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ATP 108: COMMERCIAL TRANSACTIONS NOTES –

PART 2

NOTES CONTINUED FROM PART 1

CHAPTER7: DEBT CAPITAL

· It may be the case that a companycan acquire all the capitalit needs throughthe
selling of shares

· However, in many companies, this will not be the case and the company will
need to obtain additional capital by borrowing it from others

· Such capital is known as ‘debt capital’ or ‘loan capital’and can be obtained in

several ways,e.g. using an overdraft facility,obtaining a loan from the bank, or
mortgaging the property of the company
1. DEBENTURES

· A debenture isadocument by which a companycreates or acknowledged a debt,

whethersecured or unsecured à Section 3, CA 2015: a debenture is defined, in
relation to a company, as including debenture stock and other securities of a
company (whether or not constituting a charge on the assets of the company)

· Companies can raise significant amounts of debt capital using debenture stocks
– these are similar to shares, except that the holder of a debenture stock is a creditor
and not a member, and is therefore entitled to interest on the loan (the debenture)
but will not receive a dividend

· A secured loan is one where the loan agreement provides the lenderwith a claim
over the company’s assets,so that if the

company defaults on the loan, the lender can seize the relevantassets and sell them in
order to satisfy the debt owed

· A further benefit of secured loans is that, in the event of the company being
liquidated, secured creditors have the right to be paid before the unsecured
creditors. Given that insolvent companies will have limited assets, this is an
extremely important advantage

1.1 DEFINING A DEBENTURE

CASE

HOLDING
Levy v Abercorris Slate and Slab

Co [1887]

‘Debenture’ is not a term of art, but has been defined to mean simply any document

that creates or acknowledges a debt

Lemon v Austin Friars

Investment Trust Limited [1926]

It is impossible to give an exhaustive definition of a debenture, but an

acknowledgement

of indebtedness is its primary feature

Fons Hf v Corporal Limited &

Another [2014]

Debentures have the ‘ordinary meaning of an acknowledgement of debt recorded in

a

written document’ à the word ‘debenture’ has origins in the Latin word for ‘owing’

1.2 DEBENTURE AS A SECURITY DOCUMENT

· In practice, a finance lawyeris most likelyto associate the term ‘debenture’ with
a documentthat:
o Is executed in favour of a creditor;

o Includes a covenantto pay the creditor; and

o Grants security over the whole or substantially the whole of a company’sassets

· Because a debenture in a literal sense is merely an instrument evidencing

corporate indebtedness, and might itself be unsecured or irredeemable, many
leading textbooks choose to avoid the term altogether, preferring to use the terms
‘mortgage’ or ‘charge’ when referring to instruments that create securityinterests

· Typically, a debenture as a securitydocument creates:

o A fixed chargeover the assetsof the company which are not disposedof in the
ordinary courseof business;

o A floating charge over the rest of the company’sundertaking; and

o It may also take an assignment by way of security over choses in action and
mortgages over specific assets such as real estate or shares

· Adebenture of this nature grants the creditorrights as mortgageeor chargee, e.g.

the authorityto appoint an administrator or administrative receiver with wide
powers to run the company’s business and realise its assets in the event of defaulton
the debenture repayment

2. CHARGES

· Any form of securitywhere possession of property is not transferred will be

classified as a charge
· The creditor who obtained the charge is called the ‘chargee’ and the borrower
who granted the charge is known as the ‘chargor’ or ‘surety’

2.1 FIXED CHARGE

· The simplestform of charge is the fixed charge,so called becauseit is taken over a
fixed, identifiable asset of the company,

e.g. a building, a vehicle, or a pieceof machinery

· Should the debtor company default on the loan, the creditor can look to the
charged asset to satisfy the debt, usually by selling it and recovering the proceeds of
sale

· The most straightforward and common example of a fixed charge is a mortgage

à the debtor company (the mortgagor) will borrow capital from the creditor (the
mortgagee) and the loan will be secured on a fixed asset of the company (e.g. a
building). Should the companydefault on the loan, the creditor can obtain
possession of the mortgagedasset and sell it

· Unless the charge contract provides otherwise, a company can grant

multiplefixed charges over a specificasset, with prior charges having priority over
subsequent ones (unless the terms of the prior charges provide that subsequent
charges can be made that take priority)

· Fixed charges are advantageous for creditors because:

o They allow the creditor to take security over a fixed, identifiable asset and ensure
that the creditor ranks ahead of all other creditors in the event of the company
being liquidated; and

o It limits the debtor’s abilityto deal with the chargedasset (however, this created
inflexibility for the debtor)

2.2 FLOATING CHARGE

· A more flexible form of chargeto the fixed charge was required, leadingto the
creation of the floating charge

· There is no legal definition of what amountsto a floating charge, but in Re

Yorkshire Woolcombers’ Association Ltd [1903],three defining factors were
identified:

o The charge will be taken over a class of assets (e.g. machinery, raw materials, or
even the entire undertaking), as opposed to a specific asset;

o The class of assets chargedis normally constantly changing (e.g. raw materials
will be used and replenished); and

o Floating charges leave the companyfree to use and deal with those assets

· This charge ‘floats’ over the chargedassets, but is not fixed on them, so the
company is free to use and dispose of those

assets

· The company can even grant fixedcharges on the assets over which the charge
floats,which may (depending on the terms of the floating charge) rank ahead of the
floating charge (Wheatley v Silkstoneand Haigh Moor Coal Co [1885])

· However, the company cannot create a subsequent floating charge over the
exact same class of assets as a prior floating charge, unless the first chargee agrees.
The company can, however, create subsequent floating charges over part of the
assets charged by a prior floating charge and the general rule is that later charges
rank behind earlier ones (although the terms of the first charge may
provideotherwise)

· Upon the occurrence of certain events, the charge will cease to float and will
become affixed to the charged assets, whereupon the company’sability to deal with
the charged assets will be limited (‘crystallization’). Certainevents will always cause a
charge to crystallize, including:

o The company going into liquidation;

o The appointment of a receiver; and

o Anevent that a clause in the securitycontract specifies as causing

automaticcrystallisation (‘automatic crystallisation clause’)

FIXED CHARGE

FLOATING CHARGE

Legal or equitable?

Can be legal or equitable

Can be equitable only

Subject matter of charge

Usually taken over specific, identifiable assets

Usually taken over a class of assets or the

entire undertaking

Effect on the charged

asset(s)?

The ability of the chargor to deal with the

charged asset will usually be limited

The chargor will usually be free to deal with the

charged assets

Better suited for which

areas?

Better suited for assets that the company does

not need to deal with or dispose of

Suitable for all types of assets

Priority?
Ranks ahead of all other debts

Ranks behind fixed charge holders, liquidation

expenses and preferential creditors

Reliant on liquidator?

Not reliant on the liquidator – Fixed charge holders can obtain the charged asset
and sell it

to satisfy the debt owed

Floating charge holders are reliant on the liquidator to obtain satisfaction of their
debt

Set aside by liquidator?

A liquidator has no power to set aside a fixed

charge

A liquidator has the power to set aside certain

floating charges

2.3 DETERMINING THE CLASSOF A CHARGE

· Identifying whether a particular charge is fixed or floating is not always
straightforward and a charge holder may use this ambiguity to his advantage (e.g. by
creating a charge with the characteristics of a floating charge, but later arguing that
i t is in fact a fixed charge in order to gain priority upon liquidation)

· Accordingly, the approach the courts use in determining whether a chargeis

fixed or floatingis of crucial importance

CASE

HOLDING

Agnew v Commissioner for Inland Revenue [2001]

The process for determining the classification of a charge is two-fold:

(i) The court will look at the charge instrument in order to determine the
rights and obligations that the parties intended to grant each other – it is not the
task of the court to determine what type of charge the parties intended to create

(ii) The courts will use these rights and obligations to determine, as a matter
of law, whether the charge was fixed or floating

Street v Mountford [1985]

Since the courts are not concerned with the type of charge that the parties intended
to

create, it follows that the courts will not regard the parties’ own classification of the
charge as conclusive
Russel Cooke Trust Co. Ltd v Elliott [2007]

The courts will contradict the parties classification of the charge if the rights and
obligations imposed by the charge are not consistent with the label that the parties
have attached to it à in this case, the High Court held that what was described in
the charge

instrument as a floating charge was actually a fixed charge

Re Spectrum Plus Limited [2005]

A company obtained an overdraft facility from a bank, with the bank taking what
was purported to be a fixed charge over the company’s book debts as security. The
charge required that the company could not sell, charge, or assign the book debts
without the bank’s consent, and that the proceeds of the book debts were to be paid
into the bank account that the company held with the bank. The company was,
however, free to draw upon the account, providing that the overdraft facility was
not exceeded. The company entered liquidation and, in order to determine the
priority of the company’s creditors, the court had to determine whether the charge
was fixed or floating

Held: The House held that the charge was a floating charge. Lord Scott stated that
the key feature of a floating charge was that it grants the chargor (the company) the
right to use the charged asset, including removing it from the scope of the charge.
As the company could draw from the bank account, the rights granted to the
chargor indicated

strongly that the charge was a floating charge

2.4 REGISTRATION
· For obvious reasons, prior to providing a company with capital,a potential
creditorwill want to know of any charges over

the company’s assets

· Accordingly, successive Companies Acts have long providedfor a system of

registration of charges

CHAPTER8: PARTNERSHIPS

· Kenyan law recognises 3 forms of partnerships: generalpartnerships; limited

partnerships (LP); and limitedliability partnerships (LLP)

· Section 3, Partnership Act 2012 (‘PA 2012’) defines partnership as the relation
which exists between persons carrying on a business in commonwith a view to
profit

· General Partnerships are governedby the PA 2012:

o Many general partnerships (or ordinary partnerships, as they are

sometimesknown) arise withoutthe knowledge of the persons involved; it is a
matter of fact whether a general partnership exists and the parties cannot simply
determinethis for themselves

o Normally, the general partnership relationship is governed by a contractual

document/agreement, but the essence of a partnership is the continuing
relationship, personal as well as commercial, with the contractual agreementbeing
only an indication of the relationship (Hurst v Byrk [2001])
o When the courts have to consider whether a general partnership exists, they look
at the substance of the arrangements and notthe stated intentions of the parties

o One advantage of a general partnership over LPs and LLPs is that they are simple
and cheap to set up; no formal agreementis necessary as the terms of the PA 2012
will apply in default of agreement

o Nevertheless, it is advisable for the partners to formalise arrangements by

entering into a private partnership agreement

· Kenyan Limited Partnerships are also registered under the PA 2012:

o Section 2, PA 2012: a LP must be formed between two or more persons and

carry on a business in common with a view of profit

o In form, an LP broadlyresembles a generalpartnership, except that an LP has two

categories of partner:

i. General partners – they have the responsibility for managing the LP’s
business and have unlimited liability for the firm’s debts and obligations; and

ii. Limited partners – who invest capital in the LP, but do not take an active
role in the LP’s operation and

have limited liability up to the amount of capital that they have contributed

o LPs are governedby a relatively light regulatory and statutory regimeas compared
to companies

o This flexibility afforded to LPs means that they may vary in size and nature from
two-person LPs to largerLPs with more complex structures (they are often used as
vehiclesfor venture capitalfunds)
· Limited Liability Partnerships are incorporated under the Limited Liability
Partnerships Act 2011 (‘LLPA 2011’)

o An LLP is a body corporate with a legal personality separatefrom that of its

members

o The limited liability status of LLP membersmakes an LLP a popular choicefor

many professional partnerships

o However, in return for such limit on liability, the accounts of the LLP are public
and there is the administrative and cost burden of regularly filing returns and forms
with theRegistrar of Companies

FEATURE

GENERAL PARTNERSHIP

LIMITED PARTNERSHIP

LIMITED LIABILITY

PARTNERSHIP

PARTIES

Partners

General Partners: responsible for managing the LPs business and have unlimited
liability for the firm’s debts and obligations
Limited partners: who invest capital in the LP, but do not take an active role in the
LPs operation, and have limited lability up to the amount of

capital they have contributed

Members à

An LLP must have at least two designated members who have

particular administrative responsibilities and function within the
LLP

GOVERNING LEGISLATION

Partnership Act 2012

Limited Liability Partnership Act 2011 à

Partnership law applies to an LLP except as specifically provided in

the LLPA 2011

SEPARATE LEGAL PERSONALITY

No – E.g. when a general partnership or legal partnership owns a building, then the
building is owned by the partners and held in trust for the partnership (i.e. the title
deed will have the name of the partners)

Yes à An LLP is a body corporate and a legal entity separate from its members (S. 6,
LLPA 2011).

It has unlimited capacity and can do anything that a legal person

can do (S. 6(3), LLPA 2011)

FORMATION

No registration required à

Yes, registration is required à

Yes à

FORMALITIES

A general partnership can come

An LP must be registered at the

An LLP is incorporated by filing an

AND

into existence without formalities.

Registrar of Companies by filing an

electronic application through e-

REGISTRATION

It is a question of fact whether or

application for registration of a

Citizen for the incorporation of an

not a general partnership exists.

limited partnership (S. 68 – 70 PA

LLP and paying the required fee to

2012). The LP comes into existence

the Registrar of Companies.

on the date of the Certificate of

The LLP is created when the

Registration

Registrar of companies issues a

Certificate of Incorporation

LIMITED

No à

Yes à

Yes à

LIABILITY FOR

Partners are jointly liable for debts

For limited partners only.

The LLP members act as agents of

PARTNERS/

and obligations of the general

A limited partner’s liability is limited

the LLP and, in general, are only

MEMBERS

partnership business (S. 7, PA

to the amount of their agreed

liable up to the amount they have

2012).

contribution. Limited partners are

contributed to the LLP.

Partners are also jointly and

not liable for debts or obligations in

However, there are some

severally liable for the wrongful

excess of this amount, provided

exceptions – S. 10, LLPA 2011.

acts or omissions of their fellow

they do not take part in the

partners in the ordinary course of

management of the LP (S. 4(2)(b),

the partnership business or with

PA 2012).

the authority of other partners (S.

General partners have unlimited

21, PA 2012).

liability (S. 4(2)(a), PA 2012).

MINIMUM AND MAXIMUM NUMBER OF PARTNERS/

MEMBERS

Minimum number: 2

No upper limited.

Minimum number: 1 general partner and 1 limited

partner

No upper limit.

Minimum number: 2 members, who must be designates members

No upper limit.
Partners can be companies.

Partners can be companies

Members can be companies

FILING REQUIREMENTS

None

Certain changes to the LP and the partners, their liability and the sums contributed
have to be registered

Annual accounts, confirmation statement, changes to members details and status,

changes to registered office and place of inspection of records, details of mortgages
and charges, all have

to be registered

ACCOUNTING REQUIREMENTS

No formal requirements other than S. 16 PA, 2012 – ‘Accounting and Partnership

Records’
(1) Every partner shall have the responsibility to ensure that –

a. Accounting records of transactions affecting the partnership in which he is

involved are properly kept; and

b. The record are, on request, made available to the partnership or to any partner.

Section 29, LLPA 2011:

LLPS must lodge annual declarations of solvency or insolvency with the Registrar.

(1) A limited liability partnership shall lodge with the Registrar a declaration by
one of its managers that in the opinion

(2) Any partner shall have the duty to cooperate with the person keeping records of
the partnership or drawing up the accounts of the partnership on behalf of the
partnership

of the manager, the partnership either –

a. Appears, as at that date, to be solvent; or

b. Does not appear, as at that date, to be solvent

(2) The declaration shall be lodged not later than fifteen months after the
registration of the LLP and subsequently once every calendar year at intervals of not
more than 15 months

Section 30, LLPA 2011:

Limited Liability partnerships are to keep proper accounting records.

(1) An LLP shall keep such accounting and other records as will –

a. Sufficiently explain the transactions and the financial position of the

partnership; and

b. Enable a profit and loss account and a balance sheet to be prepared, from time
to time that gives a true and fair view of the state of affairs of the partnership

INTERNAL REGULATION

Governed by private partnership agreement with default rules in PA 2012 applying

in absence of a specific agreement.

There are no constitutional documents.

Governed by private LLP agreement with default rules in LLPA 2011 applying in
absence of specific agreement.
No constitutional documents.

DUTY OF GOOD FAITH BETWEEN

MEMBERS

Yes

No à Unless provided for in the LLP agreement

EXECUTION OF DOCUMENTS

SIMPLE CONTRACTS

A partnership has no legal personality and contracts with third parties through one
or more of its partners, or other duly authorised agent. The formalities for
executing a written contract that is intended to bind a

partnership depend on the legal

A limited partnership has no legal personality and so will usually contract with
third parties through its general partner(s). each general partner’s capacity to
contract depends on the nature of its own legal personality.

A simple contract with an LLP can be made in either of the following ways:

i. By the LLP itself, in writing and under its common seal (S. 7(2) LLPA 2011); or
personality of the person executing the contract for the partnership.

ii. On behalf of the LLP by anu person acting under its authority, whether express
or implied (S. 43(1)(b), CA 2006, as modified)

DEEDS

An individual partner does not have authority to execute a deed on behalf of a

partnership unless he or she has been expressly authorised to do so by a deed
(Berkeley v Hardy [1826]).

Deeds should be executed by all the parties in a partnership unless one partner has
been given the requisite authority by deed, e.g. through a power of attorney, to
execute the deed on behalf of all the partners.

Where a deed is executed by a partner on behalf of the partnership:

· The form of execution will depend on the legal personality of the executing
partner;
· The instrument should make it clear that: the deed is made in the firm’s name;
the obligations in the deed are undertaken by the partner’s as a whole (not just the
executing partner); and, the person executing the deed does do as an agent of the
firm (S. 20, PA 2012)

The general partner must be given express authority, conferred by deed, to execute
the proposed deed on the LP’s behalf.

Where a deed is executed by a general partner on behalf of a Limited Partnership:

· The form of execution will depend on the legal personality of the executing
partner;

· The instrument should make it clear that: the deed is made in the firm’s name;
the obligations in the deed are undertaken by the partner’s as a whole (not just the
executing partner); and, the person executing the deed does do as an agent of the
firm (S. 20, PA 2012)

An LLP may execute a deed by:

· Affixing the LLP’s common

seal (if it has one);

· Signature on behalf of the LLP, either: two members of the LLP, or, a single
member of the LLP in the presence of a witness who attests the member’s signature
Whether the member executing a document on an LLP’s behalf is itself a body
corporate, it must act through the agency of a duly authorised natural person (CA
2015).

HOLDING ASSETS

A general partnership does not have a separate legal personality so it cannot own
assets in its own name.

Assets are normally held in the name of individual partners who hold the assets as
trustees for the partnership.

An LP does not have separate legal personality so it cannot hold assets in its own
name.

Assets are usually held either:

· On trust by one or more nominee (often the general partners); or

· By all the partners

An LLP can hold assets in its own name.

TAX
TRANSPARENCY

Yes

CESSATION OF PARTNERSHIP

Dissolution of an LP occurs when the partnership relationship terminates.

Dissolution can be brought about by:

i. Expiration of a fixed term or the end of the venture for which the LP was
established;

ii. Illegality;

iii. Any limited or general partner may make an application to the court for
dissolution of the LP on grounds of: another partner’s permanent incapacity;
conduct by a partner calculated to prejudice the carrying on of the business;
deliberate or persistent breach of the LP agreement by a partner; the partnership
business only being carried on at a loss; or a dissolution being ‘just and equitable’.

BUT: the death or bankruptcy of a limited partner and the mental disorder of a
limited partner, unless their share cannot otherwise be ascertained and realised, are
not grounds for

dissolution of an LP by the court.

Positive steps must be taken to terminate an LLP. It will not dissolve automatically.
The routes to termination are:

i. Striking off by the Registrar

ii. Winding up (voluntarily or compulsorily)

CHAPTER9: COMMON LAW OF AGENCY

1. WHAT IS THE COMMON LAW OF AGENCY?

· The words ‘agent’ and ‘agency’ are often used in business, and even by courts,
to refer to relationships which fall short of the classiccommon law definition of the
agency relationship

· In the broadest sense of the word, the common law of agency determines who
(if anyone) is acting on behalf of whom, with what authority, and for how long,
when three or more persons or groups of persons become involved in dealings with
each other

· When examining dealings among three or more persons, it can be difficult to

work out which person is acting on its own behalf (i.e. the principal) and which
person is actingon behalf of another (i.e. the agent), e.g.:

o Where there is no written agreement, it may not be clearwhether an

intermediary is acting as a sales agent for a vendor,or purchasing agent for the
buyer;

o Sometimes, all the parties might be actingas principals (e.g. seller, resellerand
end-user purchaser)

· Common law of agency extends to any situation where it is agreed, expressly or

otherwise, that one person should do something on behalf of another

· Note: the authority granted to the agent may fall short of an authorisation to
enter into binding legal relations on behalf of the principal, and without prior
reference to the principal

1.1 ESSENTIAL FEATURES OF A COMMON LAW AGENCY

· An agent is a person with power to create, change or terminate the legal

relationsof another, i.e. the principal

· In the classic common law agency relationship, the agent has the power to bind
and give rights to its principal when dealing with another principal

· The relationship us usually (not always) established by consent, eitherexpress or

implied

· Once the two principals are in a legal relationship with each other,the agent
dropsout of the transaction, with no furtherrights or dutiesconcerning the
transaction itself but with residual rightsagainst its principalarising out of the
transaction

CASE
HOLDING

Garnac Grain Co. Inc v HMF Faure and Fairclough Ltd [1968]

‘The relationship of principal and agent can only be established by the consent of
the principal and the agent. They will be held to have consented if they had agreed
to what amounts in law to such a relationship, even if they do not recognise it
themselves and even if they have professed to disclaim it … But the consent must
have been given by

each of them, either expressly or by implication from the words and conduct’

Phonogram Limited v Jane

[1982]

‘The general principle is, of course, that a person who makes a contract ostensibly as
an

agent cannot afterwards sue or be sued upon it’

1.2 RELATIONSHIP BETWEEN LAW OF CONTRACT AND COMMON

LAW OF AGENCY

· Agency relationships are most often created under the law of contract, but the
relationship between principal and agent need not be contractual à anagent can act
gratuitously, without any compensation or reward

· Agency relationships have many implied rights and duties which will not be
implied undera purely contractual relationship
CASE

HOLDING

Yahuda Fire & Marine Insurance v Orion Marine Insurance Underwriting

Agency Limited [1995]

‘Although in modern commercial transactions agencies are most invariably founded

upon a contract between principal and agent, there is no necessity for such a
contract to exist. It is sufficient if there is consent by the principal to the exercise by
the agent of authority and

consent by the agent to his exercising such authority on behalf of the principal’

1.3 LIMITED AGENTS

· A ‘full common law agent’is an intermediary with the authority to change the
legal positionof its principal

· A‘limited agent’ refers to an intermediary that has been granted a limited

authorityto represent the principal, withoutany authority to change the legal
position of the principal

· Examples of roles which may not give rise to a full common law of agency:

(i) Company director: usuallya full common law agent of the company
(ii) Company employee: may be a full common law agent of the company,
depending on the seniority, job title, how she/he is held out by the company, etc.
(while otheremployees may be limitedagents only)

(iii) Estate agent:not a full common law agent of the seller,because he/she does
not have power to enter into legally bindingcommitments on behalfof the principal
(though he/shemay sometimes owe fiduciary duties)

(iv) Recruitment agent:not a full common law agent of the candidate, but
merely has the task of bringingthe employer and prospective employee together

(v) Auction house: usually a full common law agent for the seller and, if
necessary, the buyer (Phiips v Butler [1945])

2. ADVANTAGES, DISADVANTAGES AND RISKS OF AGENCY

ADVANTAGES OF APPOINTING AN AGENT

DISADVANTAGES OF APPOINTING AN AGENT

LAW COST BUSINESS EXPANSION: an agent allows the principal to expand its
business without making a significant further

investment

LOSS OF CONTROL: the principal surrenders a measure of control when he/she

appoints an agent for any task
FOREIGN EXPERTISE: appointing a cross-border agent may allow the principal
to tap into experience and expertise to operate its business in a foreign territory, e.g.
some local laws may forbid the conducting of business in their territory without

involvement of a local national (e.g. the UAE)

REDUCED REVENUE: in the case of a business agency, the principal will usually
be obliged to give the agent some of its margin. Generally, a principal will need to
reimburse the agent in one way or another

ANONYMITY: the agency arrangements may be of a type that

allows the principal to remain anonymous

GROUP RELATIONSHIP: it is a convenient way of bringing group members into

a contractual relationship – where one member

of a corporate group can contract on behalf of others

INCAPACITY: e.g. where the principal is indisposed, the agent

can deal with his or her affairs

ADVANTAGES OF ACTING AS AN AGENT

DISADVANTAGES OF ACTING AS AN AGENT

REMUNERATION: the agent will usually be compensated in one way or another

for acting as an agent, and this may be protected for a certain period under the
Commercial Agents Regulations

Apart from the risks inherent in any business, there are few disadvantages in acting
as an agent, since the central concept of common law agency is that the agent drops
out of the chain of liability once a contractual relationship is secured between

two principals.

LOWER START UP COSTS AND REDUCED RISK: the agent of a

business can benefit from the success of a business that is already well established

RISKS FOR THE PRINCIPAL

RISKS FOR THE AGENT

UNAUTHORISED ACTS: the agent might act beyond the scope of its actual
authority, but not beyond the scope of its apparent authority, so that the principal
is saddled with unexpected

liability

LIABILITY ON THE PRINCIPAL’S TRANSACTION: the agent might

become liable on a transaction, instead of, or in addition to, the principal, e.g. by
accidentally exceeding its authority

CIVIL OR CRIMINAL LIABILITY: following from the above, the agent might
make the principal civilly or criminally liable. A principal is liable for the torts of its
agent in accordance with

the normal principles of vicarious liability

BREACH OF WARRANTY OF AUTHORITY: there is danger of an action for

breach of warranty of authority if the agent misrepresents its authority

BRIBERY: the agent might make corrupt payments and contribute to criminal
liability on the part of the principal under the Bribery Act 2016 if the principal has
failed to implement

procedures to reduce the risk of bribery

3. CREATION OF AGENCY

Express

Appointment
Implied Appointment (Conduct)

Appointment

by Necessity

Appointment by Ratification

3.1 EXPRESS APPOINTMENT

· An agency is often created by express appointment, which may or may not be

accompanied by a contract à oral agency appointments are also possible

· The grant of authoritymay be formal, e.g. by way of aPower of Attorney, or

informal, e.g. by letteror email
o The instrument creatinga Power of Attorney must be executedas a deed by the
donorof the power

o The Power of Attorney has effect on its own, withoutthe need of a

contractsupported by consideration

· There are some statutory provisions that apply to the appointment of an

agentfor certain transactions:

o Actual disposition of interest in land: interests in land may be created or

disposedof by an agent, and dispositions of equitable interests may be effectedby an
agent, but only if that agent has been authorised in writing to do so

o Contracts for the sale or other disposition of an interestin land

o Delegation of trustee powers: as a general rule of trust law, trustee – having

voluntarily agreed to act as such – cannot delegate the exercise of their powers and
duties. However, the instrument establishing the trust may specifically authorise
delegation

· Authority to execute adeed must be conferred by a deed – usuallya Power of

Attorney (Powell v London &Provincial Bank [1893])

· Aformal Power of Attorney is not necessary in most commercial transactions to

enable the agent to commit the principal, however,to indicate agency the agent will
sign contracts “for and on behalfof [the principal]”

· A formal Power of Attorney, however, might prove to be aconvenient

document to show third parties so as not to disclosethe commercial arrangements
between principal and agent – such a structure might be particularly useful for
cross-border situations where local laws or procurement practices require translates
and notarised confirmations of authority to be lodgedwith government agencies
3.2 IMPLIED APPOINTMENT [CONDUCT]

· An agency can come into being through the conduct of the parties, e.g. a
principalmight recognise or acquiesce in the acts of another, and those acts might
be consistent with the principal/agent relationship (Targe Towing Limited v Marine
Blast Limited [2004])

· To determine whether there is an impliedagency, the behaviourof the parties is

assessed objectively

o The conferring authority does not have to be proved by direct evidence– even
circumstantial evidence will suffice

o Circumstantial evidencecan include things said by the agent to the other party
(Monde Petroleum SA v Wrsternzagros Limited [2016])

· In general,implied agency may be summarised as:

o Where an agent alleges to have been authorised, the question is whether or not
the agent is reasonable in forming the impression that it has been authorised by the
principal to do whatever it did

o Where an agent allegesnot to have been authorised, the consent of the agent may
be inferred from the fact that it acted on behalf of a principal

o Note: the mere fact that an agent did what was requestedby the principal does
not mean that it did so on the

principal’s behalf
3.3 APPOINTMENT ON THE BASIS OF NECESSITY

· In certain cases, the law may treat an agent as ‘an agent of necessity’ – i.e. to do
something which the agent would not otherwise have authority to do on behalf of
its principal, where there is already an agency relationship, or even where there is no
pre-existing agency relationship at all

· This agencyof necessity ordinarily arises in the following situation:

(i) The principal’s propertyis at risk;

(ii) The agent needs to take urgent actionto save it;

(iii) The agent is unable to obtain expressauthority from the principal in time
to take the necessary remedialaction

· Examples of an agentof necessity includethe following:

o The master of a ship enters into a salvage agreement to save the principal’s cargo
(The Unique Mariner (No. 1) [1978])

o A warehouse is storing produce on behalf of a principal and realises that the

produce must be sold before it perishes à in China Pacific SA v Food Corp of India
[1982] , the House of Lords held that a gratuitous bailee who incurredreasonable
expenses in discharging his duty of care to preserve goodsfrom deterioration by
exposure to the elementswas entitled to reimbursement from his bailor

· Taking the second example,several possibilities arisedepending on the facts:

(i) The warehouse acts as an agent for the principal so as to commit the
principal to sell the produceto the purchaser, so that there is a contract between the
purchaser and the principal;
(ii) The warehouse sells the produce as principal, is liable itselfto the
purchaser for any breach of contract, and must accountto the principal for the
purchase price; or

(iii) The warehouse is entitled to compensation from the principal under the
law of restitution

3.4 APPOINTMENT BY RATIFICATION

· An act done by an intermediary on behalf of a disclosed principal, but without

authority, may be treated in law as the act of the principal is subsequently ratified or
adopted by that disclosedprincipal

· Ratification is defined as ‘the approval after the event of the assumption of an

authoritywhich did not exist at the time’

(Harrison & Crossfield Limited v Londonand North-Western Railway[1917])

· The lack of authoritymay arise because:

o No authorityof any kind was grantedin the first place, in which case ratification
operatesas an original appointment;

o An agent exceeded its actual authority,in which case ratification operatesas an

extension of authoritygranted under pre-existing appointment

· Ratification has been referredto as a unilateral act of the will, and does not
depend on estoppel

· There is alsono need for the principal to communicate the fact of ratification to
the thirdparty
· Silence or inactivity may not be enough to constitute ratification, but may do
so if the inactivity results in a state of affairs which is inconsistent with treating the
transaction as unauthorised (Yona International Ltd v La Reunion)

3.4.1 WHEN IS RATIFICATION ADVANTAGEOUS?

· Ratification is useful when a principal wants to benefitfrom a contract entered

into by an intermediary, even though the intermediary was notoriginally authorised
to enter into that particular transaction or kind of transaction. E.g.:

o An insured individualmight want to take advantage of an insurancepolicy

covering a particular type of loss that it suffered, even though his agent had no
authority to obtain that kind of cover

o Or, a third party might want to argue that a principalhas ratified the contract
entered into by the agent, so that

the principal cannotuse the agent’slack of authority to be relieved of liability under

the contract

· Re Tredemannand Lederman Freres [1899]: the principalmay ratify the

transaction and benefit from the profit made by the agent, even if the agent
fraudulently entered into the transaction apparently in the name of its principal

3.4.2 LIMITATION OF THE RATIFICATINO DOCTRINE

· Ratification cannot take place if the approval of the unauthorised act of an

agent is by an undisclosed principal
· Only the party on whose behalfthe agent purportedto act can ratify the
contract (Jones v Hope [1880]), moreover, ratification is not effective where to
allow it would be unfairly prejudicial to the other party

CASE

HOLDING

Keighley, Maxted & Co. v Durant [1901]

An agent purchased wheat in its own name, intending it to be a joint purchase for
the benefit of another, but without authority, and so the subsequent approval of
the transaction by the other purchaser did not amount to ratification. As a result,
the supplier did not succeed in holding the initially undisclosed joint purchaser
liable for the failure of both purchasers to take

delivery of the wheat

3.4.3 EFFECT OF RATIFICATION

· Ratification is the retrospective creationof an enforceable contract betweenthe

principal and the third party

· As with any other agency agreement, the agent drops out of the transaction but
retains its right to be paid fees and expenses in accordance with the agreement
· The principal in these situations might be considered to have waived any claim
it might have had against the agent for exceeding its authority, but it might still have
a claim if it suffered additional loss as a result of the agent’s acting beyond the scope
of its authority

4. TYPES OF AUTHORITY AN AGENTCAN HAVE

4.1 EXPRESS ACTUAL AUTHORITY

· An agent is said to have actual authority when what it does is authorised by its
principal – whether expresslyor impliedly

· The agent is entitled to act in accordance with its own reasonable

interpretation of express authority which has been granted, and the principal will
be bound accordingly

CASE

HOLDING

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964]

‘An ‘actual’ authority is a legal relationship between principal and agent created by a
consensual agreement to which they alone are parties. Its scope is to be ascertained
by applying ordinary principles of construction of contracts, including any proper
implications from the express words used, the usages of the trade, or the course of
business between the parties. To this agreement the contractor is a stranger; he may
be totally ignorant of the existence of any authority on the part of the agent.
Nevertheless, if the agent does enter into a contract pursuant to the ‘actual’
authority, it does create contractual rights and liabilities

between the principal and the contractor’

4.2 IMPLIED ACTUAL AUTHORITY

· Actual authority may also be implied from the wordingof an express

appointment

CASE

HOLDING

Hely-Hutchinson v Brayhead [1968]

Lord Denning relief on freeman and Lockyer v Buckhurst Park Properties and then
went on to say the following:

‘An actual authority may be express or implied. It is express when it is given by

express words, such as when a board of directors pass a resolution which authorises
two of their number to sign cheques. It is implied when it is inferred form the
conduct of the parties and the circumstances of the case, such as when the board of
directors appoint one of their number to be managing director. They thereby
impliedly authorise him to do all such things as fall within the usual scope of that
office. Actual authority, express or implied, is binding as between the company and
the agent, and also as between the company and others, whether they are within
the company or outside it’

Howard v Baillie [1796]

An agent that is instructed to achieve a particular objective has implied actual

authority to take

such steps as may be necessary to achieve that objective

4.3 APPARENT OR OSTENSIBLE AUTHORITY

· An agent is said to be acting within the scope of its apparent or ostensible

authority (and therefore able to commit the principal) if:

a. The principal in some way represents or holds out the agent as having an
authority which is wider than the agent’s

actual authority (the person makingthe representation must have some authority to
make representations);

b. The agent commits the principal to a thirdparty within the scope of that
wider,apparent authority; and

c. The third party makes a commitment or otherwise alters its position in

relianceon that representation of authority

· Where the agent acts within the scope of his apparentauthority, the principal is
bound to the same extent as if he actually authorised the transaction expressly
CASE

HOLDING

Freeman and Lockyer v Buckhurst Park Properties

‘An ‘apparent’ or ‘ostensible’ authority … is a legal relationship between the

principal and the contractor created by a representation, made by the principal to
the contractor, intended to be and in fact acted upon by the contractor, that the
agent has authority to enter on behalf of the principal into a contract of a kind
within the scope of the ‘apparent’ authority, so as to render the principal liable to
perform any obligations imposed upon him by such contract. To the relationship so
created the agent is a stranger. He need not be (although he generally is) aware of
the existence of the representation but he must not purport to make the agreement
as principal himself. The representation, when acted upon by the contractor by
entering into a contract with the agent, operates as an estoppel, preventing the
principal from asserting that he is not bound by the contract. It is irrelevant
whether the agent had actual authority to enter

into the contract’

4.3.1. THEORY BEHINDDOCTRINE OF APPARENTAUTHORITY

· The logical basis for the doctrine of apparent authority has been found in the
idea that the transaction, when viewed objectively, simplyresults from an
agreement, as with the formation of a contract: “where an agent is ostensibly
authorised to make an offer on behalfof the principal, any offer the
agentsubsequently makes that does not appear to transgress the scope of the
authority conferred indicates, viewed objectively, the willingness of the principal to
contract on the terms stated”

· The alternative approach, as outlined above and followed in many of the cases,
is that the doctrine of apparent authority is based onestoppel

· One problem with the estoppel approach is that, while the principal is
estopped from denying the contract that has been entered into in reliance on the
representation of authority, it acquires no rights under the contract. The doctrine
of estoppel in thiscontext confers rights on the third party, but not on the principal

4.3.2. IMPORTANCEOF DOCTRINE OF APPARENT AUTHORITY

CASE

HOLDING

Freeman and Lockyer v Buckhurst Park Properties

‘In ordinary business dealings the contractor at the time of entering into the
contract can in the nature of things hardly ever rely on the ‘actual’ authority of the
agent. His information as to the authority must be derived either from the principal
or from the agent or from both, for they alone know what the agent’s actual
authority is. All that the contractor can know is what they tell him, which may or
may not be true. In the ultimate analysis he relies either upon the representation of
the principal, that is, apparent authority, or upon the representation of the

agent, that is, warranty of authority’

4.3.3. KNOWLEDGE OF LACK OF AUTHORITY

· A third party can generally rely on ostensible authority provided it does not
have knowledge of a relevant restriction or lack of authority, and where there are no
suspicious circumstances

· Questions to ask when deciphering the ‘apparent authority rule’ include: was
the belief reasonable? Did he have actual belief in the apparent authority, regardless
of the reasonableness or otherwise of the belief? Did the third part act dishonestly,
in bad faith,or irrationally in relying on the agent?

· Lord Neubergerin Thanakharn v Akai Holdings Limited [2010] stated that

apparent authorityis essentially a species of

estoppel by representation:

o Under the law of misrepresentation, it is no defenceto an action for

rescissionthat the representee might have discovered its falsity bythe exercise of
reasonable care

o Ifa party has relied upon the truth of a representation, it is no answer to say that,
if he had thoughtabout it, he must have known that it was untrue

o If the representation is clear and unequivocal, the recipient is under no

obligation to ascertain whetherit is true

– it would be otherwiseif the reliance were dishonestor irrational, and this

wouldamount to turninga blind eye or beingreckless
4.3.4. USUAL AUTHORITY

· Anagent has authorityto do what is usual for someone in the agent’s position –
‘usual authority’ can be considered as a type of impliedauthority; a type of apparent
authority; or, an independent kind of authority

· Usual authority may be restricted by instructions from the principal, but a

third party dealing with the agent without noticeof the restriction is allowedto rely
on the agent’s apparentauthority

· The principalis liable for all the acts of the agent which are within the authority
usuallyconfided to an agent of that character, e.g. one wouldexpect a horse-dealer to
have authority to warrantthat the horse was sound

4.3.5. AUTHORITY IMPLIEDFROM A CUSTOM OF THE TRADE

· This is a type of ‘usual authority’, but with tighter rules on the application of
the doctrine due to the fact that most case s have arisen in relatively sophisticated
trading situations

· When an agent’s authority is derived from trade usages and customs, the same
must be more thanpatters of consistent behaviour – they must be accepted in the
trade as binding à Drexel Burnham Lambert International BV v Nasr [1986]: ‘what
has to be shown by evidence is that the custom is recognised as imposing a binding
obligation’

· A party relying on a bindingcustom or practicemust show that the practiceis:

(i) Certain – it is clearly established;

(ii) Notorious – so generally known that an outsider makingreasonable

inquiries couldnot fail to be aware of it;

(iii) Recognised as legallybinding;

(iv) Reasonable – e.g. custom giving rise to conflicts of interest are not
considered reasonable; and

(v) Consistent with the express terms of the contract in question

5. EXCLUSIVE, NON-EXCLUSIVE AND SOLE AGENTS

EXCLUSIVE RIGHTS

These prevent the principal from actively seeking sales in the agent’s territory, and
from appointing other agents or distributors there. However, the principal may
reserve certain rights to itself, e.g. right to continue

to supply certain identified customers/classes of customers in the territory without

involving the agent

SOLE RIGHTS

These prevent the principal from appointing another agent for the territory and
other distributors, resellers,

etc. but will not prevent the principal actively seeking sales itself in the territory
NON-EXCLUSIVE

RIGHTS

These leave the principal free to appoint other agents and resellers, and actively seek
sales in the territory

itself (at the same level of customers as the agent)

6. MAIN LEGAL PRINCIPALS UNDER ENGLISH LAW

6.1 DISCLOSED PRINCIPAL

· A ‘disclosed principal’ is one where the third party is aware that the agent is
acting on behalf of another person

· A disclosedprincipal may eitherbe:

o An identified principal: the third party knows the identity of the person with
whom it is contracting (via the agent)at the time the contract is made

o An unidentified principal: the third party knows the agent is acting on behalf of
another person but does not know the identity of the other person. However,
identification could, if necessary, take place at the time the contract is made.

· Thus, if a third party is aware that an agent is acting as agent on behalf of a

principal (whether identified or not) and the agent acts within the scope of its
authority (actual or ostensible):

o Direct contractual relations will be established between the principal and the
third party, so that only the principalcan sue or be sued on the contract; and
o The agent is not generally liable on the transaction to the third party unless he
agrees to be so (expressly orthrough trade custom)

6.2 UNDISCLOSED PRINCIPAL

· An agency is referred to as an ‘undisclosed agency’ where a third party does not

know that an agent is acting on behalf of another person, because that fact has not
been disclosed

· The third party believesit is contracting directly with the agent, believing the
agent to be the principal, when in fact the agent is actingon behalf of anotherentity
(its principal)

· Where a third party does not know that the agent is actingon behalf of a
principal, several scenarios are possible:

a. If the third party is never aware that the person with whom it isdealing is an
agent, then the partiesto the contract are the third party and the agent (who has not
revealedthat it is an agent)

b. If the principal revealsthe agency relationship to the third party:

(i) The third party may either treat the agent with whom he contracted as the
principal, or accept the true principal, in which case the agent is relieved of its
obligation to the thirdparty; and

(ii) The principal may enforce the contract made on his behalf
CASE

HOLDING

Sui Yin Kwan v Eastern Insurance Company Limited [1994]

(i) An undisclosed principal may sue and be sued on a contract made by an

agent on his behalf, acting within the scope of his actual authority;

(ii) In entering into the contract, the agent must intend to act on the
principal’s behalf,

(iii) The agent of an undisclosed principal may also sue and be sued on the
contract;

(iv) Any defence which the third party may have against the agent is available
against his principal;

(v) The terms of the contract may, expressly or by implication, exclude the
principal’s

right to sue, and his liability to be sued.

However. Each situation will depend on its own facts, e.g. if a third party has made
it clear that it did not wish to contract with anyone other than the agent.

· The logic here appearsto be that the third part shouldnot be at a disadvantage
where the agent has not revealed that he
is acting on the principal’s behalf

· The third party is entitled to deal with the personwhom it thought was the
principal. In addition, it is also fair to allow the third party to have theoption of
dealing with the real principal, if he so chooses

· To reduce the risk of entering into a contract with an unwelcome and

undisclosed principal, a contracting party may wish to state in the agreement that
the partiesare acting on their own behalf and not as agent for any undisclosed
principal

6.3 UNIDENTIFIED PRINCIPAL

· These are situations where an agent concludes a contract on behalf of a

disclosed principal but without revealing the principal’s identity, either because the
principal has instructed the agent to keep his identityconcealed, or the agent elects
not to disclose the principal’s identity

· The problem arises where the agent requests the contact details of the principal
for purposes of exercising its enforcement rights against the person, they lieà there
are two approaches to this problem in other jurisdictions:

(i) An agent that acts for an unidentified principal assumes personal liability
on the contract from the outset, unless a contrary intention is apparent;

(ii) On the other hand, the principal is liable under normal agency principles
and the agent is under an obligation to reveal the identity of the principalwithin a
reasonable time on demandof the third party, failingwhich the agent becomes liable

· The positionunder English law is not clear, but one can speculate as follows:
o Ifthe agent does not disclosethe identity of the principal, a court wouldstrain
to make the agentliable on the contract, and the agent would need to look to the
principal under the implied indemnity from principal to agent under common law;
or

o If the agent does disclose the identity of the principal, there is a possibility of
the agent being liable to the principal for breach of an express or common law duty
of confidentiality (but query whether the principal would have suffered any
additional loss as a resultof the breach)

7. DISTRIBUTOR/RESELLER v AGENT

· An agent is appointed by the principal to negotiate and possibly conclude

contracts with customers on the principal’s behalf. The agent is usually paid
commission on the sales it makes, on a percentage basis, although the compensation
to the agent could be calculated on some other basis, for example, “the surplus
which the agent can obtain over and above the price which will satisfythe principal”
(Ex p Bright, re Smith [1879)). The only contractfor sale of the productsor services
is madebetween the principaland the customer. The agent generally has no
contractual liability to the customer

· Under a distribution agreement, however, the supplier or manufacturer sells its

products(and/or services) to the distributor, who then resellsthe products or
services on to its customers, in its own name, at a priceit normally has power to
determine itself and adding a margin to cover its own costs and profit. In
purchasing and reselling the products or services, the distributor contracts as
principal both with the supplier and with its customer. Title to products will pass
to the distributor from the supplier and from the distributor to the end-user, or
perhaps anothertiered reseller (for example, where goods are distributed via
wholesale distributors and retail distributors)

8. MAIN TYPES OF AGENT

8.1 COMMERCIAL AGENT

· ‘Commercial agent’ is a loosely used term often referring to someone that acts
on behalf of another in a businesscontext

· When used by lawyers,‘commercial agent’ refersto a self-employed intermediary

who has continuing authority to negotiate(and sometimes conclude) the sale or
purchase of goods on behalf of another person(the principal). E.g.:

o Employer/employee relationships: anemployee with actual,apparent, or usual

authority can be the full common law agentof the employer

o The supply of services:agency relationships relating to the negotiation (and

possibly conclusion) of contracts for the supplyof services, as opposedto goods

8.2 INTRODUCTION AGENT [LIMITEDREPRESENTATIVE AGENTS]

· An introduction agent may be appointed to find buyersfor the principal’s

goods and services, but does not have authority

to enter into contracts on behalf of the principal

· An introduction agent can be classified as a ‘limited representative agent’,

rather than a full common law agent. Such agents are also referred to as marketing
or canvassing agents. E.g. an estateagent under Englishlaw

· The principal usually agrees to pay to the introduction agent commission based
on the value of the supply contract if the third party purchases the principal’s assets,
goods or services, alternatively, the principal may be willing to pay a fixed finder’s
fee forevery introduction that the introduction agent makes

· Many of the common law rights and duties applicable to a full common law
agency relationship will apply as between an introduction agent and its principal

· Subject to the terms of the agency contract, where the remuneration of an

agent is a commission on a transaction to be brought about, it is not entitled to
such commission unless his services were the effective cause of the transaction being
brought about

· In determining whether an agent’s work was an “effective cause”, rather than

simply a “cause”, the question is whether

an agent actuallybrought about the relationship betweenthe buyer and seller

CASE

HOLDING

Nahum v Royal Holloway and

Bed New College [1998]

Where there are no express words requiring a different interpretation, the word
‘introduction’

means an effective causative element in bringing the buyer to that transaction

Brian Cooper & Co. v Fairview

Estates [1987]

An ‘effective cause’ term will be ‘very readily’ implied, especially in a residential

consumer

context, unless the provisions of the contract of the facts negative the implication

County Homesearch Company Limited v Cowham [2008]

The main rationale for implying a term that the agent has to be the effective cause
of the transaction to earn commission is to reduce the possibility that a client is
obliged to pay commission to more than one agent.

The paymen of two compensations is to be avoided, but there will be cases where
the terms of

the relevant contracts and the facts compel the payment of two commissions

Egan Lawson Ltd v Standard

Life Assurance [2001]

It is not clear whether the test is ‘an effective cause’ or ‘the effective cause’

Chasen Ryder & Co v Hedges

[1993]

Where an effective cause term is implied, the burden is on the agent seeking the
commission to

establish that they were the effective cause

8.3 DEL CREDERE AGENT

· A del credereagent guarantees to its principal the payment of the priceof goods
or services sold (Morris v Cleasby[1816])

· Although del credere agents are not common in modern commercial situations
(mainly due to the availability of other forms of creditprotection), note that:

o The liability of a del credere agent to its principal is limited to ascertained sums
which becomedue as debts

o In all other respects, the del credere relationship is a classic common law agency
relationship. All disputes arising out of the contract are between the principal and
the customer with whom the principal has a contract throughthe agency of the del
credere agent

· While the del credere agent guarantees the paymentfor the price of goods or
servicessold, this obligation is not a promise to answer for the debt, default or
miscarriage of another, since the del credere obligation is incidental to another
transaction
· Therefore, a del credere agency does not need to be evidenced in writing, but
may be inferred from a courseof conduct

8.4 STATUTORY/MERCANTILE AGENTS

· As we have seen,under the commonlaw of agency, an agent for the owner of

goods can pass good title to the goods when

selling or disposingof the goods to another,if this is within the scope of the
agent’sactual authority

· However, at common law, the mere fact that an agent may have been entrusted
by its principal with the possession of goods or documents of title did not of itself
enablethe agent to make a transfer of the goods binding on the principal, not did an
authority to sell the goods include apower to pledge them

· This state of affairs created risks for those dealing with mercantile agents or
factors, whose business it was to take possession of goods with a view to selling
them on behalfof a principal

· Inresponse, Parliament intervened during the nineteenth century by means of

the Factors Acts to protectpersons dealing in good faith with mercantile agents or
with certain apparent ownersof goods

· The Factors Act 1889 is still in force and narrows down the common law
definition of a mercantile agent: ‘a mercantile agent having in the customary course
of his business as such agent authority either to sell goods, or to consign goods for
the purposes of sale, or to buy goods, or to raise money on the securityof goods’
· Both the Factors Act 1889 and the Sale of Goods Act 1979 include provisions
designated to allow valid transfers of goods from mercantile agents, or others in
possession of goods or their document of title, to bona fide third-party recipients of
the goods,in good faith without notice of any lack of authority on the part of the
transferor

8.5 AGENTS ON BEHALFOF COMPANIES

· A contractmay be made on behalfof a company by any person actingunder its

authority, express or implied

· This person could be the managingdirector, the board of directors, one or more
directors, a manager, an employee, etc.

· Some employees of a company have agency powers while some do not.

Therefore, in practice it is alwaysprudent to verifythe authority of therelevant
signatory to enter into a major contract. The following should be checked:

o The company’s articles of association – these should directly confer authority to

bind the company or contain a power to confer such authority;

o Any major transaction should be approved by the Board which will normally
authoriseexecution of the necessary documents– a certified copy of the board
resolution should be requestedby the other party;

o Details of the directors and secretary of a company are kept by the Registrar of
Companies – these should be checked to ensure that the relevantsignatories are duly
appointed officersof the company
9. DUTIES OF AGENT TO PRINCIPAL &RIGHTS OF PRINCIPAL

· Most agency contracts are recorded in a written contract, so the most obvious
obligation of an agent to the principal will be to complywith the terms of the
agency agreement (failing which, he will be liable for breach of contract)

· Subject to what is written in the agreement, the agent also has furtherbasic
duties, impliedby common law and by equity

9.1 DUTY TO OBEY LAWFUL INSTRUCTIONS OF THE PRINCIPAL

· This duty mirrors the duty of the agent to comply with the contractual
obligations set out in a written agreement. Therefore,

the nature of the agent’sobligations will requireinterpretation of the contract in the

usual way:

o The appointment may be drafted in such a way that the agent becomes
strictlyliable for a failure to perform, with no requirement for the principal to prove
negligence if the agent fails to discharge its duties. Such a duty should only be
accepted by an agent if the nature of the task is clear, e.g. to put up for sale certain
items (but not other items)for certain minimum prices

o On the other hand, the obligations on the agent may be general, giving the agent
a discretion as to how to achievegeneral goals, in which case terms may be implied
into the appointment that the agent will exercise reasonable care and skill in the
discharge of his duties, but there will be a reasonable amount of leeway as to how it
goes about it
· An agent who fails to carry out instructions generally has no right to
remuneration, because either a trigger event has not occurred, or because there has
been a total failure of consideration. In addition, the agent may have liability in
damages for breach of contract

· The liability of a gratuitous agent is in tort, and arises when the agent has
assumed responsibility to act, but either fails to act, or, when acting, fails to exercise
reasonable care and skill (Hendersonv Merrett Syndicates [1995])

· The standardof reasonable care may be lower wherethe agency is gratuitous

(Chaudhry v Prabhakar [1988])

9.2 DUTY TO ACT ONLY WITHINTHE LIMITS OF ITS AUTHORITY

· An agent that exceeds its authority will be liableto its principal for loss caused
by the unauthorised actions

· It is good practice to expressly set out the scope of the agencyappointment

within the agency agreement, and add a clause stating that the agent has no
authority to commit the principal exceptas expressly statedin the agreement

9.3 DUTY TO USE REASONABLE DILIGENCE AND CARE

· An agent must act quicklyenough to achievethe discharge of his agency duties

(World TransportAgency v Royte [1957])

· Again, it is advisableto include in an agency agreement an express obligation to

act promptly,including metrics or precise dates where appropriate
9.4 DUTY TO AVOID CONFLICTS OF INTEREST

· An agent who acts for two principals with potential conflicts of interest,
without the informed consentof both, is in breachof the obligation of undivided
loyaltyà FHR EuropeanVentures LLP v Cedar CapitalPartners: ‘he puts himself in a
positionwhere his duty to one principal may conflictwith his duty to theother’

· An agent will be in breach of his fiduciary duties if he acts for another

individual who is in competition with the principal without express permission.
However:

o If the contract under which the agent is acting authorises him to do so, the
normal fiduciary duties are modified accordingly (Henderson v Merrett Syndicates
Ltd [1995])

o An authority to act for competing principals may be implied. In a case where an

estate agent acted for two vendors of adjacent properties, the Privy Council held
that it was appropriate to imply a term into the contract with one principal, that
the agent was entitled to act for other principals selling competing properties, and
to keep confidential from the first principal material information obtained from the
other principals (Kelly v Cooper [1993])

o Such a term can be implied in the common situation where a principal is aware
that an agent instructed to sell propertyor goods also acts for other
competingprincipals. Estate agents act for many clients,so where there are
properties of a similar specification and price, there will be a conflict of interest in
relation to the estate agents’ principals. Despite this conflict, estate agents must be
free to act for severalcompeting principals, otherwise they would be unable to
perform their function
CASE

HOLDING

FHR European Ventures LLP and Others v Cedar Capital

Supreme Court upheld Court of Appeal decision.

A secret commission received by the defendant was to be treated as the property of

the claimant, and not merely as giving rise to a claim for equitable compensation.
There were practical and policy considerations for finding that a principal had a
proprietary right over all benefits acquired by an agent in breach of fiduciary duty.
The existence of a constructive trust did not depend on

the agent having derived the relevant benefit from assets which were, or should be,
the property of the principal. If an agent is considered a constructive trustee for its
principal of any unauthorised benefits it receives the result is that it will be
personally liable to account for such benefit, but also the principal will enjoy
priority over other creditors in the event of the agent’s

insolvency

Commercial First Business Ltd v Pickup and Vernon [2017]

High Court dismissed a counterclaim from borrowers that a broker owed the
borrowers a fiduciary duty, with the result that the amount of the commission it
received from the lender (and not just the existence of commission) ought to have
been disclosed to the borrowers before they entered into the loan agreements. The
court referred to the absence of any written contract and broker’s fee and concluded
that the broker’s involvement had simply involved receiving a quotation and
submitting the loan application forms to the lender. The court held that:

· Because the fact of commission was disclosed, it could not see how the
borrowers could “reasonably have expected undivided loyalty”. It found that the
broker was not the borrowers’ agent and did not owe a fiduciary duty.

· The existence of a “half secret” commission prevented a fiduciary duty from

arising. (This is contrary to all the reported “secret commission” cases in which
relief has been granted involving half secret commissions. This issue has historically
been approached by the courts as being relevant to the nature of relief that may be
granted, rather than the issue of whether a fiduciary duty is owed)

9.5 DUTY TO DISCLOSE ALL MATERIAL FACTS TO PRINCIPAL

· An agent is under a duty to keep its principal fully informed

· A principal is entitled to require production by its agent of documents relating

to the affairs of the principal, and this right may continue aftertermination of the
agency (YahudaFire Insurance Co v Orion Marine Insurance[1995])

9.6 DUTY NOT TO DISCLOSE PRINCIPAL’S CONFIDENTIAL

INFORMATION
· To be protectedby the common law of confidential information, the
information needs to be: confidential in nature (i.e.

‘necessary qualityof confidence’) and disclosed in circumstances importing an

obligation of confidence

CASE

HOLDING

Lamb v Evans [1893]

An agent has no right to employ as against his principal materials which that agent
has obtained only for his principal and in the course of his agency. They are the
property of the principal. The principal has … such an interest in them as entitles
him to restrain the agent form the use of

them except for the purpose for which they were got

Seager v Copydex [1967]

The rule that a person may not derive a profit from the use of confidential
information ‘depends on the broad principle of equity that he who has received
information in confidence shall not take unfair advantage of it. He must not make
use of it to the prejudice of him who gave it without

obtaining consent’

9.7 DUTY NOT TO MAKE PERSONAL PROFIT OR ACCEPT BRIBES

· An agent may not use his positionto make a profit, unless he fullyinforms his
principal and the principal agrees

CASE

HOLDING

Hippisley v Knee Brothers [1905]

An auctioneer was appointed to sell goods for a commission, plus expenses. He

charged the principal with the gross amount of expense items without revealing
that he has the benefit of trade accounts.

The court held him liable for the amount of the discounts which he did not pass on
to the principal

Regal (Hastings) Ltd v Gulliver [1942]

‘The rule of equity which insists on those who by use of a fiduciary position make a
profit, being liable to account for that profit, in no way depends on fraud, or
absence of bona fides; or upon questions or considerations as whether the property
would or should otherwise have gone to the

plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff,
or whether the
plaintiff has in fact been damaged or benefitted by his action. The liability arises
from the mere fact

of a profit having in the stated circumstances been made’

9.8 DUTY TO ACCOUNT TO PRINCIPAL FOR PROPERTYAND

MONEY

· The duty of an agentto account is oftenreflected in the contractual obligations

under the agency agreement

· In most situations, money will not pass through the hands of the agent à
however, where it does, the question is whether the agent holds the money on trust
for the principal or whether it is simply a debtorto the principal

· Where the money can be regardedas held in trust, a proprietary remedywill be

available and this may be more advantageous. The proprietary remediesfor the
principal includethe following:

o Entitlements to any profits made out of the principal’s money or property;

o If the agent mixes the principal’s money with his own, or to buy property, the
principal is nonetheless entitled to be repaid up to the value of the contribution;

o The property will not be available to the agent’sunsecured creditors in his

bankruptcy;

o The principal may be able to trace and recoverthe money from third parties
(other than bona fide purchasers)
9.9 DUTY NOT TO DELEGATE AUTHORITY

· The general rule is that an agent is not allowed to delegate its authoritywithout
the approval of the principal ( McCann (John) & Co v Pow [1974]) à consistent
with the maxim ‘delegatus non potest delegare’(a delegate cannotdelegate)

· In an agency situation, the principal is assumed to have chosen the agent after
an assessment of the agent’s skill and

competence, and this choice should not be nullified withoutapproval

· In addition, as explained in Allam & Co v Europa Poster Services Ltd [1968],

‘the relation of an agent to his principal is, normally at least, one which is of a
confidential character and the application of the maxim delegatus non potest
delegareto such relations is founded on the confidential nature of the relation’

· Anagent may delegatesome or all of its express authoritywhere such a power

can be implied from the grant of express authority, e.g. where the delegated task is
sufficiently straightforward that it would not matter who performed it (Allam v
Europa Poster Services), or where it is usual business practiceor necessary for the
agent to use subcontractors, e.g. a shipperof goods by air would not normally be
expectedto use its own freight planes

· In De Bussche v Alt [1878], it was considered that delegation is permissible in

several circumstances, including where

‘unforeseen emergencies arisewhich impose upon the agent the necessityof

employing a substitute’

· In summary, and at the risk of oversimplification, an agent may delegate its

duties:
o Where the principalhas agreed to subcontracting or delegation;

o Where the delegated duties are routineand do not require particular skills;

o Where it is usualbusiness practice for the agent to delegate, to discharge its

agency obligations; or

o Where it is or becomesnecessary for the agent to delegate, to discharge its agency

obligations

· Where delegation is permitted, the principal will be liable for the acts of the
sub-agent. However, the sub-agent will normally be responsible to the agent, not to
the agent’s principal, on the basis that there is no contract between the principal
and the sub-agent. However, the sub-agent may be liable directly to the principal in
tort, for example, for negligent misstatement, under the principle in Hedley Byrne
& Co v Heller [1964]

9.10 DUTIES UNDER AGENCY AND CONTRACTCOMPARED

COMMON LAW/FIDUCIARY DUTIES IMPLIED ON AGENT

‘PURE’ CONTRACT LAW

Obey lawful instructions of the principal

Compliance with the terms of the contract

Authority to act only within certain limits

Compliance with the terms of the contract

To use reasonable diligence and care, and reasonable

despatch, in executing the principal’s lawful instruction

These terms may be set out in the contract, or implied by statute, but may be
excluded by contract (subject to statutory

control)

Not to put itself into a situation where its interests will conflict

with those of its principal

Many contracts are signed between businesses with

competing interests

To disclose all material facts to the principal and refrain from

divulging confidential information to third parties

No duty to disclose to the other contracting party, for example,

the costing for goods and services being provided. Most

businesses will prefer to enter into express contractual confidentiality agreements
rather than rely on the common law of confidentiality or an implied duty of
confidentiality

under the common law of agency

Not to make secret profit or accept bribes

There will normally be no implied obligation on a party to disclose, for example, it’s
costing or profit margins. Therefore, depending on all the circumstances, a builder
would normally be under no obligation to reveal that, as well as charging its
customer, it is also receiving a discount from its supplier. Of

course, bribery is an office in itself

To account to the principal for property and the money of the principal that is
under its control

The handling of property and money on behalf of another

normally gives rise to fiduciary duties in addition to normal contractual duties

Not to delegate its authority

Contractual duties can be subcontracted by one party, and the other party is
generally obliged to accept the subcontractor’s performance if the subcontractor
fulfils all that the subcontracting party had agreed to do. This may not suit the
other party, but if it failed to prohibit subcontracting expressly in the contract, it
will be deemed to have consented to the

subcontract
10. DUTIES OF PRINCIPAL TO AGENT & RIGHTSOF AGENT

10.1 DUTY TO PAY REMUNERATION/COMMISSION

· An agentis entitled to be paid:

o Where the terms of the agreement expressly/impliedly providefor such

payment;or

o If the agent has a right in restitution to claim on a quantum meruit (reasonable

price)basis

· Where there is no express provisioncovering remuneration, a court may imply a

reasonable sum where the agent has been appointed in circumstances in which an
agent is normally paid

10.2 CONDITIONAL FEES

· Where an agent is entitled to remuneration on the occurrence of some future

event, he will be entitled to it only if that event happens

· Where an agent is remunerated by way of commission ona transaction that the

agentis to procure, then unless otherwise agreed, the agent is not entitled to
remuneration unless he was the ‘effective cause’ of the transaction between the
principaland third party

· In situations where the agent introduces a customer to the principal but the
principal, for its own reasons, decides not to proceed, the courts have felt able to
imply a term into the agency agreement which might enable the agent to recover
commission, or damages as compensation for loss of commission
· The implied term would need to have the effect that the agent should not be
deprived of is commission of it has done all that was required of it, but the
principalhas for its own reason breacheda commissionable contract

CASE

HOLDING

Luxor (Eastbourne) Ltd v

Cooper [1941]

In several cases, the courts have refused to imply a term to the effect that the
principal is under

an obligation to conclude a contract with the customer introduced by the agent

Alpha Trading Ltd v Dunshaw

– Patten [1981]

However, where the principal for its own commercial reasons put itself in breach of
a concluded cement purchase contract, the Court of Appeal was able to imply a
term into the associated

agency contract which had the effect of ensuring the agent its commission

10.3 DUTY TO PAY EXPENSES AND INDEMNIFY AGAINSTLOSSES

· Unless agreed otherwise, the principal is under a duty to:

o Pay all the expenses of the agentproperly incurred in discharging its agency
obligations (Anglo-Overseas

o Transport Co Ltd v Titan Industrial Corp (United Kingdom)[1959]); and

o Indemnify the agent against all liabilities incurredby the agent in the
performance of lawful acts within the scope

of the agent’sauthority (Re Famatina Development Corp Ltd [1914])

· The implied indemnity does not extend to liabilityarising from the agent’s
acting outside the scope of its authority,nor

liability arising from the agent’sown negligence, default,or insolvency

· Where an agency agreementis silent on the agent’s right to reimbursement of

expenses and indemnification, these rights may be implied, on the normal principles
relating to implied terms. However, a commercial lawyer drafting an agency
agreementwould wish to set them out expressly

· Where an agency is gratuitous then rights to expenses may arise underthe law
of restitution

10.4 DUTY TO ACT IN GOOD FAITH

· The commonlaw imposes no such obligation on the principal

· Thus, it would be reasonable for the agent to ask that a good faith obligation be
incorporated via an express contractual provision, given the fact that the agent is
already under a common law obligation to act in goodfaith

11. LIABILITY OF AN AGENT

11.1 AGENT’S LIABILITY UNDER A CONTRACT

· An intermediary may become liableunder a contractwhere:

(i) It has not made it sufficiently clear that it is actingas an agent;

(ii) If it executesa deed in its own name other than under a power of attorney;

(iii) Ifthere is a custom of the trade that an agent is personally liableon the
contracts that it makes, especially if the agent does not name the principal;

(iv) Where the agent enters into a contract as an agent, but is in fact acting on
its own behalf (whetheror not this is the casewill usually turn on an interpretation
of the contract);

(v) Where the agent enters into a collateral contract confirming the main
contractor an associated contract; or

(vi) Where an agent does not disclosethat it is acting as an agent,the third

party may elect to enforcethe contract as against the principal or the agent

11.2 AGENT’S LIABILITY IN CONTRACT FOR BREACH OF

WARRANTY OF AUTHORITY
· Where an agent enters into a contract on behalf of its principal,it is taken to
warrant that it has authorityto do so (this warranty of authority is taken to ariseout
of a contract that is collateral to the main contract)

· The third party is deemed to supply consideration for the collateral contract by
enteringinto the main contract with the principal

· The claimantin an action for breachof warranty of authority must prove that:

o The would-be agent represented that it had authority to act as an agent on behalf
of the principal

o The would-be agent did not in fact have such authority;

o There was nothing to put the third party on notice that the would-beagent
lacked authority; and

o The third party relied on the would-beagent’s representation that it had

authority

· Note: liability for breach of warrantyof authority is contractual and therefore

strict

11.3 AGENT’S LIABILITY IN TORT

· Liability in tort may arise in several circumstances:

o Negligence generally: an agent will be liable in negligence under normal

principles.
o Negligent misstatement: in particular, if an intermediary negligently represents
that it has authority where none exists, it mightbe liable for negligent misstatement

o Deceit:if a person acts fraudulently, falsely claiming to be an agent, there might

be liability under the tort of deceit. Moreover, depending on the facts, there might
be an offence of obtaining a pecuniary advantage by deception

12. LIABILITY OF A PRINCIPAL

· A full common law agency arrangement is useful for a principal as it enablesthe

principal to use an intermediary to change its legal relations with third parties

· Therefore, as seen above, the principalwill be liable to third parties to honour

contractsentered into by an agent acting within the scope of its authority
(eitheractual or apparent)

· Ofcourse, if a principal imposesconditions or limitations on the

agent’sauthority and a third party knows of such limitations, then the principal will
not be liable for acts exceeding those limitations

· Additionally, a principal could be held liable under a contract entered into by

an intermediary acting without authority or beyond its authority, if the principal
did something that suggestedthat the agent did have authority

· Aprincipal will also be liable where it does not inform existing customers and
the world at large that another person is misrepresenting itself as an agent
o AJU Remicon V Alida Shipping Company [2007]: ‘an estoppel by acquiescence
will arise where the putative principal is aware that an agent is purporting to act as
such but fails to take steps to intervene when those could readily have been taken’

o City Bank of Sydney v McLaughlin [1914]: ‘in general a man is not bound
actively to repudiate or disaffirm an act done in his name but withouthis authority.
But this is not the universal rule. The circumstances may be such that a man is
bound by all rules of honesty not to be quiescent, but actively to dissent, when he
knows that others have for his benefit put themselves in the positionof
disadvantage, from which, if he speaks or acts at once, they can extricate themselves,
but from which, after alapse of time, they can no longer escape’

· Therefore, the position appearsto be that a principalin this situationmust take

active steps to inform existing customers

(and maybe even the worldat large, wherepossible) of misrepresentation by such a

‘purported agent’

· Where the principal does not know the identityof the unauthorised agent or
the third parties to whom the misrepresentations have been made, that would seem
to reduce the chances of liability considerably

· As for whether a principal can be liable on a contract which the principal has
no seen, this depends on whether the agent is acting with the scope of its actual or
apparent authority – the answer ordinarily turns on the wording of the specific
agency contract, and in particular, the extent to which the principal has held the
agent out as havingauthority

· E.g. if the agent has actual or apparentauthority to enter into a certain type of
contracton behalf of its principal, and does so, it will not matter whether the
principal has seen the contract or not (it will still be bound)
13. RIGHTS AND DUTIESOF THIRD PARTIES AGAINSTPRINCIPAL
AND AGENT

· A third party will have the right to enforce against a principal the commitment
of an agentmade on behalfof the principal, if the agent is actingwithin its actual or
apparent authority à the third party sues the principal, the agent havingdropped
out of thechain (Freeman and Lockyer v Buckhurst Park Properties (Mangal)Ltd
[1964])

· If a principal imposes conditions or limitations on the agent’s authority and a

third party knows of such limitations, then the third party will not be able to
enforce against the principal the commitments of the agent which exceed those
limitations (Evans v Kymer [1830])

· If a third party does not know that the person with whom it is dealing is an
agent, then the third party can enforce its contract againstthe agent. However,if the
third party gets to know that the person who he thinks is the principal is in fact the
agent,it may sue either the agent or theprincipal. If the latter, the agent drops out of
the chainagain

· Although itcan be said that the third party has the right to enforce the contract
made by an agent on behalf of its principal, the usual rule with regard to specific
performance applies, i.e. specific performance will not be available if damages
constitute an adequate remedy

14. REMEDIES

(i) Damages – theseare available as of right to a successful claimant

(ii) Specific performance – it would be rare, but a court might order specific
performance of a contract entered into by an agent on behalf of a principal, where
damages would not be an adequate remedy

(iii) Injunctions – this can compel a party to do something (mandatory) or

refrain from doing something(prohibitory), e.g. a claimant mightseek a mandatory
injunction that the defendantstop holding itself out as an agent of the claimant

(iv) Anaccount and paymentof monies received– e.g. where an agent makes an
unauthorised profit from the use of his position,even in the absence of misconduct

(v) Equitable compensation – an equitable compensation for breach of trust

is calculated on the basis of the losses directlyflowing from the breach, determined
with hindsight at the date of trial

(vi) Equitable liens – generallythe agent may get a lien over the principal’s
property

(vii) Rescission – this involves the setting asideof a contract, and is available at
common law and in equity

14.1 USUAL REMEDIES AVAILABLETO THE PRINCIPAL

(i) Termination of contractand suit for damages

(ii) Damages where thereis no contractual link, e.g. for breachof an equitable
duty
(iii) The remedies for breach of fiduciary duties vary according to the
circumstances and are more extensive than would be available had the agent merely
been in breachof contractual duties.They include the right to an accountof profits.
In the contextof the law of agency, some recurring issues arise:

a) Whether or not the agent has misconducted itself, which may or may not be
relevant

b) Whether or not the principal has a proprietary interest in funds which have
ended up in the hands of third partiesafter breach of fiduciary duty onthe part of
the agent

(iv) It is settled law that there are circumstances in which a fiduciary (which
can be an agent) that acts in breach of its fiduciary duties can lose its right to
remuneration, e.g. in Hosking v Marathon Asset Management LLP [2016], the
High Court confirmed that a partner in breach of his or her fiduciary duty can be
deprived of the appropriate profit share in the partnership, and not just the
partner’s remuneration

(v) A fiduciary’s liabilityto account for profit made from his position does not
depend on whetherthe principal has in fact

been damaged, but from the mere fact of a profit havingbeen made in breach of a
fiduciary duty

(vi) The aim of this remedy is not to compensate the innocent party, but to
strip the fiduciary of the benefit received by the breach of theduty

14.2 USUAL REMEDIES AVAILABLE TO THE AGENT

(i) Anorder as againstthe principal to pay the agreed sum – normallyexercised
to recovercommission due under the agencyagreement

(ii) A court order directing the principal to provide an account detailing all
sums received from its customers in respect of which the agent might be entitled to
commission

(iii) The court may imply an agreement to pay remuneration into the agency
contract, if there is no express contractual provisionabout payment

(iv) Agent’s lien over the principal’s property – the agent’s position with
regard to compensation and reimbursement of expenses is strengthened by the fact
that under the commonlaw, the agent has a lien over property of the principalin the
agent’s possession. The main features of a common law or legal lien are that it:

a. Arises by operation of law;

b. Confers on the lien-holder the right to retain tangiblemovable property

lawfullyin its possession, belonging to another person, until its claims are satisfied;

c. Can only ariseover assets that can be transferred by delivery;

d. Does not give the creditor the right to sell the property and use the proceeds
of sale to pay the outstanding debt;

e. Provides a passive rightto retain the property;

f. Can be exercised when action on the debt is statutebarred; and

g. Can extend to all sums owed in connection with the relevanttransaction, not
just sums due in respect of the

goods in the agent’s possession

14.3 REMEDIES AVAILABLE TO A THIRD PARTY

(i) Damages for breachof contract createdby the agent between the third
party and the principal

(ii) Specific performance (but only wheredamages would not be an

appropriate remedy)

15. TERMINATION OF AGENCIES

15.1 NO SPECIFIED TERM AGENCIES

· An agency appointment can be revokedby either party at any time, unless:

o There is a contractual term specifying the duration of the agency and/or the
circumstances in which it may be terminated unilaterally (which is the case in most
commercial agreements); or

o The appointment was stated to be irrevocable when it was made

· Remember that an agencyagreement can always be terminated by an agreement

betweenthe principal and agent

· Moreover, if there is no agreement and one party withdraws form the

relationship unilaterally, this will still have the effectof terminating the relationship
· Even where there is no express provision giving a right to termination on
notice, there may be circumstances when the court will concludethat it must have
been the intention of the parties that the agency shouldbe terminable ‘on reasonable
notice’.There are no general guidelines on what constitutes reasonable notice, but
the factorsa court might consider are:

o The length of the contractterm and the type of contract;

o The degree of financial dependence of the terminated party on the contract;

o The common intentionof the parties at the time when they enteredinto the
contract;

o The commitments of the partieswhich exist at the date of noticeto terminate;

o The time that would be required by the terminated party to replacethe lost
businessrepresented by the contract;

o And, the extent to which the agent remains subjectto restrictive covenants

15.2 SPECIFIED TERM AGENCIES

· E.g. a commercially realistic sales or marketing agency agreement usually

provides for a specified minimum term to allow the agent enough time to recoverits
investment in the agency,and after such term has expired, each party can terminate
on notice

15.3 TERMINATION BY OPERATIONOF LAW

(i) Agency obligations completed –when an agentis appointed to perform a
particular task,the agency terminates when the task is completed

(ii) Effluxion of time –if a specific period is agreed or is customaryfor the

completion of the act or acts to be done by the agent, then the agency will cease
automatically when that periodhas expired

(iii) Frustration –the normal rules relating to frustration of contract will

apply, i.e. the agency will automatically terminate if performance becomes
impossible or illegal

(iv) Winding up or bankruptcy-this arise sunder common law and will almost
invariably be one of the trigger events included within a standard termination
clause

(v) Death or insanity – the agency will terminate automatically on the

insanityof either party, except in the case of an enduring power of attorney

15.4 CONSEQUENCES OF TERMINATION

(i) Not to hold oneself out as the agent of the principal

(ii) Not to promotethe principal’s products(in a sales or marketing agency

agreement)

(iii) Not to use any of the principal’s branding and otherintellectual property

(iv) To return all of the principal’s property,e.g. advertising materials

(v) To delete any software made available by the principal for the purposesof
the agency
CHAPTER10: SALE OF GOODS

1. INTRODUCTION

· The law in Kenya relating to the purchaseand sale of goods is the Sale of Goods
Act (Cap. 31) (‘SOGA’)

· Section 3(1) SOGA defines asale of goods as ‘a contractwhereby the seller

transfers or agrees to transfer the property in

goods to the buyer for a money consideration called the price’

· The legal consequences flowingfrom this definition are:

A sale of goods is a ‘contract’

It is reasonable to assume that the contract envisaged by the SOGA is to be formed

according to the rules which govern the formation of contracts in general (rules of
the common law).

Thus, before a sale of goods can take place:

· There must be an offer to buy, or sell, followed by an acceptance; and

· All other conditions prescribed by common law for validity of a contract must
be met
à note: a contract for Kshs. 200/= or more must be evidenced in writing

The contract effects a transfer

of ‘property in the goods’

· Where the transfer is immediate, the contract constitutes a sale

· Where the transfer is delayed, the contract constitutes an agreement to sell

· The ‘property in the goods’ means the ‘ownership of the goods’ sold or agreed
to be

sold – the buyer pays not for the physical goods, but the right to own them

The consideration for the transfer of ownership must be a ‘money consideration’

I.e. barter trade is not a sale of goods, it is an exchange of goods.

In Aldridge v Johnson: the court held that the apparent inadequacy of the
consideration is

legally irrelevant, and in any case the owner of the goods must be assumed to know
what he is doing

The property in the goods is

‘transferred’

This means there must be two different parties to the contract as a person cannot
sell goofs to

himself (although it appears probable that he can do so in two distinct capacities)

1.1 GOODS

· The SOGA provides that ‘goods’ include ‘all chattels personnel other than
things in action and money’ – i.e. anything that can be touched, moved or taken
away but does not cover land and other species of commercial property such as
shares, debts, etc. which cannot physically be moved or taken away

· ‘Money’ may in exceptional cases be classified as ‘goods’, e.g. where money is

boughtand sold as a curio by a person who collects coins. However, money which is
used as currency/legal tendercannot be sold as ‘goods’

· The Act classifies goods into:

(i) Specific goods: those which are identified and agreed upon at the time the
contract of sale is made (Section2 SOGA)

(ii) Unascertained goods: goods to be manufactured or acquired by the seller

after the makingof the contract for sale

(iii) Existing and future goods: existing goods are owned and possessed by the
ownerwhen the contractof sale is made, while future goods are goods to be acquired
or manufactured by the sellerafter the contractis made

CASE

HOLDING

Robinson v Graves
Dispute arose over an agreement under which an artist had promised to make a
portrait for 250 guineas. It was held that this agreement was not a sale of goods
contract, but a contract for ‘work and materials’ à although a good was to be
ultimately delivered, the substance of the contract was not a transfer of

ownership but an application of the artist’s skills towards its production

1.2 CAPACITY

· Section 4(1) SOGA: capacityto buy and sell is governed by the generallaw
concerning capacityto contract

· However, where ‘necessaries’ are sold and delivered to an infantof a person who
by reason of mental incapacity or

drunkenness is incompetent to contract, he must pay a reasonable price for them

1.3 FORM

· Section 6 SOGA: a contract for the sale of goods to the value of Kshs. 200/= or
more cannot be enforced unless the buyer accepts and receives the goods, or gives an
earnest/had made past payment, or the party to be charged signed a written
memorandum thereof

· On the other hand, contracts for sale of goods whose value is less than Kshs.
200/= may be made in writing, by word of mouth, or implied from conduct
1.4 SUBJECT MATTER OF THE CONTRACT

· Section 7(1) SOGA: the subject matter of the contract of sale may be either
existing goods, owned or possessed by the seller, or future goods, to be
manufactured or acquired by the sellerafter the makingof the contract of sale

· Section 8 SOGA: in a contractfor sale of specific goods,if the goods have,

withoutthe knowledge of the seller,perished at the time when the contract was
made, then the contract is void or where the contract is for the sale of an indivisible
quantity of specificgoods and part of the goods have perished at the time when the
contract was made

· Where the contract is for the sale of divisible or severable goods, it therefore
appears reasonable that Section 8 would avoid the contract as to the goods which
had actually perished

· Section 9 SOGA: where the contract is for the sale of unascertained or future
goods and subsequently the goods, without any fault of the seller or buyer, perish
before the risk passes to the buyer, the agreement is avoided

CASE

HOLDING

Barrow, Lane and Ballard Limited v Phillips and Company Limited

The plaintiffs contracted to sell to the defendants 700 bags of nuts which were
believed to be lying in certain warehouses. Unknown to them, 109 bags had
disappeared (presumably by theft) at the time the contract was made, and a further
450 bags disappeared before the goods could be delivered to the defendants. The
plaintiffs sued for the price of the goods. It was held that the

contract was void and the defendants were not liable

Asfar and Company limited v Blundell

The word ‘perished’ may be construed to cover a change in the physical condition of
the goods,

which renders them unfit for the purpose for which they would normally be
bought. In such a

case, the goods would be regarded as having ‘perished’ in a commercial sense

1.5 THE PRICE

· Section 10 SOGA: the price for goods may be fixed by: contract; the manner
provided in the contract; or, the course of dealing of the parties à if the price is not
fixed or determines as aforesaid, the buyer must pay a reasonable price

· The contract is unvoiced where the contract specifies that the price is to be
fixed by the valuation of a third party, and that third party does not make the
valuation. However, if the failure to value is the fault of the buyer or seller, they
must pay damages

2. TERMS OF THE SALE OF GOODS CONTRACT

· The terms of a contract of a sale of goods are governedby the common law,
which relies on the intentionof the parties as the basis of their classification – these
are called express terms

· However, there are certainimplied terms – called conditions and warranties –

which are implied into every contractcovered by the SOGA,unless the contract
showsa different intention

· The purpose of the implied term was to protect buyers against unfair
consequences of the common law rule ‘caveat emptor’

2.1 IMPLIED CONDITIONS

a) RIGHT TO SELL

· Section 14 SOGA: thereis an implied condition that the sellerhas a right to sell
the goodsand, in the case of an agreement to sell, that he will have a right to sell
atthe time that the property is to pass

· The provisionprotects a buyer who unknowingly bought or agreedto buy

stolen goods

CASE

HOLDING

Rowland v Divall [1923]

The plaintiff bought a car from the defendants and four months after the sale, it
was discovered that the car had been stolen by the person from whom the defendant
bought it à the court held that since the buyer has not received any part of that
which he contracted to receive, namely, the property and the right to possession,
and that being so, there has been a total failure of consideration. The buyer was
therefore

entitled to recover the full purchase price from the seller

Niblet Limited v Confectioners’ Materials Company [1921]

The defendants sold the plaintiffs 3,000 cans of condensed milk which were being
shipped to the United Kingdom from America. The cans were labelled “Nissly”,
which was an infringement of the trademark of Nestle, an English company.
Customs authorities in England refused to release the cans to the plaintiff until
after the labels had been removed and destroyed. The plaintiff sold the unlabelled
tins for the best price he could obtain and then sued for damages for breach of the
implied condition. It was held that the defendants were in breach. Although they
owned the goods and so had power to sell them, they did not have the right

to do so since Nestle could have obtained an injunction restraining them from

selling the goods in England

b) CORRESPOND WITH DESCRIPTION

· S.15 SOGA: where goods are sold by description, thereis an implied condition
that the goods correspond with the description. A sale is by description when:

a. The goods are unascertained or future goods; and

b. The goods are specificbut bought as ‘a thing corresponding with a

specificdescription’

CASE

HOLDING

Varley v Whipp

The defendant agreed to buy from the plaintiff a second-hand reaping machine
which was stated to have been new the previous year and hardly used at all. The
defendant had not seen the machine at the time of the sale. He later refused to
accept it, on the ground that it did not correspond with the description.

Held: the machine did not correspond with its description and so the defendant
was not liable for the price.

The judge stated that the phrase “sale by description” must apply to “all cases where
the purchaser has not seen the goods but is relying on the description alone”

Grant v

Australian Knitting Mills Limited [1936]

The plaintiff went to the defendant’s shop and asked for a pair of long woollen
underwear. The goods were displayed on the counter before him and a sales
assistant selected a pair which he bought. The underwear contained an excess of
sulphite and the plaintiff contracted dermatitis after wearing it. The chemical
should have been removed before the underwear was sold but this had not been
done. It was held that there had been a sale by description.

The judge stated: ‘There is a sale by description even though the buyer is buying
something displayed before him on the counter: a thing is sold by description,
though it is specific, so long as it is sold not merely as the specific thing, but as a
thing corresponding to a description, e.g. woollen undergarments, a hot-water
bottle,

a second-hand reaping machine’

c) CORRESPOND TO SAMPLE AND DESCRIPTION

· S.15(2) SOGA: where there is a sale of goods by sample as well as by

description, the goods must correspond with the description as well as the sample

CASE

HOLDING

Nichol v Godts [1854]

The plaintiff agreed to sell to the defendants some oil which was described as
‘foreign refined rape oil, warranted only to equal sample’. He delivered the oil to the
quality sample but which was not ‘foreign refined

rape oil’. It was held that the defendant was entitled to reject the goods
Re: Moore and Company, and Landauer and Company [1921]

The buyer ordered 3000 cans of canned fruit in crates containing 30 cans per crate.
However, on delivery, some crates contain 24 cans while others contained 30 cans –
even though the market value of both the crates was the same. The court held that
the way in which the goods were to be packed was part of the description and the
buyer had rightly rejected them, even though he was not in any way affected by the

wrong packing

d) MERCHANTABLE QUALITY

· S. 16(b) SOGA: where goods are bought by description from a seller who deals
in goods of that description, there is an implied condition that they are of
‘merchantable quality’, i.e. the goods must be reasonably fit for the
purpose/purposes for which the goods of that kind are generally bought

· The goodsmust be of merchantable qualityat the time of delivery (Mash and

Murrell v Emmanuel)

CASE

HOLDING

Wren v Holt
Beer containing an abnormal quantity of arsenic acid was not of merchantable
quality

Godley v Perry

A catapult which broke while being used by a child for whom it had been caught
and captures his eye was

held not to be of merchantable quality

Frost v Aylesbury

Dairy Company

Milk which was contaminated with germs of typhoid fever, from which the plaintiff
died, was not of

merchantable quality

e) FITNESS FOR PURPOSE

· S.16(a) SOGA: goods which are bought for aparticular purpose are reasonably
fit for that purpose.This condition is only appliedif:

a) The particular purpose was made known to the seller, expressly or by

implication;

b) The goodsare of a description whichit is in the courseof the seller’s business to

supply; and

c) The buyerrelied on the seller’s skillor judgement

· Frost v Aylesbury Dairy Company: the liability which it imposesis not
restricted to manufactured goods and may, in appropriate cases, apply to non-
manufactured goods as well

· An exceptionis that the seller would not be liable if he proves that the goods
were sold under a patent or other trade

name, and that the buyer did not actuallyrely on the seller’s skill and judgement

f) BULK GOODS SHALL CORRESPOND WITH THE SAMPLE

· S.17(a) SOGA: where the goods are bought by sample,there is an implied

conditionthat the bulk will correspond with the samplein quality

· Nichol v Godts: where goods are bought by sample and description, the goods
suppliedmust correspond with both the sample and the description

· Further, the buyer will have a reasonable opportunity of comparing the bulk
with the sample (thus suspending the S. 28 provision that renders time of
paymentand time of delivery concurrent conditions)

· The seller cannot thereforedemand payment when he deliversthe goods – he

must afford the buyer an opportunity to examine the goods to see if theycorrespond
with the sample first

g) GOODS ARE DEFECTED RENDERING THEM UNMERCHANTABLE

· The goods must be free from any defect rendering them unmerchantable which
would not be apparent on a reasonable examination of a sample
· Godley v Perry it was held that the defendants were liable for sale of a defective
catapult because: the catapult was not reasonably fit for the purpose for which it
had been bought, and, the catapult was not of merchantable quality, and the defect
of the goods could not be discovered by a reasonable examination of the sample à
the judge held that a buyer is not expected to carry out every test that might be
practicable; the test is ‘not extremeingenuity but reasonableness’

2.2 IMPLIED WARRANTIES

a) QUIET POSSESSION

· S. 14(b) SOGA: this provision is intended to protect the buyer against defects
of title which arise after the contract is entered on to. However, these situations are
rare and problematic when they arise

CASE

HOLDING

Microbeads v Vinhurst Road Markers Limited

In January 1970 the sellers sold a number of road marking machines to the buyer.
Unknown to both parties, another company was in the process of patenting their
own road marking apparatus under the Patents Act which gave them rights to
enforce the patent from November 1970. In 1972 the patentee sued the buyer for
using the road marking machines in breach of patent. The buyers then claimed
against the sellers for breach of implied condition as title and breach of the implied
warranty as to quiet possession. It was held that:
(i) There was no breach of the implied condition since at the time of the sale, the
sellers could not have

been prevented by injunction from selling the goods

(ii) But there was a breach of the implied warranty as to quiet possession. Lord
Denning explained that the warranty is a continuing warranty which applies not
just at the time of the sale but also in the future

b) FREE FROM CHARGE OR ENCUMBRANCE

· S. 14(c) SOGA: the goods shall be free from any charge or encumbrance in
favour of any third party which is not declared or made known to the buyer before
or at the time when the contract is made

· This provisionprotects buyers againstdefects in the seller’s titlewhich exist at

the time the contractis made

c) NEMO DAT QUOD NON HABET

· Another common law maxi mis ‘nemo dat quod non habet’, i.e. a personcannot
give that which he does not have – where the goods are sold by a personwho is not
the ownerthereof and who does not sell them with the consent or the authority of
the owner, the buyer acquires no better title to the goods than the seller had

· Consequently, if the goods had been obtained by fraud and the seller had a
voidable title thereto, even the buyer would acquire a voidable title (regardless of
whether he was aware of the fraud)

EXCEPTIONS TO THE NEMO DAT QUOD NON HABET RULE

Estoppel

S. 23(1) SOGA provides that the ‘nemo dat’ rule will not apply if ‘the owner of the
goods is by his conduct

precluded from denying the seller’s authority to sell’.

Pickard v Sears stated that an estoppel will be raised against the owner of the goods
only if his conduct misled a third party into believing that the person who was
selling the disputed goods was either their owner, or had the owner’s authority to
sell them

Sale by factor

Sale by factor gives a good title to the buyer in good faith.

The factor is ordinarily the mercantile agent whose business is to sell or otherwise
deal in goods. He can sell the goods entrusted to him and give a good title to the
same provided the conditions of the Act are complied with (i.e. the goods were
entrusted to him in the ordinary course of his business and they are in

his possession with the consent of the owner)

Sale under voidable

title

S. 24 SOGA: where the seller is good has a voidable title thereto but his title has not
been avoided at the

time of the sale, a buyer in good faith without notice of the defect in the seller’s title
acquires good title

Resale by a seller in possession

S. 26(1) SOGA: if a person who has sold goods, but remained in possession of
them/their documents of title, transfers the goods o documents of title to a third
person, that person acquires a good title if he

receives the goods in good faith and without notice of the previous sale

Sale by a buyer in possession

S. 26(2) SOGA: where a person, having bought or agreed to buy goods, obtains
possession of the goods or documents of title to them (with the seller’s consent), a
transfer by that person of the goods or documents of title to a third person
receiving them in good faith and without notice of lien or other right of the original
seller in regard to the goods, has the same effect as if the person making the transfer
were a mercantile agent in possession of the goods or documents of title with the
consent of the owner.

The seller has rights against the original purchaser but cannot claim the goods from
the second purchaser

Sale under statutory powers of sale, e.g. under the Uncollected Goods Act
Sale under a common law power of sale, such as sale by an agent of necessity

Sale under a court order

Sale in a market

d) STOLEN GOODS

· Where goods have been stolen and the thief has been prosecuted and convicted,
the property in the goods reverts to the originalowner

· This is so even if the goods have been resold or otherwise dealt with in the
mean time

· This provision may be viewed as supplementing the provisions of the Penal

Code pertaining to theft by making it impossible for a client of a thief to plead his
innocentas a ground for retaining stolen goods

3. TRANSFER/PASSINGOF PROPERTY

· It is important to determine when the transferof the property in

goods,envisaged by the contract of sale, takesplace as:

o This determines when risk in the goodspasses to the buyer;

o This determines the remedies availableto the parties; and

o It is the essenceof the contract of sale of that property

· The generalrule is that the propertypasses in accordance with the intention of
the parties,express or implied

· However, wherepassing of the property is not providedfor by the parties, the

rules contained in Section 20 SOGA apply:

3.1 Where there is an unconditional contract for sale of specific goods ina
deliverable state, the property passes to the buyer at the time when the contractis
made

· Goods are said to be inadeliverable state if they are insuch a state that the buyer
would, under the contrac t, be bound to take delivery of them

· It is immaterial in such a case that the time of paymentor of delivery, or both, is

postponed

CASE

HOLDING

Underwood Limited v Burgh, Caste, Brick and Cement Syndicate [1922]

In this case there was a contract for the sale of a machine weighing 30 tons. At the
time of the sale, it was still fixed to the floor of the building in which it was
installed. However, it was agreed between the seller and the buyer that the machine
would be detached, dismantled and delivered by the seller “free on rail”. The seller
detached the engine and dismantled it but while it was being taken to the railway
station it was damaged. The buyer refused to accept it and the seller sued for the
price. It was held that the property had not passed to the buyer, because the engine
was not in a deliverable state at the time

the contract was made

Phillips Head and Sons v Showfronts [1970]

The defendants bought a carpet from the plaintiffs. When the carpet was delivered
to their showroom where it was to be laid, it was found that it could not fit
properly and had to be sent away for stitching. It was returned the next day
wrapped in heavy bales. It was stolen before it could be laid and the defendants
refused to pay for it. It was held that they were not liable. The property in the
carpet had

not passed to them since, at the time it was stolen, it was not in a deliverable state

3.2 Where thereis a contract for sale of goods not in a deliverable state, and the
seller has to do something to the goods to put them in a deliverable state, the
propertydoes not pass until that thing is done and the buyer has noticeof it

· E.g. in the case of Underwood Limited v Burgh above, the property in the
machine could not have passeduntil the machinehad been safelyput on the rail and
the buyer notified

3.3 Where there is a contract for the sale of specific goods in a deliverable state but
the seller is bound to weigh, measure, test or do something with reference to the
goodsfor the purposeof ascertaining the price, the property does not pass until that
thing is done and the buyerhas notice of it
CASE

HOLDING

Acraman v Morrice

The defendant had agreed to buy the trunks of certain trees. Although the contract
did not expressly say so, the custom of the particular trade was that the buyer
measures and marks the portions of the trees that he wanted and the seller would
then cut off the rejected parts. The seller did not do so but nevertheless sued for the
price. It was held that the defendant was not liable because no property in the trees
had passed to him. The property would have passed after the seller had actually
severed the rejected

parts and the buyer had been notified of it

3.4 Where the goods are delivered to the buyer on approval or ‘on sale or return’
or other similar terms, the property therein

passes to the buyer:

a. When he signified his approval or acceptance to the seller;or

b. If he does not signify his approval or acceptance, he retains the goods without
giving notice of rejection –

i. Beyond the time fixed for the return of the goods; or

ii. Ifno time is fixed, beyondthe expiration of a reasonable time; or

c. He does any act adopting the transaction

· The effect of this provision is to change the relevant common law rules relating
to offer and acceptance. At common law, there would have been no contract
between the parties. However, the provision creates a contract by converting what
would have been lapse of an offer into an acceptance thereof

CASE

HOLDING

Kirkham v

Attenborough [1987]

The meaning of ‘any act adopting the transaction’ was explained. In this case, the
plaintiff delivered jewellery to a third party “on sale or return”. The third party
pledged the jewellery with the defendant without informing the plaintiff that he
had accepted his offer. The plaintiff sued for the recovery of the jewellery on the
ground that it was still his property. It was held that the pledge was an act by the
third party (offeree) “adopting the transaction” and, therefore, the property in the
jewellery had passed to

him, so that the sale to the defendant was effective

Kempler v Bavington

The above decision can be contracted with this case à the plaintiff, a diamond
merchant, delivered a quantity of diamonds to a third party “on sale or return”. The
delivery note which accompanied the diamonds informed the third party that the
plaintiff would debit his account with the price of any diamonds if they were not
returned within seven days, and that, until the account was charged, the diamonds
belonged to the plaintiff. As soon as he received the goods, the third party sold them
to the defendant and disappeared with the money. As the third party’s account had
not been charged with the price of the diamonds at the time he sold them, it was
held that the property in them still rested with

the plaintiff. For this reason, the plaintiff was able to recover the diamonds from the
defendant

3.5 Where there is a contract for the sale of unascertained or future goods by
description, and goods of that description and in a deliverable state are
unconditionally appropriated to the contract, either by the seller with the assent of
the buyer, or the buyer with the assent of the seller, the property in the goods
thereupon passesto the buyer

· InHayman v Mintock, A sold B 50 sacks of flour out of 200 lyingin his

warehouse, for which B obtaineda storage warrant.Nothing was done to
appropriate any particular sacks to the sale, and so it was held that no property in
any sacks passed to B

3.6 Where the seller delivers the goods to a carrier or to any other person for the
purpose of transmission to the buyer, he is deemed to have unconditionally
appropriated the goods to the contract provided that when he makes such delivery,
he does not reserve the right of disposal
· In Pignatorio v Gilroy it was explained that where the seller gives notice of
appropriation and the buyer makes no objection within a reasonable time, his
assent is presumed and the propertypasses on the expiration of that time

3.7 Seller’s reservation regarding disposal

· Where the seller reserves the right of disposal of the goods until certain
conditions are fulfilled, the property in the goods does not pass until such
conditions are fulfilled

3.8 Sale by auction

· On a sale by auction, the property in the goods knocked down passes to the
buyer at the fall of the hammer,in the absence of any agreement to the contrary

4. PERFORMANCE OF CONTRACT

4.1 DUTIES OF THE SELLER

(i) Duty to deliverthe goods

(ii) Duty to pass a good title

(iii) Duty to put the goods into a deliverable state

o S. 28 SOGA: it is the duty of the seller to deliver the goods, and of the buyer to
accept and pay for them, in accordance with the terms of the contractof sale
o S. 29 SOGA: unless otherwise agreed, delivery of the goods and payment of the
purchase price are concurrent conditions, i.e. the seller must be ready and willing to
give possession of the goods to the buyer in exchange for the price, and the buyer
must be readyand willing to pay the price in exchange for possession of the goods

o Where the goods have been delivered to the buyer, and he has had reasonable
opportunity of inspecting them, he is deemed to have accepted them

(iv) Duty to deliverthe right quantity

o Delivery must be of the exact quantity – if it is too much or too little, the buyer
may reject the whole consignment

o However, where the delivery is greater or less than the amount contracted for
and the buyer nonetheless acceptspart/more of the whole delivery, he is liable for
the price at the contract rate and cannot claim damages afterwards

4.2 DUTIES OF THE BUYER

(i) Take delivery – under S. 2 SOGA: it is the duty of the buyer to take
delivery of the goods, failing which the seller may maintainan action against him for
damages for non-acceptance pursuant to S. 50(1) SOGA

(ii) Pay the price – under S. 28 SOGA: it is the duty of the buyer to pay the
price of the goods, failing which the seller may maintainan action against him for
the price pursuant to S. 49 SOGA
5. DELIVERY

· Delivery is the voluntary transfer of possession from one person to another.

Delivery generally takes place in any of the following forms, namely:

a) Physical transferof the goods;

b) Delivery to a common carrier;

c) Delivery of documents of title;

d) Transfer of the means of obtaining delivery;or

e) Delivery by attornment

5.1 RULES OF DELIVERY

(i) The goods must be in a deliverable state

(ii) Unless otherwise agreed,the cost of putting the goods into a deliverable
state is borneby the seller

(iii) Whether it is for the seller to transmitthe goods to the buyer or for the
buyer to take delivery thereofdepends on the terms of the contract

(iv) Unless otherwise agreed,the place of delivery is the sellersplace of

business, and if not, his residence

(v) In sale of specific goodswhich the partiesknow are in some other place,
that other place is the place of delivery
(vi) If the goods are in the hands of a third party, delivery takes place when
such party notifies the buyer that he holds goods on his behalf

(vii) If the seller is bound to transmit the goods, delivery by common carrieris
prima facie complete when the goods are handed on to the common carrier

(viii) If the sellerdelivers less goods than contracted, the buyer is entitled to:

a. Reject all the goods; or

b. Accept the goods and pay at the contractrate

(ix) If the goods are mixed with goods of a different description, the buyer is
entitled to:

a. Reject the goods; or

b. Accept those included in the contractand reject the balance

(x) Unless otherwise agreed,the buyer is not boundto accept deliveryby

instalments

(xi) Where delivery is by instalments to be paid for separately and the seller
makes one or more defective deliveries or the buyer neglects or refuses to accept and
pay one or more deliveries, whetherthis is treatedas a severable breach or a total
repudiation of the contractdepends on:

a. The terms of the contract; and/or

b. The circumstances of the case

(xii) If the buyer refuses to take delivery as of right, he would not be bound to
return the goods but must notify the seller his refusal
5.2 DELIVERY BY INSTALMENTS

· Section 32(1) SOGA: unlessotherwise agreed, the buyer of goods is not bound
to acceptdelivery thereof by instalments

· If the contract states definitely that the good are to be delivered by instalments,
each instalment to be paid for separately, it is ‘a question in each case depending on
the terms of the contract and the circumstances of the case’ whether a breach is a
breach of the contractas a whole, or whethersuch breach can be dealt with apart
from the main contract

· Each instalment must fulfil the conditions of sale as to quality, description, etc.
and the fact that the buyer has accepted previous instalments does not preclude him
from rejecting subsequent instalments which are not of the contract quality,
description, etc. (Jackson v Rotax Motor Company [1910])

CASE

HOLDING

Maple Flock Company Limited v Universal Furniture Products [1934]

It was held that the tests to be applied to determine whether the breach is such as to
give the buyer the right to regard the contract as at an end are:
(i) The quantitative ratio which the breach bears to the whole contract; and

(ii) The degree of probability or improbability that the breach will be

repeated

Brandt v Lawrence

Repudiation by the buyer cannot take place until after proper performance of the
contract has become impossible. This means that if tender of part of the goods only
is made, tender of that part cannot be

refused because at that time the buyer does not know for certain that the balance
will not be delivered

6. BREACH OF CONTRACT

6.1 REMEDIES OF THE UNPAID SELLER

· Remedies of an unpaidseller are eitherreal of personal

· Real remedies are remedies against the goods and are enforceable without
judicial intervention, while personal remedies are against the buyer and enforceable
through the courts

(i) Action for price

o Section 49 SOGA
o The unpaid seller has a right of action for the price of goods where the property
in the goods has passed to the buyer and he refuses to pay for them according to the
contract, or where the buyer has agreed to pay for the goods on a certain day and
then wrongfully refusesto pay for them

(ii) Action for damages

o Section 50 SOGA

o Where a buyer wrongfully neglects or refuses to accept and pay for the goods, i.e.
the property in the goods has not been passed to the buyer, the sellermay maintain
an action againsthim for damages for non-acceptance

o The amount of damages will be the estimated loss caused by the buyer’sbreach of
contract

(iii) Right of lien/Retention of goods

o Section 41 – 43 SOGA give the unpaid seller who is still in possession the right
of lien in the following cases:

i. Where the goodshave been sold on credit but the term of credit has expired;

ii. Where the goods have been sold withoutany stipulation as to credit; or

iii. Where the buyer becomes insolvent

o The lien is lost if the unpaid seller delivers the goods to a carrier or other bailee
for transport to the buyer,without reserving the right of disposal of the goods or
where the buyer lawfully obtainspossession of the goods orwhere the unpaidseller
waives his rights

o Where part delivery is made, the unpaid seller has a lien over the rest of the
goods, provided the part delivery does not amountto a waiver of the right of lien
(and the lien is limited for the unpaid balanceof price only)

(iv) Stoppage in transit

o Section 44 – 46 SOGA provide that where the buyer becomes insolvent, the
unpaid seller has a right to stop the goods ‘in transitu’

o This right is onlyexercisable where the goods are in transit; if the transit is at an
end, the right is alsoat an end

o Goods are in transitfrom the time they are delivered to a carrierby land or water
or other bailee,for the purposeof transport to the buyer, until the buyer or his agent
takes delivery of them from the carrier or bailee à If the buyer obtains the goods
before they reach the appointed destination the transit is at an end, and the transitis

also at an end when the goods reach the appointed destination and the carrier or
bailee informs the buyer that he (the carrier or bailee) holds them on his (i.e. the
buyer’s) behalf

o Where part delivery has been made, the right of stoppage in transitu is effective
over the remainder of the articles,unless the part delivery was made in such a way as
to show that the seller has agreed to give up possession of the whole of the goods
o The unpaid seller exercises his right of stoppage in transitu either by taking
possession of the goods or by giving notice to the carrier or bailee that he wishes to
exercise the right. The carrier or baileemust then return the goods to the unpaid
seller who must pay all the expenses connected with such return

o S. 47 SOGA deals with any sub-sale or pledge by the buyer à It providesthat,

subject to the provisions of the Act, the unpaidseller’s right of lien or retention or
stoppage in transituis not affectedby any sale, or otherdisposition of the goods
which thebuyer may have made, unless the sellerhas assented thereto

(v) Right of re-sale

o Section 48 SOGA: the seller may re-sell the goods if the buyer does not pay for
the goods, or tender their price, within the agreed or a reasonable time. The rightof
re-sale is allowed in the following three situations:

i. Where the goodsare of a perishable nature;

ii. Where the unpaid seller gives notice to the buyer of his intentionto re-sell,
and the buyer dos not within a reasonable time pay or tender the price; or

iii. Where the sellerexpressly reserves a right of re-sale

o If, despite re-selling the goods, the seller still suffers a loss, he can bring an action
for damages for non-acceptance, but the first buyer will be discharged from any
further liability to pay the price

o Where the seller of the goods obtains more for them than the original contract
price, he can retain the whole of the proceeds
(vi) Right to withholddelivery of goodswhere the propertyhas not passedto
the buyer

6.2 REMEDIES OF THE BUYER

(i) Damages for non-delivery

o Section 51(1) SOGA: where the seller wrongfully neglects or refuses to deliver
the goods to the buyer, the buyer may maintain an action against the seller for
damages for non-delivery

o Section 51(2) SOGA: the measureof damages is the estimatedloss directly and
naturally resulting in the ordinary

course of events,from the seller’sbreach of contract

o Section 51(3) SOGA: where there is an available market for the goods in
question, the measure of damages is prima facie to be ascertained by the differences
between the contract price and the market/current price of the goods at the time
when they ought to have been delivered. If no time was fixed,then at the time of the
refusalto deliver the goods

(ii) Specific performance

o Section 52 SOGA: in any action for breachof contract to deliver specificor

ascertained goods,the Court may, if it thinks fit, on the application of the plaintiff,
by its judgement or decree, directthat the contractshall be performedspecifically,
without giving the defendant the optionof retaining the goods on payment of
damages

o Judgements for specific performance are usuallyonly made where the goods are
uniqueor of some special value,

e.g. an articleof special artisticvalue or rarity

(iii) Damages for breachof warranty

o Section 53 SOGA: where there is a breach of warranty by the seller, the buyer is
not entitled to reject the goods on that account. He may, however, “set up against
the seller, the breach of warranty in diminution of extinction of the price”; or he
may sue the seller for damages for the breach of warranty

(iv) Recovery of price

(v) Rejection of the goods

7. IMPORT AND EXPORTTRADE

7.1 F.O.B. CONTRACTS

· Under an F.O.B. (Free on Board)contract it is the duty of the seller to put the
goods on board a ship for the purpose of their transmissionto the buyer à the
contract of carriage by seahasto be made by, or on behalf of, the buyer
· The cost of putting the goods on board must be borne by the seller, but once
the goods cross the ship’s rail, they remain at the risk of the buyer

· Delivery is complete when the goods are put on board the ship, but the seller
should give notice of the shipment to the buyer so as to enable him toinsure the
goods à ifthe seller fails to do this, the goods will be at his risk

· In Colley v Overseas Exporters, it was explained that the property in the goods
does not pass to the buyer until the goods cross the ship’s rail. If, therefore, the
seller is prevented from putting them on board by failure of the buyer to nominate
an effective ship, i.e. a ship able and readyto carry the goods, the proper remedyof
the seller is an action for damages for non-acceptance and notan action for the price

7.2 C.I.F. CONTRACTS

· AC.I.F. (Cost, Insurance, Freight) contract is a contractfor the sale of goods to

be performed by the deliveryof documents representing the goods, i.e. of
documents giving the right to have the goods delivered, or the right, if they are lost
or damaged,of recovering their value, from the shipowner, or from
insurers,respectively

· Clemens Horst v Biddel Brothersexplained the dutiesof the seller under such a
contract:

(i) To ship at the port of shipmentgoods of the description contained in the

contract;

(ii) To procure a contract of carriage by sea, under which the goods will be
deliveredat the destination contemplated by the contract;
(iii) To arrange for insurance upon the termscurrent in the trade which will
be available for the benefitof the buyer;

(iv) To make out an invoicefor the goods;

(v) To tender, within a reasonable time after shipment, the bill of lading,the
policy or certificate of insurance and the invoiceto the buyer so that he may obtain
deliveryof the goods, if they arrive, or recover for their loss if they are lost on the
voyage. The bill of lading tenderedmust correctly state the date of
shipment,otherwise the buyer can reject the goods

· Under a C.I.F. contract the buyer has a right to reject the documents of title if,
on delivery, they show non- compliance with the terms of the contract. He also has
a separate right to reject the actual goods if, when delivered, they are found not to
conform to the contract

7.3 EX-SHIP CONTRACTS

· When goodsare sold ex-ship,the duties of the seller are:

(i) Todeliver the goods to the buyer from a ship which has arrived at the port
of delivery at a place from which it is usual for goods of that kind to bedelivered;

(ii) To pay the freight and otherwise releasethe shipowner’s lien;

(iii) To furnish the buyer with delivery order,or some other effectual direction
to the shop to deliver

CHAPTER11: HIRE PURCHASE

1. INTRODUCTION

· A hire purchase is defined as a ‘system in which a buyer takes possession of

merchandise on payment of a deposit and

completes the purchase by paying a series of instalments while the seller retains
ownership until the final instalment is paid’

· The instrument that facilitates the hire purchaseis known as the Hire Purchase
Agreement

· The Hire Purchase Act of 1968 (‘HPA 1968’)defines hire purchaseas ‘an
agreement for the bailmentof goods under which

the bailee may buy thegoods or under which the property in the goods will or may
pass to the bailee’

· The HPA 1968 seeks to protectthe hirer againstexploitation by unscrupulous

hire purchase companies

· However, the Act also has variousexclusions:

o Section 3, HPA 1968: The Act does not apply to transactions of below Kshs. 4,
000, 000/=

o The Act doesnot apply to any scheme controlled, managed or guaranteed by the
Government for the purposes of providing loans to any person for thepurchase of
motor vehicles

o Section 3(2), HPA 1968: The Act does not allow a body corporate to act as the
Hirer
2. REQUIREMENTS AND CONTENTOF THE HIRE PURCHASE
AGREEMENT [Read in conjunction with slides on HPA]

2.1 AGREEMENT TO BE IN WRITING

· Section 6 HPA 1968: A Hire Purchase Agreement must be written and signed
by the hirer and by all the parties to the agreement

· If the agreement is not in writing and signed as required, it will be

unenforceable by the ownerunder the agreement

2.2 REGISTRATION

· Every Hire Purchase Agreementmust be delivered to the Registrarof Hire

Purchase Agreements within thirty (30) days of its execution

· This period may be extended by the Registrar is the delay was due to an
accident, an inadvertence or some sufficient cause

· To be registered, the agreement must be in theEnglish language (S. 5, HPA

1968)

· If the agreement is not registered, this may have the followingconsequences:

o No one can enforce the agreement againstthe hirer or take any action againstany
guarantor of the agreement;

o The owner cannotrecover the goodsfrom the hirer;and

o The holder of any security given by the hirer or guarantor to the agreement
cannot enforce it against any of them

2.3 STATEMENT OF CASH PRICE

· The owner must state in writing,in the prescribed form, to the prospective
hirer, a price at which the goods may be purchased by him/her for cash. The
agreement must include:

o The amount of each instalment;

o The period of repayment;

o A description of the goods; and

o A notice of the hirer’srights displayed in prominent form

· Non-compliance with these requirements renders the agreement unenforceable

against the hirer and the guarantor

2.4 STATUTORY NOTICE

· The agreement must have a statutory noticesetting out the rights of the hirer

· The noticemust be at least as prominent as the rest of the contents of the

agreement
· It should contain appropriate warnings or notices to the hirer in
prominentbold letters regarding his basic rights and obligations under the Hire
Purchase Agreement

· For example:the hirer’s right to terminate the agreement shouldbe boldly

drawn

2.5 DELIVERY OF COPY OF AGREEMENT TO HIRER

· The owner must delivera copy of the agreementto the hirer, or send the same
by registeredpost, within 21 days of the date of the agreement

· Incase of failure to adhereto this requirement, the owner will not be entitled to
enforce the Hire PurchaseAgreement or any contract of guarantee relating to it

3. CONDITIONS &WARRANTIES

3.1 IMPLIED CONDITIONS [Section 8, HPA 1968]

(i) Condition that the owner has or will have a right to sell the goods at the
time when the property is to pass

(ii) A condition that the goodsare of a merchantable quality,unless they are

second-hand and the agreementsays so

(iii) Acondition that the goods will be reasonably fit for the purpose that the
hirer expressly or by implication makes known to the owner asbeing the purpose for
which he wants the goods
(iv) A condition that the legal ownership of, and title to, the goods shall
automatically be vested in the hirer upon payment of the hire purchase price in full

3.2 IMPLIED WARRANTIES

(i) A warranty that the hirershall enjoy quiet possession

(ii) A warranty that the goods are free from any charge or encumbrance

(iii) A warranty that the goods will be of a merchantable quality. However,

the principle of caveat emptor excludes this warranty

(iv) A warranty that the goodswill be reasonably fit for the purpose that they
are needed

3.3 CONDITIONS AND WARRANTIES NOT TO BE EXCLUDED

· The implied conditions and warranties set out above must not be excluded and
will be implied notwithstanding any agreement to the contrary

· The owner shall not be entitled to rely on any provision in the agreement
excluding or modifying the condition regarding fitness for the purpose, unless he
proves that before the agreement was made the provision was brought to the notice
of the hirer and its effect made clear to him (S. 8(3), HPA 1968)

CASE
HOLDING

Karsales (Harrow) v Wallis [1956]

The Defendant (Mr. Wallis) agreed to buy a used car if the vendor was able to find a
company with which the Defendant could enter into a hire-purchase agreement.
The vendor found such a company (the Claimant). Once the agreement was entered
into, the Defendant inspected the vehicle he had agreed to purchase through the
hire purchase agreement and found that it had been substantially altered from the
version he had previously seen and agreed to buy. Namely, the radio was missing, as
were the chrome strips around the body, the new tires had been replaced by old
ones, the bumper was not held together with rope and perhaps most importantly,
the car could not start. The Defendant therefore refused to pay for the car. The hire
purchase agreement contained an exclusion clause which stated that ‘No condition
or warranty that the vehicle is roadworthy or as to its age, condition or fitness for
any purpose is given by the owner or implied herein’

Held: Karsales was under an obligation to provide a car which is in substantially the
same condition as when Mr. Wallis inspected it. This is particularly the case for hire
purchase agreements where the purchaser had previously inspected the vehicle.
More broadly, where there is a fundamental breach of a contract, a party cannot rely
on an exemption clause. Not in the least, the Sale of Goods Act 1979 would still
imply a term into the contract that the goods will be fit for purpose which cannot
be

excluded through such a clause

Swisse Atlantique

Societe S.A. v Roterdamsche Kolen Centrale

The House of Lords, after examining a number of earlier cases, held that there was
no rule of law that an exemption clause could not cover a fundamental breach and
that the scope of an exemption clause was a question of construction of the clause
and the contract as a whole. The implication is that the provisions in the Act which
appear to ban exclusion clauses cannot be relied on to provide the kind of
protection that was originally intended. In practice, it is unlikely that the courts
would allow a seller to promise to deliver one thing and actually deliver another,
and argue that he is not liable for the mis delivery. The courts would strike out such
an exemption as being repugnant to the main purpose of

the contract. The courts could also declare the whole contract void for want of
consideration

4. THE TRIANGULAR TRANSACTION

· Usually, the first sale in the transaction is by the dealer to the financialcompany,
even when custody of the propertyappears to be with the dealer

· No contractof sale exists between the dealer and the hirer (Drury v
VictorBuckland Limited [1941])
· If, however, the dealer gives express warranty to the hirer, the courts will infer a
collateral contract between the dealer and the hirer (Andrew v Hopkins [1957])

· There are also situations where the dealer may be deemed to be an agent of the
finance company (Financing Limited v Stimson[1962])

· However, there is no rule of law that in a hire purchase transaction the dealer
never is or always is acting as agent of the finance company (Mercantile
CreditCompany Limited v Hamblin [1965])

· A dealermainly acts on its own, but may act as an intermediary or an agent in

certaininstances

5. GUARANTOR

· Owners in a Hire Purchase Agreementwill often wish to ensure due

performance of a hirer is guaranteed by another person

· This may be procuredvia creation of a separateowner-guarantor agreement, or

alternatively, throughprocuring the guarantorto be part of the Hire Purchase
Agreement itself

· The guarantor must sign a written note or memorandum by himself or

through his agent, however,his liability is secondary

à i.e. his liability dependson the validity of the main agreement and on whetherthe
hirer defaultsor not
· If the existing contractis varied withouthis consent, the guarantor will
automatically be discharged

· Therefore, a guarantor provisionin this situation is contrasted to a Contractof

Indemnity in which the giver of the indemnity assures primary liability

· The guarantormay insist on due performance of the hirer’sobligations

· The guarantor may claim an indemnityagainst the hirer if he is compelledto

pay, and if he does pay the outstanding balance, he takes over by subrogation as
against the owner

· The guarantor may also take over any securities such as cheques or promissory
notes which the owner took

6. VOID PROVISIONS

· By virtue of Section7, HPA 1968, any provision in the agreementshall be void if

it:

(i) Allows the owneror his agent to enterthe premises of the hirerand take
possession of the goods;

(ii) Attempts to preventthe hirer from terminating the hire

purchaseagreement as providedfor under Section 12;

(iii) Adds extra liabilities should the hirerterminate the agreement; or

(iv) Attempts to relievethe owner from liability for the defaultof any of his
agents
· In addition,provisions which imposean agent on the hirer are also void:

o A personacting on behalfof the owner cannot be treated as or deemedto be the

agent of the hirer under a Hire PurchaseAgreement (as is often the case with
insurance agreements)

o Any provision purporting to impose such a personon the hirer as his agent will
be void

o A provisionwhich relieves the owner from liability for acts or defaults of any
personacting on his behalf in connection with the formation or conclusion of the
agreement is equally void

7. LIMITATIONS AGAINST OWNER

· Section 29, HPA 1968 prevents the owner – in the event of the hirer’s breach –
from enforcing any kind of accelerated payment, unless more than one tenth
(1/10th) of the hire purchase price is due in one instalment or more than one
twentieth (1/20th) in two instalments

· Also prohibited is any provision calling for damages, forfeiture, penalty or

accelerated payments, unless the hirer is given notice in writing and allowed 14 days
within which to carry out the obligation

· This section gives the hirer time to re-organise himself and avoid the adverse
consequences of what might have been a mere oversight on his part

8. LOCATION OF HIRER AND GOODS

· Ifthe owner requireshim to do so in the Hire Purchase Agreement, the hirer
must inform the owner of any changesin his location, including his postal,
residential and business addresses (as per the agreement) à afailure of the hirer to
comply means he may be fined up to Kshs. 2, 000/=

· The owner of the goods may also stipulatethat the hirer shall not remove or
permit the removal of the goods from Kenya without the written consent of the
owner (S. 10, HPA 1968)

o Before he removes or allows the goods or part thereof to be removed from any
premises for keeping at other premises, the hirer must notify the owner or his agent
in writing

o The hirer will be liable for a fine of up to Kshs. 10,000/=and for one year’s
imprisonment if he contravenes this,

and further, if the reasonfor removal was to deprivethe owner of his ownership

· The court may, on the application of the hirer and after hearing any
representations made by or on behalf of the owner, make an order approving the
removal of the goods to some other placewithin Kenya. That place shall, thereafter,
and for the purposes of theagreement, be substituted for the first-mentioned place
(S. 11, HPA 1968)

9. RECOVERY OF POSSESSION

· Once two-thirds of the hire purchase price has been paid or rendered by the
hirer, then any right to repossess the goods can only be exercised through court
action
· Ifthe owner institutes a suit to enforce a right to recover possession of the
goods from the hirer and he provesthat before the institution and after the right to
recover had accrued, he had made a request in writing to surrender the goods, then
the hirer’s possession shall be deemed to be adverse possession (S. 14, HPA 1968)

· Section 16(3)(b)HPA 1968 allowsthe owner to remove the goods if two or

more instalments are owing. This is not

repossession, but merelyan action protecting the owners’ interests

· Section 16(4) HPA 1968 provides that at a hearing for repossession, the court
can make the following orders:

o Delivery of all the goods tothe owner;

o Delivery of a part of the goods tothe owner;

o Condition that the hirer pays the unpaid balance in order to repossess the goods

· Under Section 25 HPA 1968, if the owner legally retakes possession of the
goods otherwise than by a suit, there is a duty places on him or her to resell at the
best possible price

· The hirer shall not be liable to the owner for conversion if he refusesto give up
possession to the owner by reason only of such refusal(Section 26 HPA 1968)

10. LICENCING THE HIRE PURCHASE

· Any person who carries on a hire-purchase business may only do so under and
in accordance with the terms ofa current licenceauthorising him to do so

· The Ministershall appoint a public officerto be the licensing officerfor the

purposesof the Hire Purchase Act 1968

· Such an officer is currently known as the Registrarof Hire PurchaseAgreements

in the Office of the AttorneyGeneral

· The Registrar may granta licence withoutconditions or subjectto such

conditions as he may think fit, or refuseto grant a licence (Section 20(1) HPA 1968)

· Every person carrying on hire purchase business must have an annual license,
failing which he is liable to a fine not exceeding Kshs. 20,000/= or imprisonment
not exceeding 1 year

· The licensemust be displayed in a conspicuous place in the business premise

11. SERVICE OF NOTICES

· Section 32 HPA 1968 states that notices to be served on either the owner or the
hirer should:

o Be delivered to him personally;

o Be delivered to a person over 16 years of age, residentor employed at the place of

residence or business; or

o Be posted or their last known residence or place of business

· Section 32A HPA 1968 allows the Minister, in consultation with the CBK, to
determine matters to be taken into account in the computation of the hire purchase
price, instalments, interest rates, penalties and forfeitures that may be imposed on
the hirer

12. INFORMATION

· A hirer can seek any information from the owner, e.g. on the outstanding
balance under the Hire PurchaseAgreement –

this request is to be made in writingand a fee of Kshs. 10/= is to be paid

· The owner is to give the hirer the information requestedfor within 14 days à
ifthe owner defaultsto supply the information within30 days, he will be
committing an offence and would be liable to a fine not exceeding Kshs. 500/=

· Under Section 34 HPA 1968, a person who gives any false information in a
proposal form or document will be guilty of an offence and liable to a fine not
exceeding Kshs. 5000/=or 6 months imprisonment, or both

13. TERMINATION

· The Hire Purchase Agreementmay be terminated by the hirer in the following

ways:

(i) Exercising of the hirer’s option to determine by returning the goods to the
owner and giving notice à if he exercises this option, the hirer must deliver the
goods to the owner, meet the depreciation costs and pay not less than ½ of the
purchase price

(ii) Breach or repudiation by the hirer;

(iii) Death of the hirer;

(iv) Bankruptcy of the hirer;

(v) Distress or execution

14. COMPLETION

· The hirer may give notice in writing to the ownerof the goods of his intention
to complete the purchase of the goods and to pay the owner the netbalance of the
purchase price on a specific day

· He hirer may exercisethis option at any timeduring the continuance of the

agreement, or within 28 days afterthe owner has repossessed the goods for whatever
reason

CHAPTER12: NEGOTIABLE INSTRUMENTS

1. INTRODUCTION

· The law recognises people’s rights in respect of real or personal property,and

with respect to personal propertythe law
recognises the validityof two different kinds:

(i) Choses in possession: these are corporeal property rights which can be
perceived by the senses and may be physically possessedor transferred, e.g. cash,
jewellery, a book, a watch, a table, etc. (i.e. tangibleproperty which exists in material
form)

§ They represent property rights exercised in relation to objects which have a

material or physical existence

§ Such rights can be protectedphysically

(ii) Choses in action: these are incorporeal property rights, i.e. they have no
material existence and are not of a tangible nature

§ They may be protected by means of legal action

§ Rights incorporated in negotiable instruments, right of an investor arising out of

a grant of a patent in respect of his invention, shareholders’ rights, rights of a
copyright’s holder, rights of a trader in respect of his trademark, trade name, good
will, etc. are instances of choses in action

· As stated above, negotiable instruments are a form of choses in

action(incorporeal property rights)

· Negotiable instruments are a classof documents that are todayfreely used for or
as payments in commercial transactions and monetary dealingswithin a country,
territory or region

· To facilitate payments within any given territory, country or regional economic

block, the relevant authorities often legislate on the currencies or other modes of
paymentsto be used as legaltender within the respective paymentsystems
2. NEGOTIABLE INSTRUMENTS

· The principal means or mode of realising payments within Kenya is through

various negotiable instruments recognised under the law (they are also referred to as
commercialpapers)

· In spite of developments represented by instantaneous money transfers (via

telecommunication networks), negotiable instruments are stillused extensively as a
means of commercial payment globally

· Mercantile custom and usage wield an important influence in this field, and the
certainty guaranteed under the law relating to negotiable instruments is still prized
in commercial transactions

· The protection offered by negotiable instruments to the bona fide purchaser

for value is paramount in trade – i.e. the principle that a good faith holder for value
acquires a better title than his transferor

· ‘Negotiable instrument’ is not defined in any Kenyan legislation, but it seems to

denote any writing or record that can be exchanged or transferred as money or for
money (to ‘negotiate’ here means to ‘transfer’)

· Essentially, a negotiable instrument is a document which promises the payment

of a fixed amount of money and which may be transferred from one person to
another person à i.e. it is a document containing rights that can be transferred by
delivery of the document
Any writing, or record, or
document …

… That can be exchanged or transferred from one person to another…

… And ordinarily promises the

paymentof a fixed amount of
money

2.1 NEGOTIABLE INSTRUMENTS IN KENYA

· The historyof negotiable instruments in Kenya is closely tied to their
development in Europe

· Kenya’s principal legislation governingnegotiable instruments – the Bills of

ExchangeAct (‘BEA’) – is largely a copy of the 1882 United Kingdom legislation by
the same name

· The main commercial paperscreated by the BEA are: Bills of Exchange;

Cheques; and, Promissory Notes

INSTRUMENTS NEGOTIABLE BY CUSTOM OR USAGE

TRANSFERABLE BUT NON-NEGOTIABLE INSTRUMENTS

These are instruments which have, over the years, acquired the

character of negotiability by the usage or custom of trade

These are some common documents which are freely

transferable but are no negotiable

(i) Treasury bills;

(ii) Banker’s drafts;

(iii) Bearer securities;

(iv) Bank notes;

(v) Share warrants;

(vi) Bearer debentures;

(vii) Dividend warrants;

(viii) Certificates of deposit;

(ix) Bearer scrips;

(x) Share certificates with blank transfer;

(xi) Floating rate notes, etc.

(i) Traveller’s cheque – not negotiable because of the condition attached, i.e.
the drawer must sign in front of the payee;

(ii) Bills of lading – not negotiable because they represent title to property
and not title to money;

(iii) Postal or money orders;

(iv) Delivery orders;

(v) Registered share certificates;

(vi) Registered debentures;

(vii) Insurance policies;

(viii) I.O.U’s
2.2 SOURCES OF LAW

· The principalsources of law relating to negotiable instruments in Kenya are:

o The Bills of Exchange Act (Cao. 27);

o The Cheques Act (Cap. 35);

o English common law; and

o English rules of equity

· The BEA largely mirrorsthe English statuteof 1882, whichin turn

largelycodifies case law that was developed from comprehensive rules created by
merchants earlier– it provided, and continues to provide, a code for the creation of
bills and cheques

· The BEA applies to Bills, Chequesand Promissory Notes,and came into force
on 14th May 1927

SOURCE OF LAW

RELEVANT

SECTION

WHAT IT PROVIDES

Bills of Exchange Act

Section 2

‘Bill’ means ‘Bill of Exchange’

Section 84

‘Note’ means a ‘Promissory Note’

Section 73

A ‘cheque’ is a bill of exchange, drawn on a banker and payable on demand

(i) The BEA does not mention other negotiable instruments, but its
principles are often used by courts in cases involving other types of instruments;

(ii) All cheques are – by law – bills of exchange, but not all bills of exchange
are cheques

(iii) Bills of exchange are relatively uncommon

(iv) The most common commercial document known today is the cheque

(v) Promissory notes, other than bank notes, are mainly used in medium-term
export credits today
The Cheques Act

Borrowed from the English Act of 1957, and came into effect on 28th July 1968

· It is mainly a procedural statute

· It was enacted to reduce the endorsement on cheques

· In practice, cheques were almost wholly issued to payees who presented the
same to bank for encashment or collection – they had long ceased to be instruments
of transfer

· Under this Act, banks are not required to examine endorsements on cheques
and

need not dishonour cheques for irregularities in endorsements

Judicature Act

Section 3

By virtue of Section 3 of the Judicature Act, common law and the doctrines of
equity are –

subject to the Kenyan constitution and various statutes – sources of Kenyan law.
Common law today is simply the body of law derived from judicial decisions as
opposed to the constitution and statutes

3. BILLS OF EXCHANGE

· Bills of exchange, as negotiable instruments, are still used widely in

international trade

· E.g. where a seller of goods allows his overseas buyer a period of credit but
needs access to funds in the interim, he may draw a bill of exchange in his own
favour on the buyer, or, more usually, on a bank that has undertaken to pay under
the terms of a documentary creditor

· With a credit periodagreed, the bill will be payable at a futuredate à e.g. 90 or

10 days after sight

· The bill of exchange is thereafter presented by the seller to the buyer for
acceptance (and in the case of a documentary credit transaction, the seller presents
the bill to the bank for acceptance)

· Where a bill has been accepted, the seller may proceed to discount it to his own
bank for immediate but reduced payment

à at this point, the seller’s bank assumes liability to collect payment from the buyer,
or other party that has accepted liability, when the bill matures

3.1 ESSENTIAL ELEMENTS OF A BILL OFEXCHANGE

· A Bill of Exchangeis a written promise of payment from one personto another
that is legallybinding

· Section 3(1) BEA: it is ‘an instrument in writing containing an unconditional

order, signed by the maker, directing a certain personto pay a sum certainin money
only to, or to the order of, a certainperson, or to the bearerof the instrument’

· A bill of exchangemust:

o Be in writing;

o Contain an order to pay;

o Be an unconditional order;

o Have all threeparties (i.e. drawer,drawee and payee);

o Be signed by thedrawer;

o Contain an order to pay money, which must be a sum certain; and

o Be duty-stamped (S. 5, 32 Stamp Duty Act)

· The serialnumber, date, placeand statement as to consideration do not affect

the validityof a bill of exchange

· However, a bill of exchange or note must be drawn on a stampedpaper, and the

stamp must be an impressed stamp (S. 23, Stamp Duty Act)

3.2 PARTICULARS OF A BILL OF EXCHANGE

(i) Name of drawer;

(ii) Address of drawer;

(iii) Signature of drawer;

(iv) Amount certain;

(v) Instructions (e.g. “Pay [insert name] on demand [or after 30 days]”);

(vi) Name of Payee;

(vii) Name of drawee;

(viii) Address of drawee;

(ix) Date; and

(x) Stamp Duty

4. CHEQUES AND PROMISSORY NOTES

· A chequeis defined as a ‘bill of exchange drawn on a banker and payable on

demand’ (Section 73(1) BEA)

· A chequehas two specialfeatures:

o It is always drawn on a specialbanker; and

o It is alwayspayable on demand
· Acheque as a bill of exchange is a negotiable instrument and can be
negotiatedfrom one person to another by mere delivery, or delivery and
endorsement, or whateverthe case may be

· As with a bill of exchange, there will always be three parties to a cheque:

(i) Drawer – the bank customerwho draws the cheque and orders the bank to
make payment;

(ii) Drawee – the bank whichis ordered to make the payment; and

(iii) Payee – this is the person to whom the payment is made

BILL OF EXCHANGE

CHEQUE

May be drawn on any person, including a bank

Is always drawn on a bank

A Bill may be drawn such that it is payable on demand, on expiry of a certain

period, or after sight/on the happening of a

determinable future event

Can only be payable on demand

Bill must be accepted before payment is made

Cheque does not require acknowledgement and is intended for

immediate payment

Notice of dishonour of a Bill is necessary

No notice (of dishonour, or otherwise) is necessary in the case

of a cheque

Bill may not be crossed

Cheque may be crossed

A 3-day grace period is allowed in the case of Bills

No grace period is given in the case of cheques

· A promissory note is an ‘unconditional promise in writing made by one person

to another, signed by the maker, engaging to pay on demand or at a fixed or
determinable future time, a sum certain in money or to the order of a specified
person or to the bearer’(Section 84(1) BEA)

· In a promissory note there are only two parties, but despite this the note still
countsas a negotiable instrument:

(i) Maker – the person who makes the promise to pay and signs;and

(ii) Payee – the person to whom the payment is to be made, that is, unless
henegotiates it
· The prominentcharacteristics of a promissory note are as follows:

o It must be in writing– a mere verbal promiseis not sufficient;

o It must containan express promiseto pay – a mere acknowledgement is not

sufficient;

o The promise to pay must be unconditional; and

o The maker of the notemust sign it

BILL OF EXCHANGE

PROMISSORY NOTE

A bill is an order

A promissory note is a promise to pay

There are 3 parties to a bill

There are only 2 parties to a promissory note

A foreign bill must be protested if it is dishonoured

A foreign note need not be protested if it is dishonoured

5. NEGOTIATION
· When a bill of exchange, cheque or promissory note is transferred to any
person, so as to constitute that person the holderthereof, the instrument is said to
be negotiated

· There are two methodsof negotiation:

a) Negotiation by delivery: if an instrument is payableto the bearer, it is

negotiable by delivery thereof

§ Delivery refersto the actual handing over of the document (negotiable

instrument) by way of a transfer of possession – actual or constructive – from one
person to another

b) Negotiation by endorsement and delivery: ifan instrument is payable to order,

it is negotiable by the holder by enforcement and delivery thereof

§ Endorsement means writing or signingof a person’sname on the back of an

instrument for the purposeof negotiation

§ The personwho endorses the instrument is called the ‘endorser’ and the person to
whom it is endorsed is called the ‘endorsee’

· Asper Section 29 BEA, in each case the transfereemust take the negotiable
instrument: for value, in good faith, and withoutnotice of conflicting claims or
defences (if any)

6. PARTIES TO A BILL OFEXCHANGE

(i) Drawer – the person who makes the bill of exchange

(ii) Drawee – the person who is directedto pay under the bill of exchange
(iii) Acceptor – the drawee becomesthe acceptor when he or she signs the bill

(iv) Payee – the person to whom paymentis to be made under the bill

6.1 HOLDER

· A holderis any payee or endorsee in possession of a bill or note, or the bearer

thereof(S. 2 BEA)

· However, the possessor may not necessarily be the ownerof the bill

· A personwho takes an order bill through a forged endorsement is not a

holderbecause he is notthe endorsee of it

· The rights ofa holder include:

(i) Right to enforcethe bill:

§ Against any person who has signed it; and

§ Against the transferor from whom he got it, whether or not the transferor
signedthe bill;

(ii) Right to acquire full rights in respect of a bill – for this, the holder must
give value for it by himselfor should have obtained it froma person who gave value;
and

(iii) Bylaw, there is a presumption (rebuttable by the defendant in an action

by the holder) that possession of a bill by the holder is supported by valuable
consideration
6.2 HOLDER FOR VALUE

· Aholder of a bill in respect of which value has been given at any time is deemed
to be a holder for value as regards the acceptorand all parties to thebill who became
parties prior tothat time (S. 27 BEA)

· ‘Valuable’ means:

a) Any consideration enough to supporta simple contract; or

b) An antecedent debt or liability

· Once a bill or cheque is given for value, all subsequent holdersare holders of
value

· Value is co-extensive with the contractual concept of consideration:

o Anything which in the law of contractwould be treatedas consideration is ‘value’,

e.g. goods, money, services

o Value given need not be adequate, but it must be something recognised by the
law as capableof being consideration

6.3 HOLDER IN DUE COURSE

· This is someone who takes the bill complete and regular on the face of it (on
both sides of the bill – i.e. ‘face’ and ‘back’):

(i) Before it was overdue;

(ii) Without notice of any preciousdishonour, if any;

(iii) In good faith and for value; and

(iv) Without notice of any defect in the transferor’s title at the time the bill
was negotiated to him

· ‘Complete’ means that it has all essential formal requirements as per the BEA,
e.g. unconditional order, is in writing, is addressed to one person, etc.

· ‘Regular’ means that there is no obvious abnormality such as erasure, additions

not in conformitywith the rest of the

document, etc. à these abnormalities could include:different ink, endorsement in

the name of a different payee, etc.

· ‘Complete and regular’ means also that:

(i) There has been no forgeryof essential endorsement;

(ii) The bill is complete, without any missingsections;

(iii) The Bill must not be overdue and must be taken withoutnotice of
previousdishonour;

(iv) The holder of the bill took it in good faith and for value; and

(v) Atthe time the bill was negotiated to the holder, he had no notice of any
defect in the title of the person who negotiated it

· Apayee of a cheque cannot, therefore, be a holder in due course, as the cheque

was merely given/issued to the payee and not negotiated to him (within the
meaning of Sections29, 31 BEA)
· Similarly, an innocent third party who gives valuein good faith cannot,
nevertheless, be a holderin due course of a promissory note which is not complete
and regular on the face of it

· The rights of a holder in due courseinclude:

(i) He is an absolutelegal owner of the bill/cheque;

(ii) His title cannotbe disputes and is not affected by any defectin the previous
title or any counterclaims;

(iii) Hecan enforce againstany prior partiesand can sue all prior parties (if
necessary) in his own name if the bill/cheque is not honoured; and

(iv) He can pass a perfecttitle

6.4 HOLDER IN DUE COURSE BY DERIVATION

· A holder who derives his title to a bill through another holder in due course
will be entitled to all the rights of the latte r holder as regards the acceptor, and all
parties to the bill prior to that holder, if he is himself not a party to any fraud or
illegality affecting the bill (Section 29(3) BEA)

· Jade International Street v Robert Nicholas [1978]: it was held that even a
person who draws a bill in his own favour can benefitfrom this provision where the
bill is negotiated from him, as payee, to an endorsee, who is a holder in due course,
and later renegotiated back to the original payee by that endorsee
7. CAPACITY OF PARTIES

· The capacity of a person to incur liability as a party to a bill of exchange,

cheque or promissory note is co -extensive with his capacity to contract (Section 22
BEA)

7.1 MINOR

· A minormay draw, endorse,deliver and negotiate a negotiable instrument so as

to bind all partiesexcept himself

· The holderis entitled to receive paymentof the bill and enforceit against any
other partyto it (S. 22(2) BEA)

· That is, the holdermay operate as a channelthe convey title and liability

7.2 PERSONS OF UNSOUNDMIND

· Bills and promissory notes drawn or made by a person of unsound mind are
void as against him, if at the time of the executionif such instruments he is not
capableof forming a rational judgment

· However, the other partiesto the bill or promissory note will continueto be
liable

7.3 CORPORATIONS
· A corporation – being an artificial person – can exercise only those powers
which its memorandum or articles of association confer on it

· Bya proviso to Section 22 BEA, acorporation cannot make itself liableas drawer,
acceptor or endorser of a bill unless it is competentto do so under the law for the
time being in force relating to corporations

· Ifa corporation exceedsits powers and executes a bill, chequeor note, the
instrument is void and cannot even be ratifiedby a subsequent unanimous
resolution of all of its members

· Furthermore, even a bona fide holderin due course cannot make the
corporation liable on such an instrument

· The Companies Act providesthat a bill of exchangeof promissory note shall be

deemed to have been made, accepted or endorsedon behalf of a company if made,
accepted, or endorsed:

(i) In the name of; or

(ii) By; or

(iii) On behalf of; or

(iv) On account of, the companyby any person acting under its expressor
implied authority (S. 35 Companies Act)

· However, executionof cheques is excluded under the above provision

· Atrading company has implied power to bind itself by negotiable instruments,

however, a non-trading company must obtainexpress power to draw,make, endorse
or acceptnegotiable instruments
7.4 AGENT

· An agent who signs a negotiable instrument for his principal may bind his
principal, provided:

(i) He signs the principal’s name or stateson the face of the instrument that he
signs asan agent; and

(ii) He acts withinthe scope of his authority

· An agent may also sign by procuration, a noticethat he has but a limited

authority to do so (Section 25 BEA)

· An agent becomes personally liable on the instrument if:

o He puts his signature to an instrument without stating that he signsas an agent;

or

o He executes an instrument in excess of authority accordedto him

· Furthermore, the mere additionto his signature of words describing him as an

agent/that he acts in a representative character will not exempthim from
personalliability (Section 26 BEA)

CASE

HOLDING
Liverpool Bank v Walker

[1859]

The manager of a company, in accepting a bill, signed by stating his name and
adding the word

‘Manager’. The court held that he was personally liable on the bill

Alexander v Sizer [1869]

A managing director signing ‘for’ the company was held not to be personally liable

7.5 PARTNER

· In a trading firm, each partner has implied authority to bind his co-partners by
drawing, endorsing, accepting or negotiating bills, promissory notes and cheques

· Section 7, PA 2012: every partneris an agent of the firm and his other partners
for the purpose of the business of the partnership

· To be binding in nature, the act done by the partner in question must:

o Be done in relation to the partnership business;

o Be an act for carryingon business in the usual way; and

o Be an act done as a partner,and not as an individual

· Further, any act or instrument relating to the businessof a partnership and

done or executedin the name of the firm, or in any other mannershowing an
intentionto bind the firm, by any personauthorised to do so, it binding on thefirm

o This is regardless of whether such a person is a partner or not (Section8, PA

2012)

o This provision does not affectthe general rule relating to execution of deeds or
negotiable instruments

8. TRANSFER OF BILLS OF EXCHANGE

· Abill is negotiated when it is transferred from one personto another in such a

manner as to constitute the transferee the holder of the bill (Section 31(1) BEA)

· The actualmode of negotiation (transfer) dependson whether the bill is a bearer

or an order bill (Section8(2) BEA)

· A bearer bill:

o This is one that is expressed to be payableto beater or an orderbill that has been
endorsedin blank, i.e. when:

§ It is expressed to be so payable to bearer, e.g. ‘pay bearer’; or

§ The only, or last, endorsement on an order bill is one in blank, i.e. specifies no
endorsee (Section8(3), 34(1) BEA); or

§ The payeeis a fictitious or non-existing person(Section 7(3) BEA)

o Bearer bills are transferable by mere delivery(actual or constructive)

alone
· An orderbill:

o A bill is payableto order when:

§ It is expressed to be so payable, e.g. ‘Pay [insertname] or order’;or

§ It is expressedto be payable to a particular person, and does not contain words

prohibiting transfer or

indicating an intentionthat it should not be transferable, e.g. ‘Pay [insertname]’

(Section 8(4) BEA); or

§ The bill originally endorsedin blank is converted to a special endorsement, i.e.

specifies the person to whom or to whose order it is payable (Section 34(4) BEA)

o An order bill is transferred in the following ways:

§ By the endorsement of the payee or the holder to whom it has been specifically
endorsedand

§ The deliveryof it (the bill)

8.1 ENDORSEMENT

· ‘Endorsement’, in commercial law, ordinarily meanssigning the back of a

document to transfer ownership of the rightsin

that documentto a specified payee

· It is defined in Section 2 BEA as ‘an endorsement completed by delivery’

· To operate as a negotiation, an endorsement must, among other things, be
written on the bill itself and be an endorsement of the entire bill (Section 32 BEA)

8.2 DELIVERY

· Inthe ordinary sense of the word, deliverymeans – among other things – the act
of giving or transferring, or the state of being transferred or given

· In Section2, BEA, delivery is definedas the ‘transfer of possession, actualor

constructive, from one personto another’

· ‘Actual’ delivery is one which exists in reality, while ‘constructive’ delivery is

effected by mere intention, e.g. where the drawer completes a cheque and notifies
the payee, while holding it on the payee’s behalf, then the cheque is deemed issued

· No personis liable on a bill unless he has: signed it and delivered it

· Deliver is presumed in favour of a holderin due course, but presumption may

be rebuttedin the case of any other holder

8.3 NEMO DAT RULE

· Aperson taking an instrument bona fide, and for value, known as a holderin
due course, gets title even thoughthe title of the transferor may be defective

· A ‘rough and ready’ test of negotiability in the case of bearer instruments is:
can a good title be acquired through a thief? If yes, the instrument is negotiable
· In otherwords, the principle of ‘nemo dat quod non habet’ does not apply to
negotiable instruments

9. FORGED OR UNAUTHORISED BILL

· Section 24 BEA: where a signature ona bill is forged or placed thereon without
the authority of the person whose signatureit purports to be, the forged or
unauthorised signature is wholly inoperative and no rights can be acquired by
reason of such signature

· The only exception is where the party against whom enforcement is sought is
estopped from denying the genuineness of the signature

· ‘Forgery’ is the making of a false document with intend to defraud or deceive

(Section345, Penal Code)

o ‘Unauthorised signature’ refers to a signature made without the permission of

the person whom it is sought to hold liable;or

o A signature made in pursuanceof a purpose which is not approvedby the person

whom it is soughtto hold liable thereon

· ‘Authority’ may be called into question– for example – where a

person,purporting to be an agent ofanother (principal), signs his own name but
without the authority to do so

· Anunauthorised signature may be ratifiedby the person by whoseauthority it

purports to be made, but a forgery– being a criminal office – cannot be ratified
· The forgery of a drawer’s signature on a bill renders it void; as theforgery means
that it is notan order addressed by one

person to another, signedby the person giving it (Section 3(1) BEA)

· Where the acceptor’s signatureis forged, he incurs no liability, but all other
persons whose signatures are genuine are

liable to the holder

· Any forgery of the endorsement on an order bill nullifies the transfer since the
endorsement is vital for transfer of an order bill

· A forgedor unauthorised endorsement/signature is deemed ‘irregular’, i.e. the

chequeis not complete and regular on its

face

CASE

HOLDING

Kenya Industrial Research and development Institute v NBK [1995]

It was held that a cheque on which a drawer’s signature is forged is a mere paper and
is not a cheque at all, unless it becomes valid by estoppel.

However, the suggestion in that case that a forged cheque could also be validated ‘if
adopted by the drawer’ seems to go against the law on ratification of a forgery.
10. MATERIAL ALTERATION

· Section 64 BEA: wherea bill is materially alteredwithout assent of all parties

liable on it, the bill is void exceptas against:

a) A party who has himself made, authorised or assented to the alteration;

b) A subsequent endorser,provided the alteration is not apparent; or

c) A holderin due course, where the alteration is not apparent

· Any alteration to an instrument is material if it in any way:

o Alters the character is identity of the instrument;

o Shakes the very foundation of the instrument;

o Alters the operation of the instrument; or

o Changes the rightsand liabilities of the partiesthereto, whether the change be

prejudicial or beneficial

· Section 64(2) BEA: examplesof material alterations to a bill are: the date, the
sum payable,the time of payment, the place of payment, the addition of a place of
payment (without the acceptor’s consent), alteration of the name of the drawee,
crossing,change from ‘order’ to ‘bearer’ (and vice versa), alteration to the payee’s
name, etc.

· The following alterations made to a chequewill be deemedto be material:

o Date;

o Amount;

o Name of payee;

o Any crossing;

o ‘Order’ to ‘bearer’,unless the drawer endorses the same

10.1 APPARENT AND NON-APPARENT ALTERATION

· Section 64(1) BEA provided that a holder in due course may, notwithstanding a
material alteration, enforce payment of a bill according to its original tenor where
the alteration is not apparent

· No guidance is given on what is ‘apparentalteration’, but this is understoodas

one which a reasonablycareful scrutiny

would reveal (Woolatt v Stanley [1923])

· A non-apparent alteration is a cleverly or skilfully made alteration

10.2 MATERIAL ALTERATIONS

· The followingalterations will not vitiate an instrument:

(i) An alteration which,though made in a materialpart, was made before the

instrument was issued;
(ii) An alteration made for the purpose of correcting a mistake, such as the
correction of mistake in respect of the

date on a bill, e.g. ‘2021 to 2019’;

(iii) An alteration made to carry out the common intention of the originalparties,
e.g. the subsequent insertion of the

words ‘or order’ where the drawerof the bill forgets to insert the words;

(iv) An alteration made with the consent of the parties;and

(v) An alteration which is not material

10.3 ALTERATIONS AUTHORISED BY THE BILLS AND EXCHANGE

ACT

(i) Filing blanksof an inchoate instrument;

(ii) Conversion of a blankendorsement into a special endorsement or

endorsement in full; and

(iii) Crossing of cheques

10.4 EFFECT OF MATERIAL ALTERATION

· An unauthorised alteration discharges all parties prior to the alteration, unless

they agree to it
· Abanker will not pay a cheque bearinga material alteration unless the alteration
has been agreed to and signed by the drawer

· Where the alteration is not apparent,a holder in due coursecan enforce the
cheque as if it was unaltered

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