5.1 Introduction

The law of contract is the foundation upon which the superstructure of modern business is built. In business transactions quite often promises are made at one time and the performance follows later. The law of contract lay down the legal rules relating to promises, their formation, their performance, and their enforceability. The law of contract in Kenya was first based on the Contract Act 1872 of India. This Act does not apply now in Kenya except to contracts made before 1st January, 1962. The law of Contract (Cap. 23) states that the English Common law of contract is applicable since 1st January, 1961. Section 2 (10 of this Act provides: “Save as may be provided by any written law for the time being in force, the common law of contract, as modified by the doctrines of equity, by the Acts of Parliament of the United Kingdom applicable by virtue of subsection (2) of this section and the Acts of Parliament of the
United Kingdom specified in the Schedule to this Act to the extent and subject to the modifications mentioned in the said Schedule, shall extend and apply to Kenya”. It means that the common law of England relating to contract, subject to modifications, is
applicable in Kenya. The date of reception of the common law of contract is 12th August 1897. English decisions after this date are only of persuasive authority.

5.2 The Nature of Contract

A contract is an agreement of promises which is legally binding or enforceable by law. A contract has been defined by Sir William Anson in the words, “A legally binding agreement between two or more parties, by which rights are acquire by one or more to acts to forbearances on the part of the other or others”. The law of contract imposes an obligation on every person to honour his legally enforceable promises, failure to do which renders him liable to compensate the injured party or otherwise attorn for his conduct. What is intended here is to promote commercial relations and since commerce generally entails individual or personal interactions, the obligation imposed by a contract is, in general, created by the parties themselves. The parties must, however, act within
the ambit of the law.

5.3 Essential of Valid Contract

The essential elements of valid contract as follows:
1. Offer and acceptance
There must be a ‘lawful offer’ and a ‘lawful acceptance’ of the offer, thus resulting in an agreement. The adjective ‘lawful’ implies that the offer and acceptance must satisfy the requirements of the Contract Act in relation thereto.

2. Intention to create legal relation
There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of social or domestic nature do not contemplate legal relations, and as they do not give rise to a contract e.g. an agreement to dine at a friend’s house or a promise to buy a gift for wife are not contracts because these do not create legal relationship. In commercial agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends to create legal relationship is a contract provided other requisites of valid contract are present.

3. Lawful Consideration
Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and called consideration.

4. Capacity of parties
The parties to an agreement must be competent to contract, otherwise it cannot be enforced by a court of law. In order to competent to contract, the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject.

5. Free Consent
Free consent of all parties to an agreement is another essential element of a valid contract. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense. There is absence of ‘free consent’, if the agreement is induced by (i) coercion, (ii) unduce influence, (iii) fraud, (iv) mis-representation, or (v) mistake.

6. Lawful object
For the formation of a valid contract, it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or property of another.

7. Possibility of Performance
Another essential feature of a valid contract is that it must be capable of performance. If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. All the above elements must be present. If one or more elements are absent then the contract may be void, voidable or unenforceable.

5.4 Classification of Types of Contracts
Contracts may be of various types. These may be classified as under:-

1. Express and Implied Contract
An express contract is one in which the parties specifically agree about the nature and terms of their relationship. There is then said to be an express agreement. For example, if A agrees to sell his goods to B for KSH. 10,000/= and B agrees to buy the goods at that price, there is said to be an express contract for the sale of goods at an agreed price. On the other hand, there is no specific agreement in an implied contract. The conduct of the parties, as well as all the surrounding circumstances, must be taken into account in order to
ascertain whether or not a contract exists. Thus where A hires a taxi and boards it there is an implied contract that the taximan shall convex A up to his destination and that A shall pay such fare is usually paid for that trip.

2. Unilateral and Bilateral contracts
A Unilateral Contract is one in which only one party is bound. It is a rare type of contract which arises, for instance, where there is an offer of a reward. Thus, if ‘A’ offers a reward to anyone who will recover his lost property, no one is bound to recover the lost property but ‘A’ himself is bound to give the promised reward to any one who might recover the property. Most contracts are bilateral. A bilateral contract is one in which both parties are bound. Thus, if A agrees to sell his goods to B and B agrees to buy them at a stated price, both parties are bound. A is bound to deliver the goods to B and B is bound to accept them to pay the price.

3. Valid, Void and Voidable Contracts.
A valid contract is an agreement enforceable by law. An agreement becomes enforceable by law when all the essentials of a valid contract discussed above are present. A void contract is an agreement which is not binding or enforceable by law. This is because it has no legal effect at all and is, therefore, not binding on any of parties. A contract is rendered void in certain cases where both parties were mistaken, where it is prohibited by law of where it is entered with out consideration e.t.c. A voidable contract is one which is enforceable by law of the option of one of the parties. Usually a contract becomes voidable when this consent of one of the parties to the contract is obtained by undue influence, or misrepresentation. Such a contract is voidable at the option of the aggrieved party of the party whose consent was s caused.

Where there is a voidable contract, the party entitled to avoid it must do so within a reasonable time. This may be done by A notifying the other party, B, that he (A) does not intend to be bound by the contract. Where it is no feasible to give notice, e.g. where B is a rogue whose whereabouts are not known A can still effectively terminate the contract by doing everything possible to show that ho does not intend to be bound by the contract. It is sufficient, for instance, to make a report to the police.

Car and Universal Finance Co. V. Caldwell (1965)
X bought a car from the defendant and paid by cheque. X took the car with him. The cheque bounced the next day, but X had disappeared. The defendant reported the matter to the police and the Automobile Association, requesting them to recover the car. Subsequently, X sold the car to Y, who knew X’s title to be defective. Y in turn resold the car to the plaintiffs, who bought in good faith. Held: By setting the police and Auto mobile Association in motion, the defendant had clearly shown that he intended to resend the contract; this meant that the ownership of the car reverted to him and therefore Y had no title to pass to the plaintiffs. The defendant was therefore entitled to recover the car from the plaintiffs. The right to avoid the contract is lost if the innocent party, upon discovering the true facts, subsequently affirms it. It is also lost where an innocent third party had acquired an interest in the subject matter of the contract, which is likely to be affected by the avoidance of the contract.

Newtons of Wembley, Ltd. V. Williams (1965)
X bought a car from the plaintiff and paid by cheque. He took the car with him. The cheque was dishonoured, but in the meantime X had disappeared. X subsequently resold the car to the defendant, who bought in good faith. The plaintiff sought to recover the car from the defendant. Held: Title to the car had passed to the defendant; it could not therefore be recovered by the plaintiff.
Notes: The facts in the above two cases are similar. In Caldwell’s Case the car was recovered because the innocent purchaser acquired it from a seller who had no title since the contract had already been rescinded; the seller had bought from X in bad faith. On the other hand, in Williams’s Case the car could not be recovered because the innocent purchaser has acquired it, in good faith, from a person who had right to sell it. There are many other instances of voidable contracts, e.g. contracts entered, into under a unilateral mistake, duress or undue influence as well as minors’ contracts.

4. Specialty Contracts and simple Contracts.
A specialty contract is also known as a contract under seal. It is an instrument in writing signed and sealed by the party to be bound by it and delivered by him to the person for whose benefit it was made. Thus, writing,, signature, sealing and delivery are the four essential characteristics of this type of contract, of which a Deed is the best example (e.g. a Deed of Conveyance under which property is transferred by one person to another). “Delivery” is used here not in the sense of physical delivery; what is required is an intention to be bound; Vincent V. Premo Enterprises Ltd. (1969). If A executes a deed conveying his property to B, with an expressed intention that he is to be thereby bound, A will be bound even if the deed was never physical delivered to B. A central feature of this type of contract is that its validity is independent of consideration i.e. B need not have furnished anything of value as pre-condition for enforcing A’s promise.

A simple contract is an agreement, express or implied, which gives rise to legal obligations. A simple agreement may be in writing or agreed orally, or even be implied from the conduct of parties. A simple contract may be made also made partly orally and partly in writing. In England, conveyances of land or leases of land for periods of more than three years, transfers of British ships and gratuitous promises must be under seal. Section 2 (1) of the Law of Contract Act states that no contract in writing shall be void or
unenforceable merely on the ground that it is not under deed. But such contracts, if not made under deed must be supported by consideration.

The following contracts must be in writing:-

  • Bills of Exchange and Promissory Notes.
  • Representations regarding credit worthiness or character.
  • Acknowledgement of Statute Barred Debts.

The following contracts must be evidenced by writing:

  • Contracts of Guarantee
  • Contracts for the Sale of Land
  • Contracts for the Sale of Goods over Two Hundred shillings
  • Employment Contracts over one month
  • Hire Purchase Contracts
  • Money Lending Contracts

5). Illegal Contracts and Unenforceable Contracts
An illegal contract is one which is prohibited by law or which contravenes a provision of law or one which ids contrary to public policy. Where both parties are guilty of the illegality they are said to be in pari delicto and none of them can enforce the contract. But where only one of the parties is guilty of the illegality, the contract may in certain circumstances be enforced by the innocent party. Thus an agreement to commit murder or assault or robbery would be illegal.

Void and illegal contracts, both cannot be enforced by law but the two differ in some respects. All illegal agreements are void but all void agreements are not necessarily illegal. For example, an agreement with a minor is void as against him but not illegal. Similarly, when an agreement is illegal, other agreements which are incidental or collateral to it are also considered illegal, provided the third parties have the knowledge of the illegal or immoral design of the main transaction. For example, ‘A’ engages ‘B’ to murder ‘C’ and borrows KSH. 5000 from ‘D’ to pay ‘B’. We assume ‘D’ is aware of the purpose of the loan. Here the agreement between A and
B is illegal and the agreement between A and D is collateral to an illegal agreement. As such the loan transaction is illegal and void and D cannot recover the money. But the position will change if D is not aware of the purpose of the loan. In that case, the loan transaction is not collateral to the illegal agreement and is valid contract. An unenforceable contract is one which though valid, cannot be enforced because none of the parties can sue or be sued to it. For instance, section 6 (1) of the Sale of Goods Act (Cap 31) provides.

“A contract for the sale of any goods of the value of two hundred shillings or upwards shall not be enforceable by action unless the buyer shall accept part of the goods sold, and actually receive the same, or give something in earnest to bind the contract, or in part payment, or unless some note or memorandum in writing of the contract be made and signed by the party to be charged or his agent in that behalf” Unless the conditions laid down in the above provision are complied with, the contract cannot be enforced. The contract itself is valid but its enforceability depends on whether the above provision has been complied with.

6) Contracts Uberrimae Fidei
A contract uberrimae fidel is one in which only one of the parties has full knowledge of all materials facts, which he is under a duty to disclose. The best example is an insurance contract. The insured is possessed of all facts which are material to the contract; but the insurer has no possession of these facts and the insured is under a duty to disclose them to him. Contracts Uberrimae Fidei are said to be contracts of Utmost good faith, particularly on the part of the party under a duty to disclose material fact. Any failure to exhibit good faith, or any show of outright bad faith, amounts to a breach of the contract entitling the other party to be relieved from his own obligation under the contract. Other examples of contracts Uberrimae Fidei includes:-

  • Family settlements (where full disclosure is required);
  • Contracts for the sale of land (where the seller must disclose defects relating to title);
  • Contracts of partnership (where every partner must exhibit utmost good faith in his dealings with the other partner (s).

7. Contracts of Record
A contract of record consists of the judgment of court. Such contracts are formed by an entry on the court records. The rights and obligations of the parties are put on court record and the resultant relationships between them are said to constitute a contract of record. These contracts includes:

Judgment of a Court:-
The previous rights under a contract are merged in the judgment of a court. This judgment constitutes a contract of records between the parties of the contract. We assume ‘R’ owes ‘T’ Kshs. 2,000/= on a contract. ‘T’ sues ‘R’ and court issues a judgment that ‘T’ must be paid by ‘R’ KSH. 1,500/= In this case, the previous rights become merged in the judgment of the court.

In the criminal cases, the court may bind the accused to be of good behaviour and keep peace. The person so bound acknowledges that a specified sum will be paid by him to the state if he fails to observe the terms of recognizance. In the contracts of record, the element of consent of both parties is absent. For this reason, these contracts are not true contracts.

8. Executed contract
A contract is said to be executed when both the parties to a contract have completely performed their share of obligation and nothing remains to be done by either the party under the contract. For example, when a bookseller sells a book on cash payment it is an executed contract because both the parties have done what hey were to do under the contract.

9. Executory contract
It is one in which both the obligations are understanding, one on either party to the contract, either wholly or in part, at the time of the formation of the contract. In other words, a contract is said to be executory when either both the parties to a contract have still to perform their share of obligation or there remains something to be done under the contract on both sides. For example, T agrees to coach R, a C.P.A student, from first day of the next month and R in consideration promises to pay to T Kshs. 1,000 per month, the contract is executory because it is yet to be carried out.

10. Quasi-Contracts
This type of contracts have little or no affinity with contract. Such a contract does not arise by virtue of any agreement, express or implied between the parties circumstances. For example, obligation of finder of lost goods to return them to the true owner or liability of person to whom money is paid under mistake to replay it back cannot be said to arise out of a contract even in its remotest sense, as there is neither offer and acceptance nor consent, but these are very much covered under quasi contracts. These are known as quasi contracts because these have certain relations resembling those created by contract. A quasi contract is based upon the equitable
principle that person shall not be allowed to retain unjust benefit at the expense of another.

5.5 Formation of a Contract
A contract is formed by an offer by one person and the acceptance of this offer by another person. The intention of both parties must be to create a legal relationship and they must have the legal capacity to make such a contract. There must be also some consideration against the contract between the two parties. The formation of contract involves the following factors:-

  1. The offer
  2. The Acceptance
  3. Consideration
  4. Contractual capacity
  5. Intention To Create A Legal Relationship

5.5.1 The Offer
An offer is defined as an expression of willingness to enter into a contract on definite terms, as soon as these terms are accepted. It is made by a person known as the offeror and addressed to the offeree. Thus, if A writes to B stating his desire to sell his property to B at a specified price, A is said to have made an offer to B. A is the offeror and B the offeree. An offer may be express (where the offeror specifically makes his intentions known to the offeree, whether in writing or by word of month), or it may be implied from the conduct of the parties, particularly the offeror. An offer is valid only if its terms are definite, but not where they are vague. Offer and “Invitation to Treat”

An offer, as defined above, must be distinguished from an invitation to treat, The latter is merely an invitation to make an offer and no contract can result from it alone. The best example is afforded by the display of goods in a shop or supermarket. According to decided cases this amounts to an invitation to treat, not an offer; it is the customer or prospective buyer who makes an offer to the shopkeeper or attendant, or cashier, by picking up the goods and expressing the desire to buy them.

Pharmaceutical Society of Great Bruam V. Boots (1953)
The defendant had a self-service store in which certain listed drugs were displayed on the shelves. It was an offence to sell such drugs unless the sale was done under the supervision of a registered pharmacist. A customer selected some of the drugs from the shelves. The defendants had placed a registered pharmacist on duty at the cash desk near the exit, but not near the shelves. The defendants were charged with the offence of selling listed drugs without the supervision of a registered pharmacist. If the sale took place when the customer picked up the drugs from the shelves, the defendants would be liable; but if the sale took place at the cash desk where the registered pharmacist was stationed, then the defendants were not liable. The court therefore had to determine where the sale took place. Held: The defendants were not liable because the display of goods on the shelves was merely an invitation to treat, not an offer; it was customer who made an offer by selecting the article and taking it to the cashier.

Fisher V. Bell (1960)
A shopkeeper displayed a flick-knife in his shop window with a price tag behind it. He was charged with the offence of offering a flick-knife for sale. The court had to determine whether the shopkeeper’s act amounted to offering the flick-knife for sale. Held (Lord Parker, CJ): “It is clear that, according to the ordinally law of contract, the display of an article with a price on it a shop window is merely an invitation to treat. It is in no sense an offer for sale the acceptance of which constitutes a contract”. Since there was no offer for sale, the shopkeeper was not liable.

Another example of an act that amounts to an invitation to treat rather than an offer is to be found in advertisements inviting tenders. The advertiser merely invites tenders for a particular purpose. It is the tenderer who, by his tender, makes an offer to the advertiser and the latter is thereby converted into an offeree; and it is upon the offeree to accept or reject a particular tender. (A tender is an offer for the supply of goods or services).

5.5.2 The Acceptance
An acceptance is an assent to the terms of an offer. It must correspond with the terms of an offer, and it is for this reason that a counter offer, cross-offer or conditional assent is not an acceptance in the legal sense of the word. An acceptance may be made in anyway that is expedient, but sometimes the offer itself may dictate the mode of acceptance. For example, the offeree may be
required to notify his acceptance in writing or to lodge it at a named place or to a named person, or to communicate it within a specified period of time, e.t.c. Generally, the prescribed mode of acceptance must be adhered to; it is only in exceptional circumstances that an equally reflective mode of acceptance may be upheld. An acceptance may be express (where the offeree directly assents to the terms of the offer), or it may be by conduct.

5.5.3 Consideration
The offer and acceptance are not enough to bring about a valid and binding contract. In the case of simple contracts, these are required to be supported by consideration, otherwise the contract is void. Specialty contracts are an exception. Why does the law insist on consideration before a valid contract can be made? The rationale behind this requirement is that the law of contract generally enforces only bargains and not bare promises for which no value is given. This follows from the fact that, the law of contract is
generally intended to promote commercial relations. These are relations which necessarily impose an element of bargain, an element without which there would be no commerce at all. Indeed, it is on this element that the whole doctrine of consideration is centered.
When we talk of bargain, what we have in mind is an exchange of relationship within the context of a money economy. This is clear from the fact that a party seeking to enforce a contract must prove that consideration has moved from him and that it consists of money or money’s worth.

Types of Consideration

  • Executory of Consideration
    The word executory is used to denote that the promised act is yet to be done. Thus A promises to sell and deliver to B sacks to charcoal in return for a price to be paid by B. Before delivery of the charcoal, A’s promise to B is in the nature of executory consideration for B’s promise to pay the price. Similarly, before payment of the price, B’s promise to A is in the nature of executory consideration for A’s promise.
  • Executed Consideration
    The word executed is used here to denote that the promised act has already been done. To take the example given above, after A has delivered the charcoal to B, A is said to have furnished executed consideration for B’s promise to pay the price. Similarly, after B has paid the price he is said to have furnished executed consideration for A’s promise to sell and deliver to him three
    sacks of charcoal.
    Under a given contract, it is possible for the consideration furnished by one of the party to be executory, while that furnished by the other party is executed. Thus, in the above example if it is agreed that A is to deliver the charcoal in a week’s time but that B is to pay the price immediately, at that stage consideration furnished by A is executor while that furnished by B is executed.
    The distinction between executory and executed consideration is particularly important while considering performance of the contract by the parties and the remedies available to the innocent party in the event of a breach of the contract by the other party. Thus where B has furnished executed consideration by paying the price but A has failed to deliver the charcoal B is said to
    have performed his part of the contract and he is entitled to recover the price from A ad also to damages from A for breach of contract; whereas if B’s consideration was merely executory but he was willing to pay the price, E would be said t be willing top perform the contract ad he would in this case be entitled to damages alone.
  • Past Consideration.
    Once negotiations are over and the parties have struck a bargain, any subsequent or fresh promise made by either party in relation to that bargain is known as past consideration. The law is that for d promise to constitute valid consideration is must have been made during the negotiations. As such ,past consideration is not valid consideration for the bargain in respect of which it is given ; it is in fact no consideration at all ands the promises(promised party ) cannot rely on it. After selling a horse to the plaintiff, the defendant promised the plaintiff in the following terms :” in consideration that the plaintiff at the request of the defendant, had bought of the defendant a certain horse, at and for a certain price, the defendant promised the plaintiff that the said horse was sound and free from vice. But the horse proved not to be “sound and free from vice” ands the plaintiff sued on the above Held: The defendant’s promise was given after the d sale and without any fresh consideration; it therefore amounted to past consideration, which the plaintiff could not rely on.
  • Sufficiency of Consideration
    Consideration need not be adequate. Freedom of contract demands that the parties must be free to make their own bargain .No court of law will concern itself with the question whether the price agreed upon is worth the goods supplied. In short, the consideration furnished by one party need not be equal or proportionate to that furnished by the other party. Thus, a creditor’s
    forbearance to sue (i.e. a promise not to sue) may be sufficient consideration for a promise given by the debtor relation to a particular debt.

Alliance Bank, Ltd. v Broom (1864)
The defendant owed plaintiff bankers # 22,000 by way of overdraft. The plaintiffs pressed the defendant for payment, as result of which the defendant promised to give security for the overdraft. The defendant failed to provide the security and on being sued pleaded that the plaintiffs had furnished no consideration for his promise. Held: There was an implicit promise of forbearance for the defendant’s promise.

But since by definition consideration indicates value, it must be real and not illusory. Thus, where a person is already legally bound (whether by contract or as a matter of public duty) to do a particular thing, a promise such as subsequently made by him to do that same thing is not consideration which, could support any agreement at all. Thus, a policeman discharging his ordinary duties furnishes no consideration for a promise made by X to pay him for protection. Similarly, a person contractually bound to sail a ship home furnishes no consideration for extra pay if all that is done by him is to discharge his contractual obligation:

5.5.4 Intention to Create a Legal Relationship
A contract apparently supported by consideration will not result in a binding contract unless it was the intention of the parties to enter into, or create legal relationship. It, for example, X, promises to take out Y for lunch and Y accepts ad patiently waits for X, there is no legally binding agreement and Y cannot sue X failure to honour his promise. It is not always easy to determine whether there was an intention to create legal relations. Where the circumstances expressly or impliedly to create such intention, obviously there will be no
binding contract. Thus, where it is provided that a particular transaction is not to give rise to any legal relationship but that is to be “binding in honour only” there is no legally binding agreement an none of the parties to the transaction may bring an action on it: Jones V. Vernons Pools, Ltd. (1938). In Rose and Frank Co.V. J. R. Cromption Brothers, Ltd. (1924) a document signed be the plaintiffs and defendants provided (inter lia): “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall nor be subject to legal jurisdiction in the law court… but it is only a define expression and record of the purpose an intention of he three parties concerned, to which they each honourably pledge themselves with the fullest confidence- based on past business with each other- that it will be carried through by each of he three parties with mutual loyalty and friendly co-operation”. It was held that the parties intention was that thee document should not be legally enforceable, and the plaintiff’s
action could not therefore be maintained

Complications arise where there is nothing on the face of the transaction to negative an intention to create legal relations. Generally there is a presumption that there was such intention, in the case of commercial agreements. This presumption is rebutted by a provision to the case of social or domestic agreements. Here, there is no presumption of an intention to create legal relations; such intention must be specifically proved, otherwise the person seeking to enforce the agreement will fail in his action:

Balfour V. Balfour (1919)
The plaintiff and defendant were husband and wife. The husband, a civil servant in Ceylon, was on leave and he had gone with his wife to England. Towards the end of the leave the wife was in bad health and had to remain in England, while the husband returned to Ceylon. The husband promised her # 30 per month for maintenance during this time. Later, when the husband defaulted, the wife sued him on his promise. Held: The husband’s promise did not give rise to legal relations and so the wife’s action could not be maintained.

Merritt V. Merritt (1970)
The plaintiff and defendant were husband and wife. Their matrimonial home was in their joint names, and was subject to a mortgage. The husband left the matrimonial home and went to live with another woman. Later it was agreed that the husband would pay the wife # 40 per month out of which she was to pay the outstanding mortgage payments. The husband signed a document stating that “In consideration of the fact that you will pay charges in connection with (the matrimonial home), until such time as the mortgage repayment has been completed, when the mortgage has been completed I will agree to transfer the property to your sole ownership”. The wife paid off the entire amount outstanding on the mortgage, but the husband refused to transfer the house into her sole name. Held: The parties had intended to create legal relations; there was therefore a binding contract which the husband had breached.
Note: Domestic agreements are not restricted to those between spouses. They extend to agreements between parent and child (see, e.g. Jones V. Padavation, (1969) and also those between persons who may not infact be relatives. “Domestic” is used here are to simply to
distinguish those agreements from those which are of a commercial nature.

5.5.5 Contractual Capacity
An essential ingredient of a valid contract is that the contracting parties must be ‘competent to contract’. Every person is competent to contract who is of the age of majority and who is of sound mind, and is not qualified from contracting by any law. Only a person who has contractual capacity be a party to a contract. This includes artificial as well as natural persons. The general rule is that any person may enter into any kind of contract. But special rules supply to the following persons:-

  1. Minors
  2. Persons of Unsound Mind and Drunken Persons
  3. Married Women
  4. Aliens or Non Citizens
  5. Corporations
  6. Co-operative Societies
  7. Trade Unions

These special rules are explained below ;

Minor’s contracts are governed by common law rules as modified by the Infants Relief Act 1874. Under the Contract Act (Cap. 23), contracts in Kenya are governed by the common law of England relating to contracts as modified (interalia) by “the general statutes in force in England on 12th August 1897. It may therefore, be said that the “Infant Relief Act 1874 applies in Kenya. A contract made by minors may be binding, voidable of void.

These are discussed as under:-

1. Binding Contracts
There are tow types of contracts which are binding on minors.

  • Contract for the Supply of Necessaries
    Certain things are regarded as “necessaries”. These are things without which the minor could hardly live; are therefore things which are essential to his maintenance. Under the Sale of Goods Act “necessaries” are defined as “goods suitable to the condition in life of a particular infant or minor, and to his actual requirements at the time of the sale and delivery”. Included here are
    things like food, clothing, and medicine. But whether a particular commodity falls within the category of necessaries depends on the circumstances of a particular case; and in particular items of luxury are excluded. Thus, while a suit may be an item of necessaries in the case of a minor who hails from a well to do family it might be an item of luxury to a peasant’s son, particularly
    where there are cheaper alternatives within a peasant’s means. Once a particular item has been placed within the category of necessaries the next question is: To what extent can the other contracting party enforce the contract on sale against the minor? Under the above Act, a minor is liable to pay a “reasonable price” for goods which are necessaries. He is not therefore necessarily
    liable for the actual or contract price, and anyone dealing with a minor should bear this in mind as he is likely to lose in case the minor defaults to payment, particularly where the goods were supplied to minor on credit. It is clear from the definition above that in reckoning whether or no t particular goods are “necessaries” account must be taken of minor’s actual requirements at the time of sale and delivery. It must therefore be proved that the minor was not sufficiently provided with goods in question at the time when they were sold and delivered to him; otherwise the goods are not necessaries and the contract cannot be enforced against the minor.

Nash v. Inman (1908)
A tailor supplied an infant with 11 fancy waistcoats, but the infant failed to pay. The infant was a university undergraduate. His father gave evidence that the infant was adequately supplied with proper clothes according to his station in life. Held: The clothes were not necessaries and the infant was not liable to pay from them. The fact that a minor has a sufficient allowance does no prevent him from contracting for necessaries on credit: Burghart v. Hall (1839). The lender is still entitled to a reasonable price for the necessaries supplied by him. Where a minor gets a loan o buy necessaries, the lender may recover his loan under the doctrine of subrogation, i.e. he does not recover in his own right as lender but instead he stands in the place of the person who supplied the necessaries and it is only in this latter capacity that he may recover the money. However, he will only be able to recover the money to the extent that it has
been used to buy necessaries and only to the extent of a reasonable price for the necessaries. Besides goods, certain services and expenses are also considered to be necessaries. Examples includes lodging, legal advice, and funeral expenses for the infant.

  • Beneficial Contracts of Service
    Besides contracts for the supply of necessaries, minor is bound by a contract of service whose nature is such that, considered as a whole, it is intended for his benefit:

Clements v. London and N.W. Railway Co. (18940
X, a minor, was employed by a railway company as a porter. He joined the company’s insurance scheme and agreed to relinquish his statutory right of suing for personal injury under the Employers Liability Act 1880. Though the Scheme fixed a lower scale of compensation, its terms were generally more favourable than those embodied in the Act; the Scheme covered more accidents in respect of which compensation was payable. Held: The agreement was generally for the benefit of X and it was therefore binding on him.

De Francesco V. Barnum (1890)
X, a minor of 14 years, joined the plaintiff as an apprentice in order that she might be taught stage dancing. The apprenticeship was to an agreed sum per night, that she would not marry and that she would not accept any other professional engagement without the plaintiff’s permission. The plaintiff was not bound to engage X or to maintain her while unemployed; the amount payable for X’s services was a trifling sum and moreover, the plaintiff was at liberty to terminate the contract in the event of X being found unfit for stage dancing. Held: The agreement as a whole was unreasonable and completely put X at the mercy of the plaintiff; it was not beneficial to X and was therefore not binding on her. Thus, whether a particular contract is beneficial to a minor and hence binding on him depends on the circumstances of the case. It is binding only when, considered as a whole, it appears to be advantageous or beneficial to the minor. But where the other party to the contract has more to gain from the minor, the contract and his own interests under the contract outweigh those of the minor, the contract will not be considered as being beneficial to the minor and consequently the minor will be bound by it. Certain contracts can never be enforced against a minor, however beneficial they may be to him.
This is particularly so in the case of trading contract. A minor is never by such contracts:

Cowern V. Nield (1912)
X, a minor, set himself up in business as a hay and straw dealer, Y paid for consignment of hay, which X failed to deliver. Y sued X for the price. Held: Being a minor, X was not bound by the contract entered into with Y, since it was a trading; accordingly X was not liable to repay the price to Y.
According to the above case, beneficial contact entered into with a minor is binding on him only if it is either a contract of service or of apprentices, or something close to this. Thus, in Doyle’s Case given above, the contract in question was held to be very closely connected with a contract since it was designed to develop the minor’s skill as a boxer.

2. Voidable Contracts
Voidable contracts, as far as minors are concerned, are those contracts which a minor is entitled to repudiate either during minority or within a reasonable time after attaining majority age. Apart from the minor’s option to repudiate, a voidable contract is similar to a binding one in that in either case the contract must be beneficial to the minor. But in the case of voidable contracts, the subject matter is generally of a permanent nature and the obligations created by the contract are of a continuous nature. The most outstanding examples are: leases agreements (by which the minor acquires an interest in land); contracts for the purchase of shares (by which the minor in a limited company); and contracts of partnership 9by which the minor becomes a partner in a firm). Like any other voidable contract, a minor’s viodable contract remains binding on him until it is duly terminated by him. He must take timely action to avoid the contract, otherwise he will be bound by its terms:-

Davies V. Beynon- Harris (1931)
X, an infant, leased a flat from the plaintiff two weeks before attaining majority age. Three years later, his rent was in arrears and the plaintiff sued him. Held: X had failed to avoid the lease within a reasonable time after attaining majority age and it was now too late to do so; consequently, he was liable to pay the arrears of rent.

3. Void Contracts
Under section 1 of the Infants Relief Act 1874, the following contracts entered into with minors are declared to be absolutely void:-

  • Contracts for the repayment of money lent or to be lent (i.e. loan contracts).
  • Contracts for goods supplied or to be supplied other than necessaries;
  • All accounts stated (or “settled accounts”).
    None of these three types of contract can be enforced against a minor.

Smith V. King (1892)
X, a minor was indebted to Y, who were stock brokers. After X had attained majority age, Y sued him for the debt. Y then accepted two bills of # 50 each in full settlement of the debt. Y later brought an action against X based on the bills. The acceptance by Y of the two bills amounted to a ratification of a debt contracted by him during minority; such ratification was void under the Infant Relief Act 1874 and X was no therefore liable on the bills.

Valentini V. Canali (1889)
X, a minor leased the defendant’s house and agreed to pay #102 for the furniture which was in the house by way of purchase. He effected a down- payment of #68 on the furniture. He then occupied the house and used the furniture for some months, after which he repudiated the lease. He then sought to recover the # 68 from the defendant. Held: X was not liable to pay the balance on the #102; but since he had used the furniture for some months there was no total failure of consideration and accordingly he could not recover the #68.

R. Leslie, Ltd. V. Sheill (1914)
X, a minor, fraudulently told the plaintiff that he (X) was of majority age, thereby inducing the plaintiff to lead him @ 400. X for fraudulent misrepresentation or, alternatively, for money. Held: The contract was absolutely void under the Infants Relief Act 1874; X was not liable to repay the money as the alternative claim against him was an indirect way of enforcing the void contract. Note: Since a loan contract involving a minor is void, a guarantee of such contract is equally void: Coutts & Co. V. Browne- Lecky (1947).

4. Persons of Unsound Mind and Drunken Persons
A contract made with a person of unsound mind (PUM) is binding on him only if it was during a lucid interval, i.e. an interval during which he is sane. For this purpose, it is immaterial that the other party may have been aware of the PUM’s mental capacity. Apart form this, a contract that is entered into a PUM with a person who knows him to be mentally incapacitated, is voidable at he instance of PUM. However, where the PUM has obtained necessaries under the contract, he is, like a minor, liable to pay a reasonable price for the Sale of Goods Act. As for a drunken person, his contractual capacity is generally the same as that of a PUM. If the drunkenness is, to the knowledge of the other party, such as to render him incapable of appreciating his acts, a contract entered into in these circumstances is voidable at the instance of the drunken person upon sobering up. But like a minor and PUM, he is liable to pay reasonable price for necessaries: Sale of Goods Act.

5. Married Women
At common law a married woman could not enter into a contract. But under the Law Reform (Married Women and Tortfeasors) Act, 1935, the married women can sue and be sued in contract in the same way as single women.

6. Aliens or Non-Citizens
Alien, i.e. a person who is not citizen of Kenya, can sue and be sued. Any enemy alien, i.e. a person resident in a country which is at war with Kenya, cannot sue, but if sued can defend an action.

7. Corporations
In the case of corporation, its contractual capacity is limited by the provisions of is Memorandum of Association. It can only enter into those contracts authorized by the Memorandum; any other contract is ultra vires and cannot be entered into by the corporation. In case of a statutory corporation, it can only do those things which are expressly or impliedly authorized by statute. Any contracts entered into those which are not authorized by statute are “ultra vires” and therefore, void.

8. Co-operative Societies
A co-operative society registered under the Co-operative Societies Act (Cap 490) can enter into Contracts, and be sued in accordance with the provisions of the Act.

9. Trade Unions
Section 25 (1) of the Trade Unions Act (Cap. 233) provides:
“Every trade union shall be liable on any contract entered into by it or by an agent acting on its behalf: provided that a trade union shall not be liable on any contract which is void or unenforceable at law”. A registered trade union may sue and be sued and be prosecuted under its registered name.

5.6 Terms of Contract
In the course of negotiations, a number of statements may be made by each of parties. Some of these eventually form part of the contract, while others are left out. Statements which form part of the contract are known as terms of the contract. Those which are made in the course of negotiations but are ultimately left out of the contract are called representations. A representation is a statement that is not within the contract. If it turns out to be a false representation, either fraudulently or innocently made, it is called a misrepresentation. If the statement is within the contract then there is a further problem of deciding whether it is a classified as express and implied terms.

The terms of a contract are as follows;
The rights and obligations of the parties to a contract depend on the terms of the contract, not on mere presentations. It is therefore always important to determine whether a particular statement is a term or a presentation:

Oscar Chess, Ltd. V. Williams (1957)
The defendant offered the plaintiffs a second-hand Morris as part of the consideration for a hire purchase contract. The registration book of the Morris stated that the car was a 1948 model, and this was confirmed by the defendant in good faith. But it turned out later that the car was in fact a 1939 model, which should have been valued at lower figure. The plaintiffs who were car dealers sued the defendant for the difference in value. The court had to determine whether his statement as to the age of the car was a term of the contract or a mere representation.

Held: The statement as to the age of the car was not a term of the contract but a mere representation. The plaintiffs were not therefore entitled to recover the difference in value.

Dick Bentley Productions, Ltd. V. Harold Smith Motors Ltd. (1965)
The defendants sold a Bentley car to the plaintiffs, stating that the car had done only 20,000 miles from the time it was fitted with a replacement engine and gearbox. This statement turned out to be false, the car proved unsatisfactory and the plaintiffs sued. The court had to determine whether the defendant’s statement as to mileage was to term of the contract or a mere representation.

Held: The statement as to mileage was a term of the contract; and the plaintiffs were entitles to damages for breach of contract.

Looking at the above decisions together, it is clear that it is not always easy to determine whether a particular statement is a term or a mere representation. Generally a statement made by a person possessed of special knowledge or skill is treated seriously, to the extent of being considered a term of the contract; while a statement made by a person not position and will usually be regard as a mere representation. Thus, in Oscar Chess, Ltd. V. Williams the purchasers of the car (the plaintiffs) were themselves car dealers and as such were in a position to ascertain the age of the car independently of any statement made by the defendant.

As car dealers they were possessed of some special knowledge or skill; the defendant’s statement would not therefore mean much to them and it was rightly held to be mere representation. On the other hand, in Dick Bentley Case, the defendants had been in possession of the car and were on a better position, compared to the plaintiffs, to tell the mileage which had been done by the car;
their statement therefore had to be a term of the contract. Besides the state of knowledge or skill of the respective parties, the question whether a particular statement is a term or a mere representation may be determined in another way. Where the parties make an oral agreement, which is subsequently reduced to writing, only those statements which are incorporated in the written agreement will be regarded as terms of the contract, while the oral statements left out of he noted, however, that much depends on the peculiar circumstances each case and no hard and fast rule can be laid down.

Express and Implied Terms
Parties to a contract are free to make their own bargain under the banner of “freedom of contract” They may therefore agree on any terms, as long as these are covered by law. But standard form contracts are in exception. In this type of contract, one of the parties virtually dictates all the terms of the contract, which are contained in a special document presented to the other party for signature- e.g. insurance contracts.

Express terms are those which are specifically (or expressly) agreed upon by the parties, whether orally, in writing, or partly orally and partly in writing. In the absence of specific (or express) agreement on my matter in a particular contract, certain terms may be treated by law as governing the matter in question. These are known as implied terms. Terms may be implied in a contract by statute (e.g. the Sale of Goods Act implied certain terms in every contract of sales of goods); by custom (e.g. trade customs); or by court (e.g. in
contracts of employment in master/servant relationship). Sometimes, an implied term is excluded in the express terms of the contract.

Conditions and Warranties
Not all terms of a contract carry the same weight. Some are important than the others. Those which are regarded as major terms of the contract are known as conditions, while those which are minor or of less consequence are called warranties. The distinction between conditions and warranties is best illustrated by the effect which a breach of each one of them has on the contract. In a contract of sale of goods, for example, a breach of condition by one party entitles the other (innocent) party to treat himself as discharged from his obligations under the contract, while a breach of warranty by one party only entitles the other (injured) party to damages, but not to as
right to regard himself discharge from his obligations under the contract. Both conditions and warranties may be express or implied. But conditions are further subdivided into condition precedent and condition subsequent.

A condition precedent is one which must be satisfied before a contract can become effective or operational: until such condition is satisfied the existence or operation of the contract is suspended and none of the parties has any enforceable right in the meantime:

Pym V. Campbell (1856)
The plaintiff and defendant entered into a written agreement under which the defendant agreed to buy a share in the plaintiff’s invention. But it was understood that the agreement was subject to an approval of the invention by X, an engineer. X later disapproved the invention and the defendant refused to proceed with the agreement. The plaintiff sued. Held: In the absence of X’s approval there was no effective agreement and the plaintiff’s action could not therefore be maintained.

Again, if A enters into a contract with B is to construct a number of residential houses for A, and A is required to obtain permission from the City Council before the construction work can commence, out the obligation imposed on B by the contract. A condition subsequent, on the other hand, is a condition whose occurrence may affect he rights of the parties under a contract which is already in operation. For instance, where there is a provision hat a contract is to remain valid until a stated event occurs, the occurrence of the event is a condition subsequent which terminates the contract.

5.7 Is an illiterate person protected by law?
The answer is yes, and the relevant protection is to be found in the illiterates Protection Act. The Act defines an illiterate as “a person who is unable to read and understand the script or language in which the document is written or printed as the case may be”. The document must be read over and explained to the illiterate in a language he understands; after this the illiterate, if he is satisfied, appends his mark to it in the presence of a witness whose true and full name and address must be stated; and after the illiterate has appended his mark his name must be written on the document by the witness. Similarly, any person who writes such document must give his true and full name and address. In either case, there is a presumption that the instructions of the illiterates have been complied with and that the document was read over and explained to him .The burden is on the illiterate to rebut this presumption. He should, for instance, insist on the document being read over to him, other wise he will be bound by it.

5.8 Vitiating Elements or Factors
A contract supported by consideration, in which there is an intention to enter into legal effect where if is affected by a vitiating factor. A vitiating factor (or element) is one which tends to affect the validity of the contract. The vitiating elements consist of:-

  1. Mistake
  2. Misrepresentation
  3. Duress (or Coercion)
  4. Undue Influence
  5. Illegality

These are explained below

1. Mistake
Mistake may be defined as an erroneous belief concerning something. It may be of two kinds:

  • Mistake of law
  • Mistake of fact

Mistake of law
Mistake of law may be further classified as;

  1. Mistake of general law of the country,
  2. Mistake of foreign law
  3. Mistake of private rights of a party relating to property and goods.

A mistake of law can never be pleaded as a defence. But mistake of foreign law and mistake of private rights may be treated as mistake of fact.

Mistake of fact
A mistake of fact is also known as an operative mistake. Under common law an operative mistake renders a contract void ab initio, ie. where an operative mistake is proved the legal position is that the parties are in the same position as if the contract was never entered into; the contract was void, right from the beginning The traditional approach is to divide mistakes into three distinct categories: common mistake, mutual, and unilateral mistake.

These are explained below:-

Common Mistake
A common mistake is made where both parties assume a particular state of affairs, whereas the reality is the other way round. Both parties therefore make exactly the same mistake. A contract entered into as a result of common mistake is a nullity (or null and void) at common law:

Conturier V. Hastie (1853)
A contract was entered into for the sale of goods which at the time of the contract were supposed to be in transit aboard a certain ship.
None of the parties knew that the goods had deteriorated and that by the time of the contract they had in fact been disposed of already by the master of the ship. Held: Both parties had contemplated that the goods were in existence at the time of the contract; ad since the goods were not actually in existence at that time, the contract was void and the buyer was not liable to
pay the price.

Mutual Mistake
Mutual to a particular matter, one party may assume a totally different thing, so that the other party assumes a totally different thing, so that they both misunderstand one another. They are then said to have made a mutual mistake. The mistake is different for each party, exactly the same mistake. A contract made under mutual mistake may not be a nullity, depending on the circumstance of the case (compare common mistake where the contract is automatically nullity):

Scott V. Littledole (1858)
In a contract of sale of goods by sample, the plaintiff bought from the defendants 100 chests of tea, which were then lying in a specified place. The plaintiff thought he was buying the tea contained in the 100 chests, but the defendants thought they were selling to the plaintiff only tea of the same quality as the samples. The tea in the chests turned out to be of a higher quality than the samples submitted to the defendants and the defendant refused to deliver it to the plaintiff.

Held: There was a valid contract between the plaintiff and defendant, and the defendant was liable to deliver the 100 chests.
Note: The above case is sometimes cited as authority for saying that mistake as to quality is not an operative mistake.

Unilateral Mistake
If one of the parties to a contract, and the other parties aware of this fact, there is said to e a unilateral mistake (compare mutual mistake where one party’s mistake is not known to the party). Instances of unilateral mistake is not common in fraud cases where one party misrepresents his identity to the other, thereby inducing the other party into contracting with him in the false belief that he is contracting the person whose identity has been given.

2. Misrepresentation
At representation means a statement of fact made by one party to the other, either before or at the time of contract, relating to some matter essential to the formation of the contract, with an intention to induce the other party to enter into contract, with an intention to induce the other party to enter into the contract. It may be expressed by spoken or written or implied from the acts or conducts of the parties) e.g. non-disclosure of a fact). A representation when wrongly made, either innocently or intentionally, is termed as a
misrepresentation. To put in differently, misrepresentation may be either innocent or intentional or deliberate with intent to deceive the other party. In law, for the former kind, the term ‘Misrepresentation’ and for the latter the term “fraud” is used.

Types of Misrepresentation
There are three types of misrepresentation. These are:-

1. Fraudulent Misrepresentation
A fraudulent misrepresentation is a statement made without honest belief in its truth or recklessly without caring whether it is true or not. This type of misrepresentation therefore requires proof of fraud or dishonest; and once proved it is actionable at common law.

2. Negligent Misrepresentation
An innocent is one made honestly or without fault on the part of the representor. This type if misrepresentation is not actionable at common law, and the representee has no remedy at all.

Remedies for Misrepresentation
Misrepresentation renders a contract voidable at the instance of the representee (the innocent party). Consequently, the remedy of rescission is available to him. Besides, he is also entitled to damages for loss that may have been suffered by him as result of the misrepresentation.

3. Duress
Duress refers to actual violence or threats violence calculated to produce fear in the mind of the person threatened. The requirement of agreement in the establishment of a contractual relationship presupposes that each of the parties is free contracting agent. But the freedom of the party subjected to duress (or coercion) is obviously restricted. Duress as such, is a vitiating factor which is actionable at common law (and is sometimes referred to as legal duress). For a threat to amount to duress, it must be a threat to the person, not to goods. It must also relate to an unlawful thing; a threat to do a lawful thing is immaterial, subject only to the requirements of public policy. Also, the threat must have induced the threatened party to enter into the contract. The dominant view is that contract entered into under duress (or coercion) is voidable at the instance of the party coerced.

4. Undue Influence
“A contract is said to be induced be undue influence where, (i) the relations subsisting between the parties are such that one of the parties is in a position dominate the will of the other, and ii) he uses the position to obtain an unfair advantage over the other”.
Undue influence is another factor which tends to restrict the freedom of a party in entering into a particular contract. It is based on the equitable principle that no person may take an unfair advantage of the inequalities between him and another party so as to force an agreement on the other party.

A person who seeks to rely on undue influence as a defence must prove that the other party has in fact influence over him and that he would not otherwise have entered into the contract. But where a confidential (or fiduciary) relationship exists between the parties, undue influence is presumed, and the burden is shifted on to the other party to prove hat there has been no undue influence on his part. The following are relations in which undue influence is presumed:-
1. Parent and Child
2. Doctor and Patient
3. Trustee and Beneficiary
4. Advocate and Client
5. Guardian and Ward
6. Religious Adviser and Disciple
It should be noted that Husband/Wife relationships do not raise the presumption of undue influence; undue influence must in this case be specifically proved by the party seeking to rely on it. Where undue influence is sufficiently proved to have existed at the time of the contract, the contract is voidable at the instance of the party unduly influenced and may on this ground be set aside.

Williams V. Bayley (1866)
Like any other voidable contract, a contract entered into under undue influence cannot be set aside where its subject-matter has come into hands of a bona fide purchaser, where it has been subsequently affirmed, if there has been undue delay on the party entitled to avoid the contract.

5. Illegality
An illegality contract is one which is prohibited by law e.g. making a contract to break into a house to steel goods is an illegal contract.
Besides statute, there are certain contracts which are prohibited by, and therefore illegal at common law. These are contracts which offend against public policy, i.e. those which are prejudicial to public morality and public well-being. They are as follows:-
1. Contracts to commit a crime, tort or fraud;
2. Contracts that are prejudicial to the administration of justice;
3. Contracts liable to corrupt public life;
4. Contracts that are prejudicial to public safety;
5. Contracts to defraud the revenue;
6. Contracts that are sexually immoral;
7. Contracts that are prejudicial to the country’s foreign relations.

5.9 Discharge Of Contract
A contract is said to be discharged (or terminated) when the parties to it are freed from their mutual obligations. In other words, when the rights and obligations arising out of a contract are distinguished, the contract is said to be discharged or terminated. A contract may discharge in any of the following ways:-

  1. Discharge by performance
  2. Discharge by Agreement
  3. Discharge by Frustration
  4. Discharge by Breach
  5. Discharge by Operation of Law

1. Discharge by Performance
When a contract is duly performed by both the parties, the contract comes to happy ending and nothing more remains. The contract, such a case, is discharged or terminated by due performance. But if one party performs his promise, he alone is discharged. Such a party gets a right of action against the other party who is guilty of breach. Performance of a contract is the principal and most usual mode of discharge of a contract. Performance may be: (1) Actual performance; or (2) Attempted performance or Tender.

1. Actual performance
When each party to a contract fulfils his obligation arising under the contract within the time and in the manner prescribed an amounts to actual performance of the contract and the contract comes to an end or stands discharged
2. Attempted performance or tender
When the promisor offers to perform his obligation under the contract, but is unable to do so because the promise does not accept the performance, it is called “attempted performance or tender”. Thus “tender” is not actual performance but is only at “offer to perform” the obligation under the contract. A valid tender of performance is equivalent to performance. For performance to discharge a contract, the general rule is that it must be precise and exact. Circumstances do exist, however, n which a partial performance by one party may not entitle the other party to consider himself as discharged, e.g. in cases of substantial performance or of divisible contracts like those in which delivery of goods is to be done in installments: in these cases the performing party is entitled to payment for what has been done by him under the contract.

The effect of refusal to accept a properly made ‘offer of performance’ is that the contract is deemed to have been performed by the promisor i.e. tenderer and the promise can be sued for breach contract. A valid tender, thus, discharges contract. However, tender of money does not discharge the contract. The money will have to be paid even after refusal of tender.

2. Discharge by Agreement
Where a contract is still executory, i.e. where each of the parties is yet to perform his contractual obligation, the parties may mutually agree to release each other from their contractual obligation: each party’s promise to release the other is consideration for the other party’s promise to release him. Where one party has fully performed his part of the contract, he may agree to release the other
party from his contractual obligation. In this case, however, the discharge is effective only if made under seal or where the party being discharged has furnished consideration for it; otherwise the party giving the discharge will not be bound and the other party remains liable .A unilateral discharge, supported by valuable consideration, is known as an Accord and Satisfaction. “The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative’

3. Discharge by Frustration
A contract is said to be frustrated if an event occurs which brings its further fulfillment to an abrupt end; and upon the occurrence of the frustrating event the contract is immediately terminated and the parties discharged. But the doctrine of frustration only relates to the future. This means that the parties are discharged from their future obligation under the contract but remain liable for whatever rights that may have accrued before the frustration. Thus, goods supplied or services rendered before the frustration must be paid for, although the parties are both excused from further performance of the contract. Parties to a contract are under a duty to fulfill their respective obligations created by the contract. The fact that an event or events may subsequently occur, introducing hardships or difficulties in the performance of the contract is not in itself sufficient to discharge the contract: It is difficult to determine the frustrating events. Some examples of frustrating events are given below:-

1. Destruction of subject Matter
“In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing excuse the performance”. This statement of law was made by Blackburn J. in the case given below:-

Taylor V. Caldwell (1862)
A let a music-hall to B in order that B might use it for holding concerts on specified days. Before the concerts could be held the music- hall was accidentally destroyed by fire. B sued A for breach of contract. Held: The destruction of the music-hall had frustrated the contract and B’s action could not be maintained.

2. Death or Incapacity
Just as the destruction of the subject-matter of the contract terminates it, the death or serious indisposition of a party whose personal services were contemplated by the contract will similarly terminate it. Thus, if A, a doctor, contracts to care for all my medical needs, his death is a frustrating event which automatically terminates the contract. Again, if A contracts to stage a series of shows during the months of June-September but is in May sentenced to imprisonment for one year, or becomes insane permanently or for a substantial part of the period in question, the contract will similarly be discharged by frustration- the frustrating event being constituted by
the imprisonment or insanity.

3. Frustration of Common Venture
Where both parties contemplate a particular object as forming the basis of their contract, such object constitutes their common venture. The law is that if the common venture subsequently becomes incapable of fulfillment the contract is frustrated:

Krall V. Henry (1903)
The plaintiff agreed to let a room to the defendant for the day when Edward VII was to be crowned. Though not spelt out in the agreement itself, both parties understood that the purpose of the letting was to enable the defendant view the coronation process. The King subsequently became ill and the coronation was cancelled. Held: The cancellation of the coronation discharged both parties from their contractual obligation, because the process was the foundation of the contract and its cancellation meant that the substantial purpose of the contract could no longer be achieved.

4. Discharge by Breach
Breach of contract by a party thereto is also a method of discharge of a contract, because “Breach” also brings to an end the obligations created by a contract on the part of each of the parties. Of course the aggrieved party i.e. the party not at fault can sue for damages for breach of contract as per law; but the contract as such stands terminated.

A breach of contract may take place when a party:

  1. Repudiates his liability before performance is due.
  2. Disables himself from performing his promise.
  3. Fails to perform his obligations.

5. Discharge by Operation Of Law
A contract may be discharged by operation of law in certain cases. Some important instances are as under:-

  • Lapse of Time
    If a contract is made for a specific period then after the expiry of that period the contract is discharged e.g. partnership deed, employment contract e.t.c.
  • Death
    The death of either party to a contract discharges the contract where personal services are involved.
  • Substitution
    If a contract is substituted with another contract then the first contract is discharged.
  • Bankruptcy
    When a person becomes bankrupt, all his rights and obligations pass to his trustee in bankruptcy. But a trustee is not liable on contracts of personal services to be rendered by the bankrupt.

5.10 Remedies for Breach of Contract
Whenever there is a breach of contract, the injured party becomes entitled for some remedies.
These remedies are:-

  1. Damages
  2. Quantums Meruit
  3. Specific Performance
  4. Injunction
  5. Rescission

These are explained below
1. Damages
Damages are a monetary compensation allowed to the injured party of the loss or injury suffered by him as a result of the breach of contract. The fundamental principle underlying damages is not punishment but compensation. By awarding damages the court aims to put the injured party into the position in which he would have been, had there been performance and not breach, and not to punish the defaulter party. As a general rule, “Compensation must be commensurate with the injury or loss sustained, arising naturally from the breach”. “If actual loss is not proved, no damages will be awarded”. The damages recoverable for breach of contract are governed by the rule in Hadley V. Baxendale (1894) which is as follows:-

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be, either such as may fairly and reasonably be considered arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the possible result of the reach of it”. This is the general rule. The plaintiff can only recover for loss arising naturally from the defendant’s breach or for such loss as was in the contemplation of both parties at the time when the contract was made. In this way, it is sought to do justice to both parties. In fact the above case goes on to explain that where a contract is made under special circumstances it is the duty of the party seeking to rely on those special circumstances to communicate them to the other party; and in the absence of such communication any loss arising from the special circumstances
is not recoverable:

Hadley V. Baxendale (1854)
A miller sent a broken crankshaft by a carrier to deliver to an engineer for copying and to make a new one. The miller informed the carrier that the matter was urgent and that there should be no delay. The carrier accepted the consignment on those terms. The miller did not inform the carrier that the mill would be idle and unable to work. The carrier had no reason to believe that the delayed delivery of the crankshaft was an essential mechanism of the mill. The carrier delayed delivery of the crankshaft to the engineer; and as a consequence, the mill was idle for longer than it need have been.

Held: that the carrier was not liable for the loss of profits during the period of the delay.

The Heron II (1969)
The defendant’s ship, the Heron II, was chartered by the plaintiff to carry sugar from Constanza to Basrah, and the ship was to take an agreed route. But the defendant deviated and took a longer route and as a result delivery of the sugar was delayed by 9 days. In the meantime the market price of sugar had fallen and the plaintiff lost a profit of # 4,000. Held: The loss of profits was recoverable by the plaintiff, because fluctuations in market prices are in the normal course of things and the loss suffered by the plaintiff must have been in the contemplation of both parties as a probable result of a breach of the contract.

2. Quantum Meruit
The third remedy for a breach of contract available to an injured party against the guilty party is to file a suit upon quantum meruit. The phrase quantum meruit literally means “as much as is earned” or “in proportion to the work done”. This remedy may be availed of either without claiming damages (i.e. claiming reasonable compensation only for the work done) or in addition to claiming damages for breach (i.e. claiming reasonable compensation for part performance and damages for the remaining unperformed part).
The aggrieved party may file a suit upon quantum meruit and may claim payment in proportion to work done or goods supplied.

The court must then determine a reasonable sum to be paid for those goods or services; and the plaintiffs is said to have brought his suit on a quantum meruit. In the case of contracts for the sale of goods, this remedy has been codified by the Sale of Goods Act. It provides; “where the price is not determined, the buyer must pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case”. The plaintiff may also sue on a quantum meruit where the original contract has been replaced by a new one and work has been done by him under the new one. As Lord Atkin has said: “If I order from a wine
merchant twelve bottles of whisky and two of brandy, and i accept them i must pay a reasonable price for the brandy”: Steven V. Bromley & Son (1919). A claim under quantum meruit sum does not apply, however, where the contract requires complete performance as a condition of payment e.g. a contract to do one piece of work in its entirety in consideration for lump-sum payment.

Sumpter V. Hedges (1898)
S agreed to build a house for a certain sum on H’s land. When the house was half finished S ran out of money and could not complete. H refused payment, and S brought an action on a quantum meruit for the value of materials used and the labour he had expended. Held: that the claim must fail. The contract was to do certain work for a lump sum which was not payable until completion. H had no choice but to accept the work.

3. Specific Performance
This is an equitable remedy. Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances an aggrieved party may file a suit for specific performance, i.e. for a decree by the court directing the defendant to actually perform the promise that he has made. A decree for specific performance is not granted for contracts of all types. It is only where it is just and equitable so to do i.e. where the legal remedy is inadequate or defective, that the courts issue a decree for specific performance.

Specific performance is not granted as a rule, in the following cases:-

  1. Where monetary compensation is an adequate relief. Thus the courts refuse specific performance of a contract to lend or to borrow money or where the contract is for the sale of goods easily procurable elsewhere.
  2. Where the court cannot supervise the actual execution of the contract, e.g. a building construction contract. Moreover, in most cases damages afford an adequate remedy.
  3. Where the contract is for personal services, e.g. a contract to marry or to paint a picture. In such contracts “injunction” (i.e. an order which forbids the defendant to perform a like personal service for other persons) is granted in place of specific performance.
  4. Where one of the parties to the agreement does not possess competency to contract and hence cannot be sued for breach of contract. Thus a minor cannot succeed in an action for specific performance.

4. Injunction
“Injunction” is an order of a court restraining a person from doing a particular act. It is a mode of securing the specific performance of the negative terms of the contract. To put it differently, where a party is in breach of negative term of the contract (i.e. where he is doing something which he promised not to do), the court may, by issuing an injunction, restrains him from doing, what he promised not to do. Thus “injunction” is a preventive relief. It is particularly appropriate in cases of “anticipatory breach of contract” where damages would not be an adequate relief.

Illustration: A agreed to sing at B’s theatre for three months from 1st April and to sing for no one else during that period. Subsequently, she contracted to sing at C’s theatre and refused to sing at B’s theatre. On a suit by B, the court refused to order specific performance of her positive engagement to sing at the plaintiff’s theatre, but granted an injunction restraining A from singing elsewhere and awarded damages to B to compensate him for the loss caused by A’s refusal (Lumley vs. Wagner).

5. Rescission
When there is a breach of contract by one party, the other party may rescind the contract and need not perform his part of obligations under the contract and may sit quietly at home if he decides not to take any legal action against the guilty party. But in case the aggrieved party intends to sue the guilty party for damages for breach of contract, he has to file a suit for decision of the contract. When the court grants rescission, the aggrieved party is freed from all his obligations under the contract; and becomes entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.

Illustration: A contracts to supply 100 kg of tea leaves for sh. 1,500 to B on 15th April. If A does not supply the tea leaves on the appointed day, B need not pay the price. B may treat the contract as rescinded and may sit quietly at home. B may also file a “suit for rescission” and claim damages.

Thus, applying to the court for “rescission of the contract” is necessary for claiming damages for breach or for availing any other remedy. In practice a “suit for rescission” is accompanied by a “suit for damages” .

Summary for the topic

  1. Essentials of a valid contract
  2. Classification of various types of contracts
  3. Formation of contract
  4. Contractual capacity
  5. Vitiating elements of contract
  6. Discharge of the contract
  7. Remedies for a breach of contract
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