LAW OF CONTRACT NOTES

LAW OF CONTRACT

A contract is an agreement between two parties with the intention to create legal relations.

ESSENTIALS ELEMENTS OF A VALID CONTRACT

1. Offer and acceptance
2. Consideration
3. Intention to create legal relations
4. Capacity of the parties
5. Lawful objects
6. Free consent {Vitiating Factors}
7. Possibility of performance i.e the object of the contract should be something capable of being performed by an ordinary business person
8. Certainty of terms i.e the wording of the contract must be certain and clear in meaning
9. Meeting of mind, also known as ‘consensus ad idem’. The two parties must mean and refer to one and the same thing.

TYPES OF CONTRACT

1. Express and implied contract; -Express contract have a special agreement and terms. It is either in writing or by word of mouth. Implied contract on the other hand, are formed through conduct of the parties. The parties did not formally deliberate and agree on the terms of the contract.
2. Bilateral and unilateral; -in bilateral contract, both parties are bound to fulfill their obligation in the contract. In unilateral contract, only one party is bound to fulfill obligations in the contract. Eg when one advertises a reward to anyone who may recover a lost property on behalf of the owner. This is a unilateral contract since it is only the advertiser who is bound in it.

• Executed and executory contract; -an executed contract is one where both parties have fulfilled their obligations completely. In executory contracts, the parties have not fulfilled their obligations at all or have fulfilled them partially.

1. Simple and speciality contracts; -a simple contract is one that must be evidenced by consideration i.e all simple contract must have a consideration (price paid). A speciality contract is one that does not require consideration as evidence of its existence.

Speciality contracts may include:

1. Contracts evidenced in writing; -these are contracts where there is a document or memorandum or receipt that shows the existence of contract e.g contracts of sale where amount paid is 200 and above should be evidenced in writing.
2. Contracts in writing; -these are contracts where fundamental terms must be written down e.g lease, insurance, contract of employment e.t.c.
3. Contracts under deeds; -these are contracts which must be written down, signed by the parties and sealed e.g contracts of purchase of land, buildings and other immovable properties must be under deeds.
4. Valid, void and voidable contacts; -a valid contract has all the essential elements, is binding and enforceable. A voidable contract is one that is valid until avoided by the aggrieved parties because of the lack of one or more of the essential elements. A void contract has no legal effects because it lacks fundamental elements of a contract. It is non-existent under the law and cannot be enforced.
5. Quasi contracts; -these are contracts that come into existence not because of offers and acceptance but out of the prevailing circumstances e.g in a sale or return basis, the buyer will only enter into a contract when he communicates acceptance of goods, retains the goods beyond the given duration or does something to adopt the transaction.

• Contracts of uberrima fides (utmost good faith) -these are contracts where only one party possesses knowledge of material information regarding the contract and is bound to disclose such information to the other party without concealing anything, ie in perfect good faith.

Contracts are insurance contracts of ‘uberrima fides’

 

FORMATION OF CONTRACTS (essential elements of valid contract explained in details)

ELEMENT NO.1: OFFER

Offer is defined as an expression of willingness to contract on definite terms once accepted. An offer becomes binding on the person making it as soon as it is accepted by the other party.

Distinction between:

• Offer and invitation treat

An invitation to treat is an inducement to customers to come and make an offer. It is an invitation to negotiate but not an offer. It can take the form of:

• Invitation to tender -this is an invitation to tender for supply of goods and services
• Display of goods for sale ie where goods are displayed alongside their price tags.
• Sale of shares by a public company through prospectus. Prospectus is a notice advertised by a company inviting general public to buy the shares in that company.
• Issue of travel timetables and passenger tickets.

• Offer and declaration of intention.

A declaration of intention to do something does not constitute an offer.

• Offer and mere supply of information

-if a customer request for a quotation and that quotation is sent to him, it does not amount to an offer but is simply supply of a requested information.

Rules of offer

1. An offer can be made to a specific person, a class of people or to the whole world.
2. An offer can be expressed or implied.

• An offer must contemplate giving rise to legal consequences if accepted.

1. The terms of offer must be certain i.e they should not be vague, ambiguous or loose in expression.
2. Offer must be communicated to the offeree. Communications of an offer that is posted (through a letter) will take place when the letter is received by the offeree. If letter is lost, there is no offer.
3. An offer once accepted becomes a contract and cannot be revoked or withdrawn.

• Conditions may be attached to the offer, but they must be communicated as well.
• There must be knowledge of offer before acceptance.

1. An offer cannot bind the other party without his/her consent.
2. Two identical cross offers do not constitute a contract. Cross offers arise where the parties make identical offers to each other in ignorance of each others offer

Termination of offer

1. Acceptance

An offer automatically comes to an end once it has been accepted and a contract is created.

2. Rejection

An offer to a certain person will end when it is expressly rejected by the offeree.

3. Revocation/withdrawal

An offer will come to an end when it is revoked by the offerer any time before acceptance.

4. Death/bankruptcy of offerer

Death or bankruptcy of an offerer of personal services will automatically terminate the offer.

5. Lapse of time

An offer that was open for a specified duration will come to an end at the expiry of the given time.

6. Failure to meet conditions

Failure to meet conditions attached to an offer will automatically end that offer.

7. Failure to accept the offer in the manner prescribed

An offer will be terminated if it is not accepted in the prescribed manner or in the usual manner implied in the nature of the offer.

8. Counter offer

A counter offer is a variation of the original terms of an offer. It will automatically extinguish the original offer.

Types of offers

• Cross offer -these are simultaneous identical offers made in ignorance of each others offer. EgJohn offers to buy a car worth ksh. 2million from Jane. One week later, Jane offers to sell to john the car at ksh 2 million. This is called cross offer since Jane is ignoring John’s offer.
• Conditional offer -is an offer whose validity or acceptance is subject to fulfillment of certain given conditions.

• Counter offer -this is a response to an offer whose effect is to vary terms of the original offer. Eg John offers to buy a car worth ksh. 2million from Jane. One week later, Jane agrees to sell the car to John but at ksh 1.5million. This is called counter offer.

• Single and standing offers *a single offer is expressed in definite words and its acceptance or rejection will bring it to an end.*a standing offer is one that is not definite or specific in expression but its acceptance will give rise to specific contracts over a duration of time. Eg a tender to supply 500 bags of rice is a single offer while a tender to supply not more than 500 bags of rice may be termed as a standing offer.

 

ELEMENT NO. 2; ACCEPTANCE

This is manifestation of willingness to contract on the terms of offer.

Rules of acceptance

• Acceptance can be done orally or in writing (expressed) or through conduct (implied).
• Acceptance is only possible if the offer is still open.

• Acceptance must be absolute, unconditional and unqualified i.e offer must be accepted exactly in accordance with the terms of offer.

• Acceptance must be communicated to the offerer.
• Acceptance must be within a given time or within a reasonable time.
• Acceptance must be in the manner prescribed.

• The party accepting must have been aware of the existence of the offer.
• Acceptance subject to contract is incomplete acceptance.

• An offer made to a class of people or to a particular person can only be accepted by members of that class or that specified person.

Rules of communication

• Communication of offer by post takes effect when the letter containing the offer reaches the offeree. If the letter is lost or destroyed, there is no offer.
• Communication of acceptance by the post is effective when the letter containing the acceptance is posted. This means that loss or destruction of the letter along the way will have no effect on the contract.

• Communication of revocation of offer becomes effective when the letter is received by the offeree

Exemptions to the rules of communication

• Where the requirements of communication are waived i.e the offerer does not require the offeree to communicate but to act in a certain manner.
• Acceptance of unilateral contracts is not required to be communicated but it is enough for the offeree to act accordingly.

• Where it is ascertained that the offerer was to blame for not receiving communication then the requirement of communication is waived or suspended.

• Communication to an agent is valid communication.
• In instantaneous communication, the offer is made there and then and acceptance should also be immediate.

 

ELEMENT NO. 3; CONSIDERATION

Consideration is defined as:

• The price paid by one party for the promise of another.
• It is the legal value bargained for and given in exchange for a promise.

• It is a promise for a promise, something for something situation i.e a status of equality or “quid pro quo”.

• It is some rights, interests, benefits or profits occurring to one party and some forbearance, loss, detriment or responsibility given, suffered or undertaken by the other party. The benefit accruing and the loss sustained must be in return of a promise.

TYPES OF CONSIDERATION

• Executed consideration -it is that consideration that has already been given. Also known as present consideration.
• Executory consideration -it is that which is to be paid in future.
• Past consideration -it is based on an act that has already been performed. It is a promise made after the contract is formed. Past consideration is not a valid consideration e.g Jane hires a taxi to take her from Nairobi to Thika for ksh. 1500. On arrival she promises to add the driver ksh.500 as a token of appreciation for the service but to be paid at a later date. The ksh.500 is a past consideration and it cannot be enforced in the court of law.

RULES OF CONSIDERATION

Rule 1: Consideration is necessary for all simple contracts

Rule 2: Consideration must be real although it needs not be adequate i.e consideration must be something for value but whether it is enough or not is not a concern of law.

Rule 3: Consideration must not be past.

Reference case: Rascola vs Thomas

R purchased a horse from T. After the sale was complete, T gave the promise that the horse was free from vice, however the horse proved to be full of vice and ungovernable. R sued T for misrepresentation. It was held that the promise that the horse was free from vice was a past consideration which cannot be enforced because the contract had already been concluded.

EXEMPTION TO THE RULE OF PAST CONSIDERATION

A past consideration can be enforced in the following circumstances:

1. Discharge of a legal duty -where a person has been arrested, his/her lawyer acts to bail him out. If that person later promise to pay, such a consideration is past but it will be enforceable in the court of law. The understanding is that the request for legal services has implied promise to pay.
2. Negotiable instruments -substitution of a promise to pay cash with a promise to pay through cheques, bills of exchange e.t.c. (negotiable instrument) is a past consideration but it will be enforceable. The understanding is that the promise to give a cheque prevents the other party from going to court to sue for the debt.
3. Acknowledgment of statute barred debts -the promise to pay a statute barred debt is a past consideration but when it is made in writing, it resurrects the old debt. Statute barred debt is a debt that has stayed for more than six years without being paid or promise to pay being renewed.

Rule 4: Consideration must move from promisor to promisee: 

 This rule is also called the doctrine of privity rule. It states that strangers or 3^rd parties cannot be able to enforce a contract that they aren’t party to even if it is for their benefits.

Reference case: Dunlop pneumatic tyre co vs Selfridge

Dunlop ltd was a manufacturer of tyres, it sold tyres to XYZ ltd under a contract where XYZ ltd was not to sell the tyres below Dunlop’s list price. XYZ ltd was also to obtain a similar agreement with other traders to whom he sold tyre. Selfridge bought tyres XYZ ltd and signed an agreement not to sell tyres below Dunlop’s list price. Selfridge broke the agreement and Dunlop sued Selfridge for breach of contract. It was held that the action must fail because there was no contract between Dunlop and Selfridge. In the contract between XYZ ltd and Selfridge, Dunlop was a stranger.

EXEMPTIONS TO THE PRIVITY RULE

1. Trust schemes -this is a contract where property is entrusted to a trustee by the owner on behalf of a certain beneficiary. This beneficiary is allowed to sue the trustee incase the trustee is misusing property.
2. Under the road traffic act -in 3^rd party motor insurance, a person who has been injured by a vehicle can sue the insurer for compensation even if the contract was between insurance company and owner of the vehicle.

• Assignment of debts -an assignee of debts may be able to sue the debtor if he is unpaid even if there was no contract between them. An assignee of debts is a person to whom the right to receive payment from a debtor has been transferred to him.

Rule 5: Consideration must be in excess of existing consideration

A person who is under a contractual obligation to perform a certain duty gives no more consideration by fulfilling his obligations. Where consideration already exists, an obligation exists as well. A consideration must be something on top of the existing obligation. This is known as the rule in foakes vs bear.

Reference case: foakes vs bear

Plaintiff obtained a judgment against the defendant for payment of principal amount plus 2090 pounds which included loan interest and cost of the case. The defendant later asked the plaintiff that he pays the principal amount as long as the plaintiff will not demand interest and cost of the case. The plaintiff agreed to this but after payment of principal amount, he sued for the balance of interest and the cost.  It was held that the defendant was under an existing obligation to pay 2090 pounds (interest and cost of case) and he had done nothing to show why he should pay less. The decision in this case is that payment for a lesser sum even if accepted cannot offset a debt of a larger amount.

 

EXEMPTIONS TO THE RULE IN FOAKES VS BEAR

• The rule in pinnel’s case -it states that payments of lesser sum may offset a debt of a larger amount where:
• It is paid at an earlier date
• Paid at due date but a different location
• It is paid in kind at the creditor’s request
• Rule in welby vs drake

Payment of a lesser sum to a 3^rd party at a creditors request will constitute sufficient consideration for a debt of a larger sum.

• Compounding/compromise of debts

Where the assets of a debtor are not sufficient to pay all liabilities, creditors agree to receive a lesser proportion of how much there are owed. This is called compromise of debts and is common with companies facing liquidation.

• Accord and satisfaction

This is where the lender accepts to be paid a lesser sum plus something else in kind and this will offset the whole debt

• Doctrine of equitable estoppel (promissory estoppel)

If a person conducts himself or makes a statement that is relied upon by the other party to a contract and that party suffers a loss by changing his position. The maker of the statement may be stopped for denying the statement.

This rule protects persons who have incurred losses as a result of relying on verbal statement made on an existing contract.

Reference: central London properties vs high trees.
The plaintiff leased a block of flats for 2500 pounds per annum. Due to Second World War, the tenants were unable to raise the lease charges and they were contemplating terminating the lease contract. The plaintiff verbally offered to accept a reduced rent of 1250 pounds per annum. The resulting agreement was not supported by a fresh consideration. The plaintiff relying on the promise reduced the rent to the tenants to prevent them from vacating the apartment. 5 years later after war ended, the matter went to court and it was held that the promise of the plaintiff to accept reduced rent of 1250 pounds was binding because it made the defendant to reduce rent to the ultimate tenants thus reducing their income. The court also ruled that the full rent of 2500 pounds would now be demanded because war was over and the promise had not been supported by a consideration.

 

CIRCUMSTANCES UNDER WHICH THE DOCTRINE APPLIES
i) There must be an existing contractual relationship.
ii) Plaintiff must make the promise voluntarily.
iii) Plaintiff must have intended to create legal relations by making the promise.
iv) Plaintiff must have intended the defendant to act on the promise.
v) The defendant must have acted on the promise.
vi) Defendant must have suffered a loss by relying on the promise.

Rule 6:  Consideration must be in excess of existing legal duty (public duty)
This rule affects public officers who are going beyond the call of duty to discharge services to individual clients. If they do that, they have given sufficient consideration for which they are allowed to charge. Eg when a police officer is offering security services to individuals such as banks, churches etc, he/she must be paid by such individuals even if government pays the police officer for provision of security to public generally.

Rule 7: When promisee does something beyond his/her duty.

 This is a good consideration even if it is in line with his/her existing duties.

Reference case: Harvey vs paulsby
17 out 36 of crew members deserted the voyage. The remaining crew members were promised extra 40 pounds each to get the ship to its destinations. The owner of the ship later refused to pay the additional 40 pounds claiming that they were discharging their existing obligations. It was held that the 19 crew deserved the 40 pounds extra because they did a job that was to be done by 36. The large number of desertions made the voyage difficult and more dangerous and it fundamentally changed the terms of the original contract.

Rule 8: A promise founded on a third party is a good consideration

Reference: Shadwell vs Shadwell
An uncle wrote to his nephew, “I am glad to hear of your intended marriage to Ann. I promise to give you 150 pounds per annum during my life time as long as your practice income does not exceed 600 per annum”. The plaintiff married Ann but the uncle did not meet his promise. It was held that by marrying Ann, the nephew must have fulfilled something of interest to the uncle and must have materially changed his position to please the uncle. The uncle’s promise was binding even if it was founded on 3^rd party.

 

ELEMENT NO. 4;  CAPACITY TO CONTRACT

Capacity is the ability to incur legal obligations and acquire legal rights.
Persons are generally presumed by the law to have the ability to enter into contracts. However, such capacity may be absent or impaired. Capacity may be determined by age, mental or legal status. Different rules apply to minors, bankrupts, drunkards, insane persons and corporation.
(a) Capacity of minors/infants

A minor is a person below the age 18. The law governing contract with minors comprises of two principles:

1. Minors should be protected from their own incompetence and inexperience.
2. The law does not intend to cause unnecessary hardships to those dealing with minors.

Contracts with minors may be valid, void or voidable.

Valid contracts with minors

1. Contracts for necessaries

Necessaries are goods suitable to the condition of a minor into its actual requirements at the time of sale such as basic needs. Infants are generally liable for necessaries supplied to them. It is the responsibility of a supplier to prove that the goods supplied were actually necessaries. An infant is only liable for executed contracts for necessaries but not for executory contracts.

1. Contracts of service for the infant’s benefit

A beneficial contract of service is one that will help the infant earn a living from his/her skills, education, apprenticeship etc. e.g a music recording contract, sports contract etc

Voidable contracts with minors

These contracts are valid until avoided by the minor before attaining the age of 18 years or within a reasonable time. They include:

1. Contracts for purchase of shares in a company.
2. Contracts of lease where there is an obligation to pay rent.

• Contracts to enter and form a partnership business.

Void contracts with minors

These are contracts that create no liability to the infant. The following contracts with minors are considered void and non-existent:

1. Contracts for supply of goods other than necessaries.
2. Contracts for payment of money lent. However, where the money borrowed by the minor was for purchasing necessaries, the loan is still void but the lender is allowed to subrogate himself to a supplier of necessaries and not as a lender. To subrogate is to take the position of another.

• All trading contracts i.e contracts to supply an infant with goods for the purpose of resale. It is the responsibility of the merchant to ascertain the age of the minor because not knowing the age is not an acceptable defence.

(b) Capacity of drunkards

Contracts for supply of necessaries to a drunkard are valid. Necessaries to a drunkard may include accommodation, food, transport, medical attention e.t.c. however; the drunkard is bound to pay a reasonable price and not necessarily the whole contract price. Other contracts with drunkards are voidable. The drunk is expected to avoid the contract once he/she becomes sober. The right to avoid a contract may be lost with time. The objective of this rule is to prevent persons from taking advantage of others in their state of drunkardness.

(c) Capacity of insane persons

Contracts with insane persons are valid if they are about supplies of food, medical attention e.t.c. other Contracts are voidable at the option of the insane persons. For persons who suffer temporary mental illness, contracts entered into when they are sane are valid unless the insane person can prove that:

1. At the time of entering the contract he was suffering from mental illness.
2. The other party knew or ought to have known about the mental illness.

ELEMENT NO. 6; INTENTION TO CREATE LEGAL RELATIONS

A valid contract should have the intention to create legal relations e.g. legal consequences. In practices parties do not direct their attention to these aspects when forming an agreement. To this effect, courts have formulated certain principles that will apply where legal consequences have not been expressed. These are classified into:

• Domestic and family agreements

Agreements between husband, wife, children, uncles, aunts, cousin’s e.t.c. are considered not to create legal relations except if they constitute a commercial agreement. Where husband and wife are separated, any agreement between them is legally binding.

• Social agreements

These are agreements between friends and are presumed not to carry any legal consequences except if they constitute commercial agreements.

• Commercial agreement

These are business contracts and are presumed to have legal consequences unless an agreement to the contrary is expressed.

• Collective bargaining agreements

These have no legal consequences unless they are in writing and have been registered with the industrial court.

• Mere advertisement puff

These are opinions and exaggerations by sales men and advertisers and have no legal consequences. They should not be taken literally.

 

ELEMENT NO. 6; TERMS OF A CONTRACT

Terms are rules, requirements and provisions which govern an agreement or a contract. Statements containing terms should be clear, certain and devoid of double meaning. In the process of negotiation, statements made by the parties may be terms or representations. A statement that becomes part of the contracts is a term. These other statements are representation.

The following guidelines are used to distinguish between a term and representation:

• Superior knowledge: a statement made by a person with superior knowledge about the matter is likely to be a term.
• Intention of the parties: if the makers of the statement intended to influence the other party, then the statement is a term.

• Time gap: a statement made before or during formation of a contract is more likely to be a term. A statement made after is a representation.

• Does the statement preclude further inquiry or verification? If yes, the statement is a term. If no, the statement is a representation.
• Would the party have entered the contract minus the statement? If no, the statement is a term. If yes the statement is a representation.
• Was the statement reduced I writing? If yes it is a term, otherwise it is representation.

CONDITIONS AND WARRANTIES

Terms to a contract can further be classified into conditions, warranties or innominate terms;

1. I) CONDITION

This is a term that goes to the root of the contract. It forms the basis of the formation of a contract. Breach of condition entities the aggrieved party to rescind a contract i.e. set it aside and sue for damages. The party may also decide to affirm (treat as subsisting)

1. II) WARRANTY

A warranty is a minor term in a contract. It does not go to the root of the contract. Breach of warranty entities the aggrieved party to seek other remedies other than rescission.

Guidelines to distinguish a condition and a warranty

1. The court will consider the intention of the parties.
2. The court will examine the contract as a whole in the absence of an express declaration of what is a term and what is a condition.

• The court will also examine any implied terms by customs or statutes or by the courts.

IMPLIED TERMS

Parties are presumed to have entered into a contract and specified all the terms to govern their agreement. However, it is not always possible that all the terms are specified in the contract. Therefore terms will be implied in contract either by customs, statutes or by court:

1. a) Implied terms by customs. Parties are presumed to have entered into the contract as per the prevailing customs and traditions.
2. b) Implied terms by statute. Terms may be implied in a contract by a specific Act of parliament; such terms will always be binding even if there are contrary terms expressed by the parties.
3. c) Implied terms by court. The court will imply terms in a contract in order to give it business meaning. Terms implied by courts are either facts or law. Terms implied by law are necessary for maintaining a standard behavior e.g under a contract of employment; employees undertake to carry on all lawful duties given by employer. It is implied that employer will not give any unlawful duty.

Terms implied by facts are the obvious and necessary terms to give meaning to a contract.

NOTE: The general rule is that terms should not be implied in written contracts, except in the following circumstances:

III) INNOMINATE TERMS

This are terms that difficult to classify as conditions or warranties until the magnitude of breach is seen and assessed.

EXCLUSION/EXEMPTION CLAUSES

These are clauses that seek to protect a party from liability arising from a contract. The law allows the presence of exemption clauses but it has formulated following rules for their applications;

1. Fundamental breach -exemption clauses should not amount to fundamental breach of contract.
2. Privity of contract -it is only the parties to a contract that can enforce the exemption clause. Strangers or 3^rd parties cannot rely on them.

• Misrepresentation -exemption clauses should not amount to a lie or misrepresentation of facts.

1. Notice of the clause -the exemption clause should be clearly pointed out to the other party for it to be reliable.
2. Signing of documents -where a party has signed documents, the requirements of notice is deemed to have been fulfilled. A party is assumed to have thoroughly read the document he signed.
3. Negligence -exemption clauses should not exempt a party from negligent acts.

• Clear terms –exemption clauses must be expressed clearly.
• Reasonableness –exemption clauses must be reasonable and should not amount to oppression of the other party because he or she lacks bargaining power.

1. Incorporation -exemption clauses must have been an integral part of the contract and not an after-thought.
2. Contract as a whole -the court will interpret the whole contract and not just the exemption clauses in isolation.

ELEMENT NO. 7; VITIATING FACTORS (FREE CONSENT)

These are factors that affect the free consent required in a valid contract. They include:

1. a) Mistake
2. b) Misrepresentation
3. c) Undue influence
4. d) Duress/ coercion
5. e) Fraud
6. f) Illegality
7. MISTAKE

Mistake is an erroneous belief. It is an error committed in relation to some matter of fact affecting the rights of one of the parties to a contract. It can be categorized into:

1. Mistake of fact -this is a mistake as to the fundamental part of a contract. Such a mistake is said to be operative i.e it destroys the understanding that form the basis of a contract.
2. Mistake of law -also referred to as ignorance of law. It is an error in understanding how the law is to be applied to the fact. It is not a valid defense except if it is foreign law or private rights.

Types of mistakes

1. Common/bilateral mistake

This occurs where both parties make the same mistake without awareness.

 

Forms of common mistake

• Mistake as to the existence of a subject matter (‘res exincta’) e.g an agreement to buy a cow which unknown to both parties died last night.
• Mistake as to the existence of a state of affairs e.g parties entering into marriage believing they are single while they are not.

• Mistake as to the possibility of performance i.e where contract is not capable of being performed by an ordinary person but the parties thought it was possible.

• Mistake as to the ownership of a thing (‘res sua’) e.g. an agreement to buy some property which unknown to the buyer that property already belongs to him or the property does not even belong to the seller.
• Mutual mistake

This occurs where both parties mean two different things. A mutual mistake is a mistake as to the identity as to the subject matter. Where a mutual mistake exists there is no ‘consensus ad ideum’ (meeting of the mind)

1. Unilateral mistake

This occurs where one of the parties is mistaken about some fundamental facts and the other party knows or ought to have known.

Forms of unilateral mistakes:

1. Mistake as to the identity of the party you are contracting with e.g. when dealing with identical twins.
2. Mistakes as to the terms of the contract e.g. getting a wrong quotation from the seller and entering the contract without disclosing there is an undercharge.
3. Documents mistakenly signed. If a person signs a document by mistake and the other party is aware, such a mistake can only be rectified if:
4. The party made a mistake as to the nature of the document but not the content.
5. The document was fundamentally different from that which he ought to have signed.

• He acted with reasonable care by reading the content first.

1. The signature was induced by fraud.

Remedies to mistake

1. Rectification -this is where a written contract is corrected by the court.

Conditions necessary for rectification

1. The parties must have been in final and full agreement prior to the writing of the document.
2. The intention of the parties must have continued unchanged until the time of rectifying the document.

• Parties must produce prior evidence to support the agreement.

Rescission

This refers to setting aside a contract. In recession, the parties are returned to their original position as if no contract has been signed.

• Affirmation

This is where parties agree to move on with the contract even in the presence of a mistake.

• Refusal of an order of specific performance

This is where the court refuses to issue orders of specific performance because of mistakes.

• MISREPRESENTATION

This is an untrue statement of facts made by a party with the intention to induce the other party to enter into a contract. It is a false representation which may be in form of words or conducts

Content/characteristics of misrepresentation

•  It must be a statement of some specific existing facts or past events.

The following statements do not amount to misrepresentations;

• A statement of opinion unless made by an expert.
• A statement of future conduct or intention.

• Advertisement puff

• The statement must induce the other party.

A statement cannot induce the other party if:

• That party knew the statement was false.
• He would have entered the contract in spite of misrepresentation.

•  The injured party must have relied on the statement misrepresented

Remedies of misrepresentation

• Damages in tort

A person who makes a dishonest statement is liable under tort for deceit.

2. Damage in contract

Where a plaintiff has suffered financial loss, he/she can sue for damages to recover their losses.

3. Refusal of further performances.

A person who discovers misrepresentation can refuse to continue with performance of that contract.

4. Rescission

This is the right to rescind and set aside a contract and it can be lost if:

• An innocent third party has acquired the rights in the contracts.
• The parties cannot be restored to their original position.

• There has been subsequent affirmation of a contract.

• Time to rescind a contract has expired.
• Affirmation

This is where the aggrieved party treats the contracts as subsisting even where there is misrepresentation.

Types of misrepresentation

• Fraudulent misrepresentation

This is an untrue statement made with knowledge that it is false, carelessly or recklessly without believe it is true

• Innocent misrepresentation

This is an untrue statement made in innocent believe that it is true and the maker had no means of confirming that it was false.

• Negligent misstatement

This is untrue statement made without caring whether is true or not ie the maker has both means of capacity of ascertaining its falsity but fails to do so.

3. UNDUE INFLUENCE

This is where a person takes advantage of another because of inequalities between them. The effect of untrue influence is to lender the contract voidable at the option of aggrieved party. Undue influence is presumed to exist between:

• Parent and child
• Doctor and patient
• Teacher and student
• Pastor and faithful
• Lawyer and client

Undue influence cannot be presumed between husband and wife because these are treated as equals in the eyes of the law.

The right to avoid the contract where the undue influence has been present can be lost if:

a) A third party has acquired rights in the contract

b) There was undue delay in rescinding the contract

c) There was subsequent affirmation of the contract.

 

4. DURESS/COERCION

This refers to the use of violence or threat against the other party or his relatives. It can be exerted by the contracting party or some third party acting under the instruction of the other party. The threat must be calculated to produce fear or loss life or body injury to a person or relative but not goods or property. Threatened criminal proceedings or imprisonment is also a form of duress.

5. ILLEGALITY

The law relating to illegal contracts is founded on the principle that no action can arise out of an illegal transaction. Illegality of the subject matter renders the contract void.

The following contracts are considered illegal:

• Contracts contrary to public policy

These are contracts that are inconsistent with the values of a society.

They include:

1. Contracts leading to corruption of public life.
2. Contracts interfering with sanctity of marriage e.g. an agreement to enter into marriage and later separate in future or a promise to marry another person when the current spouse dies.

• Contracts to commit fraud on public revenue.

1. Contracts in restraint of marriage.
2. Contracts containing sexually immoral elements.
3. Marriage brokerage contracts i.e. contracts to introduce a person to another with the view of marriage.

• Contracts to oust court’s jurisdiction i.e. any contract to deny someone the right to court proceedings.
• Contracts to break law of a friendly country.

1. Contracts tending to abuse the legal process.
2. Contracts involving commission of a legal process wrong i.e. contracts where the object is to criminal or civil wrong

2) Contracts illegal by statutes

This are contracts which some acts of parliament classifies as illegal. They includes:

1. Betting or wagering contracts.

Whereas betting is not an illegal process, betting contracts are considered illegal and unenforceable.

1. Contracts in restraint of trade

These are contracts restraining a person from freely exercising his/her lawful profession, trade or business. However, employers are allowed to restrain workers from engaging in competing business during employment or for certain duration after employment. Such restraint is meant to protect trade secrets and business connections. Public servants or workers can also be restrained from tendering for the same government or company they work for. This is to avoid a conflict of interest.

 

ELEMENT NO. 7;   DISCHARGE/TERMINATION OF CONTRACTS

• PERFORMANCE

This is where both parties have prepared their obligations in full. The performance should be complete, precise and exact. However, a contract could still be discharged even where there is no full performance in the following ways (ways of classifying performance):

1. Substantial performance

This is where obligations have been fulfilled substantially but there is a defect as to the quality of performance. Payment in this case should be on quantum meruit basis i.e. payment should be proportionate to the work completed.

1. Partial performance

where only a part of the whole contract has been completed, payment in this case is on quantum meruit basis. However, part performance does not apply to payment of a debt as per the rule in foaks vs bear.

• Divisible contracts

Where a contract is divisible in units and a party has completed some of the units, payment should be for the completed parts only.

1. Prevented performance

Where the defended prevents the plaintiff from completing his obligations, the contract is discharged and payment is on quantum meruit basis.

1. Lapse of time

Failure to perform an obligation on time will discharge that contract and payment will be on quantum meruit basis.

 

• AGREEMENT OF THE PARTIES

The same way the parties agree to form a contract, they can also agree to terminate it any time. Such an agreement should be in writing and signed. Discharge of a contract by agreement may take the following forms:

1. Bilateral discharge

This is where the parties agree to discharge a contract either when both have not fulfilled their obligations or have fulfilled them partially.

1. Unilateral discharge

This is where only one party has the right to surrender the contract because the other party has performed his part completely.

WAYS OF DISCHARGE BY AGREEMENT

1. Accord and satisfaction

This is where the contract is discharged and a consideration is given.

1. Novation

This where an existing contract is replaced with a new contract.

• Deed

This where a party who has not fulfilled his/her obligations is released by the other by way of writing and signing a document.

 

• FRUSTRATION

This refers to a situation where performance has been mad impossible by factors beyond the control of either party.

Frustration will discharge a contract if:

• The event frustrating the contract was not contemplated by either party.
• The event makes the contract fundamentally different from the original one.

• The contract resulted to a situation where the parties did not wish to be in.

• Neither of the party was responsible for even frustrating the contract.

Discharge of a contract by frustration may take the following forms:

• Death or incapacity of either party -this is more so if it was a contract for personal service. General contracts will not be affected.
• Destruction of the subject matter

• Changes in law i.e a contract may be legal at the time of formation but may become illegal due to alteration/amendments in law.

• Frustration of a common venture -where the whole basis of a contract was the occurrence or non-occurrence of an event and that event occurs or doesn’t occur, the contract is discharged through frustration.
• Government interference -unexpected government interference may cause fundamental changes on circumstances around the contract.

Effects of frustration

• Frustration discharges a contract as to the future; the contract is not made void from the beginning. Therefore money paid into the future is refundable and any money which was payable into the future ceases to be payable.
• Some of the money which was paid into the past where obligations have not been fulfilled is recoverable. However, where obligations were fulfilled, such money is not refundable.
• LAPSE OF TIME

A contract formed for a specific time will be discharged when that time comes to an end. If no time is fixed then the contract will be discharged after a reasonable time.

 

• OPERATION OF THE LAW

This can take the following forms:

• Death or incapacitation
• Bankruptcy -bankrupcy of either party will terminate the original contract and new contract is entered between the trustees of the bankrupt person and the other party.

• Merger of interests -this is where the interests of the two parties are merged into one party e.g. when a tenant purchases the house owned by the landlord.

• Material alteration -this is where the contract is materially altered without the consent of the other party e.g. where on employee signed a contract to be paid 50,000 but is paid only 10,000 at the end of the month.

 

• BREACH OF CONTRACT

It takes the following forms:

1. Failure to perform -this is where one party fails to meet his/her obligations in a contract.
2. Renunciation -this arises where one party renounces/denies having any obligation in the contract even before time for performance is due.

• Self disableness -this is where one party disables himself by making him/herself incapable of fulfilling his obligations e.g. a person promises to marry another but goes ahead and marries someone else.

Remedies for breach of contract

• Refusal of further performance -this is where the aggrieved party refuses to continue performing his obligations because the other party is in breach.
• Quantum meruit -this is a claim for the value of work done by a party in respect of the contract.

• Specific performance-this is an order of the court requiring the party in breach to carry out his/her contractual obligations.

• Recession -in this case, the aggrieved party is allowed to set aside a contract because of breach of the other party.
• Rectification -in this case the court will allow the party in breach to rectify the breach and carry on with the contract.
• Court injunction -this is an order of the court restraining a party from repeating an act breach

• Restitution -this involves returning the injured party back to the position he/she would have been if the contract had been concluded.
• Action for agreed sum -in anticipatory breach the contract will always provide for a certain sum payable in the event of breach by either party. The aggrieved party can sue for this amount.

• Action for damages -in this case the aggrieved party will be awarded unliquidated damages. A claim for damages has two questions:

–Remoteness of damages– damages claimed under breach of contract should not be too remote. They should be fair and reasonable to compensate the injury considered as naturally arising or that injury which could have been in contemplation as the probable result of breach.

–Measure of damages. The general rule is that the plaintiff should recover his/her actual loss and the court will try to return him to the same position he would have been if the contract was fully performed. The fact that damages are difficult to determine, does not prevent the injured party from being awarded damages. In the assessing damages, the court will take into consideration any inconveniences and annoyances caused to the injured party.

METHODS OF LIMITING DAMAGES

• Contributory negligence

This is where the other party contributed to the injury he/she suffered. The damages awarded will be his proportionate contribution.

• Remoteness of damage

The defendant may reduce the damage payable by proving they are too remote.

• Mitigation

Any act of the defendant which aimed at reducing /mitigating the effect of breach will reduce the amount of damages payable.

Types of damages

• Unliquidated damages: These are damages that are not known in advance. They will be determined by the court.
• Liquidated damages: These are damages fixed by the parties in advance.

• Ordinary/general damages: These are damages to compensate the natural consequences of breach.

• Special damages: These are damages to cover any inconveniences and annoyances caused to the injured party.
• Exemplary damages: These are damages meant to punish the wrong doer and determine others from repeating similar breach.
• Nominal damages: These are damages awarded where the plaintiff has proved breach of contract but did not suffer any actual loss.

• Contemptuous damages: These are damages awarded against the plaintiff because of bringing a case that has no basis.
• Penalty clauses: This is a sum agreed in a contract as a security for the performance of the contract such that where a party fails to meet his/her obligations; he will have to part with the stated amount.