Exam 13 May 2019, questions and answers PDF

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IB2370

Business Law 2 Exam 2019 There will be TWO versions of the exam – one for finalists and one for non-finalists. The exam is 2 hours long and there are TWO sections: Section A (worth 40% of the marks) This involves traditional problem solving questions and students must answer ONE out of a choice of two. [It is recommended that students spend approximately 45/50 minutes on this section].

Section B (worth 60% of the marks) There is one compulsory case study on negligence. This year the focus will be on Negligent Act. Students must undertake 2 tasks:  Prepare a schedule of loss for the claim (20% of the marks)  Write a legal submission on behalf of one of the parties (Claimant or Defendant). [It is recommended that students spend approximately 1hour 10/15 minutes on this section]. Below is a SAMPLE exam paper. It includes questions which have featured on previous Business Law 2 exam papers. It is followed by outline solutions plus general feedback which was posted on my.wbs after the exam:

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IB2370

UNIVERSITY OF WARWICK

SUMMER EXAMINATIONS

BUSINESS LAW 2 SAMPLE EXAM PAPER

This paper has two sections Section A and Section B. You are required to answer ONE question from Section A and the compulsory question in Section B. Time allowed: 2 hours. Where appropriate you should use actual cases and/or hypothetical examples to illustrate your answers. If you feel that a question or problem does not contain all of the facts that you require to answer it fully, identify clearly the types of additional facts required and explain how different versions of the facts might affect the result. Read carefully the instructions on the answer book and make sure that the particulars required are entered on each answer book. Silent pocket calculators that are not capable of text storage or retrieval ARE permitted but their instruction booklets, PDAs, mobile phones or any other hand-held devices that facilitate wireless communication are NOT PERMITTED

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IB2370 Section A THIS SECTION IS WORTH 40% OF THE EXAM MARKS. Answer ONE question from Section A (EITHER Question 1 OR Question 2). Both questions carry equal marks. Question 1 Darren won £200,000 on the lottery. He contacted his accountant Andy for advice on how best to invest the money. Andy advised him that shares (particularly in sports companies where business is booming) were the best form of investment at that time. Darren, who was an existing shareholder in Super Sports plc decided to increase his investment in the company after reading the annual report (prepared by Andy as auditor of the company) which was sent out to all shareholders. The report indicated that Super Sports plc was doing very well. Darren purchased £75,000 of new shares in Super Sports plc using some of his winnings. Three months later Darren was informed that Super Sports plc had gone into liquidation and he had lost all of his money. The annual report had been negligently prepared and failed to disclose the true financial state of the company. Darren also decided to invest £100,000 in a racehorse. He was a keen gambler and had always fancied owning his own racehorse. After seeing an advert in the Racing Post he went to view a 3 year old horse called Star who had been racing for 12 months. Star was owned by Betty Bradshaw, a well-known breeder in the racing world. While examining the horse Betty told Darren that Star was a top quality horse from excellent winning parentage. Darren asked how successful Star had been in her first year of racing and whether she was in good health. ‘She has won three races already’ said Betty. ‘She’s a strong and healthy horse with potential to win many more races.’ Betty did not disclose that Star had fallen during her last race and that the incident had affected her temperament and she had become very nervous of jumps. Darren purchased Star paying £100,000 for her. The contract made no reference to her previous racing success or her health. Darren arranged for her to be trained ready to compete at the start of the jumping season. After 6 weeks Star’s trainer reported to Darren that Star was too nervous to be able to race in any jumping races again and that even flat races were problematic as she was very nervous when surrounded by other horses. It is costing Darren £20,000 per year to keep and train Star and he no longer wants to keep her. Her sale price as a non-racer is approximately £5,000. Required: Advise Darren. [100%] [Total Marks 100% [Continues on next page]

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IB2370 Question 2 In March 2015 Mahindra and Jason entered into negotiations for the purchase of Tasty Take-Aways, an outlet serving snacks, drinks and ice-creams which was situated just outside the entrance to Riley’s Theme Park plc. Riley’s was a very popular tourist attraction and many customers purchased ice-creams, drinks and sweets from the TakeAway on their approach to the Theme Park. Mahindra and Jason approached Estates Bank Limited for a loan to purchase the business. Estates Bank Limited agreed to lend them £100,000 on condition that they offered their jointly owned marital home as security. Mahindra was a bit concerned about this but agreed to the arrangement after Ronald, the bank manager, explained that this was standard procedure and that it was routine for couples entering into business to use their home as security. The loan was for a 10 year period. In May 2015 Mahindra and Jason used their loan to purchase Tasty Take-Aways and were delighted to find that their turnover was much greater than they had anticipated and initially they had no difficulty repaying their loan. In September 2015 there was a serious accident on the rollercoaster ride at Riley’s Theme Park and several people were injured. An investigation was undertaken and it was found that the operator of the ride had been drunk and a number of serious safety issues were identified within the Theme Park. Del, the director of Riley’s Theme Park received a draft copy of the report a week before it was due to be published and realised that the business would receive very bad publicity. He advised his brother, who had 500 shares in the business, to sell them before the report was published. His brother immediately put his shares up for sale and sold them to Jennifer for £20 a share. When the report was published the share price in Riley’s Theme Park plc dropped to just £1 a share. Customers stopped going to the Theme Park and the turnover at Tasty Take-Aways dropped by 90%. Mahindra and Jason were unable to make their monthly repayments on their loan. In March 2016 Riley’s Theme Park closed and went into liquidation as the damage to its reputation was so severe that it was no longer viable to run the business. In April 2016 Estates Bank Limited informed Mahindra and Jason that as they were over 6 months in arrears on their loan repayments, the bank required them to sell their matrimonial home to repay the loan. Required: Advise the parties. [100%] [Total Marks 100%]

[Total Marks 100%] [Continues on next page] Page 4 of 15

IB2370 Section B THIS SECTION IS WORTH 60% OF THE EXAM MARKS. Answer both parts (a) and (b) of Question 3 below. Question 3 Gordon lived in a small Warwickshire village called Klopton. He was the chairman of the Village Fete Committee which organised a village fete every June. The fete was held in the village hall grounds and involved games and activities for villagers to enjoy as well as a beer tent and food stalls. The fete ended with a sheep shearing competition at 5pm. Every year about 500 people (adults, teenagers and children) attended the fete. The cost of entry was £10 (£5 for children) and there was a sign at the entrance saying: Klopton Village Fete Entry at your own risk. The Committee is not responsible for any loss or harm caused to visitors of the fete. Parents are required to supervise their children at all times ENJOY YOURSELVES AND HAVE FUN Gordon and the committee had put up a marquee for the sheep shearing competition, and the sheep were all waiting in special pens inside the marquee. Ollie (aged 7) attended the fete with his family. During the afternoon an unexpected heavy shower occurred and Ollie and his parents entered the beer tent to get out of the rain. While his Mum and Dad were enjoying a drink in the beer tent with their friends, Ollie who always enjoyed playing in the rain wandered off towards the marquee where the sheep were penned. He had seen the sheep earlier and was very excited about seeing the sheep shearing competition at 5pm. He had pointed the sheep out to his Dad saying ‘we must get here well before 5pm so that we get a good view.’ Ollie was keen to be a sheep farmer when he grew up. At the entrance to the marquee there was a sign stating: ‘Public Prohibited’. Ollie walked past the sign and headed towards the sheep. He noticed some clippers on the stage and decided to have a go at shearing one of the sheep himself. While using the electric clippers on one of the sheep Ollie accidentally cut his leg. It was a deep cut and his leg was bleeding profusely. Ollie called for help but no-one heard him. Ollie suffered from haemophilia (which was diagnosed when he was 5) so his wound continued to bleed and he eventually passed out. Shortly before the sheep shearing competition Gordon entered the marquee and found Ollie on the floor in a pool of blood. He was rushed to hospital and had to undergo a blood transfusion. Ollie was very ill for many months. He has now recovered but he has missed a full year of schooling as a result of the incident. [Continues on next page]

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IB2370 A pre-trial hearing has determined that if Gordon is held to be negligent then the whole Village Fete Committee will have joint responsibility for any damages awarded. The Committee does not have insurance. All characters appearing in this case study are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.

Required: ANSWER BOTH PARTS (a). Imagine that you are a lawyer representing Ollie in his negligence claim against the Klopton Village Fete Committee. Prepare a Schedule of Loss setting out the sums of money that Ollie is claiming. [20%] (b). Imagine that you are a lawyer representing EITHER Ollie or the Klopton Village Fete Committee in this litigation. Prepare a written submission on behalf of your client to present at court. Your submission should include reference to the sums claimed under the Schedule of Loss. Your submission should set out all of the legal arguments in your client’s favour with reference to relevant cases/statutes. You may not alter the facts or add extra facts but you can interpret the facts given in the way that is most favourable to your client. [80%]

[Total Marks 100%]

END OF EXAM PAPER

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IB2370

Section A Outline Solutions NB. The decisions in the cases mentioned below should be discussed/applied in detail in your answer. Question 1 Investment in Super Sports plc Darren received general investment advice from Andy. Assuming he did not pay for the advice he has no contractual claim against Andy. As the advice given is very general he would also be unable to establish a tort claim in the tort of negligent misstatement as he would be unable to satisfy the Caparo test to establish that a duty of care was owed (3 stage Caparo test). Darren received financial information about Super Sports plc by virtue of his position as a shareholder in the company and he used this information to increase his investment. The information was sent in order to assist Darren in carrying out his role as a shareholder (Caparo Industries v Dickman). Although Andy prepared the annual report he does not have a special relationship with Darren (Hedley Byrne) and Darren will be unable to prove that a duty of care was owed to him according to the Caparo principles. Darren will be able to establish breach as we are told that the report is wrong and has been negligently prepared and it is clear that Darren relied on the information when increasing his investment and he suffered a loss as SS plc went into liquidation. However, as he will be unable to prove that Andy owed him a duty of care he will be unable to establish all three criteria for negligence so should be advised not to sue.

Investment in Star Darren entered into a contract for the purchase of Star (offer, acceptance, consideration, intention to create legal relations, capacity, legal purpose). During the pre-contractual negotiations a number of important statements are made by Betty which later turn out to be untrue. Darren may be able to rescind the contract with Betty on the grounds of misrepresentation. A misrepresentation is a false statement of fact which induces another party to enter into the contract. The two key statements made by Betty are:  

She is a strong healthy horse and She has potential to win many more races

Darren must prove that these statements are fact not opinion. Although these may appear to be statements of opinion a statement of opinion will be treated as fact if the maker of the statement could not possibly have held such an opinion (Smith v Land and House Property, Bissett v Wilkinson). The false statement must induce the other party to enter the contract (Redgrave v Hurd) and must be relied upon when entering into the contract (Smith v Chadwich). Darren should be able to establish these criteria as the health and potential winnings of Star were key aspects in his decision to purchase the horse. As Betty was well Page 7 of 15

IB2370 aware of Star’s fall her statements appear to be deliberately untrue so Darren could bring a claim in fraudulent misrepresentation (BSkyB v Electronic Data Systems). He may however prefer to claim negligent misrepresentation under the Misrepresentation Act 1967 which shifts the burden of proof onto the defendant.

Feedback: The answers to this question were quite mixed. The two scenarios covered two quite distinct areas of law – a potential tort claim in negligent misstatement and a potential misrepresentation claim. Some students produced a really excellent answer to one part but were unable to deal with the other issue at all – this was such a waste as it is impossible to gain a high mark if only half of the question is answered well. The first part involved two potential claims in negligent misstatement against Andy – one for the initial advice to invest in shares and one resulting from Darren’s reliance on the inaccurate annual report. Many students merged these into one claim and applied parts of the Caparo test to each scenario. The best answers explained at the outset that any attempt to claim against Andy for his initial advice (to invest in shares) would fail as it was far too general in nature to be seen as advice that could be relied upon. It was then possible to simply consider the second scenario where Darren relied on the annual report which was wrong. This scenario was exactly the same as the one faced by the claimant in Caparo Industries v Dickman so the outcome would be the same. The best answers set out and applied the Caparo test showing why no duty of care was owed. Many students misapplied the Caparo test or tried to distinguish the Caparo case but as the facts were identical this was not good advice. When applying the Caparo test it was important to consider all three parts even though the first part failed. Similarly it was also important to briefly mention breach and the professional man test even though no duty of care was owed. The best answers cited the Bolam test and pointed out that as the facts stated that the annual report had been negligently prepared it was clear that the Def would fail the Bolam test. Lots of students seemed to think that this would be a claim against Super Sports plc but any claim would have been a tort claim against the negligent auditors (Andy’s company). The second part was generally well answered with many students being able to set out and apply the rules on misrepresentation supported by good reference to the case law. Some students mistakenly likened the case to With v O’Flanagan where the Def gave truthful information to the claimant in the early stages of negotiations and failed to inform the claimant of a change in those circumstances before signing the contract. That was not the case in this scenario, where there was a straightforward purchase based on false information.

Many students argued that the cost of keeping the horse could not be recovered as it was pure economic loss – this is a concept which only applies to Tort law so would not have affected Darren’s right to recover those losses under misrepresentation. Page 8 of 15

IB2370

Question 2 M&J v Rileys M&J will be unable to recover any compensation for their loss of business from Rileys. To succeed in a claim in negligence they would need to show that Rileys owed them a duty of care (neighbor test and 3 stage development) that Rileys was in breach of that duty and that they suffered reasonably foreseeable damages as a result. For public policy reasons no duty of care is owed to prevent pure economic loss (Weller v Foot and Mouth, Spartan Steel, Murphy v Brentwood). Although it is clear that Rileys have acted negligently, the only loss suffered by M&J is pure economic loss so they would not be able to claim. In addition, since Rileys have now gone into liquidation any claim would be pointless. Anyone who is injured as a result of the accident on the ride could also bring a negligence claim against Rileys (which would only be worthwhile if they have insurance cover). Estates Bank v M&J M could challenge the Bank’s attempt to sell their matrimonial home on the grounds that she entered into the arrangement as a result of undue influence on the part of her husband. Although the law does not presume a special fiduciary relationship between husband and wife the Bank does have a duty to ensure that the wife genuinely consents to the arrangements when the matrimonial home is used as security for business debts. In addition, there is a fiduciary relationship between the Bank and its clients. The Bank would need to be able to show that M entered into the contract with full knowledge of the nature and effect of the transaction. In Royal Bank of Scotland v Etridge the House of Lords stated that a bank is ‘put on enquiry’ whenever a wife/partner acts as guarantor for a husband/partners debts and must take reasonable steps to ensure that the wife understands the transaction she is entering into. Failure to advise her to seek independent advice is a strong indicator that undue influence has been used (Lloyds Bank v Bundy). The Bank appears to have deliberately misled M so it is likely that she will be able to establish undue influence and defend any attempt by the bank to repossess her home. Del Del has committed the criminal offence of insider dealing by telling his brother to sell his shares using information that has not yet become public. His brother may also be guilty of the offence if he has full knowledge of the circumstances. The contract with Jenny however is not affected.

Feedback: Very few students answered this question. Those that did were able to discuss the undue influence scenario very well. Many students suggested that Mahindra and Jason Page 9 of 15

IB2370 should take their case to court but the best answers recognised that they would be Defendants, not Claimants and advised them to defend any attempt by the Bank to repossess their house. Many students considered possible negligence claims by those injured on the ride but many did not explain why M and J would be unable to recover their loss of profit as it was pure economic loss. The criminal liability issues on insider dealing were generally well argued and the best answers pointed out that Jennifer would have no civil claim as her contract would not be affected.

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IB2370 Section B Notes for guidance Q3(a). This is an example of an appropria...