EACR 2213 - Law of Contracts
EACR 2213 - Law of Contracts
LAW 1
LAW OF CONTRACT
LAW OF CONTRACT - Outline
• The nature of a contract
• Formation of a contract
• Classification of contracts
• Terms of contracts (exemption clauses, conditions and warranties)
• Vitiating factors (mistake, misrepresentation, duress and undue influence)
• Termination and discharge of a contract
• Remedies for breach of contract
• Limitations of actions
Lesson 1
INTRODUCTION TO THE LAW OF CONTRACT
ELEMENTS OF A CONTRACT
LAW OF CONTRACT
• A contract may be defined as a legally binding agreement made by 2 or more
parties.
• It can also been defined as a promise or set of promises a breach of which the law
provides a remedy and the performance of which the law recognizes as an
obligation.
• The most important characteristic of a contract is that it is enforceable. The genesis
of a contract is an agreement between the parties hence a contract is an
enforceable agreement.
• However, whereas all contracts are agreements, all agreements are not contracts.
• The Law of Contract as administered in Kenya is an adaptation of the rules of
English Law of Contract as modified by sections 2 and 3 of the Law of Kenya Act
(Cap 23) 1962 and is applicable since 1st January 1961.
Types of Contracts
1. Written contracts
2. Contracts requiring written evidence
3. Simple contracts
4. Contracts under seal
WRITTEN CONTRACTS:
- These are contracts which under the law must be written, that is embodied in a formal
document e.g. contract of sale of land.
CONTRACTS REQUIRING WRITTEN EVIDENCE
- These are contracts which must be evidenced by some notes or memorandum
- Contents of the note will include:
- Description of the parties, sufficient to identify them
- A description of the subject matter to the contract
- The consideration (value)
Types of Contracts
SIMPLE CONTRACTS
- These are contracts whose formation is not subject to any legal formalities.
- The contract may be: oral, written, partly oral and written, or implied form conduct of
the parties
- Examples: contract of sale of goods, partnership agreement, and construction
contracts (for smaller projects)
Examples of Offers:
i. Public transport
ii. Bidding at an auction
iii. Submission of a tender
iv. Application for employment
Offer vs Invitation to Treat
An offer must be distinguished from an invitation to treat.
An invitation to Treat: is a mere invitation by a party to another or others to make
offer or bargain. The invitee becomes the offeror and the invitor becomes the
offeree. A positive response to an invitation to treat is an offer.
Examples of Invitation to treat:
i. Advertisement of sale by auction: in this, the prospective buyer makes the offer
by bidding at the auction and the auctioneer may accept or reject the offer.
ii. Sale by display: : At common law, the display of goods with cash price tags is an
invitation to treat. The prospective buyer makes the offer to buy the items at the
stated or other price which the shop owner may accept or reject.
iii. Sale by self-service: Prospective buyers make offers by conduct by picking the
goods from the shelves and the offer may be accepted or rejected at the
cashier’s desk. The offeror is free to revoke his offer to buy the goods at any time
before reaching the cashiers desk.
Types of Offers
- CROSS OFFER
When two parties make an identical offer to each other, in ignorance to each other’s offer,
they are said to make cross offers. Cross offers are not valid offers. Essentials of a cross
offer are that the offers must be made simultaneously and that they are made in
ignorance of each other.
- COUNTEROFFER
This is a change, variation, or modification of the terms of the offer by the offeree. It is a
conditional acceptance. A counteroffer is an offer in its own right and if accepted an
agreement arises between the parties.
- STANDING OFFER
A standing offer arises when a person’s tender to supply goods and services to another is
accepted. Such acceptance is not an acceptance in the legal sense. It merely converts the
tender to a standing offer for the duration specified if any. The offer promises to supply the
goods or services on request and is bound to do so where a requisition is made. Any
requisition of goods or services by the offeree amounts to acceptance and failure to supply
Termination of Offers
1. Revocation: This is the withdrawal of the offer by the offeror. At common law, an
offer is revocable at any time before acceptance.
Rules of revocation of offers:
a. An offer is revocable at any time before it becomes effectively accepted.
b. Notice of revocation must be communicated to the offeree
c. An offer is revocable even in circumstances in which the offeror has promised to
keep it open to a specified duration,
d. Revocation becomes legally effective when notice is received by the offeree.
e. An offer is irrevocable after acceptance.
f. A bid at an auction is revocable until the hammer falls
2. By rejection: An offer terminates if the offeree refuses to accept the same, the
refusal may be express or implied from the conduct of the offeree e.g. silence by the
offeree amounts to a rejection.
Termination of Offers
3. Counter Offer: This is a change or variation of the terms of the offer by the offeree.
It is a form of rejection. The legal effect of a counter offer is to terminate the original
offer.
4. Lapse of Time: If an offer is not accepted within the stipulated time and not
revoked earlier, it lapses on expiration of such duration. Where no duration is
specified, the offer lapses on expiration of reasonable time. What is reasonable time
is a question of fact and varies from case to case.
5. Death: The death of the offeror or offeree before acceptance terminates an offer.
However, the offer only lapses when notice of death of the one is communicated to
the other.
6. Insanity: The unsoundness of mind of either party terminates an offer. However,
the offer only lapses when notice of the insanity of the one is communicated to the
other.
7. Failure of a Condition Subject to which the offer was made - These are conditional
offers. If a condition or state of affairs upon which an offer is made fails, the offer
lapses.
2. The Acceptance
- This is the external manifestation of assent by the offeree. It gives rise to an
agreement between parties. In legal theory, an agreement comes into existence at
the subjective moment when the minds of the parties meet. This moment is
referred to as Consensus ad idem (meeting of minds).
- Acceptance may be oral, written or implied from the conduct of the offeree.
- Rules of Acceptance:
a. Acceptance may be oral, written or implied from the conduct of the offeree.
b. The offeree must have been aware of and intended to accept the offer
c. Acceptance must be unconditional and unqualified
d. An offer must be accepted within the stipulated time if any or within a reasonable
time failing which it lapses.
e. Acceptance must be communicated to the offeror in the prescribed method if any
or an equally expeditions method
f. Where parties negotiate by word of mouth in each others presence, acceptance is
deemed complete when the offeror hears the offeree’s words of acceptance.
3. Intention to Create Legal Relations
- In addition to offer and acceptance, an agreement must be characterized by
intention. The parties must have intended to create legal relations. Intention is one
of the basic elements of a contract as common law.
- An agreement is unenforceable unless the parties thereto intended such a
consequence.
- To determine whether parties intended to create legal relations, courts consider;
- Nature or type of agreement i.e. whether commercial or business and domestic or social.
- The circumstances in which the agreement was entered into. These two factors demonstrate whether the
parties intended to contract.
- The key types of agreements considered:
- Business or commercial agreements
- Domestic agreements
Intention to Create Legal Relations
BUSINESS OR COMMERCIAL AGREEMENTS:
- In considering such agreements, courts proceed from the presumption that the
parties intended to create legal relations.
- They include:
- Advertisements (for products & services) - are intended to promote sales of the advertiser
- Employment agreements - are commercial agreements intended to impose legal obligations on the
parties thereto
DOMESTIC OR SOCIAL AGREEMENTS:
- Courts proceed on the presumption that the parties did not intend to create legal
relations.
- They include:
- Agreement between husband and wife
- Agreements between parent and child
4. Capacity
- This is the legal ability of a party to enter into a contractual relationship. For an
agreement to be enforceable as a contract the parties must have had the requisite
capacity
- in practice, the law of contract restricts or limits the contractual capacity of certain
classes of persons namely;
1. Infants or minors - Contracts entered into by an infant are binding (supply of
necessaries & beneficial services), voidable (infant repudiates – escapes liability)
or void (nonexistent – debts, supply of goods, moneylending contracts) depending
on their nature and purpose.
2. Drunken persons – voidable (too drunk to understand his acts and the other party
knew)
3. Persons of unsound mind – voidable – similar application to drunkenness
4. Corporations – restricted by memorandum of association
5. Undischarged bankrupts – restricted capacity by Bankruptcy Act
5. Consideration
- At Common Law, a simple contract is unenforceable unless supported by some
consideration.
- It is a promise, performance, or forbearance bargained by a promisor in exchange of
their promise.
- Eg: if someone used his money to buy a laptop, then the laptop is the sellers
consideration, and the money is the buyer’s consideration
Types of consideration:
- Executory consideration: Consideration is executory where the parties exchange mutual
promises. Neither of the parties has performed its part of the contract. The whole
transaction is in the future. E.g. purchase of goods on credit for future delivery.
- Executed consideration: Consideration is executed where a party does an act to
purchase the others promise. The act may be a partial or total performance of the
party’s contractual obligation.
- Past consideration: Consideration is past where a promise is made after services have
been rendered. There is no mutuality between the parties. Past consideration is
generally not good to support a contractual claim.
Consideration
Rules of Consideration:
- Mutual love and affection is not sufficient consideration
- Consideration must be legal – illegal consideration invalidates the contract
- Consideration must not be past
- Consideration must be real – be something of value in the eyes of the law.
- Must flow from the plaintiff/promise - the person to whom the promise is made
provides consideration and by so doing there is a bargain between the parties or
mutuality. By providing consideration, the promise becomes party to the
transaction.
- Consideration must be something in excess of an existing contractual obligation
- Payment of a lesser sum on the day in satisfaction of a larger sum is not sufficient
consideration for the creditors promise to accept such sum in full settlement for
the debt.
6. Formalities
- In addition to the basic elements of a contract certain contracts are subject to
certain formalities, which must be complied with for the agreement to be legally
enforceable. The formalities includes:
a. Requirement of writing: Some contracts must be embodied in a formal document
e.g. Hire Purchase Agreement,
b. Requirement for written evidence: Some contracts must be evidenced by some
note or memorandum which must contain:- Description of the parties,
Description of the subject matter of the contract, The Consideration, Signature of
the parties E.g. Contracts of Guarantee,
c. Requirement of consent: Under sec. 6 of the Land Control Act , a contract for the
sale of agricultural land must be consented to by the Land Control Board of the
district in which the land is located failing which the contract is unenforceable.
d. Requirement of Signature: A contract entered into with the government must be
signed by the Revenue Officer of the ministry or some other duty authorized
person failing which the contract is unenforceable.
ILLEGALITY OF A CONTRACT
Illegality of a Contract
- The term illegality does not necessarily mean that a criminal offence is involved. It
means that the contract in question is unenforceable as it is injurious to the public
or is inconsistent with the public good.
- An illegal contract is un-enforceable. This is because for an agreement to be
enforceable, it must have been entered into for a lawful purpose. A contract may
be declared, illegal by statutes or a court of law.
- Contracts declared illegal by Statutes:
- Under the employment act, wages or salaries are payable in money or moneys worth. A contact to pay
wages or salary in kind is illegal and void. Such a contract is said to be illegal as formed and is
unenforceable.
- Contracts declared illegal by courts of law:
- A contract to commit a crime, tort or fraud
- Contracts prejudicial to public safety e.g. assisting alien enemies
- Contracts prejudicial to administration of safety e.g. one to stifle prosecution of a crime
- Contracts to defraud state revenue, Contracts liable to promote corruption in public
- Contracts liable to promote sexual immorality
VALID, VOID AND VOIDABLE CONTRACTS
Valid and Voidable Contracts
- Contracts can be classified in terms of their enforceability or validity.
- A valid contract is an agreement, which is binding and enforceable, with all the
essential elements stated above.
- A voidable contract is an agreement that is binding and enforceable, but because
of the lack of one or more of the essentials of a valid contract, it may be set aside
at the option of the aggrieved party.
- If the party entitled to such right does not exercise the right within a reasonable
time, the contract is binding.
- The right to avoid the contract is given in the following circumstances:
1. Where on of the parties has been fraudulently induced to enter into such a
contract
2. Where the other party has used duress or undue influence
3. Certain contracts entered by infants and insane persons
Void Contracts
- These are contracts which the law treats as non existent, they are generally
unenforceable. However, if a contract is only void but not illegal some rights may
be enforced by exception. A contract may be declared void by statute or a court of
law.
- Contracts void by statute:
- Under the Employment Act, a contract to pay wages or salary in kind is null and void. Under the Gaming
Act, 1845, wagering contracts are void.
- Contracts void at Common Law:
- These include contracts declared void by courts of law for being contrary to public policy e.g.
- Contract to oust the jurisdiction of the court. This is a contract which purports to deny the parties the right
to seek judicial redress.
- Contracts prejudicial to the status of marriage. This is a contract which interferes with the marriage
institution. E.g. a. Marriage brokerage contracts. b. Contracts whose tendency is to encourage separation
- Contracts in Restraint of Trade:
- This is a contract by which a persons future liberty to engage in a profession or trade in a particular
manner or with particular persons is voluntarily or involuntarily restricted e.g. An employee covenant not
to work for a business rival or set up a similar business after leaving employment.
VITIATING ELEMENTS OF A CONTRACT
Vitiating Factors in Contracts
- These are factors that invalidate the existence of contracts, should they occur.
- Ideally, contracts are carried out to the mutual satisfaction of all parties and
therefore, cause no legal argument. From time to time, however, disputes do arise.
- There are recognized factors which, when existent, will affect the validity of the
contract in dispute and they include:
- MISREPRESENTATION: This is an untrue statement made by one party to a contract to the other before or
at the time of contract, relating to some matter essential to the formation of contract, which induces the
other party to enter the agreement. It may be (a) innocent misrepresentation, where a misstatement of
fact is made without knowledge of its untruth and without intention to deceive, or (b) fraudulent
misrepresentation, which is defined as “a false representation of fact made with a knowledge of its
falseness, or recklessly without belief in its truth, with the intention that it be acted upon by the
complaining party, and actually inducing him to act upon it”. In both cases the party misled may normally
repudiate the contract, but in the case of fraud that party may claim damages as well.
- DURESS: Duress is actual or threatened interference with the personal liberty of one of the parties to a
contract or to a member of his family. It also includes threat imprisonment, or criminal prosecution, or
dishonour of a member of his family. The presence of duress enables the party affected to repudiate the
contract. Thus if a person is forced at the point of a pistol to enter into a contract, the contract can always
be set aside later. It is voidable at the instance of the party to whom the duress is applied.
Vitiating Factors in Contracts
- UNDUE INFLUENCE: Undue influence represents mental or moral persuasion, but here too the party
affected may repudiate the contract. One of the parties is in a position to dominate the will of another,
which prevents him from making his judgement freely or he uses the position to obtain an unfair
advantage over the other. The influence must be proved by the party seeking to set aside the contract.
Undue influence is presumed to exist unless the contrary is proved where a contract is between parties
who are within a fairly close relationship, such as doctor and patient, parent and child or solicitor and
client, but in other cases it must of course be proved to the satisfaction of a court. Undue influence makes
the contract voidable at the option of the aggrieved party.
- MISTAKE: Mistake may be of two kinds; mistake of fact and mistake of law. A person may escape his
liability under an apparently complete contract by proving that he contracted under a mistake of fact, and
his mistake was so fundamental that it affected the root of the contract: such as a mistake concerning
the existence or identity of the subject matter of the contract, or a mistake concerning the identity of the
other contracting party when such identity is important. In all these instances the contract is not voidable,
as in the above cases, but void, which means in effect that the law considers that a contract never existed
at all. A mistake of law, however, is no ground for relief from a transaction. But mistake of foreign law and
mistake of private rights are treated as mistake of fact.
- ILLEGALITY: Certain contracts are illegal, and, as such, are void. They may be illegal by statute, or illegal
at common law. Examples of the latter include agreements to commit a crime or a tort, to defraud
shareholders or to defraud revenue. Agreements contrary to sexual morality are also illegal at common
law, as are those, which are contrary to public policy.
DISCHARGE OF CONTRACT
Discharge of Contracts
- A contract is said to be discharged, when the obligation created by it ceases to
bind the parties who are now freed from performance. However, whether a party is
liable or not after discharge, depends on the method of discharge.
- A contract may be discharged by:
- Express agreement
- Performance
- Breach
- Impossibility or Doctrine of Frustration
- Operation of Law
1. DISCHARGE BY EXPRESS AGREEMENT:
- A contract may be discharged by agreement if the parties thereto expressly agree
to discharge the contract.
- The mutual promises constitute consideration to support the discharge. Discharge
by agreement justified on the premise that whatever is created by agreement may
be extinguished by agreement.
Discharge of Contracts
2. DISCHARGE BY PERFORMANCE:
- A contract is discharged by performance if both parties perform their mutual
obligations as agreed. Each party must have performed its part.
- Medieval common law insisted that discharge by performance was only possible if
parties had performed their obligations precisely and exactly. This is the common
law Doctrine of Precise and Exact which is to the effect that parties must honour
their contractual obligations to the letter.
- Every aspect of the contract must be performed.
3. DISCHARGE BY IMPOSSIBILITY OR DOCTRINE OF FRUSTRATION:
- A contract is said to be frustrated if performance of the obligation is rendered
impossible, illegal or commercially useless by unforeseen or extraneous
circumstances for which neither party is to blame. When a contract is frustrated, it
terminates and the parties are discharged
- Circumstances in which a contract may be frustrated in construction include:
- Destruction of subject matter
Discharge of Contracts
- Non-occurrence of an event,
- Illegality
- Death or permanent incapacitation
- When a contract is frustrated, the consequences or effects as governed by the Law
Reform (Frustrated Contracts) Act, 1943 are as follows:
- It is terminated
- Money paid is recoverable
- Money payable ceases to be payable
- If a party has suffered loss by reason of performance, the court may order the other to pay to such party a
sum of money
- If a party has derived benefit other than financial, the court may order such party to pay to the other a
sum of money which must be less than the benefit it so derived.
4. DISCHARGE BY BREACH OF CONTRACT
- Breach of a contract does not discharge it; it gives the innocent party an
opportunity to treat the contract as repudiated or as existing.
- If it treats the contract as existing, it is bound to honour its part however, if treats it
Discharge of Contracts
- Breach of contract may be:
- Anticipatory: This is a situation where a party to a contract expressly or by implication intimates to the
other in advance its intention not to perform on the date of performance. Evidence must clearly suggest
breach of contract. The innocent party may take the following steps:
- Sue in damages
- Wait for the party to perform by the due date
- Sue for decree of specific performance
- Actual: This entails the non-performance of a party’s obligation on the due date or tendering defective
performance. The innocent party may treat the contract as repudiated if the breach is fundamental to the
contract
5. DISCHARGE BY OPERATION OF LAW:
- Discharge of the operation of law entails the discharge of parties form their
contractual obligations at the instance of the law. The parties are freed by law.
- Such a discharge may take place in the event of:
- A merger
- Death
- Lapse of time
REMEDIES FOR BREACH OF CONTRACT
Remedies for Breach of Contracts
- When a contract is breached, the innocent party’s contractual rights are violated
and the party has a cause of action known as breach of contract which entitles it to
a remedy.
- In common law, remedies comprise damages only, whereas equitable remedies
include:
- Injunction
- Rescission
- Specific performance
- Account
- Tracing
- Quantum Meruit
- Winding Up
- Appointment of Receiver
Remedies for Breach of Contracts
- Specific performance (Equitable Remedy):
- The decree of specific performance is a court order which compels a party to perform its contractual
obligations as previously agreed. It compels a party to discharge its contractual obligation.
- It orders performance without an option to pay damages
- E.g. in land transaction contracts, employment contracts
- Injunction (Equitable Remedy):
- This is a court order which either restrains a party from doing or continuing to do a particular thing or compels
it to undo what it has wrongfully done.
- Injunction may be: prohibitory and mandatory, or interim and permanent
- Prohibitory: This is a court order which restrains a party from doing or continuing to do a particular thing.
- Mandatory: It is a court order which compels a party to put right what it has wrongly done. It is restorative in
character.
- Temporary or interim: It is court order whose legal effect is restricted to a specified duration on the expiration
of which it lapses
- Permanent: This is a court order whose legal effect is permanent.
Remedies for Breach of Contracts
- Rescission:
- The essence of this remedy is to restore the parties to the position they were before the contract. It is an equitable
remedy whose award is discretional.
- The remedy may be availed whenever a contract is vitiated by misrepresentation.
- Quantum Meruit:
- This literally means “as much as is earned or deserved”. This is compensation for work done. The plaintiff is paid for
the proportion of the task completed.
- It may be granted where: 1. The contract does not specify the amount payable. 2. The contract is divisible 3. The
contract is substantially performed 4. Partial performance is accepted 5. A party is prevented from completing it
undertaking.
- Refusal of Further Performance:
- In this, the party suffering the breach of contract is entitled to treat the contract as ended and may refuse any further
performance on his own part. But in case the victim of the breach does not take the initiative to bring an action for
rescission of contract, and the other party sues to him, he may set up the breach as a defense.
- Damages:
- This is the basic Common Law remedy; it is a monetary award by the court to compensate the plaintiff for the loss
occasioned by the breach.
- Its objective is to place the plaintiff to the position he would have been had the contract been performed
Remedies for Breach of Contracts
- Ordinary damages: General or ordinary damages are restricted to the proximate consequences of breach of contract
and remote consequences are not generally regarded. The measure of damages is the estimated loss directly and
naturally resulting in the course of events from breach of contract
- Special damages: Those, which do not arise naturally from the breach of contract, but are those resulting from some
particular circumstances. These damages must be specially proved if the plaintiff intends to claim.
- Exemplary damages: The purpose of awarding damages is to compensate the innocent party for the loss he has
sustained from the breach of contract. The object of exemplary damages, however, is to punish the promise-breaker,
and to deter others from committing similar breaches.
- Nominal damages: Awarded where the plaintiff has proved a breach of contract without suffering any actual loss. The
sum awarded is usually very nominal, but nevertheless is awarded as an acknowledgement that the plaintiff has proved
his claim.
- Contemptuous damages: Damages assessed by the courts when satisfied that the action should not have been brought
by the plaintiff. The court may award five cents to the plaintiff as damages to express its contempt of his conduct in
bringing his action.
- Unliquidated damages: Damages assessed by the courts when breach of contract takes place and the innocent party
sues the defendant. In such cases the onus lies on the plaintiff to produce evidence of the loss he has incurred.
- Liquidated damages: Sometimes the parties may themselves in their contract fix the damages to be paid in case either
party commits the breach of contract. If the amount so fixed reflects a genuine pre-estimate of loss likely to result by
breach, the innocent party can claim the fixed amount, and this is known as liquidated damages.
- Penalty clause: A penalty is a sum agreed in a contract to be forfeited on breach of contract. It differs from liquidated
damages in that these are an attempt to value the financial damage suffered as a result of breach of contract, whereas
penalty is used as a deterrent or security for the performance of the contract.
Limitation of Actions
LOSS OF REMEDY (LIMITATION OF ACTION)
- When a person’s legal or equitable rights are violated, he is said to make a cause of
action e.g. breach of contract, negligence, nuisance etc. Causes of actions are not
enforceable in perpetuity. The law prescribes the duration within which causes of
action must be enforced.
- E.g.
- for breach of contract – 6 years,
- Negligence and Nuisance – 3 years,
- Defamation – 1 year,
- Recovery of rent – 6 years,
- Recovery of land – 12 years,
- Assault – 3 years,