The Law Commission

PART IV

COMMERCIAL LAW AND COMMON LAW

TEAM MEMBERS^[1]

Government Legal Service

Tamara Goriely (Team Manager)

Catherine Button, Joanna Perkins,
James Robinson, Simon Tabbush

Research Assistants

Jeremy Easton, Simon Forshaw, James Turner

Professor Hugh Beale QC

(Commissioner)

Partnership Law

4.1     A major outcome for the year was the publication of our report on Partnership Law, written jointly with the Scottish Law Commission. The report includes a new Partnership Bill to replace the current outdated legislation – the Partnership Act 1890 and Limited Partnerships Act 1907.^[2] We had previously published two consultation papers, the first on general partnerships and the second on limited partnerships.^[3] 
4.2     Partnerships play an important role in the economy. There are over 500,000 partnerships in the United Kingdom with a combined turnover approaching £150 billion. The main advantages of partnership as a business vehicle are its flexibility and informality. 
4.3     Our reforms aim to: 

encourage continuity of business by facilitating continuity of a partnership after changes of partners;

preserve partnerships as a flexible and informal business vehicle

preserve mutual trust and good faith as critical components of the relationship between partners; and

provide a modern law of partnership based on concepts which can be readily understood by partners, advisers and clients alike.

4.4     As a means of providing for continuity of business following changes of partners we propose that partnerships in England and Wales should be legal entities, as they already are in Scotland. 
4.5     Many partnerships do not have formal partnership agreements. The draft Bill contains default provisions which would apply unless the partners agree otherwise, and these are designed particularly with small partnerships in mind. 
4.6     In our project we were greatly assisted by, among others, Roderick Banks, who acted as our consultant, Tony Sacker and the Association of Partnership Practitioners and the Scottish Law Commission's Advisory Group. We are also grateful to all who responded to our Consultation Papers^[4] and to the Institute of Advanced Legal Studies at London University, the Manchester Law Society and Manchester Chamber of Commerce who organised conferences during the consultation process. 

Pre-judgment Interest on Debts and Damages

4.7     In February we published our final report and draft bill, Pre-Judgment Interest on Debts and Damages (Law Com No 287). 
4.8     At present, statutes give the courts little guidance about what interest rates to apply in the absence of contractual provisions. In practice, litigants often claim and receive the judgment rate. This was set at 8% in 1993 and has not been changed since. Commercial rates are now much lower and 8% often over-compensates claimants. 
4.9     Furthermore, the courts have no power to award compound interest, even though this is the most accurate measure of the interest lost: claimants will either have had to borrow at compound rates, or will have lost the opportunity to invest (also at compound rates). Compound interest was not recommended in the past because it was thought too difficult to calculate – an argument that no longer applies in the computer age. 
4.10     The Report recommends that the courts should normally award a "specified rate", set each year at 1% above the Bank of England base rate. The courts should also have a power to award compound interest in appropriate circumstances. We are keen that interest calculations should be made as straightforward as possible, and we recommend that the Court Service should provide a computer programme and tables to help with this. 

Registration of Security Interests

4.11     Creditors often attempt to secure loans or other obligations by "taking security" on property other than land. This project looks at when and how such security must be registered and, where more than one security interest exists, which takes priority. At present, companies must register most of the mortgages or charges they grant. However, creditors use many devices (known as "quasi-securities") which act as security, but which the law does not treat as security and which do not need to be registered. Examples include finance leasing, hire purchase or retention of title clauses. 
4.12     In July 2002 our consultation paper provisionally proposed a new system of "notice filing".^[5] This would be easier than the present system for registering a company charge, and we consulted on whether it should apply not only to company charges but also to "quasi-securities". Over the last year, we have continued to develop a comprehensive scheme for the attachment, perfection and priority of security interests created by companies, applicable to both "traditional security" and "quasi-security". We plan to undertake further consultation by publishing a paper containing draft Regulations in the summer of 2004. 
4.13     We would like to thank those who have acted as consultants to this project: Professor Sir Roy Goode QC, Professor Harry Sigman, Mrs Louise Gullifer and Professor Sarah Worthington. We are also extremely grateful to the many practitioners who have given freely of their time and advice. In Autumn 2003 we held a half-day seminar and four evening seminars to discuss aspects of our developing policy. We thank the Society for Advanced Legal Studies, Norton Rose, Clifford Chance, Allen & Overy, Berwin Leighton Paisner and Freshfields Bruckhaus Derringer for their help with these. 

Unfair Contract Terms

4.14     We are working with the Scottish Law Commission to review the law of unfair contract terms. The central problem is that the law is extremely confusing. It is governed by two overlapping pieces of legislation, the Unfair Contract Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations 1999, which use different concepts and definitions and can reach different results. In August 2002 we published a consultation paper^[6] that recommended replacing both with a single, unified Act written in accessible language. Our proposals on consumer contracts were widely welcomed, and we are presently drafting a new Bill to implement them. 
4.15     The consultation paper also proposed extending the controls in business contracts, to allow challenges to a wider variety of potentially unfair terms. This provoked some concerns among larger businesses that we were reducing certainty in commercial contracts and interfering with their freedom to contract as they wished. 
4.16     We have re-thought our proposals in the light of the comments we received. We have been persuaded that the need for additional protection is confined to very small businesses (often labelled "micro-businesses") that employ fewer than 10 people. Following a very useful seminar held at the Institute of Advanced Legal Studies in August 2003, we are concentrating on ways to extend protection to cases where very small businesses contract on the other party's standard written terms. We intend to publish a final report and draft Bill later in 2004. 

The Forfeiture Rule and the Law of Succession

4.17     As part of our review into the law of illegality, we have considered a particular problem that arose from the case of Re DWS (deceased) [2001] Ch 568. The claimant's two grandparents had been murdered by their only son (the claimant's father). The grandparents died intestate, and the question was who should inherit their estate. The father was disqualified from inheriting under the "forfeiture rule", by which a murderer cannot inherit from his victims. The court found that the grandchild could not inherit either, because under intestacy law grandchildren can only inherit once their parents are dead. The property went to more distant relatives. 
4.18     In October 2003 we published a short consultation paper,^[7] in which we proposed a change to intestacy law that where a potential heir is disqualified the property should be distributed as if that person had died. We received 29 responses. We plan to publish a report and draft bill in 2005. 

Illegal Transactions

4.19     We are continuing with our wider review of the law of illegal transactions, looking at the effect of illegality on claims in contract and trusts. The law on illegality has been criticised for being complex, uncertain and, on occasions, unjust. We originally proposed that where a contract is held to be illegal, the court should have a structured discretion to enforce the contract.^[8] We are re-examining this proposal to see whether a solution to allow the court to grant restitution or financial adjustment would achieve the same benefits. We intend to publish a report in 2005. 
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Note 1    Including lawyers who were at the Commission for part of the period.     [Back]

Note 2    Law Com No. 283; Scot Law Com No 192.    [Back]

Note 3    (2000) Law Commission Consultation Paper No 159/Scottish Law Commission Discussion Paper No 111 and (2001) Consultation Paper No 161/Scottish Law Commission Discussion Paper No118.    [Back]

Note 4    There were 84 responses to the Consultation Paper on General Partnerships and 42 responses to the Consultation Paper on Limited Partnerships.    [Back]

Note 5    Registration of Security Interests: Company Charges and Property other than Land, Consultation Paper No 164.    [Back]

Note 6    Unfair Terms in Contract, Law Commission Consultation Paper No 166/Scottish Law Commission Discussion Paper No 119.     [Back]

Note 7    The Forfeiture Rule and the Law of Succession, Consultation Paper No 172.     [Back]

Note 8    Illegal Transactions: the Effect of Illegality on Contracts and Trusts, Consultation Paper No 154 (1999).     [Back]