Law contract notes

Law of Contract

  • Meaning of law of contract
  • Types of contracts
  • Essential elements of a valid contract
  • Grounds under which contracts are declared illegal Vitiating factors
  • Significance of privity of contract
  • Negotiable instruments contract
  • Methods of discharging contracts
  • Remedies
  • Limitations of action

CONTRACT

Definition

  1. Legally agreement binding two or more parties. Where rights and obligation are acquired by one or more parties to actor forbearance on the part of other or others.
  2. An agreement or promise which is legally binding or force able by law.

Nature of contract

The law of contract imposes an obligation on every person to honor a legally enforce ble promise failure to do so renders them liable to compensate the injured party. Law of contract tends to promote commercial relationship entails an individual or personal interaction.


Essentials of a valid contract

  1. Offer & acceptance

There must be lawful offer and acceptance there should be made according to the requirements of the law.

  1. Intention to create legal relations.

Agreement should be attached by legal consequences to create legal obligations.

Social and domestic nature agreement does not have any legal relations e.g. invitation for dinner, or promise to buy a gift.

In commercial agreements intention to create legal relations is presumed. An agreement to buy or sell goods creates a legal relationship provided other requirements are present.

  1. Lawful consideration;

When a party promise to do something they must get something in return. This something is referred to as considerations- price or promise. A contract with no consideration contract cannot be governed by law of contract.

  1. Capacity of parties;

The parties to an agreement must be competent otherwise it cannot be enforceable by court of law. In order to be competent a person must sound mind the right age .Should not have be disqualified form contracting by any other law which they subject to.

  1. Free consent

Consent- means the parties must have agreed upon something in the same sense. A party should not be forced to enter into a contract. Free consent may be absent if the agreement is influence by coercion, undue influence fraud, misrepresentation and mistake.

Lawful subject matter

Subject matter of the agreement should not be illegal immoral or against a public policy.

Possibility of performance

Parties must be capable of performing the contract, they should not be impossible physically or either physically or legally.

TYPES OF CONTRACT

  1. Express vs. Implied contract

Express contract; this is contract made in writing or orally .Parties agrees about the nature and terms of their relationships.

Implied contract; Parties do not specifically agree to the nature and terms of contract but according have they conduct themselves there is a contract.

  1. Bilateral vs. unilateral contract. Bilateral-Promises are made on both sides. Each party is both promises Unilateral– one sided- only one party made a promise. There is offer of a reward.
  2. Void vs. voidable contracts

Void contract is an agreement which is not binding or enforceable by law. It has no legal effects at all. No remedy is available to the injured party. These are contracts prohibited by law or where there is no consideration.

Voidable contract is treated as having existed up to a particular point in time. It becomes valid until avoided by the party whose consent was not genuine, or induced by duress, coercion, fraud, misinterpretations and minor contracts. The party is entitled to avoid it, must do within a reasonable time. This is done by;

  • Party informing the other party that he does not intend to be bound.
  • Where it is not possible to give notice because where about of the person is not known he can report to the police to show that he does not intend to be bound by the contract.
  • The right to avoid the contract may be lost if:-The party upon discovering the true facts subsequently affirms it. When the innocent third party has acquired an interest in the subject matter of contract which is likely to be affected.

Specialty contract or contract under seal

Characteristics

These are contracts which must be in writing .signed, sealed and delivered.  Seal and delivery is a mere formality. The delivery of such a contract may constructive or actual. Actual is the physical handing over the document .while constructive delivery is more formal .Here the party touches the deed and by his fingers and say,’I deliver to you as my act  and deed”. Where the delivery will take place in future is called” escrow” E.g. Deed of Conveyance where property is transferred form one person to another. Delivery means intention to be bound. This type of contract does not require consideration.

Contract to be under deed

Under English law the following contracts must be under deed otherwise are void

  • Gratuitous Conveyances of land and all leases for more than three years
  • promises i.e. contract not supported by consideration
  • Transfer of shares
  • Conditional bill of exchange

Simple contract may; this is an agreement expressed or implied giving rise to obligations.

Characteristics of simple a contract

May be writing, orally or implied by conduct of parties. These contracts may be partly in writing or partly orally. Simple contracts must be supported by considerations otherwise will not be enforceable.

The following contracts which must be in writing otherwise they are void;

  • Bill of exchange and promissory notes and transfer of shares in a company require to be stamped
  • Representations regarding creditworthiness and of character. Sect 2 of the law contract provides , any representation made relating to character ,credit ability of any person must be in writing and signed by the person responsible in case of default is made by a person for whom to was made .
  • Acknowledgement of Statue barred debts. In case of a simple contract if an action is not maintained within six years the claim is time barred.

 

The following contracts must be supported by evidence in writing otherwise is unenforceable;

  • Contract of guarantee; this is special promise to answer default of another or for miscarriage of another person it is required to be in writing.
  • Sale of land; sale of land or any disposition of land must be supported by written evidence, signed by the party by the party or the agent.
  • Employment contract over one month; sect 5 of Kenya employment act provides that a contract of service which is not in writing is not enforceable
  • Hire purchase agreement must be evidenced in writing and registered within 30 days of its execution
  • Money lending; according to money renders act it provides no action can be taken for any payment of the loan unless a note or memorandum in writing signed by the borrower can be produced..
  • Sale of goods 200ksh.Sect 6 of Kenya sale of goods Act sale of goods of more than two hundred shillings must be evidenced in writing otherwise not enforceable.

Illegal contract are contracts which are prohibited by law, contravenes a provision of law and contrary to public and promotes immorality.

Unenforceable contract are contract which cannot be enforced by a court of law because of technical default or because the .remedy has been barred by time lapse according to the limitation of actions act

Contract of uberimaei or contract of outmost good faith; this is where one party possesses full knowledge of material facts which is under duty to disclose. Non disclosure shows lack of outmost good faith which amount to breach of contract. The party is liable for non disclosure of material facts. The innocent party is entitled to compensate and in relieved from his contractual obligation. In the following contracts outmost good faith is required;

Family settlement, Sale of land                                                                                                                                         Partnership  and  Insurance contract

Contract s of record; these are contracts formed by an entry on the record in Court. Rights and obligations are put on records and this constitutes a contract of record. They include;

Judgment of court and Recognizance’s; in criminal cases the court binds the accused to be good conduct and keep peace. If he fails to observe the terms on contract the consent of parties is absent thus not true contracts.

Executed contract; when both parties have completely performed their share of obligations and nothing remains to be done by either party.

Executory; this is where both obligations are outstanding on one or both parties, whether wholly or in part at the time of formation of contract. A contract is said to be Executory when one of the parties have still to perform their share of obligation.

Quasi contract; they are contract without agreement. They are made under special circumstances they resemble a contract but are not contracts. They are based on the equitable Principle which provides; “One shall not be allowed to retain unjust benefit of the other”.

FORMATION OF A CONTRACT

Formation of a contract requires essential elements for it to be valid. They are;

  1. Offer and acceptance
  2. Intention to create legal relations
  3. Consideration
  4. Lawful object
  5. Free consent
  6. Capacity of parties or contractual capacity
  7. Possibility of performance

 

Offer

Is the willingness to enter into a contract as soon the terms are accepted.

Rules of the offer

  • An offer may be made to specific person or to a member of a group or a whole world at a large. If made specific person should be accepted by that person, if made to a member of a group should be accepted by a member of that group .if made to the whole1 world at large should be accepted by anyone.      (Carllil vs. Carbolic Smoke Ball co,1893)
  • An offer made by word of mouth or in writing or by conduct
  • An offer must give rise to legal consequences if accepted. (Guthing vs. Lynn)1831
  • Must be communicated to person being made to.(R vs. Clerk)
  • An offer cannot bind other party without his consent.
  • Offeror may be attach any conditions and must be communicated to the offerree before they bind by his acceptance.

 

Distinguishing Offer and treat

  • Invitation to treat

Invitation to treat is not an offer. Is the display of goods with prices in shop window/ shelves/ catalogues/ which mentions the prices of goods at the marked prices. It’s an advertisement for the buyer to come and make an offer. The prospective buyer is the offeror and when his offer is accepted creates a binding agreement. (Pharmaceutical Society of Britain vs. Boots Chemist 1953)

  • Declaration of intention

When a person expresses  or  his intention to do a thing , this does not bind him to another person ,if a person suffers damages he fails to carry out their intention despite the fact someone relieved and acted on it is not bound by the contract.( Harris VS Nickerson)

  • Mere supply of information

This is statement of lowest price which a person will sell his property or goods implies no condition to sell at that price to such a person making such an inquiry. (Harvey vs. Facey1893)

Types of offers

  • Cross offer .Both parties simultaneously offer to buy same property. Each of these offer are cross offers are not mutual acceptances of one another to be valid one party must accept first.
  • Conditional offer .Offer made to a subject to certain conditions required to be fulfilled, they be imposed by the parties/implied by law. If one condition is ot fulfilled the offer is terminated.
  • Counter offer .Is a reply to an offer whose effect is to vary the terms of the offer. It is an offer to reject an offer. Distinguishes the original offer.
  • Single offer. It’s a tender. The tendered is required to supply definite quality goods within a specified time. The delivery may be at once or in installments.
  • Standing offer .Is a tender. This is where tendered may be required to supply goods within aq specified period.

Parties to offer

The parties to an offer are the offeror and offerree.

Offeror- makes an offer to the offerree who accepts the offer.

The Offerree may be   an Individual, groups of persons and whole world at large

Termination of an offer

  1. Lapse of time , Offer lapses when time specified in the offer expires. If not time specified, reasonable time should be allowed. Reasonable time depends with nature of the contract and circumstances of each case.
  2. Lapse of the offer. Offer lapses when not accepted in the manner prescribed. If no manner prescribed it may be implied by the nature of the offer.
  3. Death, insanity & bankruptcy. This should before the offer is accepted.
  4. Death after acceptance does not affect the validity. A contract to render personal service is distinguished by death of the party to render the service. Where a person accepts an offer due to ignorance of death of the offer party there is no valid contract.
  5. Counter offer. This is where the terms of the offer are varied by the reply of the offer. The offer cannot be revived by the person to whom it was originally made eve if he is prepared to accept the original offer unconditionally.
  6. This is where a party refuses to accept. If offeror refuses to accept the offer he cannot subsequently change his mind and deliver his acceptance.
  7. Offer may be terminated by revocation i.e. withdraw by the person who has made at any before has been accepted.

   Rules of revocation

  1. Revocation of the offer must be communicated to the offerree

Offerree must know of the revocation of the offer .It is not necessary that it must be communicated to him. It is sufficient if comes to know through a reliable source.

  1. Revocation may be by post.

Revocation by post does not take effect until it is actually received by the offerree.

  • Option rule

This is the promise to keep the offer open for a longer time .the offeror may promise either in by express notice or before acceptance.  If he does not do so he is bound by the offer .he can revoke it at any time before expiration of time

Exceptions

The offer may not be revoked unless:

  1. Offer was actually received
  2. Promise to keep it open is supported by consideration
  • Promise to keep it open was made under seal which does not require consideration.

 

 

 

ACCEPTANCE

For a contract to be valid the offer must be accepted.

Rules of acceptance

  1. An offer may be accepted orally, in writing, or by conduct.
  2. Acceptance must be communicated, mere intention is not sufficient.(Felhouse vs. Bindley)
  3. Acceptance must be absolute and qualified .Where acceptance varies the terms of the offer it amounts to counter offer which rejects the original offer.(Neal vs. Merritt 1930)
  4. Acceptance must be communicated to the offeror in a manner prescribed by him otherwise it is inefficient.
  5. An offer must be made within the time specified, if no time is specified a reasonable time must be allowed.
  6. Acceptance must be made before the offer lapses or terminated
  7. Acceptance once made cannot be revoked. An offer can be revoked by an express notice before it, but acceptance cannot be revoked under any circumstances
  8. Acceptance by post/postal rule is effective when letter of acceptance reaches the offerree. It is effective so long as the offerree can prove the letter was posted. If it is destroyed or lost or it never reached te offer it is still effective.

 

Exceptions

  1. Contract made by telephone is complete only when acceptance is heard by the offerree.
  2. When the offer is made to the whole world at large and by its term such that it requires performance of act without notification of acceptance to the offeror there is a contract binding, even if there was no communication.
  3. Agreement to agree in future

Some agreement are not enforceable by the court if ;

  1. Parties did not intend to be bound.
  2. Did not agree on material facts.

Acceptance subject to contract

Subject to contract means that the parties do not intend to be bound until a formal contract has been made. In such an agreement there is no binding contract since the parties do not intend to be bound its terms.

 INTENTION TO CREATE LEGAL RELATIONS

The parties must have intention to create legal relations. It is not easy to determine whether the parties had intention to create legal relations. In all commercial agreements intention to create legal relation is presumed unless the parties insert a clause that they do not intend to be not in law but in honor only. In domestic agreement it must be specifically proved especially for family agreements such as  agreements between husband and wife and this depends on circumstances of each case (Parker vs. Clerk), (Balfour vs. Balfour)

CONSIDERATION

Both in English law and Kenya law a bare promise is not binding unless it is supported by consideration. A simple contract is not legally binding unless supported by consideration.

Definition;

  1. Consideration is an act of forbearance of a party or promise thereof, is the price for which the promise of the other is bought and thus given.
  2. In law consideration it may be either some rights, interest or profits, benefits accruing to one party or some forbearance or responsibility given or suffered or undertaken.

Meaning; Price paid by a party for promise made. Something in value of monetary form: money, promise, performance/ an act of supply of goods and services.

Examples;

  1. Sales of goods contract-The price payable by the buyer is the consideration on his part, while the act of supplying goods is considered on the part of the seller.
  2. Contract of employment; Workers services are considerations. Salary is consideration on the employer.
  3. Loan contract- Sum loaned is considerations on the lender. While promise to repay is consideration on borrower part.

Importance Of Consideration.

The law indicates a consideration must be made so that the Contract to be valid. The law of contract enforces bargains and not bare promises. It intends to promote commercial relations. These are relations necessary to impose an element of bargain. If no bargain there is no element of commercial dealings. Bargains means exchange relationship in context of money worth.

Types of consideration

  1. Executory consideration: This is an act or promise yet to be done.
  2. Executed consideration: The promise has already been done; both parties have done the promise.
  3. Past consideration; The law of contract provides that for a promise to constitute a valid consideration it must ne made during negotiation. Once negotiations are over and parties have struck bargain any other fresh promise made is called Past Consideration. Past consideration is not valid consideration and the promisee cannot rely on it.

Rules in consideration

  1. Consideration must move from the promisee.

Before the promised party enforces the promise of the offer party must prove that themselves have furnished the consideration for promise otherwise the right to enforce it. A stranger cannot enforce it.

Price VS. Easton 1833

Exceptions

  • Trust- Beneficiary can sue the trustee on his own right to enforce a trust.
  • Bill of exchange- a holder of Bill of Exchange can sue in his own right the drawer. If drawer fails to pay the bills when it comes due for payment.
  • Road traffic act-under the road traffic act motor insurance third party the passengers may sue though they are not party to the contract
  • Assignee of debt-the assignee of debt can sue though he is not a party to the contract.

 

 

  1. Consideration must be real although not adequate.

Consideration must have value in the eyes of the law. The law of contract demands that parties are free to make their own bargain. There is freedom of setting the price of goods. No party can be sued for setting arice for his goods different from others. Alliance Bank ltd vs. Broom 1864. Whites vs.bluets

 

 

  1. Consideration must not be past

Promise made after negotiations are over .Fresh promises is said to be past consideration. The Law of Contract provides that for a promise to constitute a valid consideration it must be made during negotiations.  Past consideration is not consideration.

Exceptions

  • When past consideration consists of services rendered at the express or legally implied request of the promissory
  • When a debt, the payment which is barred by a statute of limitation is revived by afresh promise in writing.
  • In Bill of Exchange act provides that an debt or liability on party of the promissory or drawer of the bill is regarded for this purpose as a valuable consideration.

 

  1. Consideration must be in excess of an existing obligation( Rule in Pinnels case )

Consideration must be in excess of an existing obligation. The person under duty to perform of certain act gives no consideration for a promise to pay for the performance of that contract.)         Rule in Pinnels case

When creditor accepts payments of a lesser sum than what is due him and the promises not to sue for the balance the promise is not binding on him. Since debtor is already under an existing contractual obligation to apply the whole debt, so the part payment cannot be consideration for creditors promise not to sue him for the balance.

(Foakes vs. Beer1884

Exceptions

  1. When a debtor, at creditors request makes an earlier payment, creditor pay less than amount owed by him.
  2. When the creditors agrees to accept something different in kind.
  3. Where the payment is made at the different place at the request of the creditor
  4. When lesser sum has been paid by third party in full settlement form the original debit which is accepted by the creditor
  5. When the debtor makes an arrangements with his creditor to compound his debts
  6. Where the promisee performs or promises to perform a contractual duty already imposed on him by a third party, the promise is binding on him.

 

Equitable Estoppels (HIGH TREES CASE)

The basic rule is that all simple contracts must be supported by consideration .The courts tried to minimize its harshness by applying the Principle of Equitable estoppels. This rule was recognized in the High Trees case. Consideration must be in excess of an existing obligation. The person under contractual duty to perform of certain act gives no consideration for a promise to pay for the performance of that contract. (Foakes vs. Beer1884)

If a person makes a clear and unambiguous representation of fact, and the representation shall be acted upon and representee does in fact act on it, the representor will be estopelled (prevented) from denying the truth of the statement. By making the representation the representor promises the representor that the said statement is and shall remain the truth. He cannot later afterwards turn around and deny the truth of the statement after it has been acted upon by the representee. The promise is considered binding on the promisor even if unsupported by consideration. (The High Trees case- Central London.)   (Property trust VS Trees House LTD 1974)

 

Before this rule can apply the following conditions must be satisfied:

  1. Representation/promise must have been made by the representor to the representee by word of mouth/ conduct; it must be clear and unambiguous.
  2. There existed an original agreement between promisor and the promise.
  3. There resulted a new agreement out of the original agreement for which no considerations was given by the promise.
  4. The promise relied on the promise acted on it and changed his position.
  5. The principle can be used as way of defense and cannot be used as a weapon to attack enabling party to sue on the contract lacking consideration.
  6. Consideration must be legal

Consideration should not be prohibited by law or against public policy or promoting immorality.

CONTRACTUAL CAPACITY

As a general rule every person is by law presumed to be competent to enter into contract. Lack of contractual capacity may render the contract void, voidable or unenforceable. Special rules apply to classes of people. These are:

  1. Infant or minors
  2. Persons of Unsound mind and drunkards.
  3. Married women
  4. Alien or non-citizens
  5. Cooperative societies
  6. Trade unions

Infant or minors                                                                                                                                              A) Void contracts

According to Infant reliefs act 1874 Age majority Act cap3.an infant is persons below 18years.The following contracts are absolutely void according to Infant Act 1874;

  • Contract for repayment of money to lend or to be lent
  • .Goods supplied other than necessaries.
  • All accounts stated with an infant or when an infant admits that owes money to another person.

Exceptions

  1. Protection of the infant against exploitation by traders. They are made liable for any debt contracted during infancy stage.
  2. An infant may represent himself of full age to obtain loan. Such an infant can be sued upon void contracts.
  3. Can be sued upon void contract but not against another infant. Where he lends money to an adult he can recover his money
  4. Infant has a right to paid salaries if working.
  5. If he obtains goods by fraud from supplier equity will compel him to restore goods to supplier owner.

 

B)Binding contract

These are contracts which are valid upon an infant, Infant is liable on them and are enforceable:

These are:

  • Contracts for necessaries
  • Contracts for infants benefits
  • Contracts for necessities

These are goods suitable for conditions in life of the infant. They include; Food Shelter, Clothes ,                                                                                                                                                                                    Medical care,  Education and Legal advice  An infant is not always liable for them. They must pay a reasonable price not the contract price for them. The plaintiff must prove that goods supplied to the infant were necessaries and required them at time of sale and delivery. It is necessary to distinguish between luxuries and necessaries. Luxuries are those goods not suitable for the life of the infant and must pay for them.

Nash vs,Inman1908

  • Contract for the benefit of an infant

These are the contracts for services include education and training. They will enable an infant earn a living or improve skills, occupation or profession. (Dole vs .white city stadium1935.)

  1. C) Voidable contract

These are contracts of continuing in nature which an infant gets some benefits, some rights e.g. lease of premises. These are binding on him unless he avoids them either during his infancy or within a reasonable time thereafter. If he does not do so he will be liable for all debts incurred during his infancy. They include: Holding partly paid shares in a company, Contract of leases .Contract of partnership.

  1. Unenforceable contract

These are contract entered with another infant, trading contract or money lending contracts. They are not enforceable by court of law.

2.Persons of unsound mind and drunkard

Contract entered by a person of unsound mind is binding only when they are sane mind, He is bound by contract for necessaries so he must pay reasonable price for them. he must avoid the contract the moment he realizes that he had entered into a contract when he was insane.

Insane persons can escape his liability on contract which is binding on him by proving that:

  • Time of entering contract he was suffering from Instability.
  • The other party was well aware of it.

Drunkard persons

He is in the same position with a person of unsound mind .Contract made by him is voidable .Partial or slight drunkardness is not a reasonable prove in order for escape liability he should prove he was fully drunkard.

  1. Married women

At common law women could not enter into contract  Under law Reform Married Women Tort Feasors Act 1935 Married women can be sued and sue. Women were not sued for breach of contract or tort. Husbands were sued on their behalf. Currently husbands are not liable for their wives wrongs. He will be only liable for wives contract if she entered at his request on his behalf.

  1. Non-citizen/ aliens

Can sue and be sued.  An enemy cannot sue.

  1. Corporations

Contractual capacity of a corporation is limited by the provision of its Memorandum of Associations. It can only enter into a contract authorized by Memorandum of associations. Any other contract is void. A statutory corporation is created by special Act of Parliament; it derives power from a statute. All contracts must be authorized by statute otherwise they are void.

7) Co-operatives societies and trade unions

Co-op societies are registered under Co-op societies Act (ap.490) It can enter into contract, sue be sued under any contract

Trade Unions may be sued be sued be prosecuted under registered name.

LAWFUL OBJECT

Formation of a valid contract parties must agree to a lawful object.  The object must not be illegal, prohibited by law, fraudulent, immoral or opposed to public policy.

Contracts prohibited by law

Certain statute declares some contracts illegal and void .Example Gaming act of England declares wagering and gaming contracts unlawful.

Wagering contracts; A wager is a promise to pay money or transfer property upon happening of a uncertain event in which neither party has any interest except to win or lose .e.g. a bet in football match in Nairobi .

There are three essentials of a wagering contract.

  • It must be a promise to pay money or money worth
  • The promise must be conditional on an event happening
  • The event must be uncertain one because it may happen in future and parties or unaware result.

NB; a wagering contract is not illegal but is void. They are binding on honor only and no court of law can interfere with it.

 

Features of a wagering contract

  • A loan made to the borrower to bet cannot be recovered
  • A loan made to the borrower to clear his previous wagering contract is recoverable
  • The partnership business formed for conducting wagering transaction is not illegal.

Types of contract opposed to public policy

  1. Contract to commit crime or fraud; the court will not allow anyone to benefit or to profit out of crime . any attempt to compromise crime for consideration is illegal.
  2. Contracts containing sexually immoral element. ; Any agreement for future illicit collaboration is void. Using property for immoral purposes the contract is void .But an agreement for payment of to a woman or mistress for past illicit cohabitation is binding only if such agreements do not encourage further immoral relationship. PEARCE VS BROOKS 1866
  3. Contract interfering with sanctity of marriage; an agreement between husband and wife for future separation or person already married to marry another wife is void.
  4. Contract on restraint of marriage; Agreement imposing an absolute restraint of marriage is void. A total restrain from preventing someone from marrying at all is void. Reasonable restraint is upheld. Partial restraint is to prevent someone marrying certain person’s class, tribe, religious, and faith.
  5. Marriage brokage contract; Contract to introduce person to another opposite sex with view of marriage is void. If sums of money have been promised and marriage takes place the money cannot be recovered as its illegal. An agreement to pay to parent or guardian in consideration of giving his daughter in marriage is enforceable under African customary laws. Herman vs. Charles worth 1905
  6. Contract leading to corruption in public life; Agreement to transfer position form a person to another secure an award,honor,title for consideration is illegal. Corruption administration impairs efficiency Parkinson’s college of ambulance 1925.
  7. Contract to commit fraud on public revenue; A written agreement which is not illegal on the face of it and one use it for illegal purpose cannot, there after enforce it. Alende vs. Rayon 1935
  8. Contract to oust jurisdiction of court; any agreement containing a clause that attempts to deny a person the rights to court proceedings completely is void and cannot be enforced.
  9. Contract to break laws of friendly country is void.
  10. Contract to abuse a legal process; Attempt that denies party’s right to court proceedings completely is void but where contract contains arbitration clause isn’t illegal. A party may be given financial assistance by party who has no personal interest in that case is called maintenance or champerty .

Exceptions; the provider of of financial assistance can recover such amount of money if;

  • Borrower is near relatives.
  • Lends money on humanitarian grounds.
  • Have common interest with person interested as co-workers of property.

 

  1. Contract in restraint of trade.

A person is restricted from exercising lawful profession trade occupation,  or business. In English Law if   a restraints seriously undermines the freedom of choice or freedom to complete, it is considered to be detrimental to  the general goods and court may not treat as void.

Any restraint of trade is void, reasonable constraint of trade is enforceable.

The court has to decide whether the restraint is reasonable or not by determining the following:

  • Nature of employees business
  • Provision of the employee
  • Ares covered by restraint clauses.
  • Duration of constraint clause.

Contract of restraint of trade arises in two circumstances;

  • Binding employee not to take employment with anyone else in direct competition that of employees on termination of contract.
  • Binding sellers business not to compete with their purchase. Court doesn’t interfere with them.

Contract in restraints of trade is valid unless it is proven. Burden lies on the plaintiff to prove that restraint clauses is unreasonable

Effect of illegality

General rule ;Contract that is illegal whether on formation or manner of performance money or goods transferred is not recoverable.

Exceptions

  1. If both parties are not equally guilty, the innocent party may be able to recover any sum paid.
  2. if the  illegal purpose of contract  is not carried out and one  party  honestly repent, the court will assist him to recover the money/goods transferred under contract. Repentance after date of performance is not acceptable by court.
  3. Money paid under marriage breakage is recoverable.

In such cases the court considers the following factors;

  1. Any sum of money promised marriage take place cannot be recovered.
  2. Any money paid marriage take place money cannot be returned.
  3. Any money paid no marriage taken the money is recoverable since illegal purpose has not taken place.
  4. Goods or money paid may also be recovered where a statue intends to protect a class of person and a person seeking is a member of the class.

 

PRIVITY OF CONTRACT

A person who is a party to a contract is said to be privy to the contract: thus there is privity of contract between him and the other contracting party. A person who is privity to a contract can derive benefit from it. They can be sued,and sue. This rule is the called Doctrine of Privity of contract.

Exceptions

  1. Agency- under law of Agency, a person who is not a party to contract a business can sue and be sued.
  2. Statutory Provision- A Statute may impose obligation on persons whose not a party to a particular contract. E.g. Under married Women Property 1882 a married person may take out a policy of insurance on their life for the benefit of their children.  The Bill of Exchange Act imposes  an obligation to certain persons who are not party to contract.
  3. Doctrine Of Constructive Trust; under the law of trusts beneficiary is not a party to contract but can sue be sued.
  4. Restrictive Covenant- is negative term of a contract. It is a promise given by one party to another to prevent from doing a particular act.

 

REALITY OF CONTRACT

Parties must agree to the same thing, that is, ’consensus ad idem, otherwise there will be no agreement. A contract must be complete to be valid .It may be affected by some factors which render it void or voidable.  These are;

  1. Mistake

There are two kinds of mistake of law and mistake of fact. a person may escape liability under contract by proving that he was mistaken as far as facts are concerned but not on mistake of law since it is presumed every one knows law.

Classification of mistakes of fact;

  1. Common mistake as to the existence o subject matter

This is where both parties make the same mistake. The parties assumes the .existence of subject matter while unknown to them it has ceased to exists. The contract is void .e..g .Kamau sell a car to  John parked at the garage  but unknown to them the has been stolen at night.

  1. Mistake to the identity of subject matter

In relation to a particular matter one party may assume one thing while other assumes different thing. There is misunderstanding. a contract made under this mistake is void. It also depends on circumstances of the case.

  • Mistake as to the quality of subject matter

The party is mistaken as to quality of the subject matter. This may render the contract voidable. The general principal applicable is’ Caveat Emptor’ that is buyer be ware. This means the seller is no bound to disclose all information about his goods unless the buyer asks question. In common law the contract is void. Equity set aside the contract on condition fair and just to both parties.

  1. Mistake as to the identity of the other party

The party may be mistaken as to the identity of the other party the contract is void if the identity of the party is of great importance and the other party is aware of this fact. (Cundsy vs. Lindsay1878.    Philips vs. Brooks 1919)

  1. Unilateral mistake

One party is mistaken while the other is aware of this fact. As general rule this mistake renders the contract voidable. This is common on fraud cases where a party misrepresent his identity to the other party making believe he is dealing with the party he wanted to deal with only to realize he is dealing with the right party. The general rule is that physical existence is of great importance. The party  seeking to enforce the contract may prove that he intended to deal with that person and none  else and he took reasonable step to verify the identity of that person, other wise the mistake may not be operative

  1. Mistake as to the nature of document

The general n rule is that a person is bound by the document he signs .If he makes a mistake he can avail himself the plea of non est. factum, means this is not my act. It will relieve him from liability under the document and it is declared null and void .A party must not be negligent on giving his signature otherwise he will be held liable unless it is a negotiable document.

  1. Recovery of goods or money under mistake of fact
  2. Money paid or goods transferred under mistake of fact can be recovered as money had and received. It is immaterial the mistake was due to negligence or forgetfulness of the buyer .(Cundy .vs. Lindsay)

 

Equitable remedies

Equity offers some remedies without declaring void or voidable. These are;

  1. Rectification; When parties omitted some fundamental facts in document the court may direct them to rectify the document to express the accurate original intention.
  2. Rescission. This is setting the contract aside far and just to both parties where the would have been valid under common law.
  • Refusal to grant specific performance.; The court will not order specific performance if the other party is aware that the party was mistaken.
  1. Misrepresentation

Misrepresentation is a false representation .A person may maintain an action on false representation. The law gives some remedies. Misrepresentation must have two characteristics i.e.- it must be a representation of fact not of law or opinion. The fact represented must be material fact.

Elements of misrepresentation

  1. The representation was not law of or opinion.
  2. It was made before or at the time of making the contract.
  3. It was intended to induce the party to enter the contract.
  4. The party relied on the statement and in fact entered into contract.
  5. The statement was untrue.

The general rule

The general rule is that mere silence does not mean misrepresentation. A party to a contract is therefore under no duty to disclose all the material facts, the burden lies on the  other party to elicit all the facts he considers material on the contract.

EXCEPTIONS

Fiduciary relationship; Where fiduciary relationship exists e.g. principal and agent, trustee vs. beneficiary etc, good faith is required by parties. Non disclosure amounts to misrepresentation

Partial disclosure; Partial disclosure or half truth amounts to misrepresentation

Contracts of uberimaei fidei; under theses contract the party with full facts, knowledge of all material facts have the duty to disclose them to the other party e.g. contract of insurance, partnerships Family agreements.

Supervening changes; This is where there is a change of accuracy of facts before the contract is performed the party with facts must disclose them to the other party.                           

Types of misrepresentation

  • Fraudulent- this is a statement made intentionally to fraud a person it is actionable at common law(Derry vs. Peek)
  • Negligent-this where a person makes a statement without caring whether it is true or not. He cannot escape liability for any damages suffered by the other who relied on it .(Hardley Byrne&co.Ltd vs. Heller &Partners Ltd)

 

Remedies

Rescission of contract-       A contract entered under misrepresentation is voidable at the option of the party misled .he will remain liable until he sets aside the contract. After discovering the true facts he supposed to rescind the contract .he may do so by informing the other party this he does not want to be bound or refuse to perform the contract. The misled party can refuse to perform the contract and when sure for breach of contract plead fraud as a defense.

Damages-he can obtain damages but he must prove financial damages.

  1. Undue influence

A contract is said to have been entered under undue influence when the one party is in position to dominate the will of the other party which prevents him to make judgment freely. It is based on the equitable principle that provides that nonperson should take unfair advantage inequalities between him and the other party so that he forces him to enter into contract. A person who seeks to rely on undue influence so as to escape liability must prove that; The other party dominated his will, The transaction was substantially unfair

  1. The presence of undue influence is presumed under the following relationships;
  2. Parent and child
  3. Doctor and patient
  4. Trustee and beneficiary
  5. Guardian and ward
  6. Advocate and client
  7. Religious adviser and followers

NB; where undue influence is proved it is voidable at the option of party influenced. This right can be lost if the third party has obtained his right and delay of taking matter to court (Allicard vs. Skinner)

 

  1. Duress

This refers to actual threats of violence calculated to produce fear in mind of the person threatened .it includes, imprisonment dishonor of parents criminal prosecution etc. It must relate to person not to goods must be unlawful and induce a person to enter into contract. The contract is voidable.

 

DISCHARGE OF CONTRACT

A contract is said to be discharged or terminated if the parties are freed from their mutual obligations. A contract can be discharged in any of the following ways;

  1. Performance

A contract is said to be discharged by performance if both parties performs their mutual obligations and nothing remains to be done. The contract is complete and exact.

Exceptions

  1. Divisible contract; where goods are to be delivered in instilments they are paid in separately each installment means a contract and must be paid for.
  2. Full performance is prevented by the other party
  3. Acceptance of partial performance
  4. Where there has been substantial performance

 

  1. Agreement

Parties to an agreement may agree to release each other from their mutual obligation by use of any of the following methods;

-Novation; this occurs when a new contract is substituted by another contract either by the same parties or different .Consideration being the discharge of old contract. The original contract is discharged and not be done, When the parties remain the same it is alternation.

–Accord and acceptance; the party in a contract is willing to pay lesser sum of money than contracted for if the other accepts the contract is discharged

Waiver; This means deliberate abandonment or giving up a right which the other party was obligated, thus relieving him.

FRUSTRATION

A contract is said to frustrated or impossible when an event occurs bringing the contract to an abrupt end. This is called the doctrine of frustration it relates to the future thus what was to be done ceases to be done. The parties remain liable to what ever happened before the frustrated event.


Circumstances under which a contract can be frustrated;

 

  1. Destruction of the subject matter;When performance depends upon a continued existence of a given person or a thing and is destroyed there is frustration. Destruction need not to be whole. (nickoll&  knightlvs ashton &co.ltd)

 

  1. Non occurrence of a stated event; when a contract is entered into the basis of happening of a stated event, the contract is discharged, if the event does not take place. E.g. Krell Vs Henry 1903.
  2. Death or Incapacity. ; In contract of personal services, death or illness of a particular person whose action is important for the agreed performance this discharges the contract. It should not be self-created tp prevent person from performing.
  3. Change in law. A contract may be legal at time of formation but may subsequently become illegal due to alteration of law. Contract is discharged.
  4. Government interference; unexpected government interference causing fundamental changes of circumstances may discharge a contract.

Effect of frustration

According to common law rule subsequent impossibility discharges the contract. According to the law Reform Frustrated contracts Act 1943 of England which becomes applicable in Kenya in 1961 provides when a contract is frustrated it comes to an end automatically as to future but it is not made void from the beginning.

The following Principles are provided by the Effects of Frustration:

  • Money paid before discharge is recoverable.
  • Money which became payable ceases to be payable Court does not allow parties to recover sums of money paid out of expenses incurred out of connection with contract. Will allow sums already received under the contract.
  • A reasonable sum of compensation on quantum merit basis may be received wen one party benefits from the other, other than money payment.

This Act is not applicable on these contracts

  1. Contract of insurance
  2. Charter parties & contract of carriage
  3. When the contract expressly provides contingency which arose where frustration is self-induced.
  4. Contract of sale of goods.
  5. Where one party relies on work done by third party.
  6. Contract of lease
  7. Contract became more expensive/ difficult to perform.

 

DISCHARGE BY BREACH

Breach is failure of another party to perform their obligation under the contract.

Breach may in the following ways;

  1. Failure to perform

Failure to perform a contract, performance is due, the other party can hold them liable  for breach of contract. Performance must be done at the time agreed. In commercial agreement time is presumed to essence of contract unless otherwise is agreed, e.g. failure to deliver goods on due date give right he is to treat the contract discharged. Aggressive party is allowed to treat the breach of a condition of warranty if the other party shows willingness to perform contract.

  1. Renunciation/anticipatory breach

A Party to contract may feel that may not be able to perform contract, so he can renounce the contract so that  he is not be made liable on the contract  He must do so before time of performance. Other party may sue for breach of contract immediately.

  1. Self-disablement

A person may disable himself from performing his contractual obligationor give up his right on the contract.

 

DISCHARGE BY OPERATION OF LAW

Law discharges contract in following ways

  • Lapse of time.
  • By merger.- takes place when parties merger a simple contract into a contract under deed.
  • Death- death of either party will discharge the contract  for personal  but  other contractual rights and obligations are not affected. They will survive for the benefit of the estate of deceased.
  • Bankruptcy- when a person becomes bankrupt all his rights and liabilities pass to a trustee in But a trustee is not liable o contracts of personal services.

 

Remedies for breach of contract

  1. Refusal of further performance.

When a party suffers due breach of contract he may treat the contract as ended and may refuse further performance .If sued he may use breach as a defense.

  1. Action for damages.

The normal remedy for breach of contract in common law is damages. Aim of law is to put injured in position he would have been if the contract was performed. Damages are not offered in every kind of breach of contract. In some case the law may consider that the loss suffered form the breach is too remote to merit any compensation. In order to award damages the court follows the rule laid down by Hardley vs. Baxedale

According to this rule it was decided that the loss did not naturally arise from breach of contract. The defendant was not aware of the plaintiff did not have the spare part of the mill. There fore the rule provides the following principles:

  1. Damages for breach of contract be such as fairly and reasonable be considered either arising naturally from breach of contract.
  2. Contract made under special circumstances- the party relying on special circumstances to communicate them to the party.
  3. Loss is recoverable if defendant were reasonably accepted such a loss would be incurred in the ordinary course of things.

NB; Party suffering in a breach of contract must make reasonable efforts to minimize their loss. This is called Mitigation of Loss. He is not entitled to recover damages which he could easily recover had he tried.

Classifications of damages

  • Ordinary/ general damages; these are damages restricted to proximate consequences of breach and remote consequences neither are nor regarded. The measure of the damages is the estimated loss directly and naturally resulting in the ordinary course of event from breach of contract. The court tries to compensate the injured as far as possible.
  • Special damages. ; Damages that do no rise naturally from breach of contract but result from peculiar circumstances. They must be proved.
  • Exemplary Damages; Damages used as punishments of promise breaker to prevent themselves/ others to commit same offence again .they are awarded when a banker does not honor a properly drawn cheque which has sufficient funds.
  • Nominal damages. ; are awarded when the plaintiff has proved breach of contract without suffering any actual loss. Sum awarded id usually minimal its an acknowledgement that plaintiff has brought to the court.
  • Contemptuous damages. ; Awarded by court when it is satisfied that the action should not have been brought before court by the plaintiff.
  • Unliquidated damages; Awarded by court when breach takes place. Plaintiff should give evidence loss incurred. The court follows rule in Hardly VS Baxedate to ascertain appropriate damages.
  • Liquidated damages. Fixed by parties themselves parties agree on he formation of contract the amount to pay the other party incase brech occurs.
  • Penalty Clause ;Sum agreed in a contract to be for forfeited .Used to prevent further non-performance of contract.

Differences between penalty and liquidated damages

Penalty

  1. Prevent non performance
  2. Fixed large sum which does not reflect genuine pre-estimated of loss
  3. Not Awarded in normal principle

Liquidated

  1. Attempts to value the financial loss due to breach of contract
  2. is a genuine pre-estimated of loss.
  3. in normal principle
  • Quantum Merit.; Claim for value of work done. Court will try to compensate according to proportion of work done. General rule states that a contract to provide services in return of payment of lump sum of money nothing is claimable. Claim can be made if;
    1. Party is prevented for performing whole contract as a result of fault.
    2. Party partially performed & offer party voluntarily accepts the benefit of work done.
    3. Contract is divisible.

Action for specific performance

This is an equitable remedy. Awarded at the discretion of the court/ where damages would not be adequately remedy.

Usually granted in following case

  • Sale of land
  • Taking up debentures of company.
  • Sale of rare goods

Not granted in the following cases.

  • Damages would be adequate remedy.
  • Contract to render personal services
  • Where a party is an infant

Injunction

Is order by the court to prevent continuance or repetition of wrongful act.  It is usually awarded where specific performance is not available

 

REVIEW QUESTIONS

  1. Explain the essential elements of a valid contract (14marks)
  2. Explain the rules of the offer and acceptance                                     (20marks)
  3. Past consideration is no consideration .explain stating the exceptions (10marks)
  4. Write short notes on the following vitiating factors
    1. Mistake
    2. Misrepresentation
  • undue influence
  1. duress                                                                   (20marks)
  1. Describe three methods of discharging a contract (12marks)
  2. Explain the remedies of breach of contract (10marks)
  3. Outline five exceptions to the doctrine of privity of contract (10 marks)
  4. Mjengo Company limited Incase of any communication irrespective of being false or malicious is protected. Such statement includes Mjengo Ltd was commissioned to build a block of flats for Tajiri company. The contract contained a clause under which Mjengo Company undertook to complete within twelve months and on event of it taking longer it will pay Tajiri Company, ksh.50, 000 per month as liquidated damages. However, due to strike by he workers the work was delayed and took Mjengo Company eighteen months to complete the constructions. Tajiri is c claiming ksh, 300,000 as liquidated damages which Mjengo Company has refused to pay for the reasons that the strike was beyond their control. Tajiri approaches you for advice  legal advice

-Explain the legal principles applicable to this case

-Advice Tajiri Company                                                                             (10marks)

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