TOPIC 1: Economic, political and legal systems-

- Economic systems determine the way in which the society operates financially
- Political systems determine the way in which the public is governed
- Legal systems determine the way in which the public and private behavior and relationships
are regulated within a society

a) Economic Systems
- Economics can be described as the way in which society decides what to produce, how to
produce it and who to produce it for.
- It also determines:
i) The production, distribution and consumption of goods and services in an
economy
ii) The principles and techniques by which problems of economics are addressed
iii) The principles governing relationships between institutions individuals and
property
- There are three types of economic systems :
a) Planned economy- The government makes decisions and choices about
resource allocations.
b) Market economy – This is when the decisions and choices about resource
allocation are left to market forces and of supply and demand and the working
of price mechanisms. They include:
i) Capitalist Systems- The means of production are
substantially in private ownership and operated for
profit
ii) Communist Systems
c) Mixed economy- This is where the systems and choices are made partly by free
market forces of supply and demand and partly by government decisions.

b) Political Systems
- These are based on:
a) Who holds authority in a society and how they acquire it
b) The influence of government on the economy and the people
c) The role of religion in the state
- There are two very important factors when considering what process of force in a nation
should be used:
i) The rule of law
ii) Separation of power

i) The rule of law

- How and what laws are made and enforced in a country depends to a large extent on the
emphasis that the country’s political system places on the nature of the rule of law.
- This is the degree to which individual behavior is regulated by law.

ii) Separation of powers

 - This is the ancient constitutional principle that different powers involved in the government
of a state should be separate from one another.
- In some nations the legislature, the executive and the judiciary are completely separate,
therefore each is accountable to, and can operate as a ‘check and balance’ on the others.
- While in others there is a complex relationship between the 3 sets of power, this means that
a balance is struck between control and accountability, on the one hand, and actually
‘getting things done’ on the other.
i) The executive- comprises the head of state and the government organs and
institutions, it is responsible for the daily administration of the state bureaucracy,
and the implementing of new law formulated by the legislature
ii) The legislature- is the branch of government which carries out the function of
deciding and passing new laws and of repealing and modifying old ones. Once
formulated, new law usually has to be signed off and officially brought into effect
by the Executive
iii) The judiciary- describes the court system through which legal decisions are made
and enforced, and also describes the judges and other personnel who keep the
system running. Ideally, the judiciary is completely independent of the other two
branches of government.

c) Legal Systems
Law- a set of rules of conduct recognized and applied by a state to members of the community, and
enforced by the courts.

- Legal systems can be used in 2 senses: to describe the body of laws and mechanisms for
their enforcement in a country and to describe the underlying nature of a country’s law
- Law is therefore:
* usually understood in ‘local’ rather than ‘global’ terms
* historically in writing as societies changed from tribal government to nation states
* often outlined in basic terms in a country’s constitution
* made by the people governing the country

- There are 3 broad types of legal systems

a) Common law (eg in the UK and the US)
b) Civil law (eg in France and Germany)
c) Sharia/ religious Law (eg in Pakistan and Iran)

- The elements of legal systems incorporate of:

i) The country’s law
ii) The legislature- the law-making body/ creates statues
iii) The judiciary- the body that sits the judgement on disputes about law
iv) The prosecution system- the system that seeks to ensure the criminal law is
enforced and people who break the law are prosecuted
v) The police- the body which seeks to enforce the law and protect the public
vi) The prison system- the system that ensures people who have broken the criminal
law are detained in accordance with their sentence.
 A body which enacts, amends and repeals laws so that the
people's wishes for freedom, wealth etc are met

Elected legislature It carries out a function of designing and passing new laws
and of repealing and modifying old ones
Members of the legislature are elected by the people and
represent the area of the country which they live.

A body that decides which laws should be put into action

Elected executive A nation's head of state and the head of the government are
(or the the two main roles in the executive
government body) The executive does not make the law, instead it instructs the
legislature as to what laws should be made
A body that rules on any disputes about laws, whether
Judiciary (which between the government and the people (criminal law) or
may or may not between individuals (civil law)
be elected) The roles of the judiciary is to interpret and apply the laws
created by the legislature

Types of law
- The main distinctions to be made between types of law are national and international law,
and between criminal and civil law
- Conflicts of law occur when people from different legal jurisdictions trade with each other
and their respective legal rules conflict.

National law- each nation has a set of laws which regulate how entities within it relate to each
other and to the state

International law- the system of law regulating the relations between sovereign states, and the
rights and duties they have regarding each other. It attempts to resolve the problem of conflict
of national laws.

: It deals with matters such as

a) The formation and recognition of states

b) Acquisition of territory
c) War
d) The law of the sea and of space
e) Treaties
f) Treatment of aliens
g) Human rights
h) International crimes and international judicial settlement of disputes

: There are various sources of international law;

a) Conventions and treaties

b) International custom
 c) The general principles of law recognized by civilized nations

Criminal law- is the branch of the law through which a state regulates social order by imposing or
prohibiting certain forms of behavior and imposing penalties on people who break the law.

Civil law- is the branch of the law which allows individual people or organizations to seek remedies
against one another through the courts for problems recognized by the law

Criminal law Civil law

It is a form of public law, relates to conduct

Definatio
of which the State disapproves and seeks to It is a form of private law, involves the
n
control relationship between individuals
The enforcement of particular forms of
Purpose behaviour by the State, which acts to ensure To settle disputes between individuals and to
compliance prove remedies
The case is brought by the claimant, who is
Case The case is brought by the State in the name seeking a remedy. The case will be referred
Names of the Crown. A case is reported as R where to by the names of the parties involved such
it stands for Regina (Queen) or Rex(King) as Brown v Smith

Burden of
On the prosecution On the claimant
proof

Standard Guilt must be shown beyond reasonable Liability must be shown on the balance of
of proof doubt (high standard of proof) probalities (lower standard of proof)

Usually financial compensation to put the

To regulate society by the threat of
Objective claimant in the position he or she would have
punishment
been in had the wrong not occurred.
If found guilty the criminal court will
The civil court will order the defendant to
sentence the accused and it may fine them
Results pay damages or it may order some other
or impose a period of imprisonment. If
remedy
innocent, the accused will be acquitted

a) Civil laws
- Civil laws exist to regulate disputes about the rights and obligations of people when dealing
with each other
- The 2 key principles in civil law are comprehensibility and certainty.
: Comprehensibility- law is contained in codes, which are drafted as general
principles, which should answer any situations.
: Certainty- Derived from the above, question of law should be decided predictably,
in the context of the codes. Judges only have limited power of interpretation.
- The civil law mechanism derives from Roman legal principle that laws should be contained in
codified, written collections of rules and regulations, accessible and comprehensible to the
populace and enforced and followed by judges.
- Civil code- a codification of private law relating to contracts, property, family and obligations
- They consist of comprehensive abstractly written principles as rules of law, designed to
answer any situation.
- Sources of law;
1) Treaties
2) Conventions
3) Their national and regional constitutions
4) EU Law
5) Their domestic statute and statutory codes and administrative
regulations
- The key source of the law is statue much of which is codified. Administrative regulations are
also codified.
- Statue law is usually drafted as general principles and in simple language as far as possible to
ensure that the law is accessible.
- In civil proceedings, the standard of proof means that the claimant must prove their case on
the balance of probability.
- The claimant must convince the court that it is more probable than not that their assertions
are true.

Roles of judges

- The role of judges in a civil law system is significantly different in theory from the role of a
common law judge.
- Judges apply the law
- Judges create precedents (in effect law) which must be followed by other judges

Statutory interpretation

Treaty: an international agreement concluded between States in written form and governed
by international law, whether embodied in a single instrument or in two or more related
instruments and whatever its designation.
Statutory code: a subject-based arrangement of the laws of a general and permanent nature
passed by the jurisdiction’s legislature.
Model code: a nationally recognized document developed by a private entity for the use by
State or local jurisdictions on developing codes, it is intended for incorporation by reference
or adoption in whole or in part, with or without amendment, by State or local jurisdictions.
- There is no general principle on how judges should interpret statutes.
- However, some principles of statutory interpretation have developed
*Where the meaning of the law is clear, it must be followed: the judges will not
extend or restrict the scope of a statue
*Where the statute is obscure or ambiguous: one should construe it in accordance
with the spirit rather than to the letter, to determine its legal meaning
*If there is a gap in the law: judges must resort to custom and equity. However,
despite this, customs are only of limited applicability.

- There are also the following alternative methods of statutory interpretation:

 *Teleological method: This is where a judge seeks to identify the social purpose of the
legislation and apply it in manner that achieves it.

*Historical method: This is where the judge looks at the intention of the legislator
and then tries to envisage what the intention would be being drafted in modern times

Judicial review

- The role of the judiciary is to apply the principles to the cases they meet, comment on
whether statute law is in accordance with the country’s constitution
- Civil judges generally do not interpret or re-interpret the law.
- They consider the historic intention behind the relevant law and apply the law so as to cover
the new situation in line with the historical principle.
- In most modern countries, the judiciary is empowered:
*To exercise judicial review over the actions of public individuals and bodies
*to invalidate improper actions and decisions
- In some civil states (eg France and Germany) the judiciary is also empowered to adjudicate
the constitutional validity of new laws, while in others (The Netherlands) they have no
constitutional right to do so.

b) Common laws
- Common law and statute relate to the source of law; common law is judge-made while
statute law is produced by parliament.
- The parliament consists of:
 The House of Commons
 The House of Lords
- Judges have the greatest scope to create laws using common laws

Case law: the judicial interpretation, explanation and application of law by reference to
individual cases

- The law helps judges in times of travelling the country hearing cases, identifying and
applying fundamental principles of law, thereby developing a consistent.
- The judiciary also came to be responsible for the interpretation and application of statute
- The common law system also developed the widespread use of juries to decide questions of
fact in contested cases with a judge presiding to guide and rule on matters of law and to
pass the sentence.
- The common law governs the basis principle of business law, they include:

Principle Explanation

Principles of law do not become Law does not become irrelevant and invalid
 inoperative through the lapse of just because it is old. This applies to all
time sources of the law
New laws developed by the legislature
New laws do not alter the (Parliament) are presumed not to alter,
existing law merely to add to, the existing law, unless
they specifically state otherwise
A judge is bound to apply a decision from an
earlier case to the facts of the case before
Judicial precedent them, provided, among other conditions that
there is no material difference between the
cases

Sources of law in common law

1) Statute: law made by the legislature

2) Custom (historical law): customs still pay a part in commercial transactions
3) Equity: the system of rules developed by Chancery to overcome the perceived rigidity of
commonwealth
4) The constitution: in common law countries that have a constitution.
5) Common law: the body of law referred to above, which has evolved through the application
of the doctrine of judicial precedent.
*Precedent- a previous court decision which another court is bound to follow, by
deciding a subsequent case in the same way.

Equity

- A term which applies to a specific set of legal principles which were developed by the court
of Chancery to supplement (but not replace) the common law.
- It is based on fair dealings between parties, it is added to and improved on the common law
by introducing the concept of fairness.
- The interaction of equity and common law produces 3 major changes:

Change Explanation

New rights Equity recognised and protected rights for which the
common law gave no safeguards

Better procedure Equity may be more effective than common law in

resolving a disputed matter
The standard common law remedy for the successful
claimant was the award of damages for their loss. The
Better remedies
Chancellor developed remedies not available in other
courts

- The remedies available to a claimant under equity include:

a) Specific performance- an order requiring the defendant to do what they had agreed
to do.
 b) Injunction- an order requiring the defendant to abstain from wrongdoing.
c) Rectification- an order requiring a document to be amended to reflect the parties’
true intention
d) Rescission- an order requiring the restoration of the pre-contract status quo

Legislation and delegated legislation

- Legislation is the law created by the parliament as the highest sovereign law-making body in
the UK.
- Acts may be passed to:
1) Create a new law
2) Authorize taxation
3) Codify existing law
4) Consolidate existing statute
5) Overrule an existing precedent
- The process of enacting Acts of Parliament is very time-consuming and burdensome, the
parliament can authorize another body to enact legislation, this is known as delegated or
secondary legislation.
- Stages for creating an Act of Parliament:
1) First reading
2) Second reading
3) Committee reading
4) Report stage
5) Third reading
- A Parliamentary bill becomes an Act of Parliament once receiving the Royal Assent. This is
the final stage before a Bill becomes an Act.
- There are many types of delegated legislation:
a) Orders in council: It permits the government, through the Privy
Council, to enact new law. The Privy Council is nominally a non-
party political body of eminent parliamentarians
b) Statutory Instruments: They are usually made by the government
ministries in which regulations are enacted
c) By laws: they are mase by local authorities or other local bodies.
The application of by-laws is limited to a specific geographic
territory.
d) Court rule: Made by Court Rule Committees to govern the
procedures in the particular court under the Supreme Court
e) Professional regulations- made to regulate and control the
conduct of practicing.

Roles of judges

- Setting and applying judicial precedent

- Interpret the statutes made by the legislative
- Review the law to determine whether it conflicts with the overriding principles of law.

Judicial Precedent

- The system adopted by the judges, of following the decisions is expected to be consistent
with previous decisions/cases.
 - Judicial precedent is based on 3 elements:
1) Reports: There are comprehensive law reports of earlier decisions
2) Rules: There must be rules of extracting a legal principle from a previous set of facts and
applying it to current facts.
3) Classification: Precedents must be classified into those that are binding (meaning they
must be followed in later cases) and those which are merely persuasive (meaning that a
judge in a later case may choose to follow it but he or she is not bound to do so)
- 4 rules must be considered when examining a precedent before it can be applied to a case:
a) A decision must be made on a proposition of law before it can be considered as a
precedent. It may not be a decision on a question of fact
b) It must form part of the ratio decidendi of the case
 A ratio decidendi is part of the legal judgement that establishes the
precedent that is followed by lower courts
c) The material facts of each case must be the same
d) The preceding court must have had a superior (or in some cases, equal) status to the
later court, such that its decisions are binding on the later court

Avoiding judicial precedent

- Distinguishing on the facts. A precedent is only binding if the material facts of the later
case are the same as the previous case. This is the matter of judicial judgment
- Overruling. Precedents may be overruled by higher courts than the court that set them. This
tends to be rare particularly if the precedent has existed for a long time
- Per incuriam- where an earlier decision was made ‘without care’

Statutory interpretations

- When deciding cases based on the statute law, the judges will be required to interpret the
statutes that Parliament has enacted. There are various rules and presumptions associated
with the interpretation of statute
- A statute will sometimes contain an introductory preamble to explain its purpose and
content
- Statute often contains interpretation provisions, defining words and phrases used within
them

Presumptions of statutory interpretation

- Statutes do not override existing law on a subject unless they specifically state that they do
so. In other words statutes are generally seen to supplement existing case law
- A statute does not alter the existing common law. If a statute is capable of two
interpretations, one involving alteration of the common law and the other one not, the
latter interpretation is to be preferred
- If a statute deprives a persons of their property say by nationalism they had to be
compensated for its value
- A statute is not intended to deprive a persons of their liberty. If it does so clear words must
be used This is relevant in legislation covering for example mental health and immigration
- A statute does not have retrospective effect to a date earlier than its becoming law
- As that it does not bind the crown. In certain areas the Crown’s potential liability is great,
and this is, therefore, an extremely important presumption
 - A UK statute only has effect only in the UK. However a statute does not run counter to
international law and should be interpreted so as to give effects to international obligations
- A statute cannot impose criminal liability Without proof of guilty intention. Many modern
statues rebut this presumption by imposing strict liability, say for dangerous Driving under
Road Traffic Act
- A statute does not repeal other statutes
- Any point on which the statute leaves a gap or omission is outside its scope

Rules of statutory interpretation

Literal rule
Words should be given their plain ordinary or literal meaning, Normally a
word should be interpreted in the same literal sense whenever it appears
throughout the statute.
Purposive rule

The words of a statute are interpreted not only in their ordinary, literal and
grammatical sense but also with reference to the context and the purpose
of the legislation ie what is the legislation trying to achieve?

This shows how the court took account of the mischief or legal wrong which
the statute will explicity intended to remedy
Contextual rule
A word should be interpreted in its contexts. It is permissible to look at the
statute as a whole to discover the meaning of a word in it

The same kind of rule Statutes often list a number of specific things and end the list with more
general words. In that case the general words are to be limited in their
meaning to other things of the same kind as the specific items which
precede them
The expression of one is the
exclusion of another rule To express one thing is, by implication, to exclude anything else. For
example a statutory rule on sheep does not include goats

It is know by the members of A word draws meanings from the other words around it. If a statute
the group mentioned 'children's book ,children's toy and clothes' it would be
reasonable to assume that clothes meant children's clothes
In Pari, matter rules If the statutes forms part of a series which deals with similar subject matter,
the Court may look to the interpretation of previous statutes on the
assumptions that Parliament intended the same thing

Judicial review
- In some common law states the judiciary is also empowered adjudicate the constitutional
Validity of new created by the Legislature
 - The power is more limited or even an non-existence for example parliamentary sovereignty
a principle of the UK constitution makes the supreme legal authority in the UK which can
create or end the law this means that:
 A statute once enacted by parliament, cannot be overruled by the judiciary even if
it is flawed
 No parliament can pass laws that future parliaments cannot change
- There are two major theories in the US as to how judges should do:
a) Organalism: The theory that the Constitution should be interpreted according to the
original intent of its authors
b) Constructivism: The theory that the Constitution should be interpreted looking
beyond the original intent of its authors
- The High Court is commonly organized into several divisions, including:
 The Chancery Division
 The Family Division
 The King’s Bench Division

c) Sharia law
- “Sharia” is a way to a watering place, in other words, a path to be followed.
- Sharia law is based in the religion of Islam
- The main principle of Sharia is that the divine way ordained by Allah for the man to follow
- The law is sourced directly from Allah, and this has a significant impact on how it is
interpreted by judges
- Sources of Sharia law:
 Quran: Allah’s divine revelation to his Prophet, Muhammad
 Sunnah: Record of what must come to be the acceptable course of conduct,
derived from saying of the prophet, known as Ahadith.
 Madhab: These are the 5 major secondary sources of law in the Muslim World:
a) The Shia school
b) The Hanafi School (Imam Abu Hanifa)
c) The Maliki School (Imam Malik)
d) The Hanbali School (Imam Ahmad Ibn Hanbal)
e) The Shafii school (Imam As-Shafii)
 Constitution of the country

Roles of judges

- Judges in Sharia law are generally clerics (Imam), given the religious nature of the law
although some countries also have secular judges
- Judges are required to apply the law
- There are limited powers of interpretation, given that the law was ordained by Allah

Interpretation of the Sharia law

- The Quran cannot be altered; it may only be interpreted. If the Quran does not give
guidance on a specific matter, The Sunnah may do so.
- The Sunnah is used by Muslim Jurists to:
 Confirm the law in the Quran
 Explain matters mentioned in the Quran
 Clarify verses in the Quran that may seem ambiguous
  Introduce a rule where the Quran is silent
- Within the Sunnah, Ahadith are classified according to their reliability: Mutawatir are
virtually guaranteed, Mushhur are less certain and Ahads have little certainty about their
reliability
- There is controversy in the Muslim world whether further interpretation of law may be
required, which leads to the development of various
 Taqlid
 Ijtihad
 Mujtahid

a) Taqlid
- This is the theory that no more interpretation is needed, which the process of strict
adherence to established doctrine.
- Taqlid was the result of what is known as ‘closing the gates of Ijtihad’.

b) Ijtihad
- This is the process for ascertaining the law. It is the use of Intellectual exertion by a jurist to
derive an answer to a legal question.
- Must be carried out by a suitably qualified person, known as a Mujtahid.
- The basis for Ijtihad is a Hadith which records that the Prophet approved an Imam who told
him that in making a judgement.
- There are various rules associated with exercising an Ijtihad:
 It must not be exercised on certain matters (for example, the existence of
Allah)
 The judge must be suitably qualified, known as Mujtahid
 There are various recognized methods.

c) Mujtahid
- In order to qualify as a Mujtahid a person must be:
 Well-versed in the study of the Quran
 Well-versed in the traditions of the Prophet
 Understand the principles of Ijma
 Understand the conditions of qiyas
 A good and practicing Muslim
 Just, reliable and trustworthy
- Three of the recognized methods for exercising Ijtihad have been mentioned in the following
terms;

Method Explanation

Ijma
A consensus of opinion. It should be based on
consultation between jurists

The unanimous agreement of the jurists of a

particular age on a specific issue
 Qiyas Analogical deduction. In other words, it is a
comparison of two things with a view to
evaluating one in the light of the other
Aql Deducing the law by intellect or logic. The word
literally means "tying an animal's feet and
refers to the idea that logic must be applied to
determine the meaning and extent of the law

Judicial review

- The role of the judge is to analyze legal questions in the light of the principles laid down in
the Quran and the Sunnah and the Figh.
- There is no trial by jury in Sharia law, however, the judge is assisted by an advisory council of
scholars and eminent people
- May exist in some Muslim countries to ensure that issued statutes are based on Sharia law
principles

The rule against usury

- A rule in Sharia Law that has a significant impact on commerce and trade is the rule against
usury, known in Sharia as riba
- Riba- the Islamic concept of unlawful gain, usually translated as interest, which is strictly
forbidden by the Quran.

Civil law Common law Islamic law

Alternative Continental English law,

names European law: American law,
Roman law judge-made law Sharia law

Historical Roman principles 11th century 7th century

Origins of codification, onwards, aiming revelations to the
18th century for identification Prophet
enlightenment and common Muhammad and
political-legal application by the subsequent
ideals judiciary of interpretations
fundamental
principles
Sources Statute/ Case law / judicial Quran: Sunnah :
legislation precedent: Hadith: Madhab
(codes) and statute/legislation
subordinate and subordinate
legislation legislation
Judges’ Legal Legal Clerical-judicial
qualification professionals professionals scholars
Mechanism for Limited. Where High. Judges Strict.
interpreting the interpretation is identify and Interpretation is
law required, it is by explain the by strict analysis
reference to the common law by of the Quran and
social purpose the reference to Sunnah
and historical the fundamental
intent of the law. principles
Flexibility of Relatively Relatively Relatively
decisions and inflexible: Judges flexible: judicial inflexible:
interpretation apply the codified precedents can decisions must
principles and be modified and conform with the
rules judges interpret Quran and the
statute Sunnah
Uses of juries In case of serious In trials of all None (but judhe
crime crimes other than has an advisory
the most minor council)
and in some non-
criminal cases
Examples of Continental England & Wales; Saudi Arabia;
state European states: US; Canada; Iran; Yemen
CIS states: Brazil, Australia; India
Japan

TOPIC 2: International trade, legislation and

conflict of laws

- International law- this is the system regulating the interrelationship of sovereign states and
their rights and duties regarding one another.
- There are 2 types of international laws:
a) Public international law- consists of the rules and principles which apply in general to
the conduct of sovereign states and international organizations and the relationship
between them
b) Private international law- Part of a nation’s national laws that establish rules for
dealing with cases involving a foreign element.
- Public international law arises out of the problem of conflict of laws:
 Nations negotiate treaties and model codes so that parties can refer to the
agreed code of conduct when carrying out international trade rather than
their own domestic laws
 International bodies exist to help create, manage and amend those agreed
international laws.
- International trade- the exchange of goods and services between countries, allowing
nations to import what they need and export what they produce efficiently
- Tariffs or customs duties- These are taxes on imported goods, the effect of a tariff is to raise
the price paid for the imported goods by domestic consumers, while leaving the price paid
to foreign producers the same or even lower
 - Import quotas- These are restrictions on the quantity of a product that is allowed to be
imported into the country
 Both domestic and foreign suppliers enjoy a higher price, while consumers
buy less at the higher price
 Domestic producers supply more
 There are fewer imports (volumes)
 The government collects no revenue
- Embargo- this is total ban of imports from a particular country ie effectively a zero quota
- Hidden export subsidiaries and import restrictions- there is a range of government
subsidies and assistance for exports and deterrents against imports:
 For exports- export credit guarantees financial help and general state
assistance.
 For imports- complex import regulations and documentation, or special
safety standards demanded from imported goods and so on
- Difference in law- In addition to economic problems there are legal barriers to trading
between nation, for instance international contracts

Conflicts of laws

- Conflict of law- this is where parties from different nations have a legal dispute , and it is
necessary to determine which national law governs the validity of the legal situation.
- This can be caused by problems in public, business and individual dealings across borders if
disputes arise between the parties, the key issues are:
 Whose courts have jurisdiction
 Whose laws are to be used
 How and where can the judgement be enforced

Public international law

- Individual states and countries have their own legal systems and legislatures
- There is no international supreme legislature to create binding international laws and pass
them down to the populace
- There is no international court before which states in breach of international law may
consistently be forced to appear
- Several international bodies contribute to the formulation and application of international
law and cross-border trade regulation.

International treaties, conventions and model laws

- International treaties- These are formal agreements between states or international

organizations that bind them. They are a primary source of international law
- UN Conventions- These are agreements which are binding under international law on states
and other entities
- Model laws- These are laws that a country may adopt into their own national laws. These
make practices uniform on an international basis and iron out any remaining problems.

Court-based adjudication
 - Legal disputes have traditionally been settled in courts.
- Common law courts have a key role in settling disputes, creating legal precedent, and
therefore, creating law

Civil and criminal law courts

- Most countries will have different courts to deal with civil and criminal law and may also
have different courts within those systems to deal with major and minor cases
- The number of judges, and the existence of a jury, will differ between those courts as well.

Appeals
- Most legal systems will have a system that will have a system of courts that, in its most basic
form, involves cases starting in a court of first instance and moving up to an appeal court if
the decision is contested.
- Cases may be appealed on a point of law or point of fact

English system of courts

- The English Legal System is decentralized through a system of local courts, so that smaller
matters can be dealt with where they have occurred.
- There is a system of review to higher courts, the English legal system contains a series of
appeal courts.
- The highest court within England is the Supreme Court, this court only deals with cases
whose outcome will have a significant impact on the country’s law

Civil Court Structure

Court Description

County Court Only has civil jurisdiction and deals with almost every
type of civil case at a local level

Staffed by circuit judges, who must be barristers

(qualified legal advocates) of at least ten years' standing
High Court Deals with the most major cases at first instance and is
sometimes a court of appeal from the County Court
Staffed puisne judges, who must also be barristers of ten
years' standing. They hear cases at first instance alone, but
at least 2 judges must hear appeal cases.

Court of The major appeal court in civil matters

Appeal Staffed by Lord Justices of Appeal, who are judges
promoted from the High Court. Normally, 3 judges sit
together, and cases are decided by a majority
Criminal court structure

- The key courts in the criminal court system are:

Court Description
Magistrates' Local courts that hear the bulk of criminal cases. Staffed by 2
Court types of magistrates
Lay magistrate: who are not legally qualified and sit part-
time. Two or three must sit together to hear a case

District judges: who are solicitors (legally qualified persons)

or barristers of at least
Crown Court A local court that hears criminal cases at first instance and is an
appeal court from the Magistrates' Court. Staffed by circuit
judges or, sometimes, lay magistrate

Court of Hears appeals from the Crown Court

Appeal

Key terms
- Indictable offences: Serious offences that can only be heard in a Crown Court. They are
heard in front of a jury of 12 months of the public who decide whether the accused is guilty
or not guilty
- Summary offences: Minor crimes, only triable summarily in Magistrates Courts
- Triable either way of offences: Offences that can be heard either at a Magistrates’ Court or
at a Crown Court

Advantages of Court-based adjudication

- Wide range of solutions: Going to court can provide helpful legal solutions and settlements
to prevent someone from behaving in a certain way or an order for compensation
- Judicial precedent: This establishes legal rules for the future, similar future cases may be
resolved before legal action is required, saving future generations the time and expense
going to court

Disadvantages of court-based adjudication

- Cost: It is usually expensive to go to court than to submit your case to arbitration, mediation
or conciliation
- Waiting period: There is often a long waiting period before a case comes to trail. This can be
substantial, due to the large number of cases going through the court system and the time it
takes to conduct pre-trial disclosure
- Case Timescale: Once started, the period until the case is decided can be lengthy,
particularly if the matter is subject to appeal

International Courts
 International Court of Arbitration (ICA)
- This is a body set up by the International Chamber of Commerce, and it is composed of
members from every continent in the world
- It provides services to individuals, businesses and governments to help resolve difficulties in
international commercial and business disputes to support trade and investment
- The ICA does not get involved in the actual process of arbitration, instead it oversees all
aspects of the arbitration process, such as:
 Monitoring the arbitration process
 Conformation, appointment and replacing of arbitrators
 Deciding on challenges to arbitrators
 Approving arbitral awards
 Setting, managing and adjusting arbitrators’ fees

Alternative Dispute Resolution (ADR)

- This is any type of procedure or combination of procedures voluntarily used to resolve

differences, other than court-based adjudication
- ADR procedures may include, but are not limited to:
 In negotiation/facilitation one or both parties usually have recourse to
trained negotiator/facilitator to present their interest in discussions
leading to a resolution which the parties themselves reach
 In mediation/conciliation, an impartial third party, a mediator, facilitates a
dealing between the parties, moving them towards their own resolution
but without imposing a resolution on them
 In arbitration, the parties refer their own disputes to an arbitrator, whose
function is to evaluate the case and impose their own reolution

Litigation (Court adjudication)

- Litigation is available in countries’ national courts and/or through international mechanisms

such as the ECJ.
- Common features of all legal systems are that each national court system will have:
 A formal set of procedures to be followed, with decisions being based on
the appropriate national laws and issued by judges
 A hierarchy of appeal courts, so that a party who is unhappy with judicial
decision may follow a formal process to have the decision modified,
reserved or cancelled in a higher court

Advantages of litigation

- It is more effective and clearer

- Availability of appeals
- Finality: the final decision in a case is binding on the parties
- The use of legal rules, principles and precedents in the judicial system may give parties a
degree of predictability

Disadvantages of litigation

- The uncertainty of the outcome until the case is decided on

- Its formal, judicial and impersonal nature
 - The complex nature of many laws, making it necessary for parties to be professionally
represented
- The international differences between laws, laws, remedies, procedures and objectives in
different countries
- The requirement for expert lawyers to prepare and present the case

Arbitration

- This is the process of settling a dispute by an independent person, usually chosen by the
parties themselves
- Arbitration can produce different solutions to court-based adjudication, it could be as a
reason:
 A change in the way a person or organization behaves
 A promise that a person or company won’t do something
 An apology
 An explanation for what happened
 A mistake corrected
 Compensation
- Arbitration is available through several facilitators as a cross-border process. Common
features of arbitration process are:
 A set of general procedures to be followed by reference to the codes of
the facilitating body
 Flexibility within the general principles for the parties themselves to
determine who the arbitrators will be, and how the process is to be
undertaken
 Limited appeals mechanisms, usually only in relation to procedural
irregularity rather than points of law

Principles of international arbitration

- The need to obtain a fair resolution by means of an independent tribunal without

unnecessarily delay or expense
- The fact that parties are free to agree on how arbitration should work, subject to such
safeguards as are necessary to protect the public
- The fact that courts should not intervene except as necessarily to protect the public interest

Arbitration in Sharia Law

- Arbitration is highly recommended in Islamic law. Islamic arbitration is known as takim and
arbitrators are called hakam
- The law concerning who may be an arbitrator is strict, like the law concerning who may be a
judge
- The qualifications needed are similar, particularly that the arbitrator must be Muslim, male,
just learned Sharia and free from any defects that could affect his ability to arbitrate

Advantages

- Avoidance of the complexity and adversarial nature of litigation

- Availability of consistent international process
- Co-operative, relatively informal nature of process
 - Parties’ involvement in selecting the rules of law and procedure, and in appointing the
arbitrators
- Speedier and more affordable than litigation
- Convenience- dates can be agreed between parties rather than determined by a court
- Privacy- proceedings are not open to the public

Disadvantages

- Limited rights of appeal

- Need to turn to the courts for enforcement
- Subjective nature of decisions

UNICITRAL Model Law on International Commercial Arbitration

Scope of the Model law

- The model Law applies where arbitration is both international and commercial in character
- Article 1 states that arbitration is international if the parties
 Have places of business in different states
 Have place of business in the same state, but the place the commercial
relationship is performed is in a different state, or the location of the
arbitration is in a different state
 Have expressly agreed that the arbitration agreement relates to more than
one country
- The model law sets out a general rule about receipt of written communications which will
be in force in any arbitration agreement, unless the parties agree otherwise
- Article 3 states that any written communication is deemed to have been received if:
 It is delivered to the addressee personally
 It is delivered to their place of business, habitual residence or mailing
address
 It is sent to the addressee’s last -known place of business, habitual
residence or mailing address by recorded delivery if the latest address
cannot be found
 The communication is deemed to have been received on the day it is
delivered
- Under Article 4:
 A party waives their right to object to non-compliance with this model or
law or an aspect of the arbitral agreement if they do not make their
objection without undue delay or if a time-limit is provided within such
period
- Article 5 states that courts shall not intervene in matters governed by the Model Law, except
those were stated within the Model Law
- Article 6 states that each country that adopts the Model Law should specify a court or other
authority within the adopted law which will perform necessary functions is necessary

Form of the arbitration agreement

- Article 7(2) requires that arbitration agreements must be in writing, and it can be done in 3
ways:
 It is contained in a document providing written evidence of the agreement
  It is referred to by a party in documents relating to legal proceedings and
the other party does not deny its existence
 A written document between the parties refers to another document
containing an arbitration agreement

Arbitration agreements

- This is an agreement by the parties to submit disputes arising under a contract to

arbitration, it may be in the form of an arbitration clause or in the form of a separate
agreement
- Article 7 states that an arbitrator’s agreement is an agreement by the parties to submit to
arbitration all or certain disputes which have arisen or which may arise between them in
respect of a defined legal relationship, whether contractual or not
- Under the Model Law, an agreement is in writing if it is contained in:
 A document signed by the parties
 An exchange of letters, telex, telegrams or other means of
telecommunication which provide a record of the agreement
 An exchange of statements of claim and defense in which the existence of
an agreement is alleged by one party and not denied by another

Court proceedings

- Article 8(1) states that if an action is brought before a court in relation to a matter which is
subject to an arbitration agreement, the court should refer the matter to arbitration, unless
they find that the clause is null and void
- Arbitral proceedings may commence where a matter is subject to arbitration, even if court
proceedings have been initiated and are continuing in respect of the agreement

Arbitral tribunal

- This is a sole arbitrator or a panel of arbitrators

- The parties may determine the number of arbitrators to make up the arbitral tribunals. If the
parties do not do so, The Model Law states that there will be 3 arbitrators (Article 10)
a) Arbitrator appointment
- The parties may agree on how the arbitrators are to be appointed. If they do not agree on a
method, Article 11 sets out how arbitrators are to be appointed as follows:

Appointment of the arbitration

Arbitration Each party to the agreement will appoint one

with three arbitrator. This should be done within 30 days of
arbitrators the request to do so
The two appointed arbitrators shall appoint a third
arbitrator. This should be done within 30 days of
the appointment of the first two arbitrators
Arbitration If the parties have agreed that there shall be a
with sole sole arbitrator, they shall agree on who that
arbitrators arbitrator will be
If the parties cannot agree on the sole arbitrator,
either party may request that the relevant
authority or court specified in their national law
shall appoint the arbitrator

- Article 11(5) states that arbitrators should be independent and impartial in relation to the
matter being arbitrated and possess any qualification specified in the arbitration

b) Composition of the arbitral tribunal

- Article 11 sets out the following rules:
 A person will not be stopped from being an arbitrator on the grounds of
their nationality
 If the parties fail to appoint arbitrators by the agreed procedure, any
party may request that the relevant authority or court, specified in their
national law, appoint an arbitrator
 If any of the arbitrators fails to perform their functions properly, any
party may apply to the relevant authority or court to act
 Any decision taken by the relevant authority or court in relation to (b) and
(c) will not be subject to appeal

c) Independent and impartial arbitrators

- When someone is asked to be an arbitrator, they must disclose any relevant facts that
might make them not independent or impartial in relation to the matter being arbitrated.
(Article 12)
- A party can challenge an arbitrator’s appointment on grounds of:
 Impartially or independence being doubtful
 Not possessing the qualifications agreed to by the party
- However, a person cannot challenge an arbitrator in whose appointment they were involved
on the grounds of matters of which they were aware at the time of appointment

d) Challenging the appointment of an arbitrator

- The parties may agree on the procedures for challenging an arbitrator, if they do not, then
Article 13 sets out a challenge procedure
- If the challenge procedure agreed upon is not successful, the challenging party may refer the
matter to the relevant authority or court within 30 days
- The arbitral tribunal may continue the arbitration while such action is pending
- The party making the objection must do so in writing to the tribunal, within 15 days from the
tribunal’s appointment or from the discovery of the defect
- Unless the other party agrees to the challenge and/or the challenged arbitrator steps down,
the tribunal must decide on the challenge. If all else fails, the objecting party may refer the
matter to court

e) Arbitrator unable to act

- If it is impossible for the arbitrator to act, their appointment is terminated if they withdraw
from office or if the parties agree that it is terminated (Article 14)
 - Article 15 states that if there is any controversy about whether an arbitrator is still validly
appointed, any party may refer the matter to the relevant authority or court (Article 15)
- When an arbitrator has withdrawn, a substitute arbitrator can be appointed on the same
basis that the original arbitrators were obtained

f) Jurisdiction of the arbitral tribunal

- When an arbitral tribunal may rule on anything in its jurisdiction, including on whether an
agreement contains an arbitration agreement (Article 16)
- If an arbitration agreement is a clause in a different contract, the arbitration clause shall be
treated as being an independent part of the contract
- This means that if the arbitral tribunal concludes that the contract is null and void, this does
not affect the arbitration clause, and therefore the fact that the dispute should be settled in
arbitration

g) Challenging the jurisdiction of the arbitral tribunal

- If a party wants to challenge the jurisdiction of the tribunal to conduct proceedings, a plea
must be raised before the statement of defense is submitted (Article 16)
- Any party may challenge the jurisdiction of the tribunal, regardless of whether they have
participated in appointing an arbitrator
- If the arbitral tribunal concludes that if does have jurisdiction, any party may apply to the
relevant authority or court within 30 days to decide whether this decision is valid

Conduct of arbitral proceedings

- The arbitral tribunal may order either party to undertake interim measures of protection
while the arbitration Is proceeding (Article 17)
- Interim measures of protection are orders designed to provide temporary relief that protect
the parties’ rights whilst the proceedings are ongoing.
- The parties shall be treated with equity, and each party shall be given a full opportunity to
present their case (Article 18)
- Article 19 states that the parties are free to agree on the procedure to be followed. If the
parties do not agree on a procedure, the arbitral tribunal shall conduct the arbitration in a
manner which it consists fit

Arbitration proceedings: general points

Place The parties shall agree on the place of arbitration

Article 20 If the parties do not agree, the arbitral tribunal shall
determine where the arbitration takes place. They
shall consider the circumstances of the case and the
convenience for the parties

Commencem The parties shall agree the date upon which arbitral
ent proceedings will commence
Article 21
If the parties do not agree on when arbitral
proceedings commence, then they commence when
 the request for referral to arbitration is received by

Language The parties may agree what language proceedings are

Article 22 to be conducted in
If they do not agree, the arbitral tribunal may
determine the language to be used

Experts Unless the parties agree not to, the arbitral tribunal
Article 26 may appoint one or more exports to report to it on
relevant, specific issues determined by the tribunal. If
the tribunal considers it necessary, the expert may be
questioned by the parties, and expert witnesses may
testify

Court
Assistance The arbitral tribunal itself, or one of the parties, with
Article 27 permission from the arbitral tribunal, may request
assistance in taking evidence from a competent court

Statement of claim and in defense

- Article 23 states that, within the period agreed by the parties or decided on by the arbitral
tribunal, the claimant must state:
 The facts supporting their claim
 The points at issue
 Any remedy sought
- The defendant shall state their defense in respect of the following 3 important rules:

Timing
The statements of both claim and in defence
shall be made within the period agreed by the parties
If they have not come to an agreement on when
the statements shall be made, the arbitral tribunal
may decide

Other The parties may include documents that they

documents consider to be relevant with their claims, or refer
to them
The parties may also supplement their statements
during proceedings

Failure to If the claimant fails to provide a statement of claim

provide within the period, the arbitral tribunal shall terminate
written proceedings
statements If the defendant fails to provide a statement of
defence, the arbitral tribunal shall not treat this as
admission of guilt and will continue with proceedings
Hearings and written proceedings

- Proceedings may be oral or written, unless the parties have made any agreements to the
contrary, the arbitral tribunal shall decide under Article 24 whether:
 To hold oral hearings for the presentation of evidence
 To conduct proceedings on the basis of documents
 Any material such as expert evidence, used by the tribunal in coming to its
decision shall be made available to both parties

- Article 25 provides further evidence if either of the parties fails to appear at a hearing or
produce documentary evidence, the arbitral tribunal will continue with the case and will
make its decision on the basis of evidence available to it

Concluding arbitral proceedings

- Article 28 states that the arbitral tribunals shall make deceive shall make its decision
according to the rules of law chosen by the parties, if the law of a particular state is
designated the tribunal shall make its decision according to the substantive those of the
state
- If the parties do not specify the appropriate laws, the arbitral tribunal may make its decision
according to the law that it sees fit to apply. In any case, the arbitral tribunal shall make its
decision in accordance with customs associated with the trade applicable to the transaction
- Under Article 29, the decision shall be concluded by majority of the arbitrators
- Article 30 states that if the parties settle the dispute before the arbitrators take the decision,
the arbitral tribunal shall end the arbitration and record the statement as if it has been an
arbitral award

Termination of proceedings and by order

- The proceedings are terminated under Article 32 when:

 An award is being given to one of the parties
 An order for the arbitral tribunal is made to terminate proceedings

- The arbitral tribunal makes an order to terminate proceedings when:

 The claimant withdraws their claim (unless the defendant with a
legitimate interest in continuing with proceedings objects)
 The parties agree to terminate proceedings
 Arbitration has become unnecessary or impossible

Arbitral Awards

- An arbitral award is the decision of the tribunal and the associated compensation or order
that the party should follow

Awards
- Under Article 31 the arbitral award decided by the tribunal shall:
 Be in writing
 Be signed by the arbitrators (or a majority of them if there are 3 or more)
  State the reasons behind the award
 State the date of the award and the place of arbitration
 Be copied and these copies sent to each party
- Under Article 33, a party may, with notice to the other party, request that any error in
computation or typing in the award be corrected tribunal, or that an explanation or
interpretation of a point be made
- Unless the parties have agreed otherwise, they each have 30 days following the award to ask
the tribunal to:
 Correct any computation, clerical or typographical errors in the award
 Give an interpretation of a specific point or part of the award
 Make an additional award in respect of matters included in the claim but
omitted from the award
- If the request is justified the tribunal has 30 days from request to comply (60 days for
request for additional awards)
- Arbitral awards shall be recognized as binding and enforceable in a competent court subject
to the provision of the Model Law

Setting aside/ resource against arbitral award

- Article 34 states that what is my applied to the relevant court or authority to have the
arbitral award set aside if:
 A party to the arbitration agreement was under some inability or the
agreement is not valid under the laws to which the parties are subjected
 A party was not given proper notice of an arbitrator’s appointment or of
the proceedings or that party was otherwise unable to present their case
 The award deals with a matter not contemplated by the parties or not
failing within the terms of the arbitration agreement
 The compensation for the tribunal was incorrect
 The subject matter of the dispute is not capable of being settled by
arbitration under the law of the state
 The award conflicts with public policy in that State. However, an
application must be made within three months after the award was made
or a request under Article 33 to amend the award was rejected
- Courts may suspend (for any period) a setting aside proceeding. This allows the tribunal to
resume the original proceedings or take other actions that eliminate the need for setting-
aside proceedings

Recognition/enforcement of an arbitral award

- Article 35 makes it clear that regardless of which country an arbitral award was made in, it
shall be recognized as binding
- To enforce an award, a party should make written application to the court specified under
Article 36. They should supply the court with the original award made by the arbitral court
or with a certified copy. If the award was not made in the official language of the state, they
should provide a certified translation
Non-recognition/non enforcement of an arbitral award

- Under Article 36, a court may refuse an application for recognition or enforcement if the
party against whom the award is made provides proof that:
 There is a defect in their arbitration process such that it could be set aside
by resource
 The award has not yet become binding on the parties or has been set
aside or suspended by a court of the country in which, or under the law of
which the award was made
 The nature of the dispute or enforcement of the dispute would be
contrary to the public policy of the state in which the courts operate.
 They were not given proper notice of the appointment of an arbitrator or
of the arbitral proceedings or were otherwise unable to present their case
 They were under some incapacity, or the agreement is not valid under the
law to which the parties have subjected it, or under the law of the country
where the award was made
- If the court finds that:
 The subject matter of the dispute is not capable of settlement by
arbitration under the law of the state
 The recognition or enforcement of the award would be contrary to the
public policy of a state

Difference between setting aside/resource and recognition/enforcement of an arbitral award

- Setting aside procedure is effective in all states involved arbitration. This contrasts with an
award for recognition or enforcement which only valid in the state where the party seeks
recognition or enforcement
- There may be differences in the public policy grounds under a setting aside procedure and a
recognition/enforcement procedure, becomes different states are involved in the decisions

International organizations in trade

- The international regulatory and harmonization bodies which have impact include:
1) The United Nations (UN) and the United Nations Commission on International Trade
Law (UNCITRAL)
2) The International Chamber of Commerce (ICC) and the International Court of
Arbitration (ICA)
3) The World Trade Organization (WTO)
4) The Organization for Economic Cooperation and Development (OECD)
5) The International Institute for the Unification of Private Law (UNIDROIT)

1) The United Nation and the UN Commission on International Trade Law

 The United Nation
- The UN is a global body which has almost every country in the world as a member, which
exists to maintain peace and security, develop friendly relations between nations, co-
operate in solving economic, social, cultural problems and to promote respect for human
rights and international freedom
 - The UN operates worldwide, best known for peacekeeping and humanitarian assistance.
- The purpose of the UN is to:
a) Maintain peace and security
b) Develop friendly relations among nations
c) Co-operate in solving economic, social, cultural and humanitarian problems
d) Promote respect for human rights and international freedom

 The UN Commission on International Trade Law

- UNCITRAL is the core legal body of the UN which has largely harmonized and unified public
international law
- It was made to address the disparities in national laws governing international trade, which
created obstacles to flow of trade.
- It is composed of 60 members of states elected by the General Council
- It has 6 working groups that conduct preparatory research work on topics in its programme
- It deals with issues concerning:
a) Conventions and model laws
- A Convention: this is an agreement among states establishing obligations binding upon
those states that rectify or accede do it.
- Model Laws: This is a set of model legislative provisions that states can adopt by enacting it
into national law.

b) Legal and legislative information, guides and recommendations

- The system is known as Case law on UNCITRAL Texts or CLOUT.
- It provides information for use by judges, arbitrators, lawyers, and parties to commercial
transactions.
- Most cases reported are on CISG and the UNCITRAL Model Law on International Commercial
Arbitration.

Roles of UNCITRAL

- Co-ordinating the work of organizations active in the field and encouraging their co-
operation
- Promoting wider participation and preparing/promoting the adoption of new/existing
international conventions, model laws and uniform laws
- Promoting ways and means of ensuring a uniform interpretation and application of
international conventions and uniform laws
- Collecting and disseminating information on national legislation and modern legal
developments
- Establishing and maintaining a close collaboration with the UN Conference Trade and
Development
- Maintaining liaison with the other UN organs and other agencies concerned with
international trade
- Taking any other action, it may be useful to fulfil its functions

2) The international Chamber of Commerce

 - The ICC is an organization created by business leaders from various countries which aims to
serve world business community by promoting trade and investment, open markets for
goods and services, and the free flow of capital.
- It has thousands of member companies and associations from 130 countries
- The ICC acts on behalf of business in making representations to governments and
intergovernmental organizations

Roles of ICC

- To promote inclusive, sustainable, greener trade

- To provide rules and standards for international business
- To help companies and States settle international disputes

3) The World Trade Organization

- The WTO is an organization which provides rules for the system of international trade.
- The WTO’s main objective is to help trade flow smoothly, freely and predictably.
- It also endeavors to ensure that individuals, companies and government know what the
trade rules are around the world.
- The WTO seeks to achieve these purposes by:
 Administering trade agreements
 Acting as a forum for trade negotiations
 Settling trade disputes
 Reviewing national trade policies
 Cooperating with other international
 Assisting developing countries in trade policy issues, through technical
assistance and training programmes

Structure of the WTO

- The Secretariat: supplies technical assistance and support for the various councils and
committees, ministerial conference and developing countries
- The Ministerial Conference: The WTO’s decisión-making body. Decisions of the WTO are
made by the entire membership, usually on the basis of consensus
- The General Council (Dispute Settlement Body): It establishes a panel of 3 or up to 5 experts
from different countries, accept or reject the panel’s findings and an appeal on point of law
withing 30 days, and monitor the implementation of ruling and recommendations.
- The Dispute Settlement Body: It operates a dispute settlement procedure for resolving
trade quarrels between member countries
- Special Councils: These are such as the Good Council, Service Council and Intellectual
Property Council report to the General Council
- Committees: These are working groups and working parties deal with individual agreements
and other areas

4) Organizations for Economic Co-Operation and Development

- The 47 is a group of member countries whose modern aim is to be a forum for discussing,
developing and refining economic and social policies
 - The aim of OECD is to help its member countries to achieve sustainable economic growth
and employment and to raise the standard of living in member states while maintaining
financial stability
- It has created both legally binding agreements (for instance in relation to bribery) and non-
binding agreements (such as guidelines for multinational enterprises)

5) International institute for the Unification of Private Law

- UNIDROIT is an independent intergovernmental organization. Its purpose is to study needs
and methods for modernizing, harmonizing and coordinating commercial law as between
states and groups of states
- Its basic objective is to prepare modern, harmonized and uniform rules of private
international law
- It draws up general principles addressed to judges or arbitrators who are free to decide
whether to implement them or not.
- It has 3-tiered structures:
 The Secretariat
- Responsible for carrying out the day-to-day work programme of UNIDROIT
- Running by the Secretary-General nominated by the Governing Council
- Consists of civil servants and ancillary staff

 The Governing Council

- It is made up of one ex officio member, who is the President and 25 elected officials
- Supervises the work of the secretariat

 General Assembly
- This is the decision-making body
- Elects the governing council every 5 years
- Approves the work programme every 3 years
- It is made up of one official from every member state

TOPIC 3: Contracts for the international sale of

goods.

- The aim of the topic is to explain the rules governing:

 Formation of contracts
 Obligation of the seller
 Obligations of the buyer

Sphere of application

- The convention applies to

 Sale of goods (Article 1 (1)(a))
 Sales made between parties whose places of business are in different
states
  If a party has more than one place of business, the relevant place
of business is the one which is most closely connected with the
contract (Article 10(a))
 It the party has no place of business, reference will be made to
his/her habitual residence (Article 10(b))
 The rule of private international law leads to the application of a
contracting state (Article 1 (1)(b))
- “Goods” generally means tangible, movable items
- CISG does not apply to the sales of:
1) Supply of services, or contracts where the main obligation of one of the parties is
the provision of labor (Article 3(1))
2) Goods bought for personal, family or household use (unless the seller neither
knew, nor ought to have known that the goods were bought for that use) (Article
2(a))
3) Goods bought by auction (Article 2(b))
4) Goods bought by authority of law (Article 2 (c))
5) Sales of stocks, shares, investment securities, negotiable instruments and money
(Article 2(d))
6) Sale of ships, vessels, hovercraft, or aircraft (Article 2(e))
7) Sale of electricity (Article 2(f))
- CISG governs the formation of the contract of sale and the rights and obligation of the seller
and the buyer arising in the contract.
- It is not concerned with:
 the validity of the contract or any of its provisions or of any usage (Article
4(a))
 the effect which the contract may have on the property in the goods sold
(Article 4(b))
- CISG does not apply to the seller’s liability for death or personal injury caused by the goods
- The parties to a contract which would be governed by CISG can:
 exclude CISG (and specify some other law by which the contract is to
govern)
 amend the way in which individual clauses of CISG are to operate in their
contract

General provision

a) Interpretation
- According to Article 7, when interpreting the Convention, parties should bear in mind:
 its international character
 the need to promote uniformity in its application
 the observance of good faith in international trade
 questions not expressly settled within the Convention should be settled in
conformity with the general principles on which it is based
b) Intent
- Rules for interpreting the meaning of intent have been provided in Article 8
 The statements of a party should be interpreted according to their intent
 The conduct of a party should be interpreted according to their intent
- This can only be the case where:
  the other party was aware of that intent
 the other party could not have been unaware what that intent was
- If one party could not have been aware of the other party’s intent:
 Statements and conduct should be interpreted according to the
understanding that a reasonable person of the same kind as the other
party would have had in the same circumstances
 All relevant circumstances of the case should be considered
c) Established practice
- The parties are bound by established conduct between themselves if they have made similar
contracts before (Article 9(1))
- The parties are bound by a usage which they both knew of and which is widely known and
used in international trade contracts of the same type (Article 9(2))
d) Form
- Under Article 11 a contract under the Convention:
 does not have to be concluded in writing
 does not have to be evidenced in writing
 is not subject to any other requirement as to form
 may be proved by any means, including witnesses
- Unless:
 The relevant contracting state has made a declaration under
Article 96 of the Convention stating that contracts or variations
from the Convention must be made in writing

A binding Agreement

- Contract- a legally binding agreement between two or more parties

- If a contract is made and one of the parties break it, the other party becomes entitled to
seek remedies the party in breach, such as:
 To enforce the contract (i.e. to insist on its being properly carried out)
 To claim payment of damages to compensate for the injured party’s loss
suffered because of the breach

The problem of conflict of laws

- Parties involved in international dealings may take steps to avoid the problem of conflict of
laws, for example to:
 Seeking and being guided by legal advice in making agreement
 Including a jurisdiction clause in their agreement, specifying what states’
law should apply in the event of a dispute
 Including a dispute resolution clause in their agreement

Offer and Acceptance

- Offer: a proposal for concluding a contract addressed to one or more specific people that is
sufficiently definite and that indicates the intention of the offeror to be bound by
acceptance (Article 14)
- An offer should:
 Have a sufficiently definite proposal for conducting a contract:
 When it indicates the goods in question
 It makes provisions for price and quantity of the goods
  Addressed to one or more people
 Indicate the intention of the offeror to be bound by acceptance
- Invitation to treat (or make offers): Any other proposal, unless the person making it clearly
indicates to the contrary
- Irrecoverable offer: An offer that indicates that it is irrecoverable, whether by means of it
stating fixed time for the acceptance or otherwise

Commencement of offer (Article 24)

- An offer becomes effective when it reaches the offeree and:

 It is made orally
 It is delivered to the offeree personally at their business or mailing address
 If there is no business or mailing address, it is delivered to them personally
at their habitual residence

End of offer

- An offer may come to an end in the following ways:

 Withdrawal- even an irrecoverable offer may be withdrawn if the
withdrawal reaches the offeree before or at the same time as the offer
(Article 22)
 Revocation- An offer may be revoked if the revocation reaches the offeree
before acceptable is dispatched (Article 16)
 There are certain instances in which an offer may be revoked.
These are: the offer was irrecoverable
It was reasonable to assume the offer was
irrecoverable, and the offeree acted on that assumption
 Rejection: An offer, even one which is irrecoverable, is terminated by
rejection when rejection reaches the offerer. (Article 17)

Acceptance (Article 18)

- This is a statement made by, or other conduct of, the offeree indicating assent to an offer.
Silence and inactivity do not amount to acceptance.
- A party may accept an offer by an act if:
 The parties have established practices between themselves, setting
precedent for acceptance of an offer being made by an act
 The act is performed within a given timetable or reasonable timetable if
no one is given, according to the rules set out above
- Counter-offer: this is a reply to an offer which appears to be accepted, but which contains
additions, limitations or other modifications regarding the price, payment, quality of goods,
quantity of the goods, delivery, extent of liability or dispute settlement. (Article 19)

Commencement of acceptance

- The general rule that acceptance becomes effective the moment that the indication of
assent reaches the offeror
- When an offer or the past transactions between the offeror and the offeree indicate that the
offeree may indicate their ascent by performing an act, acceptance is effective as soon as
the act is performed.
- The exceptions to the general rule are that acceptance is not effective when:
  Acceptance has not reached the offeror within a fixed timescale
 Acceptance has not reached the offeror within reasonable time
- Reasonable time will be judged in relation to the method of communication that was used
by the offeror.
- An oral offer must be accepted immediately unless the circumstances indicate otherwise

Communication of acceptance

- Acceptance is only valid if it reaches the offeror at a reasonable time or within a time fixed
by the contract
- The period commences:
 From the moment the telegram containing the offer is handled in
 From the date shown in the letter containing the offer or on an
envelope
 When an offer contained in instantaneous communication
reaches the referee
- Official holidays and non-business days are included within the period. If acceptance cannot
be delivered because the last day of the period is a non-business day or a holiday, an extra
business day is given to affect delivery
- The offeror may impose a time limit for acceptance , if the offeree accepts outside that time,
acceptance is ineffective
- The time limit might be by reference to a time and date or by reference toa period. The
period for acceptance of a time limit set by the offeror is measured as follows

Late acceptance

- If the offeree is late in making acceptance, the offeror can nevertheless choose to recognize
it.
- The offeror must promptly notify the offeree, orally or by dispatching a note
- If the acceptance is delayed in transmission and so arrives out of time even though it was
properly sent and should have arrived in time.
- It is regarded as valid unless the offeror promptly notifies offeree that the offer has lapsed,
orally or by dispatching a note

Withdrawal of acceptance

- Acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same
time as the acceptance would have become effective (Article 22)

Modification or termination of the contract (Article 39)

- The rules on modifying or terminating a valid contract are as follows:

 A contract that is not in writing may be modified or terminated by the
mere agreement of the parties
 A contract that is in writing and contains a clause that only allows
modification or termination to be made in writing cannot be modified or
terminated by the parties otherwise than in writing
 However, a party cannot rely on such a clause, requiring changes to be in
writing where their conduct has led the other party to act to the
understanding that the contract has been modified in same way
Delivery of goods and handling over documents

- The seller must deliver the goods:

 At the right place (Delivery)
 At the right time (Time of delivery)
- The right place (Delivery) means that delivery of the goods must be:’
 At the place specified in the contract, or if no place is specified
 To the first carrier for transmission to the buyer, or if none is specified
 By making them available to the buyer at the place where the seller had
their place of business at the time the contract was made
 By making them available to the buyer at the place where the goods were
stored or manufactured if the parties knew of it all the time the contract
or otherwise
- The right time (Time of delivery) means:
 On the date, or during the period, fixed in the contract or if no time or
period is specified
 Within a reasonable time after the contract was made

Delivery

a) On basis points (Article 31)

- If the contract specifies the place that the goods should be delivered to and when, then the
seller must ensure that they deliver the goods at the place and time
- If the contract does not specify, the following rules apply:
1) If the contract involves carriage of the goods, the seller must hand over the goods to the
first carrier for transmission to the buyer (Article 31(a))
2) If the contract does not involve carriage and does relate to specific goods, or
unidentified goods to be drawn from a specific stock, or relates to goods to be
manufactured or produced, and at the time they made the contract the parties knew
where goods would be produced, the seller must place the goods at the buyer’s disposal
at the place.(Article 31(b))
3) In other cases, the seller must place the goods at the buyer’s disposal at the place where
the seller had their place of business when the contract was made. (Article 31(c))

b) Involving carriage: additional points (Article 32)

- If the contract involves carriage, the seller must:
 Clearly identify the goods to the contract when handling the goods over to
the carrier (Article 32(1))
 Make relevant contracts for the carriage of goods to the relevant place by
appropriate transportation and according to the usual terms applying to
that transportation (Article 32(2))
 Provide insurance for the goods if the contract so provides by implication
(Article 32(3))
 If the contract does not provide insurance, the seller must provide the
buyer with all relevant information in sufficient time to enable the buyer
to insure the goods while they are in transit. (Article 32(3))
 c) On time (Article 33)
- If the contract specifies the date on which the seller must deliver the goods, the seller must
deliver the goods on that date. (Article 33(a))
- If the contract does not so specify:
 but specifies a period within which the goods must be delivered, the seller
must deliver the goods within that period (Article 33(b))
 In other cases, the seller must deliver the goods within a reasonable time
after the contract has been formed (Article 33(c))

Handing over of documents (Article 34)

- If the contract requires documents to be handed over from the seller is required to hand
over documents relating to the goods, they must hand them over at the time and place and
in the form required by the contract
- If the seller has handed over documents before the time required by the contract, they may
correct any lack of conformity in those documents up to the time that they have required to
hand them over by the contract.
- The buyer retains the right to claim damages for this inconformity

Arrangements for carriage and Insurance

- If the seller is arranging for carriage of the goods, the seller must also make such contracts
as are necessary for carriage to the place fixed, by appropriate means of and on usual terms
of such transportation
- The terms of the contract may require the seller to deal with insuring the goods while they
- The terms of the contract may require the seller to deal with insuring the goods while they
are being carried, if not, the seller must, if the buyer asks, give the buyer all available
information necessary to enable the buyer to affect such insurance.

Conformity of the goods (Article 35)

- The seller must deliver goods which are:

 of the quantity
 of the quality
 of the description
 packaged or contained in the manner
- If the contract does not state what the required level of quantity and quality is, and the
goods are not described in the contract, the following conformity requirements must be
met:
a) The goods are fit for the purpose for which goods of the same description would
ordinarily be used.
b) The goods are fit for any particular purpose expressly or impliedly made known to
the seller at the same time as forming the contract. This is unless circumstances
show that the buyer did not rely on, or that it was unreasonable to rely on, the
seller’s skill and judgement
c) The goods possess the qualities of any sample or model held by the seller to the
buyer
 d) The goods are contained or packaged in the manner usual for such goods, or
where there is no such manner, in a manner adequate to preserve and protect the
goods
- The seller is not liable for goods not meeting this description if at the time of the contract:
 The buyer knew that the goods did not conform
 The buyer could not have been unaware that the goods did not conform

Compliance with regulations

- The seller is NOT obliged to sell goods which conform to all statutory or other public
provisions in force in the buyer’s state unless either:
a) The same provisions apply in the seller’s state
b) The buyer told the seller about
c) The buyer told the seller about the provisions and then relied on the seller’s expert
knowledge
d) The seller knew of the provisions due to special circumstances

Liability for lack of conformity

- The seller will be liable for a lack of conformity in the goods:

 Which exists at the time when risk to the goods passes to the buyer, even
though the lack of conformity becomes apparent only after that time
 Which occurs after risk passed and which is due to a breach of any of
their obligations.
- The seller will not be liable for a lack of conformity in the goods:
 If, at that time of forming the contract, the buyer knew, or could not have
been unaware, that the goods did not conform.

Buyer’s duty to examine the goods (Article 38)

- Article 38 states that the buyer must examine the goods to ensure conformity as soon as
possible after the delivery
 If the contract involves carriage, the buyer should examine the goods as
soon as possible after their arrival
 If the goods are being dispatched immediately by the buyer and the seller
knows that the goods may be examined on their arrival at the next
destination

Loss of right to rely on lack of conformity (Article 39)

- The buyer loses the right to rely on a lack of conformity of the goods if they do not give
notice to the seller of the nature of the nature of the lack of conformity:
 within reasonable time of the buyer discovering the lack of conformity
 within reasonable time of the time when the buyer ought to have
discovered the lack of conformity
 within 2 years from the date on which the goods were handed over to the
buyer, unless this length of time is inconsistent with the terms of the
contract or any guarantees under the contract
- The above provisions do not protect the seller if the lack of conformity relates with:
 facts which the seller knew
 facts which the seller could not have been unaware of
  the seller did not disclose these facts to the buyer

Third party rights (Article 41,42)

- The goods must be free from potential claims from other people
- The seller must deliver goods which are free from any right or claim of a third party unless:
 the buyer agreed to take the goods subject to that right or claim
 the claim relates to intellectual property and the seller was not, and could
not have been, aware of the possibility of a claim at the time the contract
was made
 Intellectual property: a term covering several distinct rights
which provides the owner with a form of limited monopoly or a
degree of exclusivity
 unless the right or claim (in respect of industrial or intellectual property)
results from the seller’s compliance with technical drawings, designs,
formula or other such specifications furnished by the buyer
- The right to rely on these provisions is lost when:
 Buyer does not give notice to the seller specifying the nature of the right
or claim of the third party within a reasonable time after they become
aware or ought to have become aware of the right or claim
 Seller knew of the right or claim of the third party and the nature of it

Buyer’s remedies for seller’s breach of contract

Breach of contract: where a party fails to fulfil their obligations under the contract
Fundamental breach of contract: where a breach results in such detriment to the other
party to substantially deprive them of what they are entitled to expect under the contract.
- If the seller breaches the contract, the buyer has the right to:
a) Require performance (Article 46)
b) Declare the contract avoided (Article 49)
c) Reduce the price in proportion to the non-conformity (Article 50)
d) Claim the damages (Article 74-77)
e) Give additional period for performance (Article 47-48)

a) Requiring performance
- The buyer may demand that the seller performs their obligations under the contract. These
rules are:
 The buyer cannot require performance by the seller if the buyer has
already resorted to remedy which is inconsistent with this requirement
(Article 46(1))
 If the goods do not conform with the contract, the buyer may request
substitute goods (Article 46(b))
 If the goods do not conform with the contract, the buyer may request that
the seller repairs (Article 46(3))
 The buyer may fix a reasonable additional time for the seller to perform
their obligations (Article 47(1))
  During that additional period, the buyer may not resort to other remedies
unless the seller informs the buyer of their intention not to perform
(Article 47(2))
 The seller may remedy any failure to perform their obligations, even after
the date of delivery, unless this puts the buyer to unreasonable expense or
delay (Article 48(1))
 If the seller asks the buyer if their failure to perform and the buyer does
not reply, the seller may perform their obligations in the period set out in
their request and the buyer may not resort to other remedies in that
period (Article 48(2))
 Such a notice of the seller’s intention is deemed to include a request that
the buyer make known their decision. (Article 48(3))
 Such notices are only valid if they are received by the buyer (Article 48(3))

b) Declare the contract avoided

- The buyer may declare the contract avoided, and therefore be absolved of obligations
arising under the contract
- The contract may be avoided if:
 the seller commits fundamental breach of contract (Article 49(1)a)
 the seller has not delivered the goods and fails to deliver the goods during
the additional time set for performance by the buyer (Article 49(1)b)
 due to late delivery if the buyer declares the contract avoided within
reasonable time after they are aware the goods have been delivered
(Article 48(2)a)
 regardless of delivery if the buyer declares it avoided with reasonable time
after they knew of the breach (Article 48(2)b(i)) or after additional time
periods for performance have expired (Article 48(2)b(ii))
 if only part of the goods conforms or have been delivered, the above rules
apply to the non-conforming or undelivered part.

c) Reduction in price (Article 50)

- The buyer may reduce the price due under the contract (whether it’s paid or unpaid at the
time) in the same proportion as the value that the goods actually delivered had the time of
delivery bears to the value that conforming goods would have done at the time:
 if the goods do not conform to the contract
 unless the seller remedies their failure to perform their obligations
 unless the buyer refuses to accept performance by the seller

d) Early delivery or extra delivery (Article 52)

- If the seller delivers the goods early:
 the buyer may take delivery or refuse to take delivery until the
appropriate date
- If the seller delivers too many goods:
 the buyer may take delivery of the excess or refuse to accept the excess
 if the buyer accepts the excess, they must pay for it at the contract rate
 - If there are additional storage costs they may be recovered by making a claim for damages in
accordance with Article 45(1)(b), unless the acceptance of the early tendered goods amount
to an agreement to modify the delivery date.

Obligations of the buyer

Payments of the price (Articles 55-59)

- The buyer must take all necessary steps to pay in accordance with the contract

a) Setting the price (Articles 56)

- The price will be set by the contract, unless the contract does not fix a specific price for the
goods, when the following rules apply:
 The parties are deemed to have implied referred to the price generally
charged when the contracts were formed for goods sold in comparable
circumstances (Article 55)
 If the price to be determined by weight, the relevant weight is the net
weight (Article 56)
b) Place and the Time of payment (Articles 57-59)
- The place where the price is to be paid will be as set by the contract, unless the contract
does not fix a specific place, when the following rules apply:
 The price shall be paid at the seller’s place of business (If the seller
changes their place of business after the contract has been formed, they
must bear extra incremental cost to the buyer of paying them) (Article
57(1)(a))
 The price shall be paid where the goods or associated documents are
handed over to the buyer or the buyer’s agent (Article 57(1)(b))

TOPIC 4: Passage of risk and ICC Incoterms

Risk of loss and carriage

Principles

- The principle of risk of loss is important for establishing what happens if the goods are
harmed or destroyed before delivery
 If the seller bears the risk and the goods become damaged or lost before
delivery, the seller will have to make good or face liabilities to the buyer
 If the buyer bears the risk and the goods become damaged or lost before
delivery, the buyer will still be liable to pay for them
- Identifying the point at which risk is to help the parties to make their insurance and other
arrangements
- CISG provides for the passing of risk, connecting it with the time at which the buyer takes
actual or notional possession of the goods.
 CISG Provisions (Articles 67-69)

a) Contracts involving carriage (Article 67)

- If the contract does not specify where the seller is going to hand over goods to the buyer,
the risk passes to the buyer when the goods are given to the first carrier (Article 67(1))
- If the contract specifies the place at which the seller is going to hand over the goods to the
first carrier, the risk passes to the buyer when the goods are given to the first carrier at that
place (Article 67(1))
- In the above cases, risk only passes to the buyer if the goods are clearly identified to the
contract (Article 67(2))
- Goods may only be appropriate to the contract if they are clearly identified and separated
from other goods

b) Goods sold in transit (Article 68)

- Risk in goods in transit passes to the buyer when the contract is concluded
- If circumstances indicate, risk passes to the buyer when the goods were handed to the
carrier who issued the document relating to the contract of carriage
- If at the time of the sale the goods were lost or damaged and the seller knew or ought to
have known this, risk remains with the seller

c) Other cases
- In other cases, risk passes to the buyer when they take over goods (Article 69(1))
- If the buyer does not take over the goods at the appropriate time, the risk passes when the
goods are placed at their disposal and in not collecting them, they are in breach of the
contract (Article 69(1))
- If the buyer is due to collect the goods from somewhere other than the seller’s premises,
risk passes when delivery is due and the buyer is aware that the goods are placed at their
disposal at the place (Article 69(2))
- If the goods are not appropriate to the contract, then risk does not pass until the goods are
clearly appropriate to the contract (Article 69(3))

Terminology

- Carriage (shipping)- the process of transporting people or goods by land, sea or air
- Carrier- a business that transports people or goods usually according to defined and
published routes, schedules and price rates, and usually under recognized regulation
- Shipper (consignor)- a person who prepares goods for shipping, including arranging or
coordinating the transport of goods
- Freight- (1) goods consigned for transport, (2) the fee charged for transport, and (3) the
process of loading a cargo onto a transport vehicle or ship

CISG Provision

- Article 58 provides that if the contract involves carriage of the goods, the seller may dispatch
the goods on terms whereby the carrier will only hand over the goods to the buyer against
payment
Standard Trade Definitions

- Incoterms (ICC Rules for the Use of Domestic and International Trade Terms) are the eleven
standard trade definitions commonly used in international sales contracts, and increasingly
often also in domestic transactions
- The ICC Incoterms address the matters of carriage and risk, establishing the extent of the
seller’s responsibility for the carriage of the goods, and the point at which risk passes from
the seller and the buyer.
- Incoterms typically specify when the seller is deemed to “deliver” to the buyer, and the
seller’s responsibilities for the arrangements, costs and risk of carriage
- Each term is known by an acronym. There are 4 groups of terms:
a) E Group: used where the seller does not want to arrange transport
b) F Group: used where the seller can arrange some transport within their own
country
c) C Group: used where the seller can arrange and pay for most of the freight charges
up to the foreign country
d) D Group: used where the seller can pay for most of the delivery charges to the
charges to the destination country
- The 11 Incoterms that comprise these 4 groups can be divided into 2 categories:
 Terms suitable for any mode of transport
 Terms suitable for sea and inland waterway transport

1) Incoterms for any mode of transport

Departure (E Terms)

Ex Works (EXC) - Under such a contract the seller has minimum obligation with respect to delivery.
They simply have to make the goods available to the buyer at the seller’s own place of business

- The buyer or buyer’s carrier are responsible for loading the goods on a transport vehicle, and
the buyer assumes the risk and the responsibility for their carriage and export from there
on. This role places minimum responsibility to the seller

Main carriage unpaid (F Terms)

Free Carrier (FCA) - Under at this term, the seller fulfills their obligation when the goods have been
cleared for export and handed over to the carrier named by the buyer at named point

- The seller clears the goods for export and hands them over at a place named in the contract.
The buyer becomes responsible thereafter. If the specified place is the seller’s place of
business, the seller is responsible for loading. FCA is the rule of choice for containerized
goods where the buyer arranged for the main carriage

Main carriage paid (C Terms)

Carriage Paid To (CPT) - This is where the seller pays for carriage to a named location. The risk for
the goods passes from the seller to the buyer when the goods are handed over to the first carrier.

- The seller is required to clear the goods for export. The risk passes from the seller when the
goods are to the named destination
Carriage and insurance paid to (CIP) - This is where the courage and insurance are paid by the seller
up to a named destination: thereafter the buyer assumes costs such as import duties and other taxes

- The buyer bears the risk once the goods have been passed to their first carrier, in terms of
insurance they must obtain insurance for the goods that complies with Institute Cargo
clauses

Arrival (D Terms)

Delivery at Place Unloaded (DAP) - The seller discharges their responsibilities and is no longer liable
for any risks only once the goods are ready for unloading by the buyer at the agreed destination

- The buyer has a responsibility for import clearance while the seller bares all risks involved in
bringing the goods to named place.

Delivery at Place Unloaded (DPU) - Under this term, the seller pays for carriage costs to a named
destination and for unloading from the arriving means of transport and placing the goods at the
buyer’s disposal.

- The seller bears all risks involved in bringing the goods and unloading them at the terminal
at the name port or place of destination

Delivered Duty Paid (DDP) – The seller is responsible for the transport of the goods to the named
destination in the country the goods are being imported to, with all duties relating to the
importation paid

- The seller is not obliged to insure the goods: however, most sellers prefer to purchase
insurance.
- This rule places maximum obligation on the seller and is the only rule that makes the sellers
responsible for import clearance and payment of taxes/ import duty

2) Terms relevant to maritime transport only

Main carriage unpaid (F Terms)

Free Alongside Ship (FAS) - The seller discharges the obligations when the goods have been placed
alongside the ship at a named port of shipment in the country of export

- In this case the seller bears export charges, but has delivered the goods once they are
standing alongside the ship at the port while the buyer is responsible for getting them on the
ship and from them on.

Free on Board (FOB) – The buyer makes arrangements for shipping and the seller discharges their
duty by putting the goods on board the ship in the country of export.

- The buyer does not have obligation in respect of courage or insurance of the goods after
they have placed them on board the vessel while the buyer must bear responsibility for the
risk of the goods from when they are on board the vessel and obtain any import licenses
required

Main Carriage paid (C Terms)

Cost and Freight (CFR) – The seller pays for all costs and freight (Carriage) to take the goods to a
named port of destination in the country of import

- Once the goods are on board the vessel in the exporting country port, the goods become the
risks of the buyer and arranges and pays for the marine insurance while the seller is required
to clear the goods for export

Cost, Insurance and Freight (CIF) – The seller is responsible for the costs to bring the goods to the
port of destination and the seller must also take out and pay for the basic insurance to cover the
buyer’s risk of loss or damage during the carriage

- The seller need only pay for the minimum insurance so if the buyer wants more
comprehensive insurance the buyer must make agreement for that

Application of CISG

- CISG applies to contracts between buyers and traders in different contracting states if they
do not make their own agreements by using an intercom or some other provisions in their
contract
- If the parties do not make their own explicit arrangements CISG provision supply. The two
regimes complement one another.

TOPIC 5: Breach of Contract and the Remedies

- Other CISG the principal obligations of the seller are:

 To deliver the goods, documentation etc at the place and time required
under the contract and /or under CISG (Article 31 & 33)
 To ensure that the goods conform with the contract and/ or the
conformity requirements of CISG (Article 35)

- Under CISG the principal obligations of the buyer are:

 To accept delivery (Article 60)
 To pay the seller at the place and time required under the contract and
or/ under CISG (Article 55-58)
 To inspect the goods for conformity and promptly inform the seller of any
non-conformity (Article 38)

Breach of contract

- This occurs when one of the parties fails to order agreed contractual obligations or perform
incorrectly or interferes with the other party’s ability to perform
- Breach may be:
 Relatively minor so that it can be remedied by the other party’s
demanding that it can be corrected and/ or by the payment of damages to
the injured party
  So serious as to strike at the very purpose of the contract. This is known as
fundamental breach
 Fundamental breach: A breech is fundamental if it results in such
detriment to the other party as substantially to deprive the
innocent party of what they are entitled to expect under the
contract, unless the party in breach did not foresee and a
reasonable person of the same kind in the same circumstances
would not have been foreseen such a result

Time of breach

- Breach may arise:

 In the performance or non-performance of the contract at the time due
under the contract
 By a party’s word or actions before the due time, indicating that when that
time comes, the party will not honor the contract. Breach occurring ahead
of time for performance is described as anticipatory breach

Remedies for breach

- They include:
 Demand for performance: Dubai Ursula may be entitled to demand that
the other party complete agreed contractual obligations
 If one party is entitled to require performance of any obligation
by the other party in accordance with the provisions of CISC, a
court is not bound to issue an order for specific performances
 Allowance of additional time: The buyer or the seller may combine a
demand for performance with an additional period of time reasonable
length for performance
 Completion of performance: If the buyer is in the breach , the seller will
be entitled to continue with the contract and insists on payment of the full
contract price
 Suspension of performance: the buyer or seller may choose to suspend
their own performance until the other party resumes or completes agreed
contractual obligations
 Avoidance of contract: If the other party is in fundamental breach the
injured party may declare the contract as having come to an end and avoid
all contractual obligations under it
 Price reduction: The buyer may be entitled to a reduction of the price
payable
 Damages: This is a monetary award for the direct, foreseeable
consequential loss suffered by the injured party, to restore them to the
position they would have enjoyed if the wrong had not been permitted

CISG (Articles 46-52; 71-77)

- CISG provides that if the seller fails to perform any of the contractual obligations, or commits
an anticipatory breach the buyer may:
 Require the seller to perform agreed contractual obligations (Article 46)
  Reduce the price of non-conforming goods(Article 50)
 Suspend their own performance of the conflict (Article 71)
 Declare the contract avoided (Article 49)
 Claim damages for the loss suffered as a result of the breach (Article 45)
- ALL EXPLAINED IN TOPIC 3

CISG (Articles 62-66; 71-77)

- CISG gives the seller the right to:

 Require the buyer to pay and/ or to accept the goods (Article 62, 63, 66)
 Make, supply and claim payment for goods to the seller’s specifications if
the buyer has failed to provide a specification under the contract (Article
65)
 Suspend their own performance of the contract (Article 71)
 Declare the contract avoided (Article 64)
 Claim damages for the loss suffered as a result of the breach

a) Required the buyer to pay and/ or to accept the goods

- This seller may not exercise the right to claim performance specific performance if they have
already resorted to a remedy inconsistent with specific performance (Article 62)
- The seller can allow the buyer extra time to do as required during which time the seller will
not take any other action to enforce the contract or seek any other remedies unless the
buyer refuses to perform (Article 63)
- If the goods have been lost or damaged after the risk of loss passed to the buyer, the buyer
must still pay for them (Article 66)

b) Right to supply goods made to the seller’s own specification ( Article 65)
- If the buyer is required to specify details relating to the goods under the contract and fails to
do so by the date agreed or within a reasonable time after a request from the seller:
 The seller may make the specification of the goods
 The seller must inform the buyer of the details of the specification
 The seller must fix a reasonable time for the buyer to make a different
specification if they choose
 If the buyer fails to make a different specification after receiving such a
communication then the classification of the seller is binding

c) Right to suspend performance in cases of Anticipatory Breach ( Article 71)

Anticipatory breach: This is where a party to the constraint informs the other party that they do
not intend to perform their obligations under the contract or it appears after concluding the
contract that a party will be unable to perform as substantial part of their obligation

- This may be as a result of:

 A serious deficiency in the ability to perform or creditworthiness (Article

71(1)(a))
 In the others party’s conduct in preparing to perform or performing the
contract (Article 71(1)(b))
- The party suspending performance must:
  Immediately give notice to the other party and must continue its
performance if the other party gives satisfactory assurance that they will
be able to perform (Article 71(3))
 May prevent the buyer taking over possession of the goods if they have
been dispatched to them, regardless of what documents the buyer
possesses entitling them to the goods (Article 71(2))
- If the party in anticipatory breach is committing a fundamental breach of contract:
 The injured party may declare the contract avoided (Article 72(1))
 If time allows the injured party must give reasonable notice to the party in
breach that the contract is avoided (Article 72(2))

d) Right to declare the contract avoided (Article 64)

- The sailor may declare the contract avoided and therefore absolve themselves any
commitments under the contract only:
 If the buyer commits fundamental breach of contract (Article 64(1)(a))
 If the buyer does not perform their obligations during the additional time
period fixed by the seller for performance or (notifies the seller that they
will not do so) (Article 64(1)(b))
 Unless the buyer has paid the price, although the seller may declare the
contract avoided in respect of late performance before they become
aware of the performance (Article 64(2)(b))
 For any fundamental breach other than late performance (the buyer
having paid the price) so as it is within reasonable time of the seller
knowing about the breach or after the additional time period for
performance has expired (Article 64(2)(b))

e) Right to claim damages (Article 61)

- The seller’s right to claim damages is independent of other remedies available to them. It is
not harmed by claiming any of the other remedies

CISG (Article 73)

Instalment Contracts

- An installment contract is where the contract contains a number of separate parts example a
contract to deliver goods in separate chunks over a long period of time
- In an instalment contract:
 If one party fails to perform any of their obligations in respect of any
instalment and this is a fundamental breach of contract with respect to
the installment, the other party may declare the contract avoided with
respect to the instalment (Article 73(1))
 If one party failed to perform any of their obligations in respect of any
installment and this causes the other party reasonable grounds for a belief
that a fundamental breach of contract will occur in respect of future
instalments, they may declare the contract avoided (within a reasonable
time) (Article 73(2))
 If the buyer declares the contract avoided in respect of one delivery, they
may declare it avoided in respect of past and/ or future deliveries if those
 deliveries are independent and could not be used for the purpose both
parties were aware of at the offset of the contract (Article 73(3))

Measuring Damages

- Damages for breach of contract by one party consist of a sum equal to the loss, including
loss of profit, suffered by the other consequence of the breach
- Under (Article 74) damages may not exceed:
 The loss foreseen by the parties as a result of possible breach of contract
at the outset of the contract
 The loss which ought to have been foreseen at the outset of the contract
- Under (Article 75) if the contract is avoided and:
 If the buyer has in a reasonable manner and within a reasonable time both
replacement goods
 If the seller has resolved the goods in a reasonable manner and within a
reasonable time
- Article 76 provides that:
 If purchase or resale has not taken place and there is a current price for
the goods in the place where the goods should have been delivered, the
party claiming damages may recover the differences between the contract
price and the current price in the country of the delivery at the time of
avoidance. If, however, the party claiming the damages has avoided the
contract after taking over the goods, the current price at the at the time of
such taking over shall be applied instead of the current place at the time of
avoidance (Article 76(1))
 If I purchase or resale has not taken place, there is a current price for the
goods, and the contract was avoided after one party had taken over the
goods, the current price at the time of taking over will be relevant instead
of the price at the time of avoidance (Article 76(2))
 If there is no current price for the goods at the place where the goods
should have been delivered, then a reasonable substitute price should be
used taking account of the cost of delivery to the cost to the place where
the goods should have been (Article 76(2))

Mitigation of Loss (Article 77)

- Article 77 provides that the injured party must take reasonable steps to mitigate the loss
resulting from the breach (ie to reduce it).This includes taking measures to reduce the
injured party’s loss of profit

Interest (Article 78)

- If a party fails to pay:

 The price
 Any other sum in arrears
 The other party is entitled to interest on the outstanding balance
  Interest will be determined at an appropriate rate, depending on the
applicable law

Exemption from Liability to Pay Damages (Article 79)

- Apartments to play liability damages for failure to perform their obligations if they prove:
 Failure was beyond their control or beyond the control of a 3rd party they
engage to perform the whole or part of the contract and they could not
reasonably have taken the impediment into account at the time of
contract was agreed or to have avoided or overcome its consequences
(Article 79(1))
- This article only has effect while the impediment exists (Article 79(3)). The party is subject to
the impediment:
 Must notify the other party within a reasonable time (Article 79(4))
 May be liable to damage if the other party does not receive the
notification within reasonable time
 May be liable to a different revenue requested by the other party eg
reduction of the price if the goods were defective (Article 79(5))
- Exemption under Article 79 is only effective for the period during which the impediment
exists. The party who fails to perform must notify the other party within a reasonable
time.

CISG (Article 85-88)

- Both parties are under a duty to serve the goods if they are in possession of them depending
a dispute or while they await the other party’s performance

a) Seller’s duty to preserve when buyer fails to take delivery ( Article 85)
- Under Article 35 the seller must take appropriate resolvable steps to preserve the goods:
 If the buyer is in delay in accepting the goods
 where payment of the price and delivery of the goods are to be at the
same time and the seller is in control of the goods
 Where the seller is returning the goods until the buyer in breach has
reimbursed the buyer’s risks reasonable expenses for preserving them

b) Buyer’s duty to preserve rejected goods (Article 86)

- Under Article 86 it seeks the buyer must take up a reasonable steps to preserve the goods:
 If the buyer has received the goods and intends to reject them in
accordance with UNCCISG provisions
 If the buyer has rejected the goods in accordance with UNCCISG and
intends to retain them until the seller has reimbursed the buyers
reasonable expenses
 If the goods have been list of buyer’s disposal and buyer exercises the
right to reject them (in which case they must take possession of them so
long as this does not cause unreasonable inconvenience and expenses)

c) Buyers and sellers rights to store or sell the goods (Articles 87, 88)
- According to Article 87 a party who is required to preserve the goods may:
  Deposit the goods in a warehouse of a 3rd party at the expense of the
other party assuming the cost is not unreasonable
 Sell the goods to a 3rd party if there has been a reasonable delay by the
other party to take possession of the goods or pay the price or cost of
preservation is reasonable notice of the sale is given to the other party
(unless the goods are subject to deterioration in which case nothing is only
required if possible)
 Retain reasonable expenses for preserving the goods out of the sale
proceeds although they must account for the balance to the other party

Available to the Available to the Article Comments

buyer seller number
Demand Yes No 46
delivery
Buyer has right to demand seller's performance of the
seller's obligation including delivery and conformity of
goods
Demand No Yes 63
Payment Seller has right to demand buyer's performance of the
buyer's obligation including taking delivery and paying the
contract price

Allow extra Yes Yes 47 Buyer can allow seller extra time to perform
time 64 Seller can allow buyer extra time to perform
Produce goods No Yes 65
to own If the buyer fails to provide specifications required under
specifications the contract, the seller can produce and supply goods to
the seller's own specifications. Seller must give buyer notice
and chance to change the seller's spec

Suspend Yes Yes 71

performance Buyer or seller can suspend performance where the other
party is in anticipatory breach, notify other party and give
them an opportunity to assure performance

Reduce price Yes No 50

Buyer can reduce price by reference to loss caused by non-
conformity

Increase price No No N/A Not an available remedy

Declare Yes Yes 49, 64
contract Buyer or seller may declare contract avoided for the other
avoided party's fundamental breach
 Claim Yes Yes 45, 61, 79 Buyers or sellers can claim damages for the loss caused by
damages the breach, independently all of the other remedies

Damages are not available if the other party's failure to

perform is out of the party's control

Dispose of the No No 88
Parties must sale wasting goods belonging to the other
other party's
party, and may be entitled to sell other goods belonging to
goods and
the other party, but must not account to the other party for
keep the
the proceeds (less reasonable expenses of disposal)
proceeds

TOPIC 6: Transport documents and means of

payment

- Goods will usually be transported to the buyer by a 3rd party- a courier or shipping company
- This may be complicated by the fact that delivery is obtained through one third party and
subcontracted or otherwise carried out by another different party

Shipper
Seller Carrier Buyer
(Delivery
agent)

Goods

Bills of lading

- This is a document which is issued by a carrier to the shipper, acknowledging that they have
received the shipment of goods and that they have placed on board a particular vessel which
is bound for a particular destination. It states the terms on which the goods are to be carried
- The bill of lading can therefore be an important document in determining when risk has
passed from buyer to seller:
- Bill of lading is traditionally issued in triplicate: One copy is kept on the vessel, one is kept by
the shipper and one is sent ahead to the consignee

Role of a bill of lading

- The bill of lading does 3 things:

 a) It provides evidence that the goods described in it have been received by the
carrier (and if it is a shipped bill of laiding, that they have been shipped)
b) It either provides evidence of, or contained within it, the contract of courage and
the terms on which the goods are to be carried
c) It can be a document of title to the goods being shipped

Types of bills of lading

- A bill of lading may be one of the 4:

a) Inland bill of lading: It relates to a contract for transporting goods overland to the
seller’s international carrier (say from the factory to the port)
b) Ocean bill of lading: It relates to a contract for carriage of goods from a seller in one
country to a specified port in another country
c) Through bill of lading: This combines the contract for inland and marine carriage. It
covers transport from one specified point to another
d) Airway bill: It relates to a contract for carriage of goods by air (both domestic and
international) from one point to another

Negotiable and non-negotiable bills of lading

1) Negotiable bill of lading

- The person who legally owns a negotiable bill of lading owns the goods and has the right to
reroute them
- A negotiable bill is issued to the seller’s order rather than to a named recipient of the goods
- The carrier holds the goods until it receives an original bill of lading endorsed by the seller,
which has been presented by the seller to the bank for payment

2) Non-negotiable bill of lading

- With non-negotiable Bill of Landing (which includes all airway bills) the bill of lading names
are recipients to whom the career must deliver the goods
- It does not transfer ownership or provide the right to possess the goods to anyone other
than the consignee named in the bill
- A straight bill does, however, have the following function:
 Evidence of contract: It serves as a receipt and evidence of the contract of
carriage between the shipper and the carrier. It acknowledges that the
goods specified in the bill have been received by the carrier for
transportation
 Proof of shipment: It provides proof that the goods have been loaded
onto the vessel or other mode of transport for shipment. It includes a
description of the goods, quantity, weights, packaging and other relevant
information
 Delivery Instructions: It includes instructions for the delivery of the goods
to the specified consignee or destination. It may outline the place of
delivery, special requirements or other instructions for the carrier to
follow
 Customs clearance: It is typically required by customs authorities for
custom clearance processes serving as supporting documentation for
 import or export procedures and providing important information about
the shipment
 Legal protection: It can offer legal protection to both the shipper and the
carrier. It outlines the terms and conditions of the contract of carriage
including liability limits, responsibilities and obligations of each party
thereby helping to resolve disputes or claims that may arise during
transportation

Bills of lading and passage of risk

- The bill of lading is important when you consider the passing risk under the contract.
- If no other provision is made, risk passes to the buyer when the goods pass to the carrier.
- The bill of lading is evidence that has happened, so it is evident of risk passes to the buyer

Methods of payment

- They include:
a) Bank transfer
b) Bills of exchange
c) Letters of credit
d) Letter of comfort
- The United Nations (UN) has 2 further conventions/model laws on payments which include:
a) UNICTRAL Model Law on International Credit Transfer
b) UN Convention on International Bills of Exchange and International Promissory
Notes

a) Bank Transfer
- The UNICITRAL Model Law on International Credit Transfers defines a credit transfer as ‘the
series of operations, beginning with the originator’s payment order, made for the purpose of
placing funds at the disposal of beneficiary. The term includes any payment order issued by
the originator’s bank, or intermediary bank intended to carry out the originator’s payment
order (Article 2(a))
- Originator’s means the issuer of the first payment order in a credit transfer
- Intermediary bank means any receiving bank other than the originator’s bank and the
beneficiary’s bank

Advantages
- Straightforward to arrange and carry out
- Relatively fast since they are carried out electronically
- Self-contained within the systems of the bank so do not require any other systems, such as
the past
- Do not have to be arranged in person (can be done online or over the phone)

Disadvantages
- Possible for fraudulent payments to be made if a person comes into possession of the
authentication procedures for the transfers
- Speed means there is not the same cancellation period, should the parties become aware of
such fraudulent such fraudulent activity
b) Bills of exchange
- A bill of exchange is an unconditional order in writing by one person to another to pay a
specific sum to a specific person or bearer on a particular date
- There are various terms associated with bill of exchange that are mainly used:
 Drawer: the person who makes the order and draws up the bill
 Drawee: the party on whom the bills are drawn, usually the bank
 Payee: the person to whom the bill is payable
 Acceptor: The drawee once they have assented the bill. The drawer must
accept in writing with a signature, a simple signature by the drawee is
sufficient
 Holder: The person who holds the bill (this might be the payee, the drawer
or the drawee) there are 3 different types of holders: holders in due
course, holders for value and mere holders
 Endorsee: Anyone to whom the bill is transferred to make them the
beneficiary of the bill
- Once the drawee has signed the bill and thus accepted it: (Accepted bills of exchange)
 The drawee becomes the principal debtor on the bill
 The drawee is primarily liable to pay for it
 Therefore, the drawee will ensure prior to acceptance that the drawer has
sufficient funds to pay the drawee the value of the bill of exchange
- A bill of exchange is a transferable and negotiable asset: (Endorsed bills of exchange)
 The payee may sell the bill of exchange to another party
 To entitle the other party to benefit from the bill (in effect, become the
new payer) the payee must endorse the bill of exchange in favour of the
new owner
 This can be achieved by writing the new owner’s name on the bill with the
signature of the former payee

c) Letters of credit
- A letter of credit is an undertaking by a bank to make a payment to a named beneficiary
with a specific time, against the presentation of documents which comply strictly with the
terms of the letter of credit
- Letters of credit provide a method of payment in international trade which gives the seller a
risk-free method of obtaining payment, and which ensures for the buyer that the seller
complies to the letter with the terms of the underlying sales contract
- There are four parties to a letter of credit:
 The buyer, who is known as the applicant
 The buyer’s bank, which is known as the issuer or issuing bank
 The seller/payee who is known as the beneficiary
 The beneficiary’s bank. This will be the correspondent bank which may be
advising or confirming
- A letter of credit:
 Ensure that the seller has performed all the requirements of the
underlying sales contract before payment is made
 It is an autonomous transaction. According to the principle of autonomy of
credits, any conditions in the underlying contracts are irrelevant. Any
 condition, which the buyer wants to ensure is satisfied before payment is
made, must be stipulated in the letter of credit itself
 Provide security for the seller, as it promises that if the appropriate
documents are presented to the bank, the seller will receive payment
 Provide security for the buyer, as it undertakes to examine the documents
to ensure that all appropriate documents are tendered
 Transfers the risk of non-payment to the buyer’s bank, so long as the seller
fulfills all their obligations as the bank is bound to pay the money on
presentation of the documents, even if the buyer does not pay the bank
 Is therefore the most secure form of payment for the seller other than
cash in advance
- However letters of credit are slow to arrange and administratively cumbersome, but they
are usually essential where the risk of non-payment is high or when dealing for the first
time with an unknown buyer
- The procedure for obtaining a letter of credit is as follows:
Step 1: The buyer and the seller agree a contract for the sale of goods which
provides payment through a letter of credit
Step 2: The buyer (the applicant) requests a bank in their country to issue a letter of
credit in favor of the seller. This bank is which issues the letter of credit is known as
the issue bank
Step 3: The issuing bank, by issuing its letter of credit, guarantees payments to the
seller (the beneficiary/ payee) provided the seller complies with the requirements as
to the documentation
Step 4: The issuing bank asks the seller’s bank in the seller’s country to advise the
credit to the seller
Step 5: The advising bank establishes the authenticity of, and agrees to handle the
credit (on terms arranged with the issuing banks)
Step 6: The advising bank (in the seller’s country) might be required by the issuing
bank to add its own ‘confirmation’ to the credit. The advising bank would be adding
its own guarantee of payment to the guarantee already provided by the issuing
bank
Step 7: A letter of credit arrangement must be made between the seller, the buyer
and the participating banks before the sale takes place

- Once the letter of credit has been obtained, the following may happen:
 The seller may ship the goods
 The documents called in the letter of credit, such as invoice or bill of
lading, are presented by the seller to the advising bank. If they comply
with the letter of credit, the seller is paid and the advising bank forwards
the documents to the issuing bank
 Once the issuing bank has checked the documents it pays the advisory
bank. It then releases the documents to the buyer so that the latter can
claim the goods from the carrier

- There are various types of letters of credit, such as:

Type of letter of
Description
credit
Confirmed letter of The advising bank (or a fee) confirms that payment will be made
credit to the seller provided the requisite documents are presented by
the seller, payment being made by the advising bank even if the
issuing bank or the buyer fails to reimburse the payment

Unconfirmed letter The advising bank does not guarantee payment, even in the
of credit event of default by the issuing bank, but confirms that the letter
of credit is authentic

Recoverable letter This can be amended or cancelled by the buyer at any time
of credit without notice to the seller. They are rarely used since they give
little protection to the seller

Irrecoverable letter These cannot be amended or cancelled without agreement of all

of credit parties

Standby letter of These are used in cases where another, less secure, method of
credit payment has been agreed
If the other method fails, then the seller can claim payment under
the standby. These are subject to the UN Convention on
Independent Guarantees and Standby Letters of Credit

Revolving letter of These are used when there is a cause of dealings between buyer
credit and seller, so it is easier to always keep a letter of credit open
which may revolve automatically or subject to certain conditions
Time-revolving means it is reinstated after use for the next
regular shipment, until the amount of credit has been used up
Value-revolving means that once it is its value has been used it
can be reinstated in the same amount, for further shipments

Transferable letter This allow the seller to transfer the rights to receive payments to
of credit another person who was not party to the original contract, such
as the original supply of the goods

Back-to-back letter This allows the seller to use the buyer's letter of credit as security
of credit to issue a second letter of credit from them as a buyer to the
original supplier or seller

Special features

- Letters of Credit can be at any amount, in any freely traded currency, and, subject to the
presentation of complaint documents, may be payable:
 at sight: which means as soon as a complaint set of documents are
presented to the paying bank
 after a specified term.
 - Letters of credit are irrecoverable unless they state otherwise and may be transferable by
the payee. An irrecoverable letter of credit cannot be amended or cancelled without the
agreement of all parties

d) Letter of comfort
- This is a statement or letter by a third party that will stand behind the obligations of a party
under a contract
- A letter of comfort is a letter issued to a 3rd party lender by a parent company. The letter
acknowledges the parent’s company approval of a subsidiary company’s attempt at raising
finance
- A letter of comfort does not guarantee the loan given to the subsidiary company. It merely
gives reassurance to the lender that the parent company is aware of, and approves of, the
situation
- A letter of comfort imposes no obligation or liability upon the writer unless it:
 Has the effect of guaranteeing or indemnifying the debts
 Makes some other clear undertaking
 Is issued negligently or fraudulently

United Nations Convention/Model Laws On Payment

1) UNCITRAL Model Law on International Credit Transfer

- Credit Transfer: a payment transaction by which payment services provider transfers funds
to a payee’s account against a payer’s order
- It is also known as bank transfer or sending payment by wire

Terms Used
 Bank: banks plus other entities who execute payment orders in the
manner of a bank. The branches of the same bank that are in different
states are treated as separate banks
 Originator: The issuer of the first payment
 Sender: The person who issues a payment order, including the originator
and the sending bank
 Credit transfer: The series of operations beginning with the originator’s
payment order, made for the purpose of placing funds at the disposal of a
beneficiary. The term includes any payment order issued by the
originator’s bank intended to carry out the originator’s payment order
 Payment order: An unconditional instruction by a sender to a receiving
bank to place at the disposal of a beneficiary a fixed or determinable
amount of money if:
 The receiving bank is to be reimbursed by debiting an account of
(or otherwise receiving payment from) the sender
 The instruction does not provide that payment is to be made at
the request of the beneficiary
 Authentication: a procedure established by agreement to determine
whether a payment order or an amendment or revocation of a payment
order was issued by the person indicated as the sender
  Execution period: the period for processing a payment order, usually one
or two days from receipt.

- The credit transfer process is:

1) The person wishing to make payment (originator) instructs their own bank (the sending
bank) to transfer a specified sum to a specified recipient(beneficiary)at another bank
(the receiving bank)
2) The sending bank sends a message to the receiving bank, asking it to make payment in
accordance with the sender’s settlement instructions
3) If the sending and receiving banks do not have reciprocal accounts, the credit will be
funded through those accounts and made available by the receiving bank to the
beneficiary
4) If the sending and receiving banks do not have reciprocal accounts, they will use a
correspondent bank, to which the sending back makes the order and from which the
receiving banks draws it. There is a series of correspondent (Intermediary) banks

Obligations of sender of payment order (Article 5)

- The key obligation of the sender is to pay the receiving bank for the payment order when
the bank accepts it.
- Problems arise if:
 The person sending the payment order did not have authority to do so
 The payment order was forged
- There are 3 steps in the Model Law to prevent this happening:
 The sender is only bound by the payment order if the sender issued it
themselves or it was issued by another person who had authority to bind
the sender (Article 5(4)(a) and (b))
 A purported sender is bound if the payment order is subject to
authentication procedures agreed between the sending and receiving
bank, and the receiving bank had carried out this authentication (Article
5(2)(b))
 A sending and receiving bank cannot agree between themselves that the
purported sender is bound in this way if the authentication process is not
commercially reasonable (Article 5(2)(a) by implication)

Intermediary Bank’s Obligations (Article 7 and 8)

- An intermediary should act promptly on receipt of an order, to accept or reject.

- If it rejects the order or defects an irregularity it must give notice to the sender, notice is not
required if the sender cannot be identified or has failed to put the intermediary in funds
- If the intermediary neither accepts nor rejects within 5 banking days of the end of the
execution period, the order expires
- As regards acceptance, there may be an arrangement between the sender and the
intermediary bank that orders will be carried out on receipt
- If so, receipt of the order by the intermediary bank is treated as automatic acceptance
 - Otherwise, an intermediary bank ‘accepts’ the order by notifying the sender that it accepts
and/or by issuing a further order to carry out the order it has received, or by debiting the
sender’s account to process the transfer
- If the transfer fails, the bank must repay the sender any funds received with interest

Obligations of the receiving bank

- The obligation of a receiving bank is divided into 2:

a) Obligations that are part of a successful credit transfer
b) Obligations that arise when something goes wrong

a) Obligations that are part of a successful credit transfer

- The obligation of the receiving bank is to execute a payment order that it ‘accepts’.
Acceptance is indicated by:
 Issuing a payment order to the beneficiary’s bank to carry out the
payment order received.
 In a funds transfer system that requires all payment orders received from
other banks in the same system must be executed by receiving such a
payment order
 Debiting the sender’s account at the receiving bank for the value of the
payment order
 Giving notice of intention to the sender of acceptance
 Failing to give notice that it does not accept the payment order within the
required time
- Execution is by:
 Placing funds at the disposal of the beneficiary (in their bank account)
 If the receiving bank is not beneficiary’s bank, the receiving bank issuing a
payment order to the beneficiary bank, which is then obliged to place
funds at the beneficiary’s disposal

b) Obligations that arise when something goes wrong

Defect Rules

Insufficient data, or an The receiving bank is obligated to notify the sender

incontinency in the data

Delay in the transfer Each receiving bank is requested to assist the

process (and neither the originator and to seek the assistance of the next
originator nor the receiving bank to complete the banking procedures
beneficiary knows what has of the credit transfer
happened)

Transfer fails to complete The originator should be paid back by their bank
the amount that was transferred, plus interest
The originator's bank can in turn recover what it is
 paid to it's receiving bank, with interest, and the
bank can recover from its receiving bank
The chain of responsibility for refunding stops at
the bank that is unable to complete the credit
transfer

Banker’s liability for failure to perform on of its obligation

- A bank that delays implementing its payment order is liable to pay the amount of the
transfer plus the appropriate amount of interest for the delay
- If the bank does so, its receiving bank is obligated to pass on that interest to the beneficiary
- If the interest is not passed on to the beneficiary, then the beneficiary has a direct right to
recover the interest from the bank that holds it

Completion of credit transfer and its consequences

- A credit transfer is completed when the beneficiary’s bank accepts a payment order for the
benefit of the beneficiary (Article 19).
- At this point:
 The matter becomes a private banking issue between the beneficiary and
their bank
 The other banks in the process have fulfilled their obligations.

2) UN Convention on International Bills of Exchange and International Promissory Notes

- This is an international bill of exchange which specifies at least 2 of the following places and
indicates that any 2 so specified are situated in different states:
 The place where the bill is drawn
 The place indicated next to the signature of the drawer
 The place indicated next to the name of the drawee
 The place indicated next to the name of the payee
 The place of payment
- Promissory note: this is a written instrument which contains an unconditional promise
whereby the maker undertakes to pay a definite sum of money to the payee or to their
order, is payable on demand or at a definite time, is dated and signed by the maker
- The promissory note must specify at least 2 of the following places and indicate that any 2 of
them are situated in different states:
 The place where the note is made
 The place indicated next to the name of the maker
 The place indicated next to the payee
 The place of payment

Value of the bill and when it is payable

a) Value of the bill (Article 7)

 - The sum payable on a bill is deemed to be definite sum. If there is a discrepancy between
the sum expressed in words and the sum expressed in figures, the sum payable by the
instrument is the sum expressed in words.
- This is even if the bill states that it is to be paid:
 With interest
 By instalments
 According to a rate of exchange indicated in the bill
 To be determined by the bill
 In a currency other than
 In a currency other than the currency in which the sum is expressed in the
bill

b) When the bill is payable

- A bill is payable on demand:
 If it states that it is payable at sight or on demand or on presentation, or if
no time of payment is expressed
 The time of payment of a bill payable on demand is the date on which the
instrument is presented for payment
- A bill is payable at a definite time if it states that it is payable:
 In a stated date, or at a fixed period after a stated date, or at a fixed period
after the date of the instrument
 At a fixed period after sight
 By instalments
 A bill which is payable at a definite time because a bill payable on demand
after it matures

- An instrument may be made by several parties and may be payable to several parties, in
which case: (Article 10)
 It is payable to all of them (together)
 Unless the instrument is clear that it is payable to any one of the payees
 The rights of a holder may be exercised only by all of them
 Unless the instrument is clear that is payable to any of them in possession
of the instrument may exercise the rights of a holder

Transferring an international bill of exchange

- An instrument may be transferred:

 By endorse (written on the instrument and signed) and delivery to the
endorsee
 By delivery only if last endorsement is in blank (a signature only)
- The transfer is affected with the process of endorsement with the payee becoming the
endorser and their supplier becoming the endorsee
- A bill may be transferred after maturity except by the drawee or the acceptor

Endorsement
 - An endorsement must be written on the instrument or on a ship affixed thereto and be
signed
- There are 2 types of endorsement:
a) In blank: endorsement is by a signature alone or by a signature accompanied by
a statement to the effect that the bill is payable to a person in possession of it
b) Special: endorsement is by a signature accompanied by an indication of the
person to whom the bill is payable

Endorsement rules

- The following key rules apply:

 A signature alone other than that of the drawee is an endorsement only if
placed on the back of the bill
 If the drawer has inserted in the instrument such as ‘not negotiable’, not
transferable’,’ not to order’,’ pay X only’ or similar, the bill may not be
transferred except for purposes of collection
 An endorsement must be unconditional
 An endorsement in respect of a part of the sum due under the instrument
is ineffective
 If there are two or more endorsements, it is presumed, unless the contract
is proved that each endorsement was made in the order in which it
appears on the instrument
- If an endorsement is forged, the person whose endorsement is forged, or a party who signed
the bill before the forgery, has the right to recover compensation for any damage that they
may have suffered
- The drawee who pays the bill is not liable if, at the time they pay for the instrument, they
are without knowledge of the forgery, unless they lack knowledge is due to their failure to
act in good faith or exercise reasonable care

Transfer warranties

- Unless otherwise agreed, person who transfers an instrument makes an implied

representation that:
 The instrument is of good quality
 There are no facts that could impair the right of the transferee to pay the
bill
- A holder has rights to the instruments unless:
 They took the instrument with knowledge of a valid claim by another
person
 They obtained the instrument by fraud or theft

Liabilities of the parties

- The following rules apply in relation to a bill of exchange

 A person is generally not liable on a bill of exchange unless they sign it
(Article 33(1))
 If someone signs a bill with a different name, they are still liable as if they
had signed their own name (Article 33(2))
  If a person’s signature is forged the person is not liable on the bill unless
they consent to the forgery (Article 34)
 If a bill is materially, the person who signs it after the alteration is liable
according to the terms of the altered text (Article 35)
 A bill may be signed by an agent (so it is clearly stated that are signing on
behalf of a principal the agent will not be liable and the principal will)
(Article 36)
 The drawer undertakes to pay the bill if it is dishonored (Article 38(1))
 The drawer may limit their liability for acceptance of payment by express
stipulation in the bill (Article 38(2))
 The maker undertakes to pay the promissory note under Article 39(1) and
may not limit their liability under Article 39(2)
 The drawee is not liable on the bill unless they accept it (Article 40(1))
 Once the drawee has accepted the bill (which must be unqualified and
written of the bill) they are liable on it (Article 40(2))
 The endorser undertakes to pay the instruments to the holder if it is
dishonored (Article 44(1))
 The endorser may limit their liability for acceptance or payment by express
stipulation in the bill (Article 44(2))

Presenting the bill

- Under Article 55, to obtain payment of the bill it must be duly ‘presented for payment’
- An instrument is duly presented for payment if it is presented in accordance with the
following rules:
a) The holder must present the instrument to the drawee or to the acceptor or to the
maker on a business day at a reasonable hour
b) A note signed by two or more makers must be presented to any one of them unless
the note clearly indicates otherwise
c) If they drawee or the acceptor or the maker is dead, presentment must be made to
persons who under the applicable law are their heirs or the persons entitled to
administer their estate
d) Presentment for payment may be made to a person or authority other than drawee,
the acceptor or the maker if the person or authority is entitled under the applicable
law to pay the instrument
e) An instrument which is not payable on demand must be presented for pay date of
maturity or one of the two business days which follow
f) An instrument which is payable on demand was represented for payment within
one year of its date
g) An instrument must be presented for payment:
 At the place of payment specified on the instrument
 If no place of payment is specified at the address of the drawee,
or the acceptor or the maker indicated in the instrument
 If no place of payment is specified and the address of the
drawee, the acceptor or the maker is not indicated, at the
principal place of the business or habitual residence of the
drawee, the acceptor or the maker
 h) An instrument which is presented at a clearing-house is duly presented for payment
if the law of the place where the clearing-house is located or the rules or customs of
the clearing-house so provide

Dishonour for non-acceptance

- A bill is dishonored by non-acceptance if the drawee, upon due presentation, expressly

refuses to accept the bill
- This will also be the case if acceptance cannot be obtained with reasonable diligence or if
the holder cannot obtain the acceptance to which they are entitled under the Convention.
- The holder may then exercise an immediate right of resource against the drawer, the
endorsers and the guarantors. The holder may then claim payment for the guarantor or the
drawee upon any necessary protest

Dishonour for non-payment (Article 58)

- A bill should be dishonoured by non-payment:

 If payment is refused upon presentation or if the holder cannot obtain the
payment to which they are entitled
 If presentation for payment is dispensed with and the instrument is unpaid
at maturity
- If a bill is dishonored by non-payment, the holder may, subject to the rules on protests,
exercise a right of resource against the endorsers and their guarantees

Protesting the bill for dishonour

- If an instrument is dishonored by non-acceptance or by non-payment, the holder may

exercise a right of resources only after the instrument has been protested for dishonor
- A protest is a statement of dishonored draw up at the place where the bill has been
dishonored and signed and dated by a person authorized in that respect by the law of that
place
- The statement of dishonor must specify:
 The person at whose request the bill is protested
 The place of protest
 The demand made and the answer given
- Protests for dishonor must be made on the day on which the bill is dishonored or on one of
the four business days which follow
- If a bill is not protested, the drawer, the endorses and their guarantors are not liable on it,
but it does not discharge the acceptor or the guarantor of the drawee of liability on it
- If a person who is required to give notice of dishonor fails to give it to a party who is entitled
to receive it, they are liable for any damage which that party may suffer from such failure.

Amount payable on the bill

- The holder of a bill has the right to be paid

- The following key rules are applicable:
 The holder may exercise the rights on the bill against any one party, or
several, or all parties liable on it and it is not obliged to observe the order
in which the parties have become bound
  Any party who takes up and pays the bill may exercise their rights in the
same manner against parties liable to them
 At maturity the amount payable to the holder is the amount of the
instrument with interest, if interest has been stipulated
 Interest is only payable to the maturity date, and a deduction of interest
can be made if the bill is presented before for the maturity date
 An instrument must be paid in the currency in which the sum payable is
expressed

Bill of exchange Letter of credit Credit

Form of Written Written Electronic

instruction

Who creates the Usually, the seller of goods The issuing bank (eg the The originato
bill/letter/order creates the Bill of Exchange bank of the debtor/ "sending ban
buyer) buyer of the
debtor/buye

Speed of May be speedy, but can be Postponed until payee Speedy - usu
transaction postponed to a specific complies with terms of hours
future time Letter (eg presentation of
bills of lading)

When is As stated in the bill. May be When the payee complies When benefic
mechanism payable on demand or at a with requirements specified accepts an o
payable fixed or determinable in the letter payment
future time
Is mechanism No. Revocation constitutes No. Unless expressly Yes. Provided
revocable dishonour revocable order arrives
for recipient
on it
Liability of bank None. Unless it formally To pay the payee on To complete
to whom the accepts liability compliance with the terms accepting the
order is made of the letter. To notify the valid) and m
issuing bank of compliance available to t
To notify the
irregularities

TOPIC 7: Agency Law

- Agent: This is a person who has been authorized either expressly, by conduct or by
implication, to act for any other party which is called the principal
 - Agency: This is the relationship which exists between two legal people (the principal and the
agent) in which the function of the agent is to form a contract between their principal and a
3rd party

Types of agents
- There are 7 types of agents:
a) Partners: These are accountants who own and run an accountancy policy together
and are therefore agents of each other
b) Company directors: Company directors act as agents of their company
c) Promoters: A promoter is someone (except professionals acting in their
professional capacity) who undertakes to form a company
d) Factors: A factor, sometimes mercantile agent, is a person whose job is to sell or
buy goods on behalf of another person for example Motor deals are often factors
e) Brokers: A broker may operate in many trades. They are essentially an intermediary
who arranges contracts in return for commission, for example an insurance broker
f) Auctioneers: Auctioneers are agents authorized to sell property at auction on
behalf of the seller. When an auctioneer accepts a bid from a buyer, they become
the agent of the buyer for the purpose of making a record of the sale
g) Commercial agents: A commercial agent is an independent agent who has
continuing authority in connection with the sale or purchase of goods

Formation of agency

- An agency relationship can be established in any of the 5 ways:

1) Express agreement
2) Implied agreement
3) Necessity
4) Ratification
5) Estoppel

1) Express agreement
- This is where the agent is expressly appointed by the principal, this may be orally or in
writing
- In most commercial situations the appointment would be made in writing to ensure that
everything was clear
- An agent expressly appointed by the principal has actual authority of the principal to act on
their behalf

2) Implied agreement
- An agency relationship between two people may be implied by the relationship or by their
conduct
- This is where the principal has not expressly agreed that the agent should be their agent

3) Necessity
 - Agency by necessity used to happen when goods were shipped and it was impossible to
contact the owner of the goods quickly enough to handle an emergency situation.
- There are four conditions to be satisfied:
 Principle’s property is entrusted to the agent
 An emergency arises, making it necessary for the agents to act
 It is impossible to contact the principle
 Agent acts in the interests of the principal

4) Ratification
- An agency relationship may be created retrospectively, by the ‘principal’ ratifying the act of
the ‘agent’. Therefore it is created after the ‘agent’ has formed a contract on behalf of the
‘principal’
- If the principal agrees to the act of the agent after the event, they may approve the acts of
the agent and make it as if they had been principle and agent at the time of the contract
- The conditions for ratification are:
 The principal must have existed at the time of the contract made by the
agent
 The principal must have legal capacity at the time of the contract was
made
 They ratify the contract in its entirety
 They complete their notification to the 3rd party sufficiently clearly
- Once a contract has been ratified by the principal, the effect is that it is as if the agency
relationship had been expressly formed before the contract made by the agent took place

5) Estoppel
- This arises where the principal implies that the agent is their agent even though they are not
- Such a case the principle is estopped from denying the agents apparent authority hence the
name agent estoppel
- An agency relationship is not formed if it is the ‘agent’ who creates the impression that they
are in an agency relationship with the principal

Authority of the agent

- A principal does not give the agent limited authority to act on their behalf, therefore, a
contract is made by the agent is binding on the principle and the other party if the agent was
acting within the limits of the authority from their principal
- In analyzing the limits of an agent’s authority, three distinct sources of authority can be
identified:
a) Express authority
b) Implied authority
c) Actual authority

a) Express authority
- This is authority explicitly given by the principal to the agent to perform particular tasks
along with the power necessary to perform those tasks
- The extent of the agents express authority will depend on the construction of the words
used on their appointment
 - If the appointment is in writing, then the document will be examined
- If it is oral, the scope of the agent’s authority will be a matter of evidence
- If the agent contracts outside the scope of their express (actual) authority, they may be
liable to the principal and the 3rd party for breach of warrant of authority

b) Implied authority
- This is where there is no express authority, authority may be implied from the nature of the
agent’s activity or from what is usual or customary in the circumstances.
 An agent has implied authority to do things which are reasonably
incidental to the performance of an expressly authorized act
 An agent has implied authority to do things which are agent
occupying that position would usually have authority to do

c) Actual authority
- Such authority arises when agent is held out by a principal as having authority
- The representation by the principal may arise from previous dealings (allowing the agent to
make contracts in the past is a representation that agent has authority to continue to
continue the future)
- However, a 3rd party cannot rely on apparent authority when they know of the lack of actual
authority

Ostensible authority

- Ostensible authority usually arises either:

1) Where the agent acts for a disclosed principal
2) Where the agent acts for an undisclosed principal

1) Where the agent acts for a disclosed principal

- A principle is disclosed where the existence of the principal has been made known to the 3 rd
party. It is not necessary for the principal to be identified to the third party
- As a general rule, the contract is between principal and the 3rd party. The agent is neither
liable nor entitled under the contract
- However, the agent will be personally liable in the following expectations circumstances:
 Where the agent showed an intention to undertake personal liability
 Trade usage or customs
 Where the agent refuses to identify the principal
 Where the agent is acting on behalf of a fictitious principal

2) Where the agents act for an undisclosed principal

- An undisclosed principal is where the principal’s existence has not been made known to the
3rd party. When the third party discovers the existence of the principal, they can elect to
treat principle or the agent as bound by the transaction
Revocation of authority

- Where a principal has presented to a 3rd party that an agent has authority to act, and has
substantially revoked the agent’s authority, this may be insufficient to escape liability
- The principal should inform the third party who have previously dealt with the agent of the
change in circumstances, this is particularly relevant to partnership and the position when a
partner leaves a partnership

Agent’s fiduciary duty

- An agent has fiduciary duty to the principal; these include that the agent should:
 Not allow their personal interests to conflict with those of the principal
 Always act in the best interest of the principal
 Not make a secret profit
 Has the duty account for principal for all money and property received

Termination of agency

- An agency is terminated when the parties agree that the relationship should
- It may also be terminated by operation of law in the following situations:
 Principal or agent dies
 Principal or agent becomes insane
 Principal becomes bankrupt or the agent becomes bankrupt and this
interferes with them position as agent
- Termination breaks the actual authority of the agent to an end. However, 3rd parties are
allowed to enforce contracts made later by the agent until they are actively or constructively
informed of the termination of the agency relationship

Agent’s liability for contracts

- An agent contracting for their principal within their actual or apparent authority generally
has no liability on the contract and is not entitled to enforce it
- However, there are circumstances when an agent will personally liable and can enforce it,
they include:
 When they intended to undertake personal liability
 Where it is usual business practice or trade custom for an agent to be
liable and entitled
 Where the agent is acting on their own behalf even though they purport to
act for a principle
 When an agent enters into a collateral contract with the 3rd party with
whom they have contracted on the principal’s behalf, there is separate
liability and entitlement to enforcement on the collateral contract
 It can happen that there is joint liability of agent and principal. This is
usually the case where an agent did not disclose that they acted for a
principal

Principal’s liability to the agent

- To claim remuneration or commission for services performed

 Usually, the amount of remuneration or commission to be paid is
stated in the agency agreement. Where it is not specified and it is
 a commercial agreement, the court will imply a term into the
agreement requiring a reasonable amount to be paid
- To claim indemnity against the principal for all expenses reasonably incurred in carrying out
their own obligations
- To exercise a lien over the principal’s property, the lien allows the agent to retain possession
of the principal’s property that is lawfully in the agent’s possession until any debts due to
the agents

TOPIC 8: Partnership

- Partnership: this is the relation between 2 or more persons, in business together with a view
of profit

Forms of partnership

1) Sole trader: The owner is the business; they own the assets and is liable for all the debts
 No legal formalities are required to set up a sole trader business
 This form of business is inappropriate for large businesses or
those involving a degree of risk
2) General partnership: This is an association of 2 or more persons carrying on business
together for profit, where each partner has unlimited and joint liability
3) Limited partnership: This is a partnership consisting of one or more general partners with
unlimited liability and one or more limited partners whose liability is restricted to the
amount they have invested.
4) Limited liability partnership (LLP): An artificial legal entity with perpetual succession, it can
hold property in its own right, enter into contracts in its own name create floating charges,
sue and be sued
 The liability of the members of LLP is limited to the amount of
capital they have agreed to contribute
 The LLP must file annual accounts and an annual report with
Companies House

Types of partners

- Business usage recognizes various categories of partners:

a) General/ full partner: participates fully in running the business and sharing in
profits
b) Sleeping/ dormant partner: Invests in the business and shares profit but plays no
part in running the business
c) Salaried partner: Held out by the firm as a partner but has limited involvement in
partnership decision making and profit shares
d) Fixed share partner: A salaried partner who also receives a designated share of
profit. It is common for a person to join an existing partnership as a salaried partner
before being offered a full partnership
Ordinary Partnership Agreements

- It is managed by partners, who are also the owners of the business

- There is no legal requirement for there to be a formal partnership agreement
- There is no separate legal person: the partners owns any property, are liable on contracts
and are liable if sued
- Limits on transfer of shares (may require dissolutions of partnership or contest of other
partners to enable partners to realize their share)
- A partnership can exist for:
 A single venture
 Continuing activities
- They can only create fixed charges such as security for borrowings
- Partners may withdraw their capital and are personally liable for the debts of the firm. Their
liability is joint and several
- Every partner has the right to take part in the management of the business

Formation of partnership

- A partnership is formed when 2 or more people agree to run a business together and it
meets the definition of a partnership
- A written partnership agreement is not legally required to form a partnership, however
there are advantages to writing the terms of the partner’s agreement:
 It fills in the details which the law would not imply – the nature of the
firm’s business, its name and the bank at which the firm will maintain its
account, for instance
 A written agreement serves to override terms, otherwise implied by the
Parliament Act which may be inappropriate to the partnership
 Additional clauses can be developed. Expulsion clause are an example and
they provide a mechanisms to expel a partner, where there would be no
ability to do so otherwise

Publicity

- If a sole trader or partnership trades under the name other than the combined names of the
partners, it must disclose:
 The name of the sole trader or each partner
 In relation to each person named, an address in Great Britain at which
documents can be served
- The information must be displayed in a prominent position so that it can be read easily:
 In all places where the business is carried out
 On business letters
 On written orders for the supply of goods and services
 On invoices and receipts
 On written demands for the payment of business debts
- If the business has more than 20 partners, the firm need not put all the partners’ names on
its business documents, but must give the address of the principal place of business and
state that a full list of the partners’ names and addresses can be inspected there
- It is a criminal offence not to disclose business details as required, punishable by a fine up to
£1,000
Liability of partners

- Partners are jointly liable for all partnership debts that result from contracts made by other
partners which bind the firm
 Partners are liable to contribute losses first and foremost in proportion to
their profit-sharing ratio
 If any partner cannot meet their share are liable to make up the shortfall
- The firm is not bound by the actions of a partner if:
 The third party knows the partner has no authority
 The partner has no authority, and the third party does not know or believe
them to be a partner

Authority of partners

- Every partner is an agent of the firm and their acts in the usual way of business bind the firm
(the partners) by way of actual implied authority.
 An exception to this rule is if the partner has no authority to
carry out that particular transaction and the third party knows
that to be the case or does not know or believe the person to be
a partner
- Anyone who represents himself, or knowingly allows himself to be represented, as a partner
in a particular firm is liable as a partner to anyone who has relied on that to give credit to the
firm.
- The effect of both conditions above is that the firm is liable for the acts of:
 All its partners, within the scope of their existence or implied actual
authority
 All purported partners who have been knowingly held out as members of
the firm, purported partners might be liable also

Implied v Apparent Authority

- Implied authority may be assumed if the person is an actual partner. The person appointed
as the managing director has the implied authority to bind the company in the same way as
the board
- Apparent authority arises if a person is not officially a partner but is either held out by others
to be a partner or makes some representation about holding that position. Such authority
arises where a director is held out by the other board members as having the authority to
bind the company

Powers available to all partners

- The outsider can assume, regardless of the nature of the business, that an individual partner
will have authority to:
 Sell goods or personal chattels of the firm
 Purchase on account of the firm’s goods necessary for, or usually
employed in, the business
 Receive payment of debts owed to the firm and give valid receipts
 Engage employees for the business and discharge them unless the other
partner’s object
 Employ a solicitor to defend the firm if an action be brought against
 - Partners in trading firms (generally accepted as firms which buy and sell goods) have
additional assumed powers:
 To deal with bills of exchange, either by signing the firm’s name or the
partner’s own name
 To borrow money on the credit of the firm, including overdrawing a bank
account
 To secure a loan by pledging assets of the firm or by depositing title deeds
of land to create an equitable mortgage

No apparent authority

- No partner, whether in a trading firm or not, has apparent authority for the following:
 To bind the firm by deed unless the other partners have given express
authority by deed
 To give a guarantee to bind the firm, even in relation to the firm’s business
 To compromise a debt by taking something else instead of money (eg
shares in a company)
 To bind the firm by submitting a dispute to arbitration
 To unilaterally open a bank account, for the firm

Partnership debts and obligations

a) Active partners
- Partners have joint liability for the firm’s debt and obligations, they can be sued collectively,
in their individual names or in the firm’s name
- Partners have joint and several liability for torts (eg negligence) committed by a partner in
the course of the business, they can be sued individually or collectively
- If a partner has died, creditors can claim against the partner’s assets for payment of debts
incurred while still a partner
- Partners can look to one another to contribute to meeting liabilities

b) Retiring partners
- A retiring partner will continue to be liable for pre-retirement debts unless released from
liability by the relevant creditors
- They are also liable for debts of the firm incurred after their retirement if the creditor knew
them as a partner and had not had notice of their retirement
- Therefore, it is vital on retirement that a partner gives notice to all the creditors of the firm

c) Post-retirement debts
- Former partners will be liable for transactions incurred after leaving the firm in dealings with
persons who knew them to be a partner
- To avoid this liability, retiring partners should:
 Ensure that individuals’ notices are sent to all people who were customers
or suppliers of the firm while they were a partner
 Advertise having left the firm in the London Gazette, this operates as a
notice to all who have dealt with the firm but know the partner to be one

d) Incoming partners
 - They will not automatically be liable for the existing debts of the firm; however, they can
agree to assume them
- Alternatively, they may be “held out” to be a partner prior to joining the firm

Basic rights and duties

- The following are rights and duties of partners:

Rights to partners Duties to partners

Right to take part in Duty to act in good faith

management of the towards other partners
business
Right to share profits and Duty to disclose all relevant
losses equally (unless information to the firm
agreed otherwise)
Right to be consulted on Duty not to make secret profits
partnership matters from partnerships
Right to inspect and copy Duty to avoid conflicts of
partnership books and interest and not complete
accounts without consent
Right to indemnity for Duty to exercise reasonable
expenses and liabilities care and skill
properly incurred
Right to interest at 5% p.a Duty to indemnity the firm for
on loans made to the firm losses caused by fraud or
(Not capital) negligence

Terminating the partnership

- A partnership is automatically dissolved by:

 Passing of time, if the partnership was entered into a fixed term
 Termination of the venture, if entered for a single venture
 The death or bankruptcy of a partner
 Subsequent illegality
 Notice given by a partner, if it is a partnership of indefinite duration
 Order of the court granted to a partner
 Agreement between partners
- The most common instance of termination is when a partner leaves the partnership. It is
important to note that as far as third parties are concerned, a partnership still exists

Liquidation of a partnership

- In the event of the termination of a partnership, the partnership’s assets are realized and
the proceeds applied in this order:
 Paying off external debts
 Repaying to the partners any loans or advances
 Repaying the partners’ capital contribution
 Anything left over is then repaid to the parties in the profit-sharing ratio
Limited Partnership Act 1907

- A limited partnership under the 1907 Act differs from a general in that it allows one or more
partners to invest in it on terms limiting the capital at risk to the amount of the investment.
- A limited partnership must fulfil the following conditions:
 There must be at least one partner with unlimited liability
 The partnership must be registered with the Registrar of Companies as a
limited partnership
 Limited partners may not participate in the day-to-day management of the
firm, if they do they lose their liability
 A limited partner has no power to bind the firm to contracts i.e. unlike the
unlimited partners, they are not an agent
- Limited partners may not generally withdraw their capital during the lifetime of the firm
- Limited partners cannot bind the partnership in a contract with a third party without losing
the benefit of limited liability

Limited Liability Partnerships Act 2000

- This is a cooperative body which has separate legal personally from its members and
therefore some of the advantages and disadvantages of a company
- They have a legal identity and unlimited liability on debts, but the liability of the individual
partners (or members) is limited to the amount of their capital contribution
- LLPs have similar requirements for governance and accountability as limited companies,
generally set up by firms of professionals such as accountants and lawyers.
- The main advantage of an LLP over traditional partnership is that LLP will be liable for its
own debts, rather than the partners. All contracts with third parties will be with the LLP
- Partners participate in management and day-to-day decision making while limiting their
personal liability for business debts and losses
- Firms of two or more persons are allowed to register on terms that the members have
limited liability for the firm’s debts and obligations
- The firm becomes a separate person from its members in the same way that a registered
company is a person separate from its shareholders

Formation of LLPs

- To be incorporated, the subscribers must send an incorporation document and a statement

of compliance to the Registrar of Companies
- The document must be signed and state the following:
 The name of the LLP
 The location of its registered office
 The address of the registered office
 The name and address of all the members of the LLP
 Which of the members are to be designated members.
- However, members will share profits in the manner of conventional partnerships rather than
by the payment of share dividends typical of companies

Incorporation of LLPs
 - The first members of the LLP, or their professional agents, must register incorporation with
the Registrar of Companies showing:
 The signatures of two or more persons “associated for the purposes of
carrying on lawful business with a view of profit”
 The name of the LLP, ending with the words “limited liability partnership”
or the abbreviation LLP
 The location of the LLP’s registered office in England
 The precise address of the Registered Office in the appropriate country
 The name and address of the first members, and a statement as to
whether they will be designated to take responsibility for the firm’s
compliance with administrative requirements
 A statement of compliance signed by members or by a solicitor

Membership of LLPs

a) Number and types of members.

- They may have a minimum of 2 members, who may be human or corporate individuals
- If the number of members fails to below 2 for more than 6 months, the sole member
becomes personally liable with the LLP for debts incurred during the period of sole
membership
- There is no upper limit on the number of members
- Designated members have the same rights and duties towards the limited liability
partnership as any other member
- However, the law also places extra responsibilities on designated members who are
responsible for:
 Appointing an auditor
 Signing the accounts on behalf of the members
 Delivering the accounts to the registrar
 Notifying the registrar of any membership changes or change to the
Registered Office address or name of the LLP
 Preparing, signing and delivering to the registrar an annual confirmation
statement
 Acting on behalf of the limited liability partnership if it is wound up and
dissolved

b) Relationship between members and LLP

– Every member is an agent of the firm whose acts within actual or implied authority
bind the LLP: unless the member concerned has no authority to carry out that
particular transaction and the third party know that to be the case or does not know
or believe the member to be one
– The LLP is liable to the same extent as the member for any wrongful acts or
omission within the context of the LLP’s activities

c) Relationship between members

- The Limited Liability Partnership Act (LLPA) provides that the internal rights and obligations
of members shall be governed by their own agreement

d) Relationship between members and outsiders

 - A member’s liability is limited to the amount of capital introduced to LLP. Generally, a
member may be liable in respect of:
 Wrongful acts or omissions
 Fraud, misfeasance, wrongful trading or other matters under the
Insolvency Act
- The court can also disqualify LLP members who are guilty of misconduct from being officers
of companies or members of LLPs

Publicity

- The LLP must have an official registered office. Like a company, the firm will be obliged:
 Prepare and file annual accounts and returns. There is no corresponding
obligation for unlimited partnership
 Provide the registrar with details of members’ names and addresses and
the address of the registered office
 State its name, in legible lettering, on the following:
 All the limited liability partnership’s business letters
 All its notices and other official publications
 All bills of exchange, promissory notes, endorsements, cheques
and orders for money or goods purporting to be signed by, or on
behalf of, the limited liability partnership
 All its bills of parcels, invoices, receipts and letters of credit
 Show on all its business letters and order forms, in legible lettering:
 It’s a place of registration and registration number
 The fact that it’s a limited liability partnership
 The address of its Registered Office

General
Requirement Limited Partnership Limited Liability Pa
partnership

Full participation in Limited partners may

running the Yes not participate in Yes
business running the business
Minimal legal Formal constitution Formal constitution m
formality must be filed with the filed with the Registra
Yes Registrar of Companies Companies and statut
formalities apply like
limited companies
A capital Partners are fully
investment with no personally liable for
involvement in day- business debts and Yes Yes
to-day running of obligations
the business
Protection of Partners are fully Limited partners may Yes
private assets personally liable for not participate in
combined with business debts and running the business
participation in obligations
day-to-day
 business of the firm
Minimal publicity Yes, but all Formal registration with Significantly publicity
partners' names registrar, and requirements, similar
must appear on disclosure of names as of limited companies
business for general partnerships accounts, identifies of
documents, and at e.t.c)
business premises

TOPIC 9: Corporations and Legal Personality

- There are 2 principal forms of business organizations in the UK:

1) Unincorporated businesses (e.g. sole traders and ordinary partnerships)
2) Corporate bodies (e.g. companies and LLPs)

1) Unincorporated businesses
a) Sole traders
- A sole trader owns and runs a business.
- They contribute capital to starting the enterprise, run it with or without employees and earn
profits or stand losses of the venture
- They are mainly found in retail trades, small-scale service industries and small manufacturing
and craft industries.

Advantages of being a sole trader

- No formal procedures needed to set up in business

- No need to consult anybody about business decisions
- The business’ accounts are kept private
- All the profits of the business accrue to the sole trader
- Personal supervision of the business by the sole trader should ensure its effective operation
- Personal contact with customers may enhance commercial flexibility

Disadvantages of being a sole trader

- Personal liability for the business’ debts puts their own house and savings at risk
- Profits or owner capital needed to finance the business (although loans or overdrafts may
be available)
- High dependance on the individual may mean long working hours and difficulties during
sickness or holidays
- Death of the sole trader may make it necessary for their family to sell the business to pay
any liabilities
- The individual may have limited business skills so may not be able to market the business
effectively or to maintain suitable accounting records
- Lack of economies of scale die to size of the operation and available finances

b) Unlimited Liability Partnership (Standard partnership)

 - A partnership is a relationship between 2 or more persons carrying on a business in common
with a view to making a profit
- Like a sole trader, the non-business assets and income of an unlimited partner may have to
be used to pay the debts of the partnership business, and the partner’s share of the business
may be claimed by the partner’s personal creditors
- If there is a change in the composition of the partnership, debts and ownership of assets
must be formally reviewed and revised

2) Corporate bodies
- A corporation is the legal personification in its own right of:
 A public position (a corporation sole)
 An association of individuals (a corporation aggregate)
 A registered company or an LLP
- A corporation exists in the eye of the law independently of the people or other corporations
who own, represent or control it at any one time
- This means that the owners and managers can arrange the business so that their personal
assets are protected from claims by the corporation’s creditors
- Corporations may be created in the following ways:
 By Royal Charter
 This is the oldest method of incorporation
 Today this method is generally used to set up and add status to
charitable ventures and professional bodies
 By Private Act of Parliament
 These ventures are known as “statutory corporations”
 They are created by specific legislation tailored to the individual
corporation
 Registration under statutory authority
 This is a form of corporation aggregate
 It is created by registration under the CA006

Types of companies

- Once the company has received this payment, the shareholder, and anyone to whom the
shares are later transferred, has no further liability to the company.
- They are known as limited companies:
a) Public limited companies (plc)
b) Private companies (Ltd)

a) Public limited companies

- These are companies that are permitted to make shares available to the public at large, by
advertising new issues by prospectus, and having their shares dealt on the public market
- They are equivalent in status to the continental open joint stock company
- To trade, must have allotted shares of at least £50,000 of which at least a quarter of the
nominal value should be paid
- Must obtain trading certificate from the Registrar before commencing trading
 - Must have at least one qualified secretary and a minimum of 2 directors

b) Private companies
- Private companies may be limited by guarantee rather than by shares, so that the members
undertake to pay a fixed amount in the event of a winding-up to help meets debts
- A company limited by guarantees has no share capital, instead the members undertake to
pay a specific minimum sum in the event that the company is liquidated
- The sum guaranteed is usually of very small value.
- Community Interest Company (CIC) is a relatively new company form created by the
Companies Act 2004
 This is a special form of company for use by ‘social’ enterprises
pursuing purposes that are beneficial to the community, rather
than to maximize profit for the benefit of the owners
- A CIC has to confirm that its purpose is related to community interests. This can be broad,
ranging from local healthcare to environmental protection and the arts
- CICs are subjects to an “asset lock” which means that assets must be used for the prescribed
purpose and profits cannot be distributed

Unlimited liability companies

- An unlimited company can only be a private company while a public company is always a
limited one
- An unlimited company need not file a copy of its annual accounts and reports with the
Registrar, unless during the relevant accounting reference period:
 It’s a subsidiary of a limited company
 2 or more limited companies have exercised rights over the company,
which would have made the company a subsidiary of that one company
 It is the parent company of a limited liability company

Private company Public company

Minimum Minimum 1 member Minimum 1 member
membership

Directors At least 1 director At least 2 directors

Minimum share No minimum issued share Minimum 50,000 issued share
capital capital capital
Raising Capital Cannot offer shares or May offer shares or debentures
debentures to the public to the public
Pre-emption Shares must generally be
rights offered to existing members Shares must generally be
first, but this rule may be offered to existing members
permanently disapplied first
Dealing in shares Cannot be listed on a stock Can be listed (though not all
exchange public companies are listed)
Accounts- filing 9 months from the end of an 6 months from the end of
deadline accounting period accounting period
Accounting May qualify for partial No exemptions available (for
exemptions exemptions (based on size) subsidiaries)
Publication of No requirement to publish Listed companies must publish
accounts accounts on a website full accounts and reports
Laying accounts No requirement to hold AGM Must lay accounts and reports
before members annually meeting annually
Can commence business
Commencement immediately on Must first obtain a trading
of business incorporation certificate
Trading certificate Not required Confirmation of minimum
requirements capital, preliminary expenses,
(SH50) promoter benefits and
statement of compliance
Annual General Not required Must hold AGM within 6 months
Meetings of financial year
Ends with "public limited" or
Name ending Ends with "Limited" or "Ltd" "plc"

TOPIC 10: Company formation