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 sub-
lessee 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.

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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.

Page 5
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.

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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.

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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.

Page 8
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.

Page 9
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) there must be an obligation on the person to provide his own skill and work in return for a wage or other
remuneration;
(2) there must be a sufficient degree of control by the employer;
(3) 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

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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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