f4bwa 2009 Dec Ans

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Fundamentals Level – Skills Module, Paper F4 (BWA)

Corporate and Business Law (Botswana) December 2009 Answers

1 This question requires the candidates to discuss the various ways of classifying law.

(a) Common Law and Legislation

Common Law

This is the law that is laid down in the cases (case law).

Legislation

This is the law that is in the Acts of Parliament. Important examples are the Constitution, the Companies Act 2003, and the

Bills of Exchange Act (Cap 68:01).

(b) Public Law and Private Law

Public Law

This is the law involving the State. A very good example is criminal law. The State lays down the law prohibiting certain

omissions and actions. In case of a breach, the State prosecutes the accused. Thus a crime is a wrong against the entire

community. Accordingly, the State takes the responsibility of enforcing the law and punishing offenders. Most commercial

laws are also part of public law (e.g., company law and banking law). Other examples of public law include licensing law,

constitutional law and administrative law.

Private Law

Private law is concerned with matters arising between individuals within the community. A good example is family law: Mattersof marriage, divorce, and adoption are private law matters. Another good example is the law of delict. A delict is a wrong

committed by one individual against another mainly violating the rights of that other person. The injured individual brings an

action (as plaintiff) against the person who has committed the wrongful act (the defendant).

(c) Criminal Law and Civil Law

Criminal Law

Criminal law is a very common branch of the law. It is concerned with the definition and prosecution of crimes. Crimes are

defined mainly in the Acts of Parliament such as the Penal Code. When a crime is committed, the State brings the prosecution

against the offender. The police assist in the maintenance of law and order and in prosecuting offenders. The courts get

involved in determining whether the crime was actually committed and in imposing a sentence.

Civil Law

It is concerned with actions by an individual (the plaintiff) against another person (the defendant) to obtain compensation for

loss suffered (e.g. in the case of breach of contract) or to establish legal rights. A good example is the law of contract whichdeals with the enforcement of legally binding obligations. Another good example is the law of delict. Other examples include

property law, commercial law and employment law.

(d) Substantive Law and Procedural Law

Substantive Law

This determines the law which governs a particular dispute.

Procedural Law

This states the procedure to be followed by litigants to have the dispute resolved in court. It will, for example, state which court

has jurisdiction and it will further indicate which documents, if any, have to be filed. Criminal Procedure, Civil Procedure and

Evidence are part of the procedural law.

(e) Common Law and Equity

Common law was gradually established by the judges of the King’s Courts in England. These judges would go around the

country on circuit interpreting the customs of the people. Their judgments became the common law of England. However,common law was too slow and the remedies were inadequate. The litigants complained to the King who appointed his

Chancellor to sit as a court to resolve the disputes. The Chancellor established faster procedure and better remedies (such as

specific performance and injunction). The law established by the Chancellor ensured justice and fairness and this new body

of law became known as equity. The principles of equity were eventually fused into the common law. Botswana received this

common law as part of its Roman-Dutch law.

(f) Municipal Law and International Law

Municipal Law

Municipal law is the internal law of a country. It is the substantive and procedural law that governs matters within a State.

These matters usually involve individuals.

International Law

This is the law that governs relations between nations. It comprises treaties, customary international law principles and

conventions.

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2 This question requires candidates to establish the difference between express and implied terms in contracts.

(a) Express terms are statements actually made by one of the parties with the intention that they become part of the contract and

thus binding and enforceable through cour t action if necessary. It is this intention that distinguishes the contractual term from

the mere representation, which, although it may induce the contractual agreement, does not become a term of the contract.

Failure to comply with the former gives rise to an action for breach of contract, whilst failure to comply with the latter only gives

rise to an action for misrepresentation.

Such express statements may be made by word or in writing as long as they are sufficiently clear for them to be enforceable.

Thus in Scammel v Ouston (1941). Ouston had ordered a van from the claimant on the understanding that the balance of

the purchase price was to be paid ‘on hire purchase terms over two years’. When Scammel failed to deliver the van Ouston

sued for breach of contract without success, the court holding that the supposed terms of the contract were too uncertain to be

enforceable. There was no doubt that Ouston wanted the van on hire purchase but his difficulty was that Scammel operated

a range of hire purchase terms and the precise conditions of his proposed hire purchase agreement were never sufficiently

determined.

Implied terms, however, are not actually stated or expressed included in the contract, but are introduced into the contract by

implication. In other words the exact meaning and thus the terms of the contract are inferred from its context.

(b) Implied terms can be divided into three types.

Terms implied by statute

In this instance a particular piece of legislation states that certain terms have to be taken as constituting part of an agreement,

even where the contractual agreement between the parties be itself silent as to that particular provision. Some statutes providethat particular terms are to apply unless the contract in question specifically states otherwise. As an example of this type of

implied term in the area of company law is First Schedule of the Companies Act 2003, which contains the model constitution,

the provisions of which apply unless they are specifically excluded. If they are not excluded they apply, even if the actual articles

make no reference to the provision.

Terms implied by custom or usage

An agreement may be subject to terms that are customarily found in such contracts within a particular market, trade or locality.

Once again this is the case even where it is not actually specified by the parties. For example, in Hutton v Warren (1836), it

was held that customary usage permitted a farm tenant to claim an allowance for seed and labour on quitting his tenancy. It

should be noted, however, that custom cannot override the express terms of an agreement (Les Affreteurs Reunis SA v Walford

(1919)).

Terms implied by the courts

Generally it is a matter for the parties concerned to decide the terms of contract, but on occasion the court will presume that the

parties intended to include a term which is not expressly stated. They will do so where it is necessary to give business efficacy

to the contract.

Whether a term may be implied can be decided on the basis of the officious bystander test. Imagine two parties, A and B,

negotiating a contract. A third party, C, interrupts to suggest a particular provision. A and B reply that that particular term is

understood. In just such a way, the court will decide that a term should be implied into a contract. In The Moorcock (1889),

the appellants, owners of a wharf, contracted with the respondents to permit them to discharge their ship at the wharf. It

was apparent to both parties that when the tide was out the ship would rest on the riverbed. When the tide was out, the

ship sustained damage by settling on a ridge. It was held that there was an implied warranty in the contract that the place of

anchorage should be safe for the ship. As a consequence, the ship owner was entitled to damages for breach of that term.

Alternatively the courts will imply certain terms into unspecific contracts where the parties have not reduced the general

agreement into specific details. Thus in contracts of employment the courts have asserted the existence of implied terms to

impose duties on both employers and employees, although such implied terms can be overridden by express contractual

provision to the contrary.

3 Compensation for damage suffered by a person can be recovered from another person only if there are legally recognised grounds

for recovery. The law of delict lays down what is required for an act causing damage to qualify as a delict and what remedies are

available to the party suffering the damage. A delict is any unlawful culpable act whereby a person (the wrongdoer) causes the

other party (the person injured) damage or injury to personality, and whereby the prejudiced person is granted a right to damages

or compensation, depending on the circumstances. From this definition the following elements of a delict may be isolated, that is

(a) an act, (b) unlawfulness, (c) fault, (d) causation, and (e) damage or injury to personality (harm). To be held liable for the harm

which he or she has caused another, the wrongdoer’s action must comply with all these requirements or elements.

Not all acts (including omissions) that are harmful to others are delicts. Before an act can be deemed to constitute a delict it must also

(in addition to meeting the other requirements) be unlawful. An act or conduct is wrongful if it either infringes a legally recognised

right of the plaintiff or constitutes a breach of a legal duty owed by the defendant to the plaintiff. The legal duty may be imposed

by statute or by operation of common law, in which case the imposition of the duty depends upon the particular circumstances ofthe case. The inquiry into whether the plaintiff’s right has been infringed or the defendant has contravened a duty is objective in

the sense that the defendant’s state of mind, motives and the degree of care taken are not considered. The focus is on whether the

infringement of the plaintiff’s interest was in the particular circumstances objectively justifiable or unjustifiable.

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Conduct is wrongful or unlawful if it is unreasonable, in other words when, in the light of all the circumstances, the defendant

is expected to behave in a manner which will not harm the plaintiff. Courts also refer to concepts such as the boni mores, the

prevailing conceptions in a particular community at the given time or the legal convictions of the community. Each of these is merely

a different expression of the general criterion of reasonableness. To determine whether conduct is reasonable, courts must consider

and balance the particular conflicting interests of the parties, the parties’ relationship to each other, the particular circumstances of

the case, whether the harm was foreseeable, whether any superior legal right exists, constitutional values and any other appropriate

considerations of social policy. Proof of the existence of a recognised ground for justification, such as, for example, self-defence,

conclusively demonstrates the reasonableness of the defendant’s conduct. Grounds of justification that have been accepted as

defences are therefore recognised expressions of the constant application of the test of reasonableness in particular situations.

4 This question requires the candidates to explain the various ways in which a contract of employment may be terminated.

A contract of employment may be terminated by:

(a) performance, e.g., completion of a specific project for which a person was employed;

(b) agreement, e.g., resignation by an employee;

(c) frustration, e.g., in the event of ill-health or military conscription;

(d) breach, the most important of these four means of discharge.

There are two further circumstances which do not fall into any of these categories, but which are also extremely important in

employment law. These are:

(a) termination by notice; and (b) termination by dismissal.

Termination by breach

An employment contract is terminated by breach where there is:

(a) summary dismissal;

(b) constructive dismissal;

(c) inability on the employer’s behalf to continue;

(d) repudiation of the contract by the employee.

Each of these are considered in turn below.

(a) Summary dismissal – the employer dismisses the employee without notice. He may do this if the employee has committed a

serious breach of contract and, if so, the employer incurs no liability. If, however, he has no sufficient justification the employer

is liable for breach of contract and the employee may claim a remedy for wrongful dismissal.

(b) Constructive dismissal – the employer, although willing to continue the employment, repudiates some essential term of the

contract, e.g., by a complete change in the employee’s duties, and the employee resigns. The employer is liable for breach of

contract.

(c) Employer’s liability to continue employment – if a person’s employer dies, an employing firm of partners is dissolved, and

employing company is compulsorily wound up, a receiver is appointed or the employee’s place of employment is permanently

closed, the employer may become unable to continue to employ the employee.

(d) Repudiation of the contract by the employee – if the employee resigns or fails to perform the contract and to observe its

conditions, that is breach of contract by him, and the employer may dismiss him or treat the contract as discharged by the

employee’s breach.

Termination by notice

As regards termination by notice, the following rules apply:

(a) The period of notice given must not be less than the statutory minimum, whatever the contract may specify; (b) It may be given without specific reason for so doing, unless the contract requires otherwise;

(c) An employment contract may be terminated for reason of retrenchment. To be lawful, retrenchment should be preceded by

consultation with employees likely to be retrenched. As soon as the employment forms the intention to retrench, he should

inform both the Commissioner of Labour and the employees likely to be affected in writing. A month’s notice pay is generally

required.

Although there is no breach of the contract, termination by notice is ‘dismissal’ under the Employment Act (Cap 47:01) and the

employee may be entitled to compensation for unfair dismissal.

Termination by dismissal

The concepts of summary dismissal and constructive dismissal are both examples of dismissal without proper notice. A dismissal

with proper notice is generally held to be lawful, unless it is shown to be wrongful or unfair . Wrongful dismissal is a common law

concept arising in specific circumstances and which gives the employee an action for breach of contract. Unfair dismissal is a concept

introduced by the jurisprudence of the Industrial Court. As a rule, every employee has the right not to be unfairly dismissed.

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5 This question requires the candidates to explain one of the grounds for the termination of a partnership.

Whether or not there is a definite period for the duration of a partnership and even though the partnership agreement expressly

prohibits withdrawal, a partner may unilaterally terminate the agreement and obtain a court order dissolving the partnership against

the wishes of the partners, if his conduct is justifiable and reasonable. He must show just cause or justa causa. A partner may

renounce the partnership on the following grounds:

(a) fulfillment of a condition allowing a partner to give notice of dissolution; or

(b) breach of an essential term of the partnership agreement; or

(c) conduct causing loss of confidence.

(a) Fulfillment of a condition

The partnership agreement may allow a partner to dissolve in certain circumstances – for example, if either partner became

addicted to drinks: Holshausen v Comming (1909).

(b) Breach of an essential term of the agreement

A partner is entitled to dissolve the partnership on breach by a co-partner of an essential term of the agreement, see example,

Schur v Davidoff (1916); Reidy v Dromey (1923); Purdon v Muller (1961).

A partner may renounce the partnership where his co-partner disappears (In re Coch & Nicholson (1884) or may be presumed

dead (Ex parte Warehouse & Anor v McKay (1919)), or becomes substantially incapable through illness of performing the

terms of the agreement (Pelunsky v Pastoll (1920)).

(c) Conduct causing loss of confidence

A partner is entitled to renounce on the ground of circumstances, arising other than through his own fault, which cause him to

lose confidence in his co-partner: McKay & Anor v McKay (1903); Gildenmeister v Machanglan (1906).

What constitutes just cause in the circumstances is a question of fact in each case. Generally, any event which irreparably destroys

the mutual trust and confidence between the partners and/or which makes good co-operation between the parties impossible, may

afford just ground for dissolution.

Examples

(i) carelessness in the conduct of a business by a managing partner, not in itself amounting to gross negligence but coupled with

a refusal to attend to the legitimate complaints of a co-partner;

(ii) the withholding of information, particularly as to the partner’s indebtedness to the partnership: Marshall v Marshall (Pty) Ltd

& Ors (1954);

(iii) adultery by a partner with his co-partner’s wife: Salter v Haskins (1914);

(iv) the institution of divorce proceedings between spouses, the two being partners: Warrington v Warrington (1916);

(v) the surreptitious and illegal appropriation of profits: Woomack v Commercial Vehicle Spares (Pvt) Ltd (1968).

6 This question requires the candidates to explain those situations where a principal may be bound by a contract entered into by an

agent on his behalf without his express authority.

There are three occasions where a principal may be bound by a contract entered into by an agent on his behalf but without his

express authority. These are agency of necessity, agency with implied authority and agency involving apparent (or ostensible)

authority.

An agency relationship between principal and agent can arise by operation of law if very strict conditions apply. This is agency by

necessity. It applies where the ‘principal’ entrusts goods to the ‘agent’ for some purpose (usually carriage) and an emergency arises

while the goods are in the agent’s possession, in circumstances where it is impossible to contract the principal for instructions. This

emergency must cause the agent to take some action to protect the principal’s interest; it must not be action taken for the agent’sown convenience: Sachs v Miklos (1948). If these conditions are satisfied, then the principal is bound by the contract made by the

agent (for example, for the feeding and care of livestock left in the agent’s care: Great Northern Railway v Swaffield (1874)).

In Roman-Dutch law, this type of ‘agency’ is known as negotiorum gestio. The person who manages the business of another without

the authority of the latter and in the latter’s absence is known as the negotiorum gestio. The negotiorum gestio has no express or

implied authority to represent the principal. He therefore cannot create obligations between the principal and third parties. He is

not entitled to remuneration for his services: William’s Estate v Mollenschool & Schep (Pty) Ltd (1939). He is entitled only to his

necessary or useful expenses provided he has not spent more than is appropriate to the occasion, nor more than the owner himself

would have spent.

An agent may have limited actual authority but may make contracts beyond those limits. In this case, the principal will be bound

if the agent acts within the scope of his implied authority. It is assumed that an agent has the authority to do things incidental to

his express powers. This may be inferred from his position (for example, as company secretary: Panorama Developments v Fidelis

Furnishing Fabrics (1971)). An agent may also have apparent (or ostensible) authority. A former agent may continue to bind hisprincipal if the third party with whom the agent deals is unaware of the agent’s loss of authority. Similarly, if the agent purports to

act on the principal’s behalf and the principal, aware of this, does nothing to deny this, the principal cannot refuse to be bound by

the contract: Freeman & Lockyer v Buckhurst Park Properties (1964).

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A contract made by the agent without the principal’s authority may be adopted as the principal’s contract by ratification. The

principal must exist when the contract is made (Kelner v Baxter (1866)), and must be identified as a party to the contract by the

agent (Keighley Maxstead & Co v Durrant (1900)). The contract is not binding until ratified. Ratification is of retrospective effect,

but must be done before the contract is to come into effect. The principal must be aware of all the facts relevant to the contract for

effective ratification.

7 This question requires candidates to explain what is meant by the term fiduciary duties as it applies to company directors and to set

out the various heads under which such duties can be considered.

The directors have the power to manage the business of their company and it is the directors, rather than the shareholders, who

conduct the day-to-day business of the company. As a consequence of the extensive powers they have in operating capital that they

do not actually own, the law has placed company directors in the position of fiduciaries. A person usually comes into a fiduciary

relationship when he controls the assets of another, or holds the power to act on behalf of another.

In general terms directors must act honestly and with good faith for the benefit of the company in discharging their duties. The

general duty to the company can be sub-divided into three further heads: the duty to act bona fide in the best interests of the

company; the duty to exercise their powers for a proper purpose; and the duty not to allow their personal interests to conflict with

their duties to the company. It should be emphasised that directors owe their duty to the company and not to individual shareholders

(Percival v Wright (1902)).

Duty to act bona fide in the interest of the company

This places directors under the duty to act in such a way as they genuinely believe is in the best interests of their company. However,

the test is not purely subjective and, if an act or decision is one that no reasonable director could properly have come to, the court

will intervene.

A particular aspect of this general requirement is that directors must use their powers for the purpose for which those powers were

given to them and not for any ulterior or improper purpose.

Most of the cases on this point have related to the exercise by directors of their power to issue new shares in an attempt to thwart

threatened take-overs. In Howard Smith v Ampol Petroleum (1974) directors preferred one take-over bid as opposed to another,

which was supported by the majority shareholding. In order to defeat the bid they disliked, the directors issued new shares,

effectively reducing the existing majority to a minority holding in the company, incapable of blocking the directors’ preferred takeover

bid. This was clearly an abuse of the directors’ powers and a breach of their duty to act bona fide in the best interests of the company.

See also Hogg v Cramphorn (1966); Bamford v Bamford (1970).

Another aspect of this general fiduciary duty is that directors must not act in such a way as will fetter the exercise of their discretion

in relation to decisions that affect the operation of the company. For example, directors might enter into a contractual agreement

with some outsider to use their vote in a particular way at board meetings. Once again such an agreement is a clear breach of theirfiduciary duty. It must be recognised, however, that if directors enter into a contract on behalf of the company, which they genuinely

consider to be in the company’s best interests, then they may vote in favour of any subsequent resolutions necessary to achieve the

successful completion of the contract.

Duty not to permit a conflict of interest to arise

This rule is strictly enforced by the courts and it can be clearly stated that directors are forbidden from entering into any arrangement

which will involve, even the possibility of, a conflict between their personal interests and the interests of their company. It follows,

therefore, that a director may obtain no other advantage from his office than that to which he is entitled by way of director’s

remuneration. In Robinson v Randfontein Estates Gold Mining Co Ltd (1920) the chairman of the board purchased a farm in his

own name after his company, which was anxious to acquire the farm, could not reach finality with the sellers. He purchased the

farm through an agent and thereafter sold it to the company at a considerable profit. The Appellate Division held that the chairman

was not justified in making a profit from his office, nor in placing himself in a position where his personal interests conflicted with

the duties arising out of his fiduciary position. He was ordered to repay to the company the profit which he had made. See also

Aberdeen Rly Co v Blaikie (1854).

In Regal (Hastings) v Gulliver (1942) the directors were required to repay to the company profits made on the sale of shares in a

subsidiary company, on the grounds that they had only been in a position to benefit because of their position as directors in the

parent company. On the same principle a director may not, for personal gain, make use of information acquired in his capacity as

director. See Industrial Development Consultants v Cooley (1972).

8 This question invites candidates to examine the way in which contractual relations can come into existence. It requires a treatment

of the rules relating to offer and acceptance and the possibility of revoking offers to unilateral contracts. The answer will set out the

general law applicable before applying it to the circumstances of the problem scenario.

Unilateral contract

A unilateral contract arises where one party promises something in return for some action on the part of another party. Reward cases

are typical examples of such cases. There is no compulsion placed on the party undertaking the action but if they carry out the taskrequested they would receive the reward offered.

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Offer

An offer is an undertaking, capable of acceptance to be bound on particular terms. The person who makes the offer is the offeror;

the person who receives the offer is the offeree. An offer sets out the terms upon which the offeror is willing to enter into contractual

relations with the offeree. An offer may, through acceptance by the offeree, result in a legally enforceable contract. It is important

therefore, to distinguish what the law will treat as an offer from other statements that will not form the basis of an enforceable

contract. For example, the offer must be capable of acceptance. Thus it must not be too vague and the intended obligations must

be stated unequivocally and unconditionally so that the rights and duties intended by the offer are determined or ascertainable. It

is also essential to distinguish genuine offers from the following: a mere statement of intention; a mere supply of information or an

invitation to do business (Crawley v Rex (1909)). An offer may be made to a particular person or to a particular group of persons,in which case it is only open for those persons to who, the offer has been made, to accept it. Alternatively, an offer may be made to

the world at large, in which circumstances it can be accepted by anyone (Bloom v The American Swiss Watch Company (1915)).

Offers to the world at large are usually made in the form of advertisements.

Acceptance of offers

Acceptance is necessary for the formation of a contract. Once the offeree has assented to the terms offered, a contract comes

into effect. Both parties are bound: the offeror can no longer withdraw their offer, nor can the offeree withdraw their acceptance.

Acceptance does not have to be in the form of express words, as it can be implied from conduct. Although a person cannot accept an

offer they do not know about, their motive for accepting it is not important as long as they know about the offer. Generally acceptance

must be communicated to the offeror. As a consequence of this rule, silence cannot amount to acceptance. However, acceptance

need not be communicated where the offeror waived the right to receive communication.

Revocation

An offer may be revoked at any time before acceptance and once revoked it is no longer open to the offeree to accept the original

offer (The Fern Gold Mining Company v Tobias (1890)). In relation to unilateral contracts revocation is probably not possible once

the offeree has started performing the task requested.

Intention to be contractually bound

The quintessence of reaching consensus is that every party to the contract must have the serious intention to be contractually bound.

This means that each of the parties must have the serious intention to create particular rights and duties. It also means that each

party must intend to be legally bound to perform their duties and to hold the other party legally liable for rendering performance as

promised in the agreement.

If two friends make an arrangement to meet at a rugby match to enjoy the game in each other’s company, there is normally no

intention on their part to be legally bound to each other. The position is quite different if two persons agree that one will give the

other a sum of money to produce the ownership of the other’s table. In this case the intention to create a legal obligation is indeed

present.

Applying the foregoing to the facts of the scenario, it would appear that Thembi made a unilateral offer to the world at large. Kgosi

was thus able to accept the offer by performing the required act. He did not have to inform Thembi that he was accepting the offer,he simply had to perform the act. However, because Kgosi was unaware of the reward it was not possible for him to accept the offer.

A person cannot accept an offer they do not know about. On the analysis, it would appear that Kgosi cannot claim the P700·00

from Thembi. As for Thembi’s decision to revoke her offer, it would have been ineffective if Kgosi had in fact found the cat when he

was aware of the reward offered. An offer cannot be revoked once performance has begun. However as Kgosi was unaware of the

reward and had not accepted, he cannot claim the reward.

9 This question requires candidates to consider the authority of company directors and other company officers to enter into binding

contracts on behalf of their companies.

Thato

Section 126 of the Companies Act 2003 provides that the business affairs of the company shall be managed by the board and

that the board has all the powers necessary for the managing, and for directing and supervising the management of the businessaffairs of the company. It is important to note that this power is given to the board as a whole and not to individual directors and

consequently individual directors cannot bind the company without their being authorised in some way to do so. There are three

ways in which the power of the board of directors may be extended to individual directors.

(i) The individual director may be given express authority to enter into a particular transaction on the company’s behalf. To this

end, s.129 of the Companies Act 2003 allows for the delegation of the board’s powers to one or more directors. Where such

express delegation has been made then the company is bound by any contract entered into by the person to whom the power

was delegated. However, in the present situation it does not appear that Thato has been expressly given the power to enter into

the contract with Dudu, and so the company cannot be liable on this basis.

(ii) The second type of authority that may empower an individual director to bind his company is implied authority. In this situation

the person’s authority flows from their position. Article 11 of the First Schedule provides for the board of directors to appoint a

managing director and allows the board of directors to delegate to any managing director such powers as they may consider

desirable to be exercised by that person. Thus the board of directors may expressly confer any of their powers on the managing

director as they see fit. The mere fact of appointment, however, will mean that the person so appointed will have the impliedauthority to bind the company in the same way as the board, whose delegate he or she is. Outsiders, therefore, can safely

assume that a person appointed as managing director has all the powers usually exercised by a person acting as managing

director.

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Implied actual authority to bind a company may also arise as a consequence of the appointment of an individual to a position

other than that of managing director. In Hely-Hutchinson v Brayhead Ltd (1968), although the chairman and chief executive

of a company acted as its de facto managing director, he had never been formally appointed to that position. Nevertheless,

he purported to bind the company to a particular transaction. When the other party to the agreement sought to enforce it, the

company claimed that the chairman had no authority to bind it. It was held that, although the director derived no authority from

his position as chairman of the board, he did acquire such authority from his position as chief executive and thus the company

was bound by the contract he had entered into on its behalf. The decision in Hely-Hutchinson was approved in NBS Bank Ltd

v Cape Produce Co (Pty) Ltd (2002).

Once again, however, it would appear that Dudu cannot make use of this method of fixing Khudu Ltd with liability for her

contract as Thato has not been appointed to any executive office in the company.

(iii) The third way in which an individual director may possess the power to bind his company is through the operation of ostensible

authority, which is alternatively described as apparent authority or authority by estoppel.

This arises where an individual director has neither express nor implied authority. Nonetheless, the director is held out by

the other members of the board of directors as having the authority to bind the company. If a third party acts on such

a representation, then the company will be estopped from denying its truth. In Freeman and Lockyer v Buckhurst Park

Properties (Mangal) Ltd (1964), although a particular director had never been appointed as managing director, he acted as

such with the clear knowledge of the other directors and entered into the contract with the plaintiffs on behalf of the company.

When the plaintiffs sought to recover fees due to them under that contract, it was held that the company was liable: a properly

appointed managing director would have been able to enter into such a contract and the third party was entitled to rely on the

representation of the other directors that the person in question had been properly appointed to that position.

The situation in the problem is very similar to that in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd. The

board of Khudu Ltd has permitted Thato to act as its managing director and he has even used the title. The board has therefore

acquiesced in his representation of himself as managing director and consequently they and Khudu Ltd are bound by any

contracts he might make within the scope of a managing director’s implied authority. As entering into a contract to draw plans

would clearly come within that authority, Khudu Ltd will be liable to pay Dudu or face an action for breach of contract.

Pinkie

As has been stated, authority to enter into contracts on behalf of companies can be implied from positions other than the managing

director and one such position is that of the company secretary (Wolper v Uitzigt Properties (Pty) Ltd (1961)). Therefore with regard

to the contracts that Pinkie entered into, whether Khudu Ltd is liable on them depends on the extent of her implied authority. Although

old authorities such as Houghton & Co v Northard Lowe & Wills (1928) treated company secretaries as having little authority

to bind their companies, later cases have recognised the important role of the modern company secretary. Thus in Panorama

Developments v Fidelis Furnishing Fabrics Ltd (1971) held that a company secretary was entitled to ‘sign contracts connected with

the administrative side of a company’s affairs’. There is little doubt that the court in Botswana will follow this decision.

It would appear that the order for the cement mixer would come within Pinkie’s implied authority but the building of the extension

onto her house would certainly not be covered.

10 This question tests the candidates’ understanding of the concept of corporate personality and the rules that govern the lifting of the

corporate veil.

The veil of incorporation refers to the fact that, upon registration of a company has its own legal personality, completely separate from

its members. A veil is said to be drawn between the company and its members, but that veil may, under appropriate circumstances,

be drawn aside to reveal those members.

The doctrine of separate or corporate personality is an old one, but the case cited in relation to separate personality is: Salomon v

Salomon & Co Ltd (1897). Salomon had been in the boot and leather business for some time. Together with other members of his

family he formed a limited company and sold his previous business to it. Payment was in the form of cash, shares and debentures.When the company was eventually wound up it was argued that Salomon and the company were the same, and, as he could not

be his own creditor, his debentures should have no effect. Although early courts had decided against Salomon, the House of Lords

held that under the circumstances, in the absence of fraud, his debentures were valid. The company had been properly constituted

and consequently it was, in law, a distinct legal person, completely separate from Salomon. It should be noted that, contrary to what

some textbooks state, the Salomon case did not establish the doctrine of separate personality. It merely permitted its application

to one-man companies. In the present instance it is clear that Kompieno (Pty) Ltd is in law a separate persona distinct from its

shareholders and those who control the management of the company. This principle ensures that Kompieno (Pty) Ltd and Kudu Ltd

are to be regarded as separate legal persons, each responsible for their own but not each other’s debts.

In some cases, however, the courts have been prepared to disregard the corporate veil and pay regard instead to the realities of the

situation. This is known as judicial lifting of the veil. As in most areas of law that are based on the application of policy decisions it

is difficult to predict when the courts will ignore separate personality. What is certain is that the courts will not permit the corporate

form to be used for a clearly fraudulent purpose or to evade a legal duty. In Cape Pacific Ltd v Lubner Controlling Investment (Pty)

Ltd and others (1995) the Supreme Court of Appeal pointed out that it is undoubtedly a salutary principle that the South Africancourts will not lightly disregard a company’s separate personality, but will strive to give effect to and uphold it.

To do otherwise would negate or undermine the policy and principles that underpin the concept of separate corporate personality

and the legal consequences that attach to it. However, where fraud, dishonesty or other improper conduct is found to be present,

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other considerations will come into play. The need to preserve the separate corporate identity would in such circumstances have to

be balanced against policy considerations that arise in favour of piercing the corporate veil.

In DHN Food Distributors Ltd v Borough of Tower Hamlets (1976), the defendant Council issued a compulsory purchase order in

respect of land occupied by a subsidiary of the plaintiff company. By an Act of Parliament, where a local authority acquires land

compulsorily, compensation must be paid in respect of the land and in respect of any disruption of business. The Council argued

that the owner of the land (the subsidiary) did not carry on any business as that was owned by the plaintiff company, a separate

legal person at law. The Court of Appeal noted that holding and subsidiary companies are treated as one for accounts purposes and

held that the plaintiff holding company and its two subsidiaries together comprised a ‘single economic unit’. In this case, only one

business was being carried on. It was merely the administration of the business that was separated between two legal entities. The

Council was therefore obliged to compensate the plaintiff for the land and the distribution to business.

The House of Lords was called upon to decide another case involving a compulsory purchase order by a Council in Woolfson and

another v Strathclyde Regional Council (1978), in which a company owned the land and the plaintiff owned the business carried

on from that land. The court distinguished the DHN case on the grounds that in that case the plaintiff enjoyed 100% control of

the subsidiary, whereas in the Woolfson case control was held jointly by Woolfson and his wife. The court doubted the decision in

the DHN case and stated that the corporate veil should be disregarded only where ‘it is a mere façade designed to conceal the true

facts’.

In Adams v Cape Industries plc (1990), the Court of Appeal had to determine whether the defendant, a company registered in the

UK, could be held liable in respect of the activities of its wholly owned American subsidiaries. The plaintiff sought to rely on the DHN

case in arguing that the defendant through its subsidiary had a ‘presence’ in the USA. The Court applied the decision of the House

of Lords in the Woolfson case and held that the defendant had no such presence. The subsidiary was a genuine trading company

distinct from its parent, was not a ‘mere façade’, and must therefore be regarded as a separate legal person. When the above casesare applied to Kompieno (Pty) Ltd and Kudu Ltd, it can be concluded that Kudu Ltd will not be called upon to settle the debts of

Kompieno (Pty) Ltd. The latter is a separate and distinct trading entity, is not a ‘mere façade’, and is therefore solely responsible for

its own debts.

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Fundamentals Level – Skills Module, Paper F4 (BWA)

Corporate and Business Law (Botswana) December 2009 Marking Scheme

1 6–10 Thorough and accurate explanation of the classification of law punctuated with relevant examples in the context of

Botswana.

0–5 Incomplete or inaccurate account, perhaps with major errors or omissions. A very weak answer will show either no or very

little knowledge of the area.

2 It is expected that this question will be marked as one answer, although 3 marks are available for distinguishing between express

and implied terms.

8–10 Thorough treatment of the topic. Clearly distinguishing between the two types of terms and explaining most, if not all of

the ways in which terms may be implied into contracts.

4–7 Less thorough answer, but showing a reasonable understanding of the topic.

0–3 Weak answer, perhaps showing some knowledge but little understanding of the topic generally.

3 8–10 Thorough explanation of the meaning of wrongfulness with appropriate references to examples and the grounds for

justification.

5–7 Reasonable explanation of the meaning of wrongfulness, but perhaps lacking in detail.

0–4 Very unbalanced answer, lacking in detailed understanding.

4 6–10 A clear understanding of the various ways of terminating a contract of employment. Full reference to relevant

authorities.

0–5 Weak answers showing little understanding of the different ways of termination of employment. Possible gaps and

omissions.

5 8–10 Answers in this band will show a thorough understanding of justa causa as one of the causes for termination of a

partnership. Full and accurate reference to relevant authorities.

5–7 A sound understanding of the area, although perhaps lacking in detail.

2–4 Some understanding of the area but lacking in detail, with little reference to relevant authorities.

0–1 Little or no knowledge of the area.

6 6–10 A thorough treatment of all the three instances in which agency is implied. Full reference to relevant authorities. Full use

of examples.

0–5 Weak, with little or no understanding of the relevant rules in this area.

7 This question requires candidates to explain what is meant by the term fiduciary duties as it applies to company directors and to set

out the various heads under which such duties can be considered.

6–10 Answers will demonstrate a thorough knowledge of the area. For the very highest marks, all of the duties will be considered

and it is likely that cases will be provided in support.

0–5 Limited understanding of the nature of the question and/or unbalanced treatment of the topic.

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8 This question requires candidates to examine the way in which contractual relations can be brought into existence. It requires a

treatment of the rules relating to offer and acceptance and the possibility of revoking offers in relation to unilateral contracts.

8–10 Answers will demonstrate a thorough knowledge of the law generally together with a clear analysis of the problem

situation and a deployment of the appropriate legal principles. Cases and examples will be used to support the analysis

and conclusions.

5–7 Answers will be generally sound in relation to the law but may be lacking in analysis or application. Once again examples

will be used.

2–4 Answers will demonstrate some knowledge of the law relating to the question but not to the degree expected of the very

best answers. They may be weak in analysis and/or application.

0–1 Little or no understanding of the law relating to the question. Extremely weak in terms of analysis or application.

9 This question requires candidates to consider the authority of company directors and other company officers to enter into binding

contracts on behalf of their companies. Although marks are not allocated separately, it is envisaged that the bulk of the answer will

deal with Thato’s situation with Pinkie’s constituting no more than a maximum of 8 marks at the outside.

8–10 Accurate knowledge of the legal principles involved in both situations, linked to a sound application of those principles.

It is highly unlikely that marks at this level could be achieved without reference to the cases.

5–7 Sound knowledge of the law but perhaps lacking in application or alternatively not showing sufficient clear understanding

of the legal principles involved.

2–4 Weak or unbalanced answer. Perhaps aware of the nature of the problem but lacking in clear knowledge of the law or

deficient in relation to how those principles should be applied.

0–1 Very weak answer. Perhaps mentioning some of the issues but failing to consider or apply them in detail.

10 This question tests the candidates’ understanding of the concept of corporate personality and the rules that govern the lifting of the

corporate veil. Marks will be allocated as follows:

8–10 Full understanding and explanation of the concept of corporate personality and the rules that govern the lifting of the

corporate veil. Accurate application of case law.

5–7 Identification of the major issues in the problem and a good attempt to apply the law to those issues. Some use of case

law to support the conclusion.

4–6 Lacking in detail in some or all aspects of application.

0–3 Little or inappropriate knowledge of the topic with little appropriate application.

Documents

f4bwa 2009 Dec Ans