Business Law Notes 3

3. THE LAW OF CONTRACT

3.1 DEFINITION
A contract is an agreement enforceable at law.

3.2 ELEMENTS NECESSARY FOR THE CREATON OF A VALID CONTRACT

For an agreement to be legally recognized and enforceable, it is essential that certain legal rules
be met:

3.2.1 Agreement/Consensus
There must be an agreement. An agreement can only be made between at least two persons,
eliminating the irrationality of a person claiming to have made an agreement with himself.

An agreement exists when one of the two or so persons makes an offer (offeror) and the other(s)
indicates an acceptance (offeree). When the offer and acceptance correspond in every respect,
there is agreement between the parties.

This correspondence between the offer and acceptance means that there has been ‘a meeting of
minds’. If the parties’ minds meet, a court of law will usually declare that those people have
reached an agreement.

Therefore, for there to be a meeting of minds and thus an agreement, common law requires that
there must be:
a) An offer made by an offeror to an offeree and
b) An acceptance of the offer by the offeree.

3.2.2 Intention to create legal relations

The parties must have the intention to create an agreement that is legally binding. This means
that the parties must intent that if one of them fails to fulfill a promise undertaken by the
agreement, he shall be answerable for that failure in law.

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The intention to create legal relations is an element necessary for the formation of a contract.
Both parties must have this intention; the courts however make this determination by
establishing whether reasonable persons, from the parties words and actions, would draw the
conclusion that they want to be legally bound.

If the parties indicate expressly or impliedly that they do not wish their agreement to be binding,
the law would accept and respect their intention. In the absence of express statements, there is a
clear difference of approach to domestic agreements and commercial agreements. With the
domestic agreements, the courts are more likely to infer that no legal relationship was
intended whereas in commercial agreements, there is normally a presumption that the parties
intended to be legally bound.

3.2.3 Written / Oral

Contracts may be concluded in written or oral form.

In factual sense however, the preferable case is to have, the contract expressed in writing; and
actually in certain situations a contract may be held to be invalid if not contained in a written
document. In other cases, the contract is perfectly valid if made orally. E.g. a contract of
employment. Nonetheless, if a dispute arises and it is necessary to prove its existence or
contents in court, written proof of the contract and its terms are very effective sources of
evidence. It is therefore advisable to always engage in written contracts.
The following contracts must be made in writing;
 Bills of exchange and promissory notes – a bill of exchange is an unconditional
order in writing, addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to or to the order of a specified
person or bearer.
 The transfer of shares in a company registered under the Companies Act (Cap
486)
 Transfer of immovable property i.e. land and anything attached to it.
 Contracts for the sale of goods, of goods of over two hundred shillings.

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All the above mentioned contracts are void i.e. destitute of legal effect, unless they are made in
writing.
The following contracts are only actionable in court if there is written evidence;

 Contracts of guarantee – it is necessary to distinguish a contract of guarantee from

a contract of indemnity. While a contract of guarantee must be evidenced by
writing, a contract of indemnity need not. There are three parties concerned in a
contract of guarantee, namely, the creditor, the debtor and the guarantor. The
transaction takes place on something like the following lines. The guarantor says
to the creditor, ‘let the debtor have the goods; if he does not pay you, I will.’ This
is a contract of guarantee and to be enforced the contract between the creditor and
the guarantor must be supported by some written evidence.
Under a contract of indemnity there are only two parties and the indemnifier
says in effect to the creditor, ‘Let him have the goods and I will see that you are
paid’. There is no question here of any secondary liability. The liability of the
indemnifier is a primary one. Such a contract can either be in writing or orally
agreed.
 Representations regarding creditworthiness – Statements relating to a person’s
creditworthiness would only be actionable if made in pursuance of a contract
which was in writing.
 Contracts for the sale of goods over two hundred shillings
 Employment contracts for over one month
 Money lending Contracts

3.2.4 Capacity to contract.

The parties must have the legal ability to contract. Capacity normally affects children, mentally
handicapped people, drunken people and corporations.

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3.2.5 Feasibility
The reality or performance of the contract must not be affected by circumstances, which
render the contract unenforceable, voidable, void or illegal. The execution of the contract
must be feasible.

3.2.6 Consideration
It is some BENEFIT received by a party who gives a promise or performs an act or some
DETRIMENT suffered by a party who receives a promise. It may also be defined as that
which is actually given or accepted in return/exchange for a promise.

3.3 TYPES OF CONTRACTS & AGREEMENTS

3.3.1 Domestic Agreements

These are agreements of a purely domestic nature. They are friendly agreements normally for the
sale of household items or other small items. Most often they are not intended to be binding in
law but are intended to rely on the bonds of mutual trust and affection. There is a legal
presumption in law that parties in domestic agreements do not intended to enter into legally
binding agreements. However, this presumption can be rebutted by the words or actions of the
parties.

Balfour v. Balfour
A British man was sent to Sri Lanka to work as a civil servant. He promised his wife, who on
the doctor’s advice had to remain in England, a household allowance of £30 a month until she
joined him in Sri Lanka. Later, the parties separated and the wife sued for the allowance. It was
held that domestic agreements such as this were outside the realm of scope of contract law all
together.

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Spellman v. Spellman (1961)

A husband and a wife whose marriage was unhappy hoped that their relationship would improve
if the husband bought her a car. The husband acquired a car on hire purchase terms and agreed
that the registration book should be in the wife’s name and she should take possession of the car.
In spite of this arrangement, the marriage continued to be unhappy and the parties separated. It
was held applying the rule Balfour v. Balfour that the husband and not the wife was entitled to
the car because the arrangement between them was of purely domestic character.

On the other hand, even if the parties are in a domestic or social relationships but intend their
agreement to have legal consequences, an enforceable contract is concluded.

Merrit v. Merrit (1970)

A husband had formed an attachment with another woman and the spouses intended to separate.
They negotiated in the husband’s car about some arrangement for the future. Before the wife left
the car, she insisted that the husband give her a written statement according to which in
consideration of her paying the mortgage on the family house which was in the name of her
husband, he would transfer that house into her sole ownership. The wife paid the mortgage and
asked for the transfer of the house. In this case, it was held that the rule in the Balfour case did
not apply.

The court indicated that in the Balfour case the parties had reached the agreement when they
were still living together but in the present case, they negotiated at arms length as they had
decided to separate and reasonable persons would regard their agreement as intended to be
binding in law. The wife was entitled to the house.

3.3.2 Commercial Agreements

The general rule here is that the parties intend that there be a legal relationship i.e. that if one of
them breaks the agreement, the other shall have the right to institute and succeed in legal
proceedings to enforce the agreement.

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The parties may however, expressly agree that their agreement although put in legal terms shall
not be binding in law but in honour only, this is to say the agreement amounts to a gentleman’s
agreement, and the court has no jurisdiction over the matter and the parties are not bound to
perform what has been promised in the agreement. As such there is a legal presumption in law
that parties in commercial agreements intended to enter into a legally binding agreement.
However this presumption can be rebutted by the words or actions of the parties.

Rose & Frank Co. v. Crompton Bros Ltd (1925)

The Rose Company made an agreement with the defendant company in which the defendants
were appointed agents for the sale of paper supplied by the company. One clause in the
agreement was:
“This agreement is not entered into as a formal or legal agreement and shall not be subject
to legal jurisdiction in the law courts’
It was held that there was no contract between the parties.

3.3.3 Vague Agreements

There are contracts that are so vague in wording making it difficult to show that the parties did
not intend to be bound in law.

Montreal Gas Comp v. Vasey (1900)

The plaintiff company agreed with defendants, Vasey, that on the expiration of Vasey’s existing
contract they could favorably consider an application by Vasey for a renewal of the contract. It
was held that the agreement was not intended to bind the company to renew their contract with
Vasey and imposed no obligation on them to renew it.

Gould v. Gould (1970)

A husband who had left his wife agreed to pay her 15 pounds a week as long as he had it. It was
held that although the husband and wife could enter into a legally binding agreement, the vague
terms, which were used, indicated an intention not to create legal obligations.

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3.4 FORMATION OF CONTRACT

The essence of contract is that there should be agreement between the contracting parties. This
agreement is normally constituted by one party making an offer and the other indicating its
acceptance. The acceptance must correspond to the offer in all material aspects. The
negotiations between the parties need not always lead to a contract. Inquiries may be made or
offers invited but no offer may be made, or if one is made it need not be accepted.

3.4.1 Offer
a) Statements Preliminary to an Offer
In Osborn’s Concise Law Dictionary an offer is defined as ‘a promise which when accepted
constitutes an agreement’. It is a statement by one party expressing a willingness to enter into
contractual relations with a specified person.

An offer must be distinguished from an invitation to make an offer and a declaration of intention.

i) An invitation to make an offer

This is not an offer, which is capable of being turned into a contract by acceptance; it is
simply an expression of a willingness to negotiate. An advertisement is normally only
intended to be an invitation to treat, that is, to negotiate e.g. a shopkeeper who displays
his goods in his window with a ticket on them stating a price, does not make an offer but
merely invites the public to make an offer to buy the goods at the price stated. Therefore,
if a customer enters the shop and tenders the price and demands the article, the
shopkeeper is not bound to sell it to him. The demand of the customer is the offer, which
the shopkeeper is free to accept or reject as he pleases.

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Pharmaceutical Society v. Boots Cash Chemists (1953)

Goods were sold in Boots Shop under the self service system. Customers selected their
purchases from the shelves on which goods were displayed, put them into a basket
supplied by boots and took them to the cash desk where they paid the price. It was held
the contract was made not when the customer put the goods in the basket but when the
cashier accepted the offer to buy and received the price.

Also a prospectus to subscribe to the shares of a company is often in the nature of an

invitation to make an offer. The application for the shares is the offer and the allotment
by the company is the acceptance.

ii) A Declaration of Intention

A statement made by a person regarding a proposed future course of action may give the
appearance of an offer, but is not necessarily so. For example, a declaration by an
auctioneer that he will sell specified goods by auction on a certain day might appear to be
an offer to sell the goods to those who attend the proposed auction on the material day.

Harris v. Nikerson (1873)

An auctioneer advertised in the newspapers that a sale of office furniture would be held at
a certain place. A broker with a commission to buy office furniture traveled to the stated
venue to attend the sale, but all the furniture was withdrawn. The broker thereupon sued
the auctioneer for his loss of time and expenses for he contended that the advisement was
an offer which he had accepted. It was held that there was no contract since the
advertisement was not an offer which could have been accepted by the broker, as alleged.
The judge stated that the broker’s contention was ‘a startling proposition and would be
excessively inconvenient if carried out.’ It amounts to saying that everyone who attends
the sale has accepted the same offer.’ The advertisement should have been viewed as a
mere declaration of intention which might not be carried out.

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A declaration by a person that he intends to do a thing gives no right of action to another who
suffers loss because the former does not carry out his intentions. Such a declaration means only
that an offer is to be made or invited in the future and not that an offer is made now. A letter of
intent which contains no additional undertaking does not oblige the writer to anything.

b) The Actual Offer

The offer may be expressed or implied from conduct.

Examples of express offers are: -

1. A offers to sell his motor bike to B at Shs.3, 000. B promises to pay Shs.3, 000
for the motor bike.
2. A advertises in a newspaper offering Sh.10, 000 reward for anyone who returns
his lost computer. B brings the computer to A.

An example of an implied offer is:

A bus goes along the street. This is an offer on the part of the transport company to carry
passengers at the published fares. The offer is accepted when the person goes onto the
bus with the intention of becoming a passenger. However if a man standing by at the bus-
stop signals for the bus to stop. The man is the offeror and the driver is the offeree.

An offer may be made to a definite person, or to some definite class of persons or to the world at
large. An offer to a definite person can be accepted only by that person and no one else. An
offer to the world at large can be accepted by anyone. An offer to some definite class or group
of people can be accepted only by a member of that class or group e.g. an offer to members of
parliament.

Carlill V Carbolic Smoke Ball Co. (1893).

Carbolic Smoke Ball Company offered by way of reward £100 to anyone who contracted
influenza after using their smoke balls as prescribed. They even stated that they had kept £1,000
in their bank showing their sincerity in the matter. Mrs. Carlill used the Smoke Ball as

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prescribed but not withstanding contracted influenza. She claimed £100. It was held that the
company was bound to pay.

All offers must be communicated to the offeree before they can be accepted. The offeree cannot
accept an offer unless he knows of its existence because he cannot accept it without intending to
do so and he cannot intend to accept an offer of which he is ignorant.

b) Termination of offers
An offer can come to an end in three ways
 Lapsing
 Revocation
 Rejection

ii) Lapsing of offers

The following are the ways in which an offer can lapse;

 On the death of either the offeror or offeree before acceptance. Death after
acceptance does not affect the obligations arising from a contract unless they
were of a personal nature.
 By non-acceptance within the time prescribed,
 When no time for acceptance is prescribed, by non-acceptance within a
reasonable time. What constitutes a reasonable time depends on the nature of
the contract and the circumstances of the case. The reason why the offer
lapses is that the offeree is regarded as having refused it if he has not accepted
it within a reasonable time. If the offeree indicates within a reasonable time
that he accepts his offer, but sends a formal letter of acceptance later, the
offeree cannot claim that his offer has lapsed.
Ramsgate Victoria Hotel V Montefiore
The defendant applied for fifty shares in the plaintiff company on the 8th
of June 1864 but no allotment was made until the 23rd of November. On
the 8th of November the defendant, having received no communication

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from the company, informed them that he was withdrawing his

application. He also refused to accept the shares and the company sued to
enforce the allotment. It was held that the interval from June to November
was not reasonable and judgment was given for him.

ii) Revocation of offers

An offer may be revoked at any time before acceptance. As a general rule, an offer is
irrevocable after acceptance.

Revocation does not take effect until it is actually communicated to the offeree.
Communication for this purpose means that the revocation must actually have reached
the offeree.

Byrne v. Van Tienhoven (1880)

The defendants, A, by a letter dated 1 st October, offered to sell goods to the plaintiffs, B.
B received the offer on 11th and immediately telegraphed his acceptance. On 8 th A posted
another letter revoking his offer which was received by B on the 20 th. It was held the
revocation was of no effect until it reached B and a contract was made when B
telegraphed.

The communication of the revocation need not have been made by the offeror. It’s
enough that the offeree learns of the revocation from a source which he believes to be
reliable.

Dickinson v. Dodd (1876)

X agreed to sell property to Y by a document which stated, “This offer is to be left over
until Friday 9.a.m”. On Thursday X contracted to sell the property to Z. Y heard of this
from B and on Friday at 7.a.m. he delivered to X an acceptance of his offer. It was held
that Y could not accept X’s offer after he knew it had been revoked by the sale of the
property to Z.

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iii) Rejection of an offer

An offer can be rejected in these two ways;
 By the offeree communicating his rejection to the offeror or

 If the acceptance of the offeree is qualified, or subject to conditions. In that case,

the qualification constitutes the rejection of the original offer combined with a
counter offer.

Hyde v Wrench
The defendant on the 6th of June offered in writing to sell his farm to the plaintiff for
£1000. The plaintiff on the 8th of June offered £950 which the defendant on the 27th of
June after considering refused to accept. On the 29th of June, the plaintiff agreed to
give £1000 but the defendant refused to sell the farm to him. The plaintiff sued for
specific performance but it was held that there was no contract between him and the
defendant. The judge said that ‘the plaintiff made an offer of his own, to purchase the
property for £950, and he thereby rejected the offer previously made by the
defendant. I think that it was not afterwards competent for him to revive the proposal
of the defendant, by tendering an acceptance of it.’

3.4.2 ACCEPTANCE
An acceptance is a final and an unqualified assent to the terms of an offer made by an offeror.

An acceptance is only possible if the offer is still in force. The acceptance must be made while
the offer is still in force and before it has lapsed or has been revoked.

Once the acceptance is complete the offer is irrevocable.

The validity of an acceptance is determined along these rules:

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1) The offeree must have the intention to accept the offer, at the time of the alleged
acceptance.
This rule requires that the offeree be aware of the existence of the offer; this may be so if the
‘offeree’ plainly has no knowledge of the offer, or has forgotten about the offer as at the time of
the alleged acceptance.
Crown v Clarke (Australia)
A reward was publicly offered for information that would lead to the arrest and conviction of
persons accused of murder. Clarke, being aware of the offer, had communicated information that
led to the arrest of one and subsequent conviction. Clarke seeking to obtain the reward instituted
a suit against the government. The application was denied both in the trial and appellate stage on
the grounds that Clarke had not acted on the offer rather to save himself from prosecution on the
aforementioned murder charges.
2) The offeree’s acceptance must be communicated to the offeror.
In principle an unexpressed acceptance to an offer does not result in a contract.
Communication of an acceptance may be in the form of words spoken or written, or by conduct.
Therefore silence by the offeree cannot amount to acceptance; however an exception can be
where the offeree says “if you do not hear from me within a week, you can assume I’ve accepted
your offer.” Then that will amount to an acceptance unless he communicates otherwise within a
week.

Felthouse v Bindley
Paul Felthouse, uncle to the plaintiff, was a builder who lived in London. He wanted to buy the
horse of his nephew, John Felthouse. After a period of price determination he wrote a letter to
the nephew, and ended his letter stating that "If I hear no more about him, I consider the horse
mine at £30 and 15s." The nephew did not reply. He was busy at auctions on his farm in
Tamworth. He told the man running the auctions, William Bindley, to not sell the horse. But by
accident, Bindley did. Uncle Felthouse then sued Bindley in the tort of conversion - using
someone else's property inconsistently with their rights. But for the Uncle to show the horse was
his property, he had to show there was a valid contract. Bindley argued there was not, since the
nephew had never communicated his acceptance of the uncle's offer. The court ruled that

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Felthouse did not have ownership of the horse as there was no acceptance of the contract.
Acceptance must be
communicated clearly and cannot be imposed due to silence of one of the parties. The uncle had
no right to impose a sale through silence whereby the contract would only fail by repudiation.
Though the nephew expressed interest in completing the sale there was no communication of that
intention.

If the offeror prescribes or indicates a particular method of acceptance, and the acceptor accepts
it in that way, there will be a contract even though the offeror does not know of the acceptance.
If for example the offeror requires the offeree to accept by advertisement in a particular column
of a particular newspaper, the acceptance will be communicated when the advertisement is
published whether or not the offeror reads it.

If the offer is one which is to be accepted by being acted upon, no communication of the
intention to accept is necessary. Unless communication of acceptance is part of the offer itself,
e.g. if an offer of reward is made for finding a lost dog the offer is accepted by finding the dog, it
is unnecessary before beginning to search for the dog to give notice of the acceptance of the
offer.

The basic principle is that a statement addressed by one party to another is effective in law only
if communicated.

3) The mode of communication of acceptance is dependent on the intention of the

parties.

The offeror may impose on the offeree the mode of communication of acceptance. He may
choose by post or by instantaneous communications

 In the case of instantaneous communications between parties present or communications

by telephone or telex, fax or email transmission, the contract is complete only when the
acceptance is received by the offeror and not merely when transmitted.

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 Where contracts are made by letter, or telegram they are said to be made by post, the rule
is, that the acceptance takes effect once the letter/telegram is posted, prepaid and properly
addressed. Whether it reaches the offeror or not, if the letter is lost or delayed in the post,
the contract is nevertheless made although the offeror may be quite ignorant of the fact.
It is possible for the offeror by terms of his offer to set aside the postal rule. He therefore
stipulates that the acceptance must reach him to be effective. This exceptional rule does
not however apply to a revocation of an offer. Revocation is not received upon posting.

4) An offer made to the public in general can be accepted by anybody who fulfills or
performs the conditions stated in the offer.
Carlil v Carbolic Smoke Ball Co
The Carbolic Smoke Ball Company made a product called the "smoke ball". It claimed to be a
cure for influenza and a number of other diseases. The Company published advertisements
claiming that it would pay £100 to anyone who got sick with influenza after using its product
according to the instructions set out in the advertisement. Mrs. Louisa Elizabeth Carlill saw the
advertisement, bought one of the balls and used three times daily for nearly two months until she
contracted the flu. She claimed £100 from the Carbolic Smoke Ball Company. The company
denied the claim arguing that there was no specific offeree. The court held that there was a fully
binding contract for £100 with Mrs. Carlill on the grounds that the advert was a unilateral offer
to the entire world and that satisfying conditions for using the smoke ball constituted acceptance
of the offer.
5) An offer to a class of persons can only be accepted by persons belonging to that class.

Wood v Lectrik ltd

The defendants advertised an electric comb in a periodical in these terms:
‘New hair in 72 hours. Electric Comb. Great news for hair suffers. What is your
Trouble? Is it grey hair? In 10 days not a grey hair left-500 pounds guarantee.’

The plaintiff’s hair was prematurely turning gray and after he had read the advertisement,
bought one of the electric combs and used it as directed. Unfortunately, the comb did not
restore the original colour of his hair and he sued the company for the 500 pounds

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‘guarantee’. It was held that the plaintiff complied with the advertisements and was
entitled to recover the 500 pounds

6) An offer made to a particular person can only be accepted by that person.

Offers can be directed to only certain persons and therefore no other person may purport to
accept that offer other than the person to whom it is directed.

Boulton v Jones

A foreman bought the business from the owner. Then a certain amount of piping was
ordered. The order was accepted and sent by the new owner. The offeror refused to pay
because the old owner owed him money and there was a set-off agreement that the dept
would be paid in the form of leather piping. It was held that it was an offer to a specific
person which could be accepted only by him.

7) The acceptance must be unconditional.

The acceptor must not alter the terms of the offer; if he does so, he is rejecting the original
offer and making a counter offer to which the person who made the first offer becomes the
offeree.

Hyde v Wrench
Wrench offered to sell his farm in Luddenham to Hyde for £1200, an offer which Hyde
declined. On 6 June 1840 Wrench wrote to Hyde's agent offering to sell the farm for
£1000, stating that it was the final offer and that he would not alter from it. Hyde offered
£950, and after examining the offer Wrench refused to accept, and informed Hyde of this
on 27 June. On the 29th Hyde agreed to buy the farm for £1000 without any additional
agreement from Wrench, and after Wrench refused to sell the farm to him he sued for
breach of contract.

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3.4.3 Some special Cases

a) Tenders
The general rule is that a tender is considered as an invitation to treat and not an offer.
Therefore, those who submit tenders make the offer and acceptance is made by the one
who invites the tender/offers. Examples of different types of tenders are: -

1. The accepted tender may result in a contract by which the buyer

undertakes to buy all the goods in the tender from the tenderor. E.g. A
requires 1,000 tonnes of coal. He invites tenders. B’s tender is accepted,
there is then a contract for the sale of 1,000 tonnes of coal from B to A.
2. The accepted tender may result in a standing offer to supply goods as and
when and if required by the buyer. When the buyer gives an order, there
is a contract for the quantity ordered and each new order constitutes a new
contract.
Ry v. Within (1873)
A railway company invited tenders for such iron articles as they might require for
a year. W tendered and his tender was accepted. Orders were given and supplied
for sometime but during the currency of the tender, W refused to execute an order
given. It was held that as W’s tender had been accepted, he could not refuse to
supply goods within the terms of the tender.

If the buyer gives no order, or does not order the full quantity of the goods set out
in the tender, there is no breach of contract. The buyer may not be bound to take
any specified quantity but be bound to buy all the goods he needs. Such a contract
is breached if the buyer does need some of the goods and does not take them from
the tenderor.

Kier v. Whitehead (1938)

In this case W invited tenders for his usual requirement of certain goods and
agreed to take his requirements from the person whose tender he accepted. K’s

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was accepted. W realized that he did not require any of the stated goods and made
no orders. K sued for breach of contract. It was held that in such a case the
tenderee must order all goods of the stated kind he requires from the tenderor.
However if he requires none and orders none there is no breach. The court held
that there was no breach of contract.

Whichever type of tender is being referred to, the person inviting the tenders may undertake in
his invitation that he will accept the tender which is the highest if he is selling or the lowest if he
is buying. If he does so then there is a binding commitment. This is the same as when someone
selling by auction undertakes that he will sell to the highest bidder except of course in an auction
each bidder knows what the other has bid. In competitive tendering each competitor is usually
unaware of the tenders of the others.

Where a person invites tenders for a particular project the general rule is that the person who
submits the tender (tenderor) makes the offer and the acceptance is made when the person
inviting the tenders accepts one of them (tenderee)

b) Option
An option is a contract within a contract where the offeror agrees to keep an offer open for a
specified amount of time. The offeror cannot prematurely revoke the offer. An example of an
option is a hire-purchase agreement entered into for a period of time by a hirer, in reliance on the
promise by the owner of the goods to allow him to buy the goods at a certain price after he has
paid the last of the hire-purchase installments.

c) Rewards
The offer of a reward is accepted by acting upon the offer and that prior notice of acceptance is
not required. The offer of a reward like an option is a unilateral contract. On the other hand,

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where the act for which the reward is promised is done in ignorance of the promise of the
reward, the reward cannot be claimed because there can be no acceptance without knowledge of
the offer.

3.4.4 The Agreement

When offer and acceptance correspond in every respect the parties have reached agreement or
consensus and a valid contract comes into existence provided all the other requirements are
present. The terms of the contract are thus settled by the parties themselves in their agreement
within the law. This is called the doctrine of freedom of contract.
Sometimes however, it is not easy to determine whether negotiations between the parties resulted
in an agreement. If the offer contains standard terms and conditions and the acceptance contains
different standard terms and conditions it may be difficult to determine whether the offeror’s or
the acceptors terms shall govern the contract. The result that there was no agreement between
the parties should be avoided because it obviously does not correspond to the intention of the
parties. This is known as the battle of forms and normally it is said that there is a contract as
soon as the last form is sent and received without objections being taken to it.

It is sometimes difficult or impossible to discover from the facts of the case a clear offer and a
clear acceptance of that offer. It can happen that the parties nevertheless go ahead apparently on
the basis that a contract has been made. In this situation, the courts tend to find that there is a
contract to be able to give legal effect to the dealings of the parties.

3.5 TERMS OF CONTRACT

The undertakings and the promises contained in the contract are known as terms of the contract.

The law normally recognizes two types of terms in a contract: Express terms and Implied terms.
Express terms are those explicitly put down in the contract, while implied terms are not explicit
in the contract, however to effectively interpret and enforce the contract it is necessary to include
them.

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The parties will usually state expressly in their contract the terms which they consider material
(fundamental) and little difficulty exists in ascertaining this express terms. Sometimes however,
they consider a term as so obvious that they fail to express it in their contract. In these cases it
becomes necessary to imply a term in order to give effect to their contractual intention.

In modern commercial practice, standard contract forms are often used. These are of 2 types :
1. Model Contract
These are aimed at simplification and standardization of contract terms. Here the parties are free
to alter the suggested terms of contract and to adapt them to their requirements. Model contract
forms are used particularly frequently in the trade of commodities.

2. Contracts of adhesion
These are imposed by the economically strong party on the weaker party and places before him
the choice to take it or leave it. These terms make a mockery of the principle of freedom of
contracting because they are not open to negotiation.

3.5.1 Conditions and Warranties

A condition is a vital term of a contract, going to the root of the contract.

A breach of a condition entitles the injured party either to treat the contract as rejected and
terminate performance of the contract and claim damages for the termination or to affirm the
contract and claim damages for the breach.

Wallis v. Pratt
In this case a condition was defined as
“an obligation which goes so directly to the substance of the contract or in other words is so essential to its very nature that its non performance
may fairly be considered by the other party as a substantial failure to perform the contract at all.”

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Normally any breach of condition however minor the breach will entitle the innocent party to
treat the contract as rejected.

A warranty on the other hand is not a vital term of the contract but merely a subsidiary,
breach of which gives no right to treat the contract as terminated but only an action for damages
for the loss arising from the breach which may be made orally or in writing.

Whether a term in a contract is a warranty or a condition is a question of the intention of the

parties to be deduced (derived) from the circumstances of the case. Thus, in a commercial
contract for the sale of goods, the deadline for delivery of goods is much more likely to be of
vital importance to the parties than is a deadline for the payment of the price. Therefore, where
the contract does not make clear the party’s wishes as to whether a term is intended to be a
condition or a warranty the courts will usually assume that they intended any term as to the date
of delivery to be a condition and any term as to the time of payment to be a warranty. It is
however always open to the parties to make it clear in the contract what their intentions.

3.5.2 Implied Terms

It may be presumed that the parties to a contract have expressed in it every material term and
accordingly there is no necessity to imply additional terms. A term will be implied however if it
is necessary to carry out the presumed intention of the parties and where it is so obvious that the
parties must have intended it to apply to the contract and therefore thought it was unnecessary to
express it. The term’s implication must be necessary to give effect to the contract, which the
parties intended.

An implied term cannot override an express term. Apart from those terms which are implied
because they are obvious and necessary to make the contract work, there are also terms which
are implied by virtue of various laws e.g. sale of goods act and by usage and custom.

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3.5.3 Exemption Clauses

It follows from the doctrine of freedom of contract that the parties in principle may agree that in
certain situations, one of them shall be exempt from the liability, such a term might read “X plc
is not liable for any property damage however caused”, or “X plc will only accept liability up to
the amount of £50”.

This rule is however subject to qualifications imposed by public policy or statute law. Therefore
a term exempting a party from liability in the event of his committing a fraud against the other
party to the contract is void because it goes against public policy.

An exemption clause in an unsigned document is not incorporated into the contract and therefore
ineffective. An exemption clause will have no effect unless at the time of making the contract the
party adversely affected by the clause was aware of its existence or else reasonable steps had
been taken to bring it to his attention. Incorporating the terms in a business document given by
one party and received by the others as the document containing the terms of the contract, may
constitute the taking of reasonable steps. The display of terms in buildings is also taken as a
reasonable step. Unless the terms are printed in such a manner or a position as to mislead a
reasonably careful person, they have no effect.

The harsher the clause, the greater is the effect needed to bring the clause to the attention of the
party adversely affected. When the offeree has signified his acceptance by signing a document
presented by the offeror, the offeree cannot plead ignorance of the terms of the offer in the
absence of fraud or misrepresentation even if he is in fact ignorant of them.
L’strange v. F. Graucob Ltd (1934)
The proprietor of a café bought an automatic cigarette vending machine from the
defendants. She signed a document which contained a number of clauses in small print
amongst them a clause excluding any express or implied condition, statement or warranty
statutory or otherwise not stated therein. She refused to pay the price on the ground that
the machine did not work and contended or claimed that she was not bound by the
exclusion clause as she had not read it. It was held that the clause was binding on her.

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An exemption clause cannot be introduced into a contract unilaterally after it has been made,
thus a hotel proprietor who contracts at the reception desk to accommodate a guest cannot rely
on an exemption clause displayed in a bedroom and thus only observed by the guest after signing
in at the reception desk. Must be displayed clearly in view.

If the contractual document is signed as a result of the other parties’ oral misrepresentation of
one of its terms, that party will not be able to rely on that term to the extent that he
misrepresented its effect and hence the oral term will override the printed exemption clause.

Curtis v. Chemical Cleaning & Dyeing Co. (1931)

C took a dress to the defendant to be cleaned and was asked to sign a receipt which
contained among other things a clause “this article is accepted on condition that the
company is not liable for any damage whatsoever it arises.’ C asked why she had to sign
and was told that the defendant could not accept liability for damage to beads. She then
signed. The dress was returned stained. It was held that the defendant could not rely on
the clause because C’s signature was obtained by misrepresentation of the effect of the
document.

Similarly, if at the time of the contract is made, a person gives an oral promise which cannot be
reconciled with the terms in the printed contract, the oral promise will normally be interpreted as
intended to take priority over the printed clause.

When interpreting exemption clauses, the courts tend to lean against them i.e. it will allow a
party to escape from his liability only if the words of the exemption clause are perfectly clear,
effective and precise. The courts developed the doctrine of fundamental breach of contract and
this is a common law rule to the effect that, an exemption clause could not protect a party from
being liable for fundamental breach i.e. a breach going to the root of the contract.

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3.6 FORM OF CONTRACT

Contracts are of two kinds namely;
1. A contract in a deed
2. A simple contract.

A fundamental difference exists between these two types of contracts. All simple contracts
require consideration but no consideration is required for a contract in deed.

3.6.1 Simple Contracts

The expression simple contract is a technical legal phrase denoting contracts requiring
consideration.

3.6.2 Contract in a deed

A contract in a deed is one which is in writing and satisfies the requirements of the law of
property.

The document must make it clear on the face of it that it is intended to be a deed by the person
making it, and the person making it must sign it in the presence of another who attests his
signature and it must be delivered. E.g. Wills and Transfers of estates.

3.7 CONSIDERATION

3.7.1 Definition
It is some BENEFIT received by a party who gives a promise or performs an act or some
DETRIMENT suffered by a party who receives a promise. It may also be defined as that which
is actually given or accepted in return for a promise.

It was defined by the court in Currie v. Misa 1875 as

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“some right, interest, profit or benefit accruing to one party or some forbearance detriment, loss
or responsibility given, suffered, or undertaken by the other.”

To this definition of course should be added that the benefit accruing or the detriment sustained
was in return for a promise given or received.

Examples:
1. A receives Sh.10,000 in return for which he promises to deliver goods to B. Here the
money A receives is consideration for the promise he makes to deliver the goods.

2. C promises to deliver goods to D, and D promises to pay for the goods when they are
delivered. Here, the benefit C receives is D’s promise to pay and this supports C’s
promise to deliver the goods.

3. X lends a book to Y. Y promises to return it. Here the advantage is entirely on Y’s side
but X suffers with detriment in parting with his book and this is consideration to support
Y’s promise to return it.

3.7.2 Executed and Executory Consideration

When the constituting consideration is completely performed, the consideration is said to be
executed. In example 1 above the payment by B to A is executed consideration.

When the consideration takes the form of a promise to be performed in the future, it is executory.
In example 2 the consideration is executory. An executed consideration is therefore an act done
by one party in exchange for a promise made or an act done by another party. An executory
consideration is a promise made by one party in exchange of a promise made or an act done by
the other.

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3.7.3 General Rules of Consideration

A. Consideration is required for all simple contracts. It is necessary for the validity of every
contract not in a deed. Every contract in writing requires it because a promise without
consideration is a gift.

B. Consideration must be of some value but need not be adequate. Consideration need not
be equivalent to the promise but must be of some value. It is a matter for the parties
themselves to determine what they consider is the proper value of their acts or promise.
For example A can decide to sell his car worth 3 Million to B for Kshs 10.

Chappell & Co Ltd v Nestle Co Ltd

Chappell & Co. owned the copyright to ‘Rockin’ shoes’ (by The King Brothers). Nestle was
giving away records of it to people who sent in three wrappers from 6d chocolate bars, as
well as 1s 6d. The Copyright Act 1956 s 8 said a 6.25% royalty needed to be paid on the
‘ordinary retail selling price’ to the owners of copyrights. Nestle said 1s 6d was the ordinary
retail selling price, but Chappell & Co argued that it should be more and sought an injunction
for breach of CA 1956 s 8. In this way the question arose as to whether the wrappers were
consideration for the records. Upjohn granted an injunction. The Court of Appeal reversed
the decision and Chappell & Co appealed. The majority of the House of Lords (Lord Reid,
Lord Tucker and Lord Somervell) held that the wrappers were part of the consideration, and
so Nestle was in breach of the Copyright Act 1956, by failing to pay royalties reflecting the
extra cost of the wrappers.

In all cases therefore the courts concern themselves only with the presence of consideration
and assume that the parties themselves have agreed on the issue of its value.

C. A promise to perform an existing obligation is not efficient consideration but a promise to

do something different is good consideration; payment of a smaller sum of money is not a
satisfaction of an agreement to pay a larger sum even though the creditor agrees to take it
in full discharge. If A owes B Shs. 10,000 and B agrees to take Shs.7,000 there is no
consideration for the forgiveness of Shs.3,000.

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However the practical effect of this rule is considerably reduced by the doctrine of
promissory estoppel. An agreement by a creditor to take something different in kind or a
smaller sum paid before the larger becomes due gives the debtor a good discharge.

D. Consideration must be legal. An illegal consideration makes the whole contract invalid.
For example A promises to give B his car if B sells cocaine for him.

E. Consideration must not be past. A past consideration is one which is fully executed and
finished before the promise is made it must be distinguished from an executed
consideration which is given at the time when the promise is made.

Examples:

a) X agrees to give and actually gives Y Shs.100,000 in return for Y promising

to go to Paris to transact some business for X. Here X gives an executed
consideration since the promise to go to Paris is given at the time the
Shs.100,000 is handed over.

b) Y without arrangement with X goes to Paris and transacts some business

for X. on his return X promises to pay Y Shs.100,000 for his services in Paris.
Here X, has given past consideration because Y’s services have been rendered
before X had agreed to accept and pay for them.

F. Consideration must move from the promisee. This means that the person to whom the
promise is made must finish the consideration. This rule is based on the principle that a
stranger to the contract cannot sue on it a rule known as the doctrine of privity of
contract. Similarly, when an employer takes out a personal accident group insurance,
covering his employees, the employees cannot sue the insurance company on the contract
of insurance since they are not party to it.

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In the case of Tweddle v. Atkinson, John Tweddle promised William Guy that he would pay
a sum of money to the child of William Guy, and likewise William Guy promised John
Tweddle that he would pay a sum of money to the child of John Tweddle, upon the marriage
of the two children to each other. However, William Guy failed to pay the son of John
Tweddle, who then sued his executors for the amount promised. It was held that the son
could not enforce the promise made to his father, as he himself had not actually given
consideration for it - it was his father who had done so instead. The son didn’t show any
consideration, so he cannot enforce the promise.

G. The consideration must be certain. Consideration is sufficient where it amounts to

something that is capable of expression in economic terms.

White v Bluett (1853),

Bluett, when sued by his father’s executors for an outstanding debt to his father, claimed
that his father had promised to discharge him from it in return for him stopping
complaining about property distribution. The Court held that the cessation of complaints
was of no economic value; thus, Bluett’s father had received no real consideration for the
promise, and the debt was enforceable at law.

H. There must be some kind of connection between a promise and the consideration offered
to support the promise. It is no consideration to "refrain from a course of conduct which it
was never intended to pursue". The consideration must have been at least an inducement
to enter into the promise.

3.8 Promissory Estoppel

The doctrine of promissory estoppel is an exception to the rule that consideration is required
before the law will enforce a promise.

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The doctrine can apply only to a promise made between parties who are already in a contractual
relationship or other relationship imposing legal rights and obligations between them. It
typically applies where one of the parties in effect waves some or all of what would otherwise be
his rights. E.g. giving someone an extra week to pay a debt. More precisely it applies where one
of the parties makes a promise intended to be binding, intended to be relied upon and acted upon
and which is in fact relied and acted upon. In this case, the law will prevent the promisor from
enforcing his original rights if that would involve him going back on the promise.

Central London and Property Trust v. High Trees House (1947)

In 1937 C let to H a block of flats for 99 years at £ 2500 per year. In 1940 owing to the war, very
few flats were let and C agreed to reduce the rent to £ 1250. H paid the reduced rent until the end
of the war in 1945. In 1945 C give notice to restore the rent at £ 2500 and he sued for arrears at
that date. It was held as the agreement for the reduction of rent had been acted upon, C could not
claim the full rent.

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