M3: CONTRACT LAW, EMPLOYMENT & NEGLIGENCE

Question 1

What is a contract?

Answer 1

A contract is a legally binding agreement that two or more parties voluntarily enter, with rights and responsibilities on each side.

Question 2

Why are contracts important?

Answer 2

Contracts are important because they provide certainty, protect the
interests of both parties and help to avoid disputes.

Question 3

What is an offer?

Answer 3

An offer:
- Is an expression of willingness to contract on specified terms
- Has the intention that it is to be binding once accepted

That is clearly communicated to the offeree to be an offer.

Question 4

What is needed to form a contract?

Answer 4

• A clear offer
• An unqualified acceptance to create an agreement
• The agreement must be supported by consideration
• There must be an intention to create legal relations
• The parties have capacity to enter into a contract

Question 5

What is acceptance?

Answer 5

Acceptance happens prior to a contract being formed when there is an offer that gets accepted it must have UNQUALIFIED ACCEPTANCE aswell.

This means that the offeree can’t add further terms while accepting as this creates a counter-offer.

Question 6

What is consideration?

Answer 6

Consideration is when both parties must receive a benefit from the other party performing their obligations under the contract (has to have value in the eyes of the law).

Question 7

Who has capacity to enter into a contract?

Answer 7

Adults generally have full capacity and can enter into contracts. The law protects those who are underage minors or who do not have mental capacity.

Question 8

What does intention to create legal relations mean?

Answer 8

Everyone entering into the contract must intend to be legally bound for the contract to be legally valid.

Question 9

What is the illegality principle?

Answer 9

If there is something problematic or illegal about either the nature of the contract itself or the circumstances in which the contract was entered into, it may not be legally binding regardless if the requirements for a legally binding contract have been met.

Question 10

When are the three key reason why a contract be deemed illegal?

Answer 10

1. Entering into the contract: Where legislation specifically prohibits people from entering into certain contracts, the very act of entering into the contract is unlawful. These contracts are not enforceable.
2. Purpose of the contract: Contracts entered into for the commission of a crime are generally illegal. These contracts are also not enforceable.

For example, agreeing to pay someone to steal a car is not an enforceable contract. Whether anyone would want to take a disagreement over this kind of contract to court is another question.

3. The way the contract is performed: Contracts where the purpose of the contract is legal but there is something illegal in the way the contract is performed are harder to classify.

Question 11

What is the difference between a valid, a void and a voidable contract?

Answer 11

Valid is when a contract is validly constituted, it is legally binding and enforceable in law.

Void is where a contract is not properly constituted, it cannot create legal rights or obligations. (Missing an element of contract formation i.e no intention)

A voidable contract is valid and enforceable, unless or until it is rescinded (set aside). Contracts are voidable where there is some issue or error with their formation. i.e. a minor, lacked legal capacity, statutory rule, vitiating factor such as duress, misrepresentation etc.

Question 12

What are the vitiating factors under which a contract is voidable?

Answer 12

1. Misrepresentation
2. Duress
3. Undue influence

Question 13

What are the rules regarding misrepresentation?

Answer 13

Any information which a contracting person does give to the other party whether voluntarily or in response to a query, should be correct.

Question 14

What are the different types of misrepresentation?

Answer 14

Fraudulent misrepresentation is where a false representation has been made knowingly.

Negligent misrepresentation is where a false representation has been made carelessly.

Innocent misrepresentation is where a false representation is neither fraudulent nor negligent.

Question 15

What are the rules regarding duress?

Answer 15

Duress requires:
- Compulsion against the will of the victim, ie the victim must have no realistic option but to agree to the demand.

• Illegitimacy of the pressure, ie the threat must be unlawful.

Question 16

What are the rules regarding undue influence?

Answer 16

A contract is entered into as a result of one party taking advantage of an existing relationship of trust or confidence with another party.

Question 17

What are the main ways in which the obligations agreed to under a contract can be discharged?

Answer 17

A contract can be discharged by:
1. Performance (the job is done)
2. Agreement
3. Impossibility of performance (health issues/law problem)
4. Breach of contract

Question 18

What are the effects of a breach of contract?

Answer 18

A breach of contract may be:
* material - goes to the root of the contract
* immaterial - does not go to the root of the contract, and causes little harm
* anticipatory - where one party gives notice that they are going to be unable to perform their obligations under a contract.

Question 19

What are conditions, warranties and innominate terms?

Answer 19

There are three kinds of contractual terms:
* Conditions – major terms of the contract
* Warranties – minor terms of the contract
* Innominate – either a major or a minor term of the contract

Question 20

When is there a right to damages and what caveats exist?

Answer 20

1. Material breach - innocent party has right to end the contract and sue for damages
2. Immaterial breach - innocent party unlikely to be able to end the contract, possibly sue for damages
3. Anticipatory breach - innocent party may end the contract and sue for damages

Caveats:
1. Remoteness of damages - The damages being claimed cannot be of a speculative nature.

2. Duty to mitigate losses - injured party must take reasonable steps to minimise their losses

Question 21

What is meant by the law of tort?

Answer 21

The law of tort recognises legal obligations on every one of us, which arise without us having any choice in the matter.

The law of tort addresses two moral questions: How should we treat each other and who should be held accountable when something goes wrong?

Question 22

What are the other remedies for a breach of contract?

Answer 22

1. Restitution - Restitution may apply where a party has profited – or been unjustly enriched –from breaching a contract.
2. Specific performance - force another party to perform their obligations under a contract.
3. Injunction - preventative remedy to try to stop a party from breaching a contract.

Question 23

What are the different kinds of torts?

Answer 23

Either intentional or unintentional

Intentional:
- Fraud
- Theft
- Defamation
- Invasion of privacy
- Trespass (to land and property)

Unintentional:
- Personal injury
- Professional malpractice

Question 24

What is negligence?

Answer 24

Negligence is a careless act that causes harm to another person or their property.

The following three conditions need to be met to bring a claim under the law of negligence:
1 - The defendant owed the claimant a duty of care
2 - There was a breach of the duty of care
3 - The breach caused loss or injury

Question 25

What is the ‘neighbour principle’ and how does this relate to duty of care?

Answer 25

You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. By avoiding these acts it shows their is a duty of care relating from one party to another.

Question 26

What are the key elements of a negligence claim?

Answer 26

1. Is there a duty of care? 2. What is the standard duty of care? 3. Has there been a breach of the duty of care? 4. Is there a direct casual link? 5. Are there any defences available? 6. What remedies are available?

Question 27

What factors must be satisfied to show that a duty of care exists?

Answer 27

* The damage to the claimant due to the defendant’s breach of duty must be reasonably foreseeable. * There must be proximity between the claimant and the defendant. * It must be ‘fair, just and reasonable’ for a duty to be imposed on the defendant.

Question 28

What is meant by the standard of care?

Answer 28

The standard that is applied is an objective test of what a reasonable person would be expected do in the circumstances.

Question 29

What do we mean by causation?

Answer 29

Causation is where we have established a duty of care is owed but now we need to establish a direct causal link between the breach and the injury suffered via factual and legal causation. Where: - Factual: ‘But for’ the negligence of the defendant would the claimant have suffered injury?” - Legal: Has an intervening act ‘broken the chain of causation’? Is the relationship between the negligent act and damage caused too remote?

Question 30

What is the difference between factual and legal causation?

Answer 30

Factual: ‘But for’ the negligence of the defendant would the claimant have suffered injury?” Legal: Has an intervening act ‘broken the chain of causation’? Is the relationship between the negligent act and damage caused too remote?

Question 31

What are the three main defences available in a negligence claim?

Answer 31

1. Contributory negligence – partial defence 2. Voluntary acceptance of risk - volenti non fit injuria 3. Illegality

Question 32

To whom do accountants owe a duty of care?

Answer 32

To their clients via Professional competence and due care (ICAS principle)

Question 33

How can accountants manage the risk of a potential negligence claim?

Answer 33

CAs can manage the risk of a potential negligence claim by: * having quality assurance processes in place to ensure work is prepared to a professional standard. * having an engagement letter, clearly outlining the scope of work to be carried out. * including a disclaimer of liability in their work to protect against claims by third parties. * arranging professional indemnity insurance (PII).

Question 34

What should be included in an engagement letter?

Answer 34

An engagement letter will include: * A statement of the actual services to be performed. * The fees to be charged or the basis of the charge (eg hourly rates or fixed fee). * The terms of the engagement as signed by the client. * The letter may also include a clause restricting their liability for negligence.

Question 35

What is a disclaimer of liability?

Answer 35

Disclaimer of liability is where a person tries to protect themselves from third-party claims by including a disclaimer of liability in their work.

Question 36

What is professional indemnity insurance and why do accountants need to have it?

Answer 36

A PII policy will cover the legal costs of any client claim as well as any compensatory damages that the firm is required to pay. PII cover is a requirement for firms for membership of their respective accountancy institutes.

Question 37

When can auditors limit their liability?

Answer 37

Auditors can limit their liability in respect of statutory audit work carried out for a company by entering into specific agreements with their clients via a LIABILITY LIMITATION AGREEMENT. A liability limitation agreement requires shareholder approval and cannot cover more than one financial year.

Question 38

What is vicarious liability?

Answer 38

The employer is held liable for the wrongful acts of an employee committed in the course of employment.

Question 39

How does vicarious liability differ from direct liability?

Answer 39

Vicarious liability = employer liable for their employees Direct liability = individual liable for the harmful act.

Question 40

What is needed to establish vicarious liability?

Answer 40

Vicarious liability requires: * a relationship of employment or akin to employment. * the harm must be committed in the course of employment. * there must be a direct causal link between the employee’s actions and the injury experienced by the claimant.

Question 41

What is the impact of vicarious liability on organisations?

Answer 41

* Financial costs. * Reputational damage. * Workplace culture

Question 42

Why is insurance important and what does the term subrogation mean?

Answer 42

Insurance is important to manage the risk of negligence claims. Subrogation = the ability to take on the legal rights of others

Question 43

What is the difference between an employed and a self-employed individual?

Answer 43

An individual has a contract of service. A self-employed individual will have a contract for services.

Question 44

What is meant by the terms ‘employee’ and ‘worker’?

Answer 44

* Employees have protection against unfair dismissal, a right to receive redundancy payments, a right to the national minimum wage, paid holiday and sickness pay. * Workers have limited employment rights. They are entitled to holiday pay, paid rest breaks and the national minimum wage.

Question 45

What are the key terms of an employment contract?

Answer 45

Two documents mainly as there is no requirement for an employment contract to be in writing. Principal statement: - Names of the employer and employee - Employee or worker’s job title or description of work - Date when the employment began - Details of remuneration (pay) - Hours of work and if and how they may vary - Terms in relation to holidays - Place of employment, including whether the employee or worker may be required to relocate - If the employee or worker will be working in different locations, where these places will be and what the employer’s address is - Duration of the role (including end date if a fixed-term contract) - Notice requirements - Length of any probation period - Any benefits, such as childcare vouchers - Details of any obligatory training and whether paid for by the employer - Details of sick pay - Details of any paid leave, such as maternity or paternity leave Written statement of particulars: - Details of pensions and pension schemes - Details of any collective agreements (agreements between an employer and representatives of employees such as trade unions) - Details of any right to non-compulsory training provided by the employer - Details of disciplinary and grievance procedures

Question 46

In what ways can an employment contract come to an end?

Answer 46

An employment contract can come to the end at: * End of a fixed term * End of a notice period * On dismissal by the employer due to: − Redundancy (min 2 years service required for statutory redundancy pay) − Lack of capability or qualifications − Misconduct − Inability to work without contravening the law

Question 47

What protection exists against dismissal?

Answer 47

Employees can make a claim through an employment tribunal for the following types of dismissal: 1. Wrongful dismissal - Employer has dismissed an employee and has breached the terms of the contract between the employer and the employee. No minimum length of service for a claim. 2. Unfair dismissal - Employee may be able to bring unfair dismissal claim if the employer did not have a fair reason for dismissal or did not follow a fair procedure. 2+ years service for a claim. Automatic unfair dismissal No minimum length of service for a claim. Reasons include: becoming pregnant, having a protected characteristic (Equality Act 2010); trade union membership; taking part in legal inductrial action Constructive unfair dismissal: An employee feels that their employer’s actions have left them with no choice but to resign. 2+ years service for a claim.

Question 48

What protection exists for employees when a business is transferred?

Answer 48

TUPE Regulations provide employment rights to employees when their employer changes because of a business transfer.

Question 49

What protection exists for employees’ data?

Answer 49

Data Protection Act 2018. An employer will need to obtain an employee’s consent to process other types of personal data. Processing includes collecting, storing and using data.

Question 50

What are the rules regarding Modern Slavery Act 2015?

Answer 50

The Modern Slavery Act 2015 requires businesses with an annual turnover of more than £36m and which supply goods or services in the UK to publish a ‘slavery and human trafficking statement’.

Question 51

What are the different types of discrimination and what are the rules around these?

Answer 51

The Equality Act 2010 precludes discrimination on nine specific grounds, collectively described as ‘protected characteristics’: * Age * Disability * Gender reassignment * Marriage and civil partnership * Pregnancy and maternity * Race * Religion or belief * Sex * Sexual orientation Employers are required to make ‘reasonable adjustments’ for disabled employees.

Question 52

What is meant by harassment?

Answer 52

Harassment is unwanted behaviour related to a relevant characteristic that makes someone feel intimidated or offended. Harassment is unlawful if it relates to one of the protected characteristics under the Equality Act 2010.