused by the fryer. (17 marks) This question tested the law relating to exclusion clauses. An exclusion clause is inserted into a contract to avoid a later claim for liability. An exclusion clause must be freely negotiated between parties of equal bargaining power, inserted into the contract and must cover the actual breach that has occurred. ICSA, 2011 Page 5 of 8

6 In order to be effective, the clause must abide by the Unfair Contract Terms Act 1977 and must be reasonable. Examples of unreasonableness have included: Restrictions for liability of death or personal injury resulting from negligence. Restrictions arising from defects in the goods which result from negligence. Exclusion of liability under the Sale of Goods Act Potential supporting cases includes Thornton v Shoe Lane Parking Ltd The Unfair Terms in Consumer Contract regulations protects weaker parties in contract negotiations. This protection can include: Excluding or limiting the liability of a seller or supplier in the event of death or personal injury resulting from an act or omission of the seller or supplier. Explain to Ken the possible benefits that he may have enjoyed should he have decided to set up the business as a limited company. (8 marks) The benefits to Ken from setting up as limited company include: Liability Ken would not normally be liable for the debts incurred by the business. There are exceptions to this lack of liability. Access to funds As a limited company Ken would have access to funds not available to other structures. Examples would include raising funds by share issue, debenture lending and so on. Succession Should Ken pass away the business could continue, depending on how the company had been set up. This was a popular question. Answers scored a narrow range of marks, with most answers scoring well. There were very few high or low marks earned. 6. (a) Describe the legislation, with supporting case law, that will affect any claim Mary might have against Ken. (15 marks) This question tested product liability legislation, mainly the Sale of Goods Act The Sale of Goods Act 1979 implies implied terms into any contract for the sale of goods. The main sections of the legislation cover: Title that the vendor has the title to sell the goods. Description and sample. Quality The Sale of Goods Act 1979 applies to commercial private sales by the principle of caveat emptor. The Supply of Goods and Services Act 1982 provides similar protection to the Sales of Goods Act 1979, but s.4 does not protect a customer where the defect in quality has been brought to the attention of the consumer prior to purchase. ICSA, 2011 Page 6 of 8

7 The Sale of Goods to Consumers Regulations 2002 amended the Sale of Goods Act 1979 where the purchaser is an individual as in Mary s case. A case example includes Lamarra v Capital Bank plc Candidates may also have discussed any other laws on hygiene, such as the Consumer Protection Act If Mary is successful, what are the potential implications for Ken? (10 marks) The rights of Mary will depend upon the circumstances and costs incurred. Mary will need to prove actual financial loss. For example, in J & H Ritchie Ltd v Lloyd Ltd, the claimant was able to reclaim the purchase price. In Frost v Aylesbury Dairy Co. Ltd 1905, it was held that the claimant should be awarded damages based upon the damage caused. In Mary s case, this could be related to loss of wages, cost of treatment and so on. In Priest v Last 1903, it was held that the claimant could include the cost of treatment. This was the least popular, and least well answered, question. It appeared it was answered when no other options were available to candidates, which suggests that candidates did not prepare this area of the syllabus. 7. (a) Describe the process of risk management, in particular with reference to the incident involving Walter. (17 marks) Risk management can be broken down into four basic steps: (i) (ii) (iii) (iv) Identification/assessment. Evaluation. Management. Control and review. With regard to Ken and Walter: (i) Identification/assessment It is foreseeable that such an accident could happen. As such, Ken should have predicted this occurrence. (ii) Evaluation There are two elements here: The likelihood of the event happening. The size of the potential loss. In this case, both could be viewed as high, prompting Ken into action. (iii) Management Ken would have three choices transfer, avoid or reduce. Ken would be advised to adopt ICSA, 2011 Page 7 of 8

8 a combination of these by transferring the risk by insurance, and reducing the risk by training the staff. (iv) Control and review Control would probably be achieved by recording all such incidents and by regular review by Ken, monthly or quarterly. Explain the rules relating to the collection of information for Ken s customer database. (8 marks) The database will be governed by the Data Protection Act Ken must comply with the eight data protection principles: Must be used fairly and lawfully. Must be obtained for the specified purposes. Must be adequate, relevant and not excessive. Must be accurate and up to date. Must not be kept for longer than necessary. Must be processed in accordance with the rights of the data subject. Appropriate measures must be taken against unauthorised or unlawful use. Must not be transferred to a country or territory outside of the European Economic Area that does not offer an adequate level of protection for the rights and freedom of data subjects. This was not a popular question and there was a surprising range of marks, with very high and very low marks awarded. Low marks for this topic was unusual, as risk management and data protection have been examined in the past and have tended to score highly. The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. ICSA, 2011 Page 8 of 8