F1 - Legal Framework August 2006

LEGAL FRAMEWORK

FORMATION 1 EXAMINATION - AUGUST 2006 NOTES

Number of Questions to be answered: FIVE (Only the first five questions answered will be marked). All question carry equal marks.

TIME ALLOWED:

3 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:

During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate.

The Institute of Certified Public Accountants in Ireland, 9 Ely Place, Dublin 2.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

LEGAL FRAMEWORK FORMATION I EXAMINATION – AUGUST 2006

Time Allowed: 3 hours, plus 10 minutes to read the paper. Number of Questions to be answered: FIVE (Only the first five questions answered will be marked). All questions carry equal marks. (Note: Case Law and Statute, should, where appropriate be, mentioned)

1.

Discuss the sources of law in the Irish legal system. [Total: 20 marks]

2.

Explain the concept of a mortgage, outlining its essential features and discussing in your answer the differences between legal and equitable mortgages. [Total: 20 marks]

3.

Gasco, a gas excavation company, has been granted a licence by the Minister for Energy to explore for gas off the coast of County Clare. Gasco has spent a considerable amount of money investing in equipment to excavate the gas. However, it has encountered a problem. Clare County Council has introduced a new environmental plan which forbids gas excavation off its coast. Gasco has suffered considerable damages as a result because it has lost the money it invested in the equipment. Clare County Council was not empowered to impose such a ban and was wrong in doing so. Advise Gasco as to whether Clare County Council owes it a duty of care. [Total: 20 marks]

4.

Explain the various types of misrepresentation in the law of contract, outlining the types of action available to the wronged party in each instance. [Total: 20 marks]

5.

Distinguish between a contract of service and a contract for services and explain the importance in this distinction. [Total: 20 marks]

6.

Discuss and analyse the principle of utmost good faith in insurance law. [Total: 20 marks]

7.

Explain in detail the role of the European Court of Justice in the legal system of the European Community, referring in your answer to the Court of First Instance also. [Total: 20 marks]

END OF PAPER

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Suggested Solutions

Legal Framework FORMATION I EXAMINATION – AUGUST 2006

Solution 1 General Comments This question, requires students to outline the various sources of law in the Irish legal system. Students are expected to explain that there is a hierarchal system in operation in Ireland, with the Constitution taking primary status. However, students must acknowledge that since Ireland joined the European Union (EU), or the European Economic Community (EEC) as it was in 1973, all European law is supreme over all national law. Extra marks will be awarded where students acknowledge this fact and if they further explain that this rule only applies in the areas of EU competence. Students who provide a logical and well structured answer, displaying a good knowledge and understanding of the system will perform well in this question. Introduction The sources of law in any legal system are the rules and legal principles of law that are applicable in that system. A lawyer must be familiar with these sources and with where to find them in order to find the relevant law which is applicable to problems with which they are presented. In addition, lawyers must also know the status of the particular rules and legal principles. This means that they must know exactly where different rules fit into the overall scheme and in the case of a conflict between rules and legal principles, they must know which will take precedence. There is a hierarchical system of laws in the Irish legal system and from this system, lawyers can tell which laws prevail over others. The Sources of Law The four main sources of law in Ireland are: Bunreacht na hEireann 1937 (the Irish Constitution) Legislation or statute law European Union Law Judicial Precedent or judge made law Bunreacht na hEireann 1937 The Constitution is the most fundamental source of law in this jurisdiction. All Irish legislation is derived from the Constitution because it sets up the various organs which create the law, interpret the law and enforce the law. Ultimately, therefore we can trace all Irish legislation back to the Constitution. The Constitution is the primary legal text of the jurisdiction and so it enjoys a higher legal status than all other national laws. If secondary legislation does not comply with the terms of the Constitution, the Irish Courts can invalidate it. The Constitution regulates the structures and functions of the principal organs of government and also regulates the relationship between these institutions by setting out the balance of power between them. The Constitution does this by means of the separation of powers between the three branches of government – the legislature, the executive and the judiciary. The Constitution also regulates the relationship between these organs of government and the citizens of Ireland. In addition to setting out the balance of power between the organs of government, the Constitution also contains provisions guaranteeing fundamental rights of citizens such as equality before the law, property rights, personal liberty and freedom of religion. The Irish courts are responsible for interpreting the provisions of the Constitution.

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Legislation Under the Constitution, the Oireachtas, or the Irish parliament is responsible for passing laws. These laws form the body of legislation or statutes of the Irish legal system. Legislation is initiated in the form of a Bill and Bills must pass through five stages in the Oireachtas, be passed by the Dail and Seanad and be signed into law by the President. Article 15.2.1 of the Constitution states that the sole and exclusive right to make laws for the state is vested in the Oireachtas and under Article 15.4.1, the Oireachtas cannot enact any statute that is repugnant to the Constitution. While the sole law making power is vested in the Oireachtas, it may occasionally delegate a law-making power to the government. Under this right of delegation, the Oireachtas can empower government ministers or local authorities with a limited law-making function. Ministers or local authorities must always act within the confines of the powers confined on them – in other words, they must act intra vires. If they do not do so, then any subsequent measure that they pass may be challenged before the courts as being ultra vires. Delegated law making occurs in very specific areas where secondary legislation requires more detail or more technical legislation. This allows the Oireachtas to focus on more important legislation and policy areas. Legislation passed by government ministers or local authorities is called delegated legislation or subordinate legislation. Delegated legislation may be updated and modified more easily than primary legislation. Delegated legislation usually takes the form of statutory instruments, orders, by-laws and regulations and has the same force of law as statutes passed by the Oireachtas. Delegated legislation must, like primary legislation, comply with the terms of the Constitution and with primary legislation also. European Union Law Ireland became a member of the EEC in January 1973. In order to give legal effect to Community law in Ireland, Article 29 of the Constitution had to be amended to enable the State to ratify the Treaty of Accession. When Ireland joined the Community, the State agreed to subscribe to a new legal system and thereby created an additional source of law in this jurisdiction – European law. By accession to the Treaty of Rome and other European treaties, Ireland ceded some of her sovereignty and created a new body of law. EU law takes precedence over national law in the case of a conflict, but only in areas of Union competence. In addition to the European Treaties, Ireland is also bound by secondary legislation emanating from the EU. Secondary legislation includes regulations, directives and decisions. Judicial Precedent Statute law is an incomplete source of law in spite of the enormous volume of it that exists today. As a result, a large part of the law is derived from decisions of the courts. This judge-made law is based on a rule known as the doctrine of binding precedent. The principle underlying this doctrine is that a decision made by a court in a case involving a particular set of circumstances is binding on other courts in later cases, where the facts are the same or largely similar. The idea of judges making use of previously decided cases dates back to the formation of the communal or common law by the royal justices from English customary law. English common law was introduced to Ireland following the Norman conquest in 1167. It was not until the nineteenth century that the general principle of judicial consistency in decision-making developed into a more rigid system of binding precedents. The necessary conditions for such a system did not exist until the standard of law reporting was improved by the creation of the Council of Law Reporting in 1865 and a hierarchy of courts was established by the Supreme Court of Judicature (Ireland) Act 1877. Precedents may be either binding or persuasive. A binding precedent is one which a court must follow, while a persuasive precedent is one to which respect is paid, but it is not binding. Whether a court is bound by a precedent depends on the status of the court relative to the court which established the precedent. The general rule is that the decisions of superior courts are binding on lower courts. Therefore, the decisions of the Supreme Court are binding on all lower courts, but decisions of the High Court are not binding on the Supreme Court and so on. A decision of an earlier court at the same level of the system is binding on a later court unless that court has good reason not to follow it.

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Solution 2 General Comments The objective of this question on mortgages is to determine whether students understand the differences between legal and equitable mortgages. Students must address legal mortgages of unregistered land, equitable mortgages of unregistered land, charges for registered land and equitable charges. Students will obtain good marks if they include a good general introduction, a discussion of the system as it was under common law and equity, and a reference to any relevant legislation. For the sake of clarity, students should deal with each issue separately, allowing for thorough and clearly thought out answers. Introduction With the booming property market in Ireland, mortgages are of much interest and increased importance. Mortgages are the means used to generate the finances required for the purchasing of property. They offer people the opportunity to take out substantial loans at a reasonable rate of interest over a significant period of time. The reason that people are allowed to do so is that the property itself is used as security. In addition to mortgages being granted for the purchase of a property, mortgages can also be taken out on a property that is already owned for renovation or improvement purposes, to develop a property for business purposes or start up a business, or to buy farm machinery or equipment. In fact, mortgages can even be taken out to purchase something unconnected with the property but the property will be used as collateral or security. Mortgages A mortgage is defined as a form of security in which a legal or equitable estate in the property is conveyed to the lender, subject to the property being conveyed back the borrower once repayment on the loan is complete. Mortgages existed at common law but their terms could be harsh on the borrower. Usually, the borrower, who had freehold estate, conveyed the fee simple to the lender with a reconveyance proviso. The date by which repayment had to be made was usually not far off and if the loan and the interest were not repaid at that date, common law took a strict view and the borrower lost all rights to his land to the lender, while still having to repay his debt to the lender. Overtime, equity intervened and the view prevailed that the essence of the mortgage was that it was security for the loan rather than a conveyance to the lender. This meant that although the date for repayment may have passed, equity intervened and the borrower did not loose his property. This development is crucial to how mortgages work today. There are various forms that mortgages and charges can take. Mortgages can be either legal or equitable and this depends on whether the lender takes a legal or equitable interest in the property. Legal Mortgages A legal mortgage consists of the borrower having a legal estate in the property which he conveys to the lender. If the proper procedures for the creation of a legal mortgage are not followed, the borrower will only be entitled to an equitable interest. If the borrower only has an equitable interest in the property, then only an equitable mortgage can be created. A legal mortgage in unregistered land can be created in two ways. First, the borrower can convey or assign the whole legal estate or interest in the property to the lender. This is subject to a proviso for redemption, which means that the legal title to the land is conveyed to the lender and has to be reconveyed to the borrower upon repayment of the loan. Second, the borrower can grant some type of lesser estate or interest in the property to the lender, such as a lease, subject to a proviso for cesser on redemption, which means that the lease for example will automatically come to an end when the mortgage is redeemed. This is what happens in the case of freehold. In the case of leasehold, the borrower can make arrangements similar to those pertaining to freehold. He cannot however convey the fee simple estate as he does not hold that estate. He can nonetheless assign his lessee’s interest to the lender, with a provision for a lease or, more usually he can make a sub-demise or sub-lease to the lender with a provision for redemption. This means that the borrower remains the lessee and the lender as sublessee is under no obligations under the original lease. The most predominant way of creating a legal mortgage on registered land is to place a charge on the register. The register is supposed to be conclusive evidence of title. When a person is registered as owner for the first time, he is issued with a document called the Land Certificate, which must be produced to the Land Registry before any subsequent dealing with the land is registered. Evidence of title is contained in this single document. But its deposit with the lender of money creates an equitable mortgage similar in its effects to the equitable mortgage created by the deposit of deeds in the case of unregistered land. Page 4

Equitable Mortgages An equitable mortgage in unregistered land may be created in three ways. First, where the borrower only has an equitable interest to convey, where he holds the property as a beneficiary under trust, or he had already created a legal mortgage on the property, thereby already conveying the legal interest in the property to another lender. The borrower can assign this equitable interest subject to a proviso for redemption. The Statute of Frauds of 1695 provides that an equitable conveyance must be made in writing signed by the assessor or made by will. The second instance where an equitable mortgage will be created is where there is an agreement or contract in existence for the creation of a legal mortgage. In this case, the equitable maxim Equity treats as done that which ought to be done applies. The contract will therefore be treated as an effective grant of an equitable mortgage. So, until the legal mortgage is formally created, equity will hold the intended legal mortgagee as holding an equitable mortgage on the property. The final way to create an equitable mortgage is by deposit of title deeds – this applies to both registered and unregistered land and is recognised by the Registration of Title Act, 1964. The deposit of title deeds will be recognised as prima facie evidence of an equitable mortgage, unless the deposit is for another purpose, such as safe keeping. There is no requirement for written documentation to accompany the title deeds but such documentation may be useful in the event of a dispute.

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Solution 3 General Comments This problem question requires students to assess whether or not Clare County Council owes a duty of care to Gasco under the tort of negligence. Students must identify the other elements required to prove negligence, but the focus of the question is on the duty of care. Students should define the duty of care, and examine whether Clare County Council will be held liable for Gasco’s damages for breach of that duty of care. Students should do so by examining case law on the matter and applying it to the case at hand. Students should be careful to do so, otherwise marks will be lost. Introduction The tort of negligence has developed certain guidelines in distinguishing those who you should not harm by your acts or omissions. These people are referred to as those to whom you owe a duty of care. The types of acts or omissions for which you will be liable are those which are found by the courts to be negligent acts/omissions, where you have failed in the standard of care owed. Such failure must have caused the injury, and the injury itself must not be too remote. To prove negligence there are a number of elements that must be shown: • A duty of care, • A breach of that duty, i.e. a failure to conform to the standard required, • Loss or damage, • Causation and remoteness implications. The Duty of Care The focus of the question is whether Clare County Council owns Gasco a duty of care. It is necessary therefore to establish to whom is a duty owed and more significantly what standard is owed. The general position is that a duty is owed to a person who can be classed as your neighbour, involving in Ireland issues of proximity, foreseeability and policy considerations. As to the standard that is owed, it is the standard of the ‘reasonable person’. The first major case in the development of the ‘neighbour principle’ is that of Donoghue v Stevenson (1932). The plaintiff suffered shock and a bout of gastroenteritis after having consumed a bottle of ginger beer due to a decomposed snail at the bottom of the bottle. In finding for the plaintiff in an action against the manufacturer, the Court held that you owe a duty of care to your ‘neighbour’, a "person so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected …" This initial standard was later developed in the case of Anns v Merton Urban District Council (1978) where a two tier test was put forward. Firstly, a duty of care must be established and secondly any factors undermining that duty must be taking into consideration. It was stated that "one has to ask whether, as between the alleged wrongdoers and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise." This test was later rejected in the UK, but followed in Ireland until the recent Supreme Court decision in Glencar Exploration p.l.c. v Mayo County Council (2002). Application The scenario in the question seems to largely reflect the decision in Glencar, where the plaintiffs had been granted ten licences by the Minister for Energy to explore for gold in the Westport area and had invested heavily in this mining activity for 24 years. In 1991, they set up a joint venture with an Australian company, Newcrest Mining Ltd, which collapsed when a mining ban was introduced by Mayo County Council pursuant to its 1992 draft county plan. The plaintiffs successfully challenged the mining ban in a judicial review proceeding in the High Court. They subsequently sought to recover damages from Mayo County Council for breach of duty but the High Court dismissed the claim because although Mayo County Council had been negligent in adopting the ban, this did not give rise to any right to damages given a lack of proximity. The Supreme Court dismissed the action on appeal, stating that the two step approach of the Anns case was no longer appropriate to follow. Keane CJ stated that: "There is, in my view, no reason why courts determining whether a duty of care arises should consider themselves obliged to hold that it does in every case where injury or damage to property was reasonably foreseeable and the notoriously difficult and elusive test of ‘proximity’ or ‘neighbourhood’ can be said to have been met, unless very powerful public policy considerations dictate otherwise. It seems to me that no injustice will be done if they are required to take the further step of considering whether, in all the circumstances, it is just and reasonable that the law should impose a duty…….." Given the similarity between the situation that Gasco finds itself in and that of Glencar, it would seem that the courts would be unwilling to find that Gasco would be entitled to damages. Page 6

Solution 4 General Comments This question requires students to identify the three different types of misrepresentation in the law of contract and requires them to show knowledge of the fact that different remedies may pertain to each. Students are expected to briefly explain the circumstances in which misrepresentation arises, to define it and to identify the circumstances in which a statement does not amount to a misrepresentation. Finally, as regards the types of action available to the wronged party, students are expected to outline the situations in which rescission will not be available. Extra marks will be awarded to those students who show a good knowledge of case law in the area. Introduction In contractual negotiations, many different types of statements can be made by the parties to the agreement. Some such statements may eventually form part of the contract’s terms and conditions. If it transpires that these statements are untrue, it results in a breach of contract. Some statements made in the negotiations may not be included in the final contract. These statements are referred to as mere representations or non-contractual representations. If it transpires that non-contractual representations are untrue, the result is not a breach of contract but rather a misrepresentation. In the case of a breach of contract, the wronged party has a right of action. In the case of misrepresentation, the wronged party also had various remedies available to him. Misrepresentation In general, a misrepresentation is a statement of fact that is untrue, inducing one party to enter the contract. If a statement is a statement of law, it cannot amount to misrepresentation. Sometimes a statement of opinion will not amount to a misrepresentation but if the party stating the opinion knows it to be untrue, it may amount to a misrepresentation of fact, as happened in Esso Petroleum Co. Ltd v Mardon (1976). In this case, Esso claimed to a potential tenant that in its opinion, a filling station would sell 200,000 gallons of petrol per annum. The Court of Appeal held that Esso misrepresented that it had exercised skill and care in coming up with this figure. If the statement, or to be more precise, the misstatement does not induce a party to enter the contract, or if the party does not rely on the misrepresentation, it cannot amount to misrepresentation. If a statement is made during negotiations by one party and the other party takes steps to verify that statement, that party cannot claim misrepresentation. This is the case whether the party uncovers the truth or not. There are three different types of misrepresentation: fraudulent misrepresentation, negligent misrepresentation and innocent misrepresentation. The remedies available to the wronged party depend on which type of misrepresentation is involved. Fraudulent Misrepresentation A statement will amount to fraudulent misrepresentation at common law if, according to the judgment in Derry v Peek (1889), it is made knowingly, if the issuer of the statement does not believe it, or if the issuer makes the statement recklessly or without caring whether it is true or not. The result of a fraudulent misrepresentation is to render the contract voidable. The wronged party can therefore avoid the contract and can also sue for damages. The wronged party however, is not suing for breach of contract, but rather suing in tort, the tort of deceit. The wronged party may decide not to go down the line of avoiding the contract, but just sue for damages. However, the possibility is there for him to either avoid or affirm the contract. To avoid the contract, it is not necessary to go to court. The wronged party is only required to give notice that he is refusing to be bound by the contract. If such refusal is justifiable, it cancels the contract. In addition to avoiding the contract, the wronged party may also apply to the court for an order of rescission. The term rescission also applies in the case where a party cancels the contract without going to court. Rescission also applies in the cases of negligent and innocent misrepresentation. Rescission involves each party to the contract returning what he got under the terms of the contract. This is known as restitution. As regards fraudulent misrepresentation, the wronged party is only required to hand back what he got under the contract if he sues for rescission. If, on the other hand, the wrongdoer takes him to court, he can raise fraud as his defence and refuse to hand back what he got under the contract. Negligent Misrepresentation In the past, the law did not distinguish between negligent and innocent misrepresentation and all misrepresentation that was not fraudulent was treated as innocent. This meant that a wronged party could not sue in damages unless the misrepresentation was fraudulent. The only relief available to a wronged party in the case of innocent misrepresentation was rescission. However, the law has changed and it is now possible to sue in damages for negligent misrepresentation. Page 7

In the case of Hedley Byrne & Co. Ltd v Heller & Partners Ltd (1964), the House of Lords held obiter that the duty of care is applicable to careless statements where a special relationship exists between the parties, in other words to negligent misstatements. In the case of Esso Petroleum Co. Ltd v Mardon, the Court of Appeal ruled that a special relationship existed between the parties in pre-contractual negotiations if one party has some relevant special knowledge, expertise or skill. It further ruled that if a contract is induced by a careless misstatement by that expert, the wronged party can sue in the tort of negligence. This imposes the requirement of a duty of care owed by the expert to the other contracting party. In Caparo Industries v Dickman (1990), the House of Lords further refined this principle. It held that the auditor of the accounts of a public company did not owe a duty of care to the public at large nor in fact to individual shareholders who wished to acquire shares or additional shares respectively. The auditor’s duty to prepare the accounts is owed to the shareholders at large so that as a body they can exercise informed control of the company. So, an expert, who makes a careless statement is only liable to those who rely on his statement when he knows that the statement will be relied upon in entering a particular transaction. The Irish courts have considered the Hedley Byrne principle on several occasions. In Stafford v Keane Mahony Smith (1980), Doyle J. stated that "In order to establish the liability for negligent or non-fraudulent misrepresentation giving rise to action there must first of all be a person conveying the information or the representation relied upon; secondly, that there must be a person to whom that information is intended to be conveyed or to whom it might reasonably be expected that the information would be conveyed; thirdly, that the person must act upon such information or representation to his detriment so as to show that he is entitled to damages." Applying this to the case at hand, the action failed. At issue was the representation by an estate agent that a property would be a good investment. The plaintiff purchased the property but later resold at a loss and sued the estate agent. The reason that the action failed was that the representation was made to the plaintiff’s brother and not the plaintiff. In addition to an action in damages under the tort of negligence, the wronged party can either rescind the contract himself or request a court order of rescission. Innocent Misrepresentation If the issuer of a false statement has neither been fraudulent nor negligent, the misrepresentation is considered to be innocent. In this instance, the wronged party had no right to damages in the past. The only relief available was rescission. Although there was no right to damages, a court could decide of its own volition to award damages instead of rescission, as happened in the case of Connor v Potts (1897), where the plaintiff had agreed to acquire two farms, innocently misrepresented to amount to 443 acres in total. The price was £12.10s. an acre. The total acreage was in fact 376 and the plaintiff was entitled to specific performance and was entitled to recover the shortfall in price. Section 45(1) of the Sale of Goods and Supply of Services Act 1980 now provides for a right to damages for innocent misrepresentation, unless the issuer of the misrepresentation can show that he had reasonable ground to believe and did believe up to the time the contract was made that the statement made was true. The Right of Rescission The possibility of rescission exists in all types of misrepresentation. However, it does not happen automatically; the wronged party must take action to rescind the contract. The right of rescission is lost if the contract is affirmed by the wronged party, where the contract is executed – unless there has been fraud, or if something happens which renders it impossible to restore the contractual parties to their pre-contract state. Likewise, if a third party acquires a right under the contract in good faith and for value, the wronged party loses his right of rescission. The doctrine of laches or delay in seeking relief may also prevent rescission, as may the Statute of Limitations Act 1957.

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Solution 5 General Comments This question is designed with the purpose of determining if students can distinguish between the relationship between an employee and employer and that between an employer and an individual hired to carry out services for the employer as a self-employed independent contractor. Students are expected to set out the various tests used to make the distinction, with reference to relevant case law. Students must also explain why the distinction is important. Students who show a clear understanding of the differences between the two types of contract and who show a good knowledge of the relevant case law will perform well in the question. Introduction Employment relationships can be divided into two forms – the employee/employer relationship and the independent contractor/employer relationship. The employee is hired under a contract of service and the independent contractor under a contract for services. The distinction between the two is not always obvious and it falls to the courts to decide on the issue of the nature of the employment relationship. Importance in the Distinction The distinction is important because it determines the statutory protection that applies. The rights and remedies provided for under the Unfair Dismissals Acts for example only apply to employees under a contract of service. Likewise of importance is that fact that employers are only vicariously liable for torts committed by employees who are under a contract of service. Independent contractors under a contract for services are responsible for their own torts. The distinction is also important for tax purposes as employees have their PAYE deducted by their employer and independent contractors have to make self assessments. An employer also has to pay social welfare contributions for his employees and may set up pension schemes for employees. Finally, one other reason for the importance of the distinction is that when a company is in receivership or liquidation, debts to employees are treated as preferential debts under the Companies Act 1963 and will be paid before other floating charge holders. Court Applied Tests The courts have established a number of criteria to determine the nature of the employment relationship. The Control Test The first test is the control test, first established in Yewen v Noakes (1880). The Irish courts have adopted this test. In Roche v Kelly (1969), it was held that the principal test is the right of the master to direct servants as to what is to be done and how it is to be done. In this case, the defendants had a contract with a farmer to build a barn and had employed the plaintiff to build it for a lump sum of £300. The defendants were to supply the construction materials and the plaintiff was to build the barn under their specifications. The defendants monitored the progress of the construction but at no time did they tell the plaintiff how to do the job nor did they supervise his working methods. The plaintiff had considerable experience and expertise in building barns and had done similar jobs for the defendant in the past. The plaintiff was injured during the construction of this barn and one of the issues was whether he was an employee of the defendant or an independent contractor. The Supreme Court found that the main factor in determining the relationship is the element of control that the employer can exercise over the employee. The Court found in this instance that the plaintiff was not an employee as the defendants did not have the right to interfere with the manner in which he carried out his obligations and hence they did not exercise any control over him. In Re Sunday Tribune (1984), the court recognised that given difficulties in relation to skilled workers who are told what to do but not how to do it, the control test was no longer of universal application and cannot be used definitively as in a modern context, the nature of the employment relationship may not be so simplistic. The Integration or Organisation Test The second test that can be used in determining the relationship is the integration or organisation test. This test was introduced by Denning LJ in Stevenson, Jordan & Harrison Ltd. v Macdonald & Evans Ltd. (1952). He stated that an employee is a person who is integrated with others in the work place or business even though the employer does not necessarily exercise a detailed control over what he does. The courts, in applying this test, will consider whether the worker was a vital part of the operation of the work place.

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The Mixed Test The third test, one now favoured by the Irish courts is the mixed test, developed by McKenna J in Ready Mixed Concrete v Minister for Pensions (1968). A contract between the plaintiff company and a lorry driver stated that the lorry driver was self-employed. He owned, insured and maintained his own lorry, but the plaintiffs had helped finance its purchase. He wore a uniform, and the lorry was painted with the company’s colours. He could delegate the driving and was paid per mile driven. The issue arose as to whether he was an employee and whether the plaintiffs should have been making pension contributions for him to the defendants. McKenna J stated that three conditions had to be fulfilled to establish a contract of service: (1) (2) (3)

there must be an obligation on the person to provide his own skill and work in return for a wage or other remuneration; there must be a sufficient degree of control by the employer; the other provisions of the contract must not be inconsistent with its being a contract of service.

The court found that the economic reality of the situation should also be considered when coming to a decision. Having regard to all of the factors, the court concluded that the lorry driver was an independent contractor. In Kirwan v Dart Industries and Leahy (1980), the Employment Appeals Tribunal applied the mixed test and set out a number of criteria to consider including the extent of control over the task, the manner in which it is carried out, the means used to carry it out and where it is to be carried out; whether the person was in business of his own account or whether he was an integral part of the business; whether the person was required to provide personal service or whether he could delegate the job and finally whether the person was free to work for other employers. The case of Henry Denny & Sons (Ireland) Ltd t/a Kerry Foods v The Minister for Social Welfare (1998), involved a question as to whether a shop demonstrator was an employee or not. Despite the contract stipulating that she was not an employee and the fact that she was responsible for her own tax affairs, Keane J held that she was an employee, applying a combination of tests. Keane J stated that: ‘in general a person will be regarded as providing his or her services under a contract of service and not as an independent contractor where he or she is performing those services for another person and not for himself or herself.’ In making this assessment, regard had to be had to the degree of control, the contract of employment and its express and implied terms, the level of integration of the individual into the workplace, whether the individual provides equipment, premises or investment, employment for others, whether they work on their own account, whether the person engaged receives holiday pay, sick pay or is part of the pension scheme. Despite the fact that the contract stated that she was not an employee, the other terms of the contract – the requirement to be at work during specified hours, the requirement to wear a certain uniform provided by employers, the requirement to carry out tasks in a particular way - led the court to conclude given other factors that she was an employee. While they favour the mixed test, the Irish courts tend not to stick rigidly to any particular test but to view each contract as a whole, examine its terms and compare them with the reality of the relationship between the parties.

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Solution 6 General Comments This is a self-contained question dealing with the principle of utmost good faith in contracts of insurance. Students should explain what is meant by this principle and the general circumstances in which it comes into play. Students should also mention the effect of non-disclosure of material facts. Students should explain, with reference to case law, the issue of materiality and how it is determined. As part of this, they should deal with the issues of physical hazard and moral hazards in contracts of insurance. Finally, students should make reference to the situations where the duty of disclosure is limited. Students are expected to engage to a large extent in a descriptive type answer, and those who write a clear and logically planned answer will perform well. Extra marks will be allocated where students refer to relevant case law. Introduction In some contracts, due to the circumstances of the contract, only one of the contractual parties may possess complete knowledge of all the material facts. In such instances, the law requires that party to show uberrimae fides or utmost good faith. This requires the party concerned to make full disclosure of all the material facts known to him, otherwise the contract may be rescinded. The insurance contract falls under this requirement of utmost good faith. The potential parties to the contract are bound to give each other all material information before the contract is concluded. The party applying for insurance coverage is under a duty to disclose to the insurer all the material facts within his knowledge which the insurer does not or is deemed not to know. Such disclosure must occur prior to the conclusion of the insurance contract. A failure to disclose, even if innocent, entitles the insurer to avoid the contract ab initio. This means that once avoided, the contract is deemed never to have existed. The insurer must avoid within a reasonable time of becoming aware of the non-disclosure. The duty arises whenever a fresh contract is concluded and this also occurs upon renewal of any contract. The duty of disclosure is based on the idea that when a person applies for insurance, he is in possession of all the information whereas the prospective insurer knows nothing at all. To redress this balance, the insured is under a duty to disclose all material facts of which he knows or ought to know. The Test of Materiality A fact is considered to be material for the purposes of disclosure if it is one that would influence the judgment of a reasonable or prudent insurer in deciding whether or not to accept the risk or what premium to charge, as per the decision in Lambert v Co-operative Insurance Society (1975). The Irish courts accepted this test in Chariot Inns Ltd. v Assicurazioni Generali SPA and Coyle Hamilton (1981). The question of materiality is a question of law, but the actual determination of the issue in any particular case is a question of fact. Each case therefore turns on its own facts. There are however, categories of facts which are obviously material and these can be divided into two categories. Firstly, those that apply to physical hazard and secondly, those that apply to the moral hazard involved in the insurance. Physical Hazard Material facts relating to physical hazard include the nature, construction or use of an insured building, whether it is particularly exposed to risk as regards property insurance. As regards life assurance, material facts include health or a high risk occupation or hobby or the results of any health test known to the insured. As regards liability insurance, a material fact would be a bad accident record. Moral Hazard Facts relating to moral hazard are those relating to the insured, his family and associates. Moral hazard is determined according to the insurance history of the applicant and any criminal convictions. The insurance history of the applicant include previous refusals to insure as well as his claims history. In Glicksman v Lancashire & General Assurance Co. (1927), Glicksman and his partner applied for burglary insurance, and the fact that he had previously been refused insurance when trading on his own was material, regardless of the reason for the previous refusal and the fact that the question on the insurance proposal form could have been interpreted as applying to previous proposals by the partners acting together only. In the Chariot Inns case, the case involved two companies with the same director, Chariot Inns Ltd (Chariot) and Consolidated Investments Ltd (Consolidated). Wooton was director and himself and his wife were the main shareholders in Chariot. Wooton was also director of Consolidated, in which his wife was a business associate and both were shareholders. In 1976, Wooton removed furniture from Chariot’s premises in Ranelagh and stored Page 11

it in Consolidated’s premises in Leeson Street. There was a fire in Leeson Street shortly afterwards and the furniture was destroyed. The insurers paid out £8000 to Consolidated under its fire insurance policy. In 1978, Wooton sought insurance for Chariot’s premises. He signed the proposal form and one of the questions on the form asked the proposer to state any claims for loss over the previous five years, to which Wooton stated ‘none’, on the advice of his insurance broker. Three months later, there was a fire in Ranelagh and the Chariot premises was destroyed. The insurance company refused indemnification on the basis that Wooton had failed to disclose material facts of previous claims history. The High Court found against the insurance company, finding that Wooton’s statement in the form was correct as Chariot was not the company that had claimed in respect of the furniture. While there was a duty to disclose all material facts, the matter not disclosed had not been material to the risk undertaken by the insurance company. On appeal, the Supreme Court reversed the decision. Although the statement on the form was correct, the Supreme Court held that the correct answering of questions on a proposal form is not the only obligation on the person seeking insurance. He is also bound to disclose to the insurer every matter which is material to the risk against which he is seeking an indemnity. It was material to the insurance that goods belonging to the plaintiffs were damaged by fire in the premises owned by Consolidated. The answer on the proposal form was literally correct, however, the circumstances in which goods were stored in Consolidated and the fact that Chariot ultimately got payment in relation to them were matters that would reasonably have affected the judgment of a prudent insurer in accepting the risk or fixing the premium and should therefore have been disclosed. As regards criminal convictions, any conviction relevant to the insured will be material unless it is both trivial and old. A number of cases involving the insurance of valuables establish that criminal convictions for offences of dishonesty are normally material, even where they belong to the distant past. For example, in Roselodge Ltd v Castle (1966), a conviction for bribery was held not to be a material fact in relation to the insurance of diamonds, but a conviction for smuggling was held to be material. Limitations on the Duty of Disclosure The duty of disclosure is not absolute and the scope of the duty depends largely on the parties involved, the nature of the insurance in question and the precise manner in which the policy came into being. There are a number of limitations on the duty of disclosure, namely: 1. the insured is not required to disclose facts of which he is not aware; 2. the insured is not required to disclose facts which although material diminish rather than increase the risk; and 3. the insured is not required to disclose facts which the insurer knows or is presumed to know or are matters of common knowledge.

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Solution 7 General Comments In this question, students are being asked to discuss the main judicial institution of the European Community (EC), the European Court of Justice (ECJ). Extra marks will be allocated where students remember to deal with the advocates general. Students should then deal with the different types of actions that can be taken before the ECJ. Students will perform well where they engage in a discussion that illustrates a good understanding of the functions of the ECJ. In their answers, students should also refer to the Court of First Instance (CFI). Introduction Article 220 of the EC Treaty states that the role of the ECJ is to ensure that in the interpretation and application of the Treaty, the law is observed. If the Treaty does not provide a solution to a particular problem and if the necessary detail has not been provided in secondary legislation, the ECJ will be called upon to deal with the system. The ECJ takes a very activist approach and its role sometimes infringes on that of the legislature. The ECJ is assisted by advocates general. The advocates general act as friends of the court in that their function is to assist the ECJ in coming to judgment. They deliver non-binding opinions on the state of the law and how it should, in their opinion, be applied to the facts of the case. The CFI was initially provided for by the Single European Act 1986 and was set up in 1989. It acts as the sister court to the ECJ and was created to unburden the ECJ of its heavy workload. The jurisdiction of the CFI is rather limited. It deals mostly with cases between Community staff and their employers – i.e. institution/staff disputes, actions brought against the institutions by individuals in the area of implementation of Community law, actions for compensation for damages brought against activities of the Community institutions or its employees and competition law. Functions of the ECJ As its primary responsibility, under Article 220 of the EC Treaty, the ECJ must ensure that the law is observed in the interpretation and application of the Treaties establishing the European Communities. To this end, the ECJ has a large jurisdiction to hear various types of action. Types of Action before the ECJ Enforcement Actions Under Article 10 of the EC Treaty, the Member States are required to fulfil their obligations under Community law. If they fail to do so either the Commission can take proceedings against them under Article 226 of the EC treaty or another Member State can do so under Article 227 of the EC Treaty. In these actions, the ECJ can ultimately determine whether a Member State has failed to fulfil its obligations under Community law. In both instances, the Commission must carry out an initial investigation into the breach of Community law, allowing the Member State some time to rectify the situation. If the Member State fails to do so, then the issue goes before the ECJ. If the ECJ finds against the Member State, it must bring its breach to an end immediately. If it does not, the ECJ can at the request of the Commission, impose fines on the Member State. Annulment Actions The Community institutions are empowered by virtue of Article 249 of the EC Treaty to enact legislation. All legislation must derive from the Treaty, in other words it must have a legal base in a provision of the Treaty and the institutions are in addition required to follow the legislative method imposed by that Treaty provision. If legislation is not based on the proper Treaty article and/or the proper legislative procedure has not been followed, an annulment action may be brought before the ECJ. Such an action can be instigated by a Member State, by the European Parliament, the Council of Ministers, the Commission or by an individual to whom a measure is addressed or which is of direct and individual concern to them. Failure to Act Actions The ECJ, along with the CFI can review a failure to act by a Community institution. However, before such an action can lie, the institution must be informed that it is required to act. Where the failure to act is found to be unlawful by the courts, the institution concerned must take action to bring the failure to an end.

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Appeals The ECJ has jurisdiction to deal with appeals on points of law against judgments of the CFI. If the ECJ upholds the appeal, it will set aside the CFI judgment. Preliminary References The ECJ also has jurisdiction to deal with preliminary references from the national Member State courts. The Member State courts are empowered to deal with issues of Community law, where Community law measures have direct effect. If the national court judge is unsure about the Community law measure, he can and sometimes must refer a question to the ECJ asking for clarification. The ECJ will rule on the matter, and the ruling is then binding on the national court, which must in turn apply it in the case before it. Moreover, all national courts in which a similar issue later arises are also bound by the ECJ’s ruling. Some of the most seminal rulings establishing the nature of and the general principles of Community law have been preliminary reference rulings. For example, the principle of the supremacy of European law over national law was decided in the Van Gend en Loos case, which came before the ECJ as a preliminary reference question from a Dutch court.

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