CONTRACT

A contract is defined in Section 1 of the Contracts Act Cap 284 to

mean an agreement enforceable by law as defined by section 9.

Section 9 defines a contract as an agreement made with free consent of

the parties with capacity to contract, for a lawful consideration, and with a
lawful object, with the intention to be legally bound.

For a contract to be valid and legally enforceable, certain elements must

be present: offer, acceptance, intentions to create legal relations,
consideration (something of value exchanged), capacity, and
legality as highlighted by RW and Hodgins in their book, "The Law of
Contract" 1975 2nd edition.

However, even when these exist, a contract could still be nullified if the
circumstances under which it has been made are such that the parties
could not have intended to enter the contract. In other words, these are
situations where the parties have reached the agreement but the question
arises whether the existence or non-existence of some fact, or the
occurrence or non-occurrence of some event, destroys the basis upon
which that agreement was reached so that the agreement is discharged
or in some other way vitiated. These situations are therefore called
vitiating factors.

VITIATING FACTORS

According to Black's Law Dictionary 12th edition page 1744, vitiating

factors are factors that can make a contract void or voidable. This means
that these factors expose the unfairness and the invalidity of the contract.

RW and Hodgins in their book "The Law of Contract" (2nd Edition,

1975), define vitiating factors as "Factors which render a contract void or
voidable."

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Therefore, Vitiating factors refer to elements that can potentially
undermine the validity of a contract, making it void or voidable.

There are mainly 5 circumstances that may nullify or vitiate an otherwise

valid contract and these include the following;

1. Mistake
2. Misrepresentation.
3. Duress/Undue influence.
4. Illegality.
5. Frustration

MISTAKE:

According to Black Law’s Dictionary 2nd Edition Page 785, Mistake is

defined as that result of ignorance of law or fact which has misled a
person to commit that which, if he had not been in error he would have
done. A mistake by one or both parties to a contract may render the
contract void but this depends on the nature of the mistake. Indeed, the
basic rule is that a mistake does not affect the validity of a contract. The
justification for this general rule is to be found in the two major doctrines
that underlie the law of contract i.e. the doctrine of caveat emptor “Let
the buyer beware” and the doctrine of freedom of contract.

However, the courts have accepted that if a mistake is such that the
parties were not really consensus ad idem, there is no agreement.
Although this depends on the type of the mistake as explained below;

A mistake maybe one of fact or one of law.

i. Mistake of fact. Section 16(1) & (2) of the Contracts Act

Cap 284 is to the effect that “where both parties to an
agreement are under a mistake as to a matter of fact which is
essential to the agreement, consent is obtained by mistake of
fact and the agreement is void.” Hence making the contract
invalid or void, the parties to the agreement are mistaken by a

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 mere being referred to in the contract, thus misleading all
parties and invalidating/ vitiating the contract. Under Common
law, only a mistake of fact could vitiate a contract.
ii. Mistake of law, Section 17 of the Contracts Act Cap
284, is to the effect that, “where a contract is entered into by
a mistake in respect of any law in force in Uganda, the
contract is void”.

There are basically three main types of mistake:

i. Common mistake,
ii. Mutual mistake
iii. Unilateral mistake

A. COMMON MISTAKE

The Sewell & Kettle Dictionary(2006) defines Common mistake as the

circumstance where all parties are “mistaken” regarding a fundamental
matter of fact. If both parties are under the same misapprehension, it may
render the contract void at law and voidable in equity. This type of
mistake normally occurs at the initial stage of contracting and parties
enter into a contract on the basis of the facts that are believed to be true,
but however, in reality, are not.

This therefore means that when both parties to a contract share the same
mistaken belief about a fundamental fact that is essential to the
agreement, they are under a common mistake.

In the case Solle V Butcher (1950) 1 KB 671, the Landlord(D) purported to

increase rent from 140 pounds to 250 pounds however, the parties had
not abided by the legally required procedure to vary rent under the Rents
Act, as such the actual rent payable by the tenant (C) was fixed at 140
pounds under the Law. C sued for restitution of over paid rent D however,

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made a counter claim for rescission of the lease on the ground of common
mistake so as to avoid paid restitution for rent that was already paid.

Bucknill LJ held that there was a common mistake of fact regarding the
identity of the flat and its previous rent justifying rescission.

Therefore, the common mistake of fact had occurred regarding the legal
status of the rent.

However, in Great Peace Shipping Ltd V Tsavliris Salvage International Ltd

[2003] QB 679 Tsavliris Salvage sought a nearby vessel to assist the
damaged ship Cape Providence. Great Peace Shipping limited mistakenly
claimed to be 30 miles away when they were actually 400miles away.
Upon realizing the mistake and urgency of the situation Tsavliris Salvage
cancelled the contract and hired another vessel for assistance.

Great Peace Shipping sued for their contract fee from the defendants. The
defendants urged that the distance from the Cape Providence was a
common mistake and this would invalidate the contract that they had for
providing assistance.

It was held that this was not a common mistake that would void the
contract between the defendant and complainant. It was a matter of
quality of the performance of the contract. The miles did not matter and it
did not make the contract impossible to perform. A common Mistake
requires an element to make contract performance impossible and
mileage was not fundamental enough to render the contract void.

B. MUTUAL MISTAKE

Black’s Law Dictionary 9th edition defines Mutual mistake as a mistake

in which each party misunderstands the other’s intent or a mistake that is
shared and relied on by both parties.

A mutual mistake happens when both parties are mistaken about different
aspects of the contract, meaning that they are at cross purposes with
each other regarding the terms of the agreement. For example, a buyer

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wants to purchase a specific model of car with a manual transmission,
while a seller believes they are selling a car with an automatic
transmission, leading to a misunderstanding about the cars features.

A mutual mistake just like the common mistake can potentially lead to a
contract being voidable, meaning a court may allow one or both parties to
rescind the contract depending on the circumstances and jurisdiction.

Raffles v Wichelhaus (1864), The complainant, Mr Raffles, offered to

sell an amount of Surat cotton to the defendant, Mr Wichelhaus. This
Surat cotton would be brought to Liverpool by a ship from Bombay, India.
This ship was called the Peerless, but there were two ships that had this
name. The complainant and the defendant were both thinking about a
different Peerless ship when they agreed to make the sale. One of the
ships was due to leave Bombay in October, which was what the defendant
had thought for his Surat cotton delivery, but the complainant was
referring to the ship that was to leave in December. When the Surat
cotton arrived in Liverpool, Mr Wichelhaus refused to pay, as in his mind,
it was months late.

The complainant sued the defendant for breach of contract. The issue in
this case was whether there was an enforceable contract between the
parties.

It was held that the contract between the complainant and defendant was
not enforceable. When the contract was being discussed, there was
ambiguity in the Peerless and what ship was being referred to, as well as
no agreement on the terms on the sale. There had been no consensus ad
idem or meeting of the minds between the parties to form a binding
contract. The objective test made it clear that a reasonable person would
not have been able to identify with certainty what ship
had been agreed on.

Therefore, since there was no meeting of the minds due to the mutual
mistake, the contract was unenforceable.

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 C. UNILATERAL MISTAKE

This is an error which occurs when one party to a contract has an

incorrect understanding of the contract’s terms or subject matter. The
other party is aware of the mistake and may take advantage of it. For
example, a buyer believes a rare coin is genuine but it is actually fake.

Hartog v. Colin & Shields [1939] 3 All ER 566, A seller mistakenly

offered hare skins at a price per pound instead of per piece, which was a
significant pricing error. The buyer, knowing this mistake, accepted the
offer.

The court held the contract void because the buyer knew or ought to have
known of the seller’s mistake.

Therefore, a contract can be void for unilateral mistake if one party is

aware of the other’s error and takes advantage of it.

OTHER TYPES OF MISTAKES

There are other types of mistake which are as explained below;

1) MISTAKE AS TO THE IDENTITY OF SUBJECT MATTER;

Mistake as to identity of the subject matter in contract law means that
both parties to an agreement believe they are contracting about the
same thing, but are actually referring to different items or things,
essentially misunderstanding the exact nature of what they are
agreeing to buy or sell, leading to a potentially void contract due to the
lack of mutual understanding.
This is where a buyer operates on the understanding that he is buying
item A while the seller is under the belief, he is selling item B, such a
mistake may vitiate the contract if the court is convinced that it was
not unreasonable for the parties to hold the mistaken belief.
Raffles v Winchelhaus (1864) 2 Hurl & C 906 – there was sale of a
consignment of goods. The contract stated that the goods being
bought and sold respectively were those on board a ship called “The
Peers” docked in Bombay harbour. It so happened that there were two

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 ships with that name – peer 1 and Peer II. The seller had in mind Peer I
and the buyer Peer II. It was held that there was no contract.

2) MISTAKE TO THE EXISTENCE OF THE SUBJECT MATTER;

Mistake as to the existence of the subject matter in Contract law refers
to a situation where both parties to a contract are unknowingly
mistaken about whether the subject matter of the agreement actually
exists, rendering the contract void because the fundamental basis of
the deal is non-existent; this is also known as "res
extincta" in legal terms.

Couturier v Hastie (1856) 10 ER 1065 – In this case, there was a

contract for the sale of a consignment of corn. At the time of the
contract, the corn was supposed to be on a ship from Saronica to the
UK. Unknown to both parties, the corn had begun to ferment owing to
leakage and to cut losses, the shipmaster had sold it off in Tunis. It was
held that there was no contract because what the parties contemplated
was that there was an existing item to buy and sell respectively and
yet not.

3) MISTAKE AS TO OWNERSHIP

This category of fundamental mistake refers to where two parties

contract for the purchase of some kind of property, but unknown to
both of these parties, the purchaser of the property already owns the
property.

Cooper v Phipps(1867) LR 2 HL 149. An uncle told his nephew, not

intending to misrepresent anything, but being in fact in error, that he
(the uncle) was entitled to a fishery. The nephew, after the uncle’s
death, acting in the belief of the truth of what the uncle had told him,
entered into an agreement to rent the fishery from the
uncle’s daughters. However, the fishery actually belonged to the
nephew himself. The House of Lords held that the mistake was only
such as to make the contract voidable. Lord Westbury said “If parties

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 contract under a mutual mistake and misapprehension as to their
relative and respective rights, the result is that that agreement is liable
to be set aside as having proceeded upon a common mistake” on such
terms as the court thought fit to impose; and it was so set aside.

4) MISTAKE AS TO QUALITY
Mistake as to quality in Contract law refers to a situation where both
parties to a contract mistakenly believe that the subject matter of the
agreement possesses a certain quality, when in reality it does not,
potentially making the contract voidable if the mistake is considered
fundamental to the agreement; essentially, they are both wrong about
the true quality of the item being bought or sold.
Bell v Lever Bros Ltd [1932] AC 161, Mr Bell was the managing
director for five years of a company that was owned by Lever Bros Ltd.
Mr Bell had traded for personal profit during his employment, which
was contrary to his contract with the company. Without knowledge of
this, Lever Bros Ltd made an offer of redundancy to Mr Bell,
terminating his contract and offering a £30,000 payment as
compensation.
The main issue in this case was whether the redundancy contract that
was created and accepted by Mr Bell, could be void by common
mistake, due to later finding out about his personal trading. Lever Bros
Ltd argued that this concealment and misconduct was a breach of his
duty that was detailed in his employment contract.
The court held that the contract was not void, as the mistake was not
an ‘essential and integral’ part of the contract. The personal trading
that had happened during the employment was not related to the
subject matter of the contract and was said to be minor compared to
the profits Mr Bell had made for Lever Bros Ltd. Only a mistake to the
identity of the parties or of subject matter to the contract, as well as an
item’s quality, would be able to successfully negate consent and
therefore void a contract, as if it had never existed. The mistake must
be essential to the identity of the contract.

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5) MISTAKE AS TO QUANTITY OF THE SUBJECT MATTER.
Mistake as to quantity of the subject matter in contract law refers to a
situation where both parties to a contract mistakenly believe the
quantity of the good or service being bought or sold is different from
what it actually is, potentially rendering the contract void due to a
fundamental misunderstanding about the core terms of the agreement.
Leaf v International Galleries [1950] 2 KB 86, The plaintiff
purchased a picture from the defendants who represented that it was
painted by the artist, J. Constable. Five years later, the plaintiff tried to
sell the painting at an auction house and was told it had not been
painted by the artist he had been told previously. He subsequently
returned the painting to the defendant who retained it for inspection.
The plaintiff brought an action to rescind the contract as the defendant
had responded maintaining that the artist of the painting was J.
Constable, despite the information that the plaintiff had been given by
the auction house. The trial judge found in favour of the defendants,
despite explaining that they had made an innocent misrepresentation
regarding the artist of the painting, on the basis that the contract had
been executed.
There were two important issues for the court to provide a decision on.
The first was whether the plaintiff had the right to rescind the contract,
five years after agreeing on the terms with the defendant. The second
issue was whether the mistake as to the painter of the art was
fundamental enough to void the contract between the parties.
The plaintiff’s claim had failed as a significant amount of time had
lapsed between agreeing the contract and the window to rescind. The
court found that the mistake that was made regarding the painter of
the art was fundamental but it was not severe enough to make the
contract void. On this basis the plaintiff’s claim failed.

6) DOCUMENTS MISTAKENLY SIGNED.

If you sign a document by mistake, you can consult a lawyer to
determine if the document can be corrected or voided.

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 Saunders (Executrix of the Will of Rose Maud Gallie, Decd.) v
Anglia Building Society [1971] A.C. 1039, widow was induced by a
fraudster to sign her leasehold interest in her house over to him. He
then mortgaged her property to the Anglia Building Society (ABS). The
mortgage deed stipulated that any costs incurred by ABS under the
mortgage were to be paid by the mortgagee. The widow brought action
claiming the contract for a mortgage over her property with ABS was
void and that the title should return to being in her name. She
succeeded in her claim. Proceedings were funded by legal aid. The
court held that even though the mortgage deed was void, the
assignment of the title was not and that costs had been incurred by
ABS so they were at liberty to recover their costs. The widow appealed.

Whether the legal aid funding of the case affected whether the building
society could recover their incurred costs on the assignment.

It was held that the claim for costs were found not conflict the
provisions of s 2(2)(e) of the Legal Aid Act 1964. The order for costs
was not against the widow and had no bearing on her to make
payment out of the estate. The costs were found to be properly
incurred, incurred without any relevance to the actual fraud and were
reasonable. On the court’s decision, it was also found that even though
ABS were an unassisted party in the proceedings, as the appeal costs
had been incurred getting the case to its final decision, those costs
were also considered reasonable. ABS were entitled to have them paid.

7) MISTAKE AS TO POSSIBILITY OF PERFORMANCE – when the

parties at the time of the contract mutually believe that the contract is
capable of being performed whereas not, then there is no contract.
There are three categories
i. Legal impossibility – here the parties believe that the law
allows the contract whereas not. In such a case the contract is
void ab initio because a court cannot force a person to do an

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 illegal act. Amar Singh v Kulubya(1964) – this a contract
between a Muganda and an Asian whereby the Muganda was
selling land to the Asian. S.2 of the Land Transfer ordinance
provided that the contract for sale of land to a non-African
without prior ministerial consent was void. It was held that the
contract was void ab initio and it could not order even the refund
as the court would be involving itself in an illegal matter.
ii. Physical impossibility – this is where it is not practically
possible to perform the contract at the time when it is executed.
Sheikh Brothers v Ochsner (1957).
iii. Commercial impossibility – it may be legally permissible to
perform a contract and physically possible to do so but where it
is commercially senseless to do so. Both parties may be excused
from it. Griffith v Brymer (1903) – a landlord entered into a
contract with a potential tenant by which he let a room to the
tenant/defendant. Both parties fully understood that the purpose
of renting the room was to enable the defendant to view the
coronation procession of King Edward VII as it was known to be
that evening. Unknown to the parties at the time of executing the
contract, the King had fallen ill, and the coronation had already
been cancelled. It was held that although it was legally and
practically possible to perform the contract, it had been rendered
commercially sterile.

8) MISTAKE AS TO THE IDENTITY OF A CONTRACTING PARTY

The general rule is that the identity of a contracting party is immaterial

and the party to a contract may not be allowed to escape from obligations
under it by claiming that he intended to be someone else. The rationale
for this rule is that the law assumes that what the contracting party is
interested in is the content of the contract, not the person he is dealing
with. If, however, the court is convinced that the identity of the
contracting party is crucial, then it may set aside the contract. Given that
generally, identity is deemed unimportant, the burden lies on the party

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seeking to rely on identity to defeat a contract to prove that identity is
crucial. He must prove four things;

 That he intended to deal with somebody else other than the one he
dealt with.
 That the party whom he dealt with knew that he was not the one
intended to be dealt with.
 That identity was fundamental to the contract.
 That he took reasonable steps to confirm the identity of the person
he dealt with.

Cundy V Lindsay (1878) 3 App Cas 459, A rogue known as Brekern

approached the respondent and offered to buy goods on credit and signed
the order papers in such a way that his signature and particulars looked
like Blendron and Co., 37 Wood Street. The sellers had never heard of
such a company at a different address but never dealt with it. They
delivered the goods to the rogue who refused to pay. Meanwhile, he had
sold the goods to Cundy. The respondents sought to recover the goods by
suing Cundy for conversion. It was held that he never acquired a good
title.

Phillips V Brooks (1919) 2 KB 243, The respondents were jewellers. A

rogue called North visited their premises and offered to buy a diamond
ring. He misrepresented himself as Sir George Bullough. The jewellers only
knew of Sir George by reputation. They checked the postal directory and
found that Sir George lived at the address. They allowed the rogue to take
the ring and accepted the cheque. The cheque was dishonoured upon
presentation. Meanwhile, North had sold the ring to Phillips a pawnbroker.
It was held that the jewellers must have intended to deal with the person
before them, not Sir George whom they knew nothing about.ie, merely
making a directory search did not show they intended to deal with
someone else.

Ingram V Little (1961) 1 Q.B. 31, A rogue in response to an advert by

the respondents visited their residence and offered to buy their family car.

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When they hesitated to accept his cheque, he told them that he was P G
M Hutchinson and gave the address. The sisters had never heard of such a
person but one of them checked the directory and found a person of those
names lived at that address. They accepted the cheque and surrendered
the car to him. He sold the car to the defendants and disappeared. When
they presented the cheque, it was dishonoured. They then sought to
recover the car from the second buyer. It was held that the offer was
intended for the real PGM Hutchinson, therefore the rogue could not
accept it. He did not therefore acquire a good title to sell.

9) MISTAKE AS TO TERMS OF THE CONTRACT

Mistake as to terms of the contract" in contract law means that one or

both parties to a contract mistakenly believed a specific term or provision
of the agreement was different than what it actually states, which could
potentially render the contract voidable or void depending on the
circumstances and type of mistake involved.

Hartog v Colin and Shields [1939] 3 All ER 566, The defendants,

Colin and Shields, were hide merchants that were based in London. The
complainant, Hartog, was a furrier from Belgium. The defendants entered
into an oral agreement with the complainant to sell him 30,000
Argentinian hare skins and this would be at a price of 10d per skin.
However, the defendant made a mistake on their written agreement that
said they would sell the complainant 30,000 hare skins at 10d per pound.
This would mean that the price difference was one third cheaper for the
complainant than had previously been agreed. Hartog accepted this offer,
but the defendants refused to fulfil contract.

The complainant argued he suffered a loss of profit and claimed damages

when the defendant did not honour the contract. The defendant argued
that Hartog would have known that this was a mistake to the price of hare
skin and that he had fraudulently accepted the offer. The issue in this
case was whether the contract would be rescinded for the mistake to the
price of hare skin.

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It was held that there was no contract between the complainant and the
defendant. Any contract would be void by the mistake of the hare skin
price; the complainant would have known that it was normally sold per
piece and not by pound. The court said that there is a duty to correct a
mistake that is known to not be the real intention of the person making it.
You cannot simply take advantage and ‘snap up’ the offer.

EFFECT OF MISTAKE ON CONTRACT.

Once established, a mistake renders a contract void ab initio and neither

party can enforce it in court. Equity sometimes intervenes to reduce the
drastic implications of a contract being rendered void by mistake. A
mistaken party who has not acted negligently may be allowed to opt out
of the contract if he can do so without injuring the other party – Webster
v Cecil (1861) 30 BEAV 62; The defendant, having refused to sell some
property to the plaintiff for £2,000, wrote a letter in which, as the result of
a mistaken calculation, he offered to sell it for £1,250. The plaintiff
accepted but the defendant refused to complete. Romilly MR refused a
decree of specific performance.

Cooper v Phipps (1867) LR 2 HL 149. An uncle told his nephew, not

intending to misrepresent anything, but being in fact in error, that he (the
uncle) was entitled to a fishery. The nephew, after the uncle’s death,
acting in the belief of the truth of what the uncle had told him, entered
into an agreement to rent the fishery from the uncle’s daughters.
However, the fishery actually belonged to the nephew himself. The House
of Lords held that the mistake was only such as to make the
contract voidable. Lord Westbury said “If parties contract under a mutual
mistake and misapprehension as to their relative and respective rights,
the result is that that agreement is liable to be set aside as having
proceeded upon a common mistake” on such terms as the court thought
fit to impose; and it was so set aside.

REMEDIES TO MISTAKE

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In contract law, remedies for mistakes depend on whether the mistake is
mutual or unilateral and whether it affects the enforceability of the
contract. The main remedies include:

1. Rescission

a) If both parties are mistaken about a fundamental fact, the contract

may be rescinded (cancelled), restoring both parties to their pre-
contractual positions.
b) If only one party is mistaken, rescission is possible if the other party
knew or should have known about the mistake.

2. Reformation

a) If a contract does not reflect the true agreement due to a mistake, a

court may rewrite the contract to correct the error.
b) Usually applied when a mistake in writing the contract
misrepresents the intended agreement.

3. Restitution

a) If a contract is voided due to a mistake, any benefits conferred

under the contract must be returned.
b) Prevents unjust enrichment of either party.

4. Specific Performance (Limited Cases)

a) In rare cases, if a mistake does not make the contract entirely void
but affects its terms, a court may require performance with
modifications.
b) Usually applied where fairness requires enforcement under adjusted
terms.

5. Doctrine of non-Est factum,

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The doctrine of non -est factum is a legal defense that allows someone to
avoid the legal consequences of signing a contract. It's a Latin phrase that
means "it is not my deed".

MISREPRESENTATION AS A VITIATING FACTOR

Vitiating factors in contract law are elements that can invalidate or nullify
an otherwise would be valid contract.
These factors undermine the fundamental principles of contract law, such
as mutual consent, fairness, and legality. When present, they can render a
contract void or voidable, allowing the affected party to rescind the
agreement or seek remedies. One of the main vitiating factors is
misrepresentation.

Sect 1(a) of the Contracts Act, Cap. 284 defines misrepresentation to

mean a positive assertion made in a manner which is not warranted by
the information of the person who makes it, or an assertion which is not
true, though the person who makes it believes it to be.

In the case of Fred Nuwagaba v Ade Musana Kaguma (Civil Appeal

No. 42 of 2012) pg. 4, misrepresentation was defined to mean a
statement of fact made and adopted by a party to a contract and is
untrue. It may be made fraudulently, carelessly or innocently and that
where one person (the representor) makes a misrepresentation to
another (the representee) which has the object and result of inducing the
representee to enter into a contract or binding transaction with him, the
representee may generally elect to regard the contract as rescinded.

Ewan Mackendrick in his book Contract Law defined

misrepresentation as an unambiguous false statement of fact or law,
which is addressed to the party misled, which is material and induces a
contract.

Section 9(1) of the Contracts Act, Cap. 284 defines a contract to

mean an agreement made with free consent of parties with capacity to

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contract, for a lawful consideration and with a lawful object, and with the
intention to be legally bound.

Section 12(d) of the Contracts Act, Cap. 284 is to the effect that
consent of the parties is taken to be free where it is not caused by a
misrepresentation. This means that if one party enters into an agreement
based on false or misleading information provided by the other party, the
consent is not truly free leading to a misrepresentation and the contract
may be voidable.

NATURE OF MISREPRESENTATION
The nature of misrepresentation can be described as the different ways in
which a false statement or misleading representation can affect the
validity of a contract. It can also imply elements and ingredients of
misrepresentation. Not every statement made by a party to a contract will
make the other party seek relief. To amount to a misrepresentation, the
statement must exhibit the following;
1. It must be a statement of existing fact.
In contract law, a statement of existing fact refers to a representation
or assertion about something that is currently true at the time it is made.
It is distinct from statements of opinion, intention, or future promises
because it relates to an objective reality that can be verified. This means
that it must not be a statement of opinion or a statement of law. It is not
always easy to distinguish facts from opinions.
In the case of Bisset v Wilkinson [1927] AC 177;
Facts
The defendant in this matter was the purchaser of land in New Zealand
which was purchased by the claimant for sheep farming. The appeal, to
which this judgment relates, is on the defendant’s counterclaim. During
the purchase process, the claimant informed the defendant that the land
being purchased was capable of sustaining 2000 sheep. However, after
the purchase, the defendant discovered that this was only possible if very
careful land management was carried out, and that the land as it stood
could not sustain this number of sheep. The defendant therefore sought

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to rescind the contract on the basis that the claimant’s statement was a
misrepresentation.

Held
It was held that the claimant’s statement was nothing more than an
opinion as to the capacity of the land, based on the claimant’s knowledge
of farming, together with the defendant’s knowledge of the current stock.
The statement was not therefore held to be a representation. In any
event, the defendant had not been able to demonstrate that the land was
not capable of carrying the 2000 sheep that the claimant had stated, and
therefore the claimant’s appeal was allowed and the contract could not be
rescinded.

2. It must be a statement of existing fact not a promise as to

the future.
A promise to do something in the future is only binding if it is incorporated
into the contract and it must be stated now not in the future.
In the case of Edgington v Fitzmaurice (1885) 24 Ch D 459;
Facts
The directors of a business provided a prospectus that contained a range
of debentures, to invite subscriptions. The directors stated that the
debentures were to enable the business to complete alterations to the
buildings of the company, to develop trade, and to purchase vans and
horses. However, it was later discovered that the real reason for issuing
the debentures was for the directors to pay off other liabilities. The
plaintiff forwarded money for the debentures that had been offered
having relied upon the statements contained in the prospectus. However,
he also was mistaken as he thought the debenture was to provide him
with a charge on the company’s property. The company later became
insolvent and the plaintiff claimed for the money he believed he was
owed.
Held

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Court held that the misstatement of the reasoning behind issuing the
debentures was a material misstatement of fact and that the plaintiff had
been influenced by this statement. On this basis, the directors were found
liable for an action of deceit, although the plaintiff had also been
influenced by his own mistake regarding the debentures.

3. The statement must have been intended to influence the

representee
Normally this requires the representee to prove that the statement was
directed at him or at least the representor knew or ought to have known
that the representee would rely on the statement.
In the case of Peek v Gurney (1873) LR 6 (HL)37;
Facts
There was a sale of company shares to the public which was preceded by
the issue of a prospectus. The persons who bought shares on the IPO
resold their shares to the plaintiff on the secondary market. The plaintiff
made a loss and claimed based on a misrepresentation contained in the
prospectus.

Held
Court held that the statements in the prospectus were not directed at the
plaintiff but those who bought at the IPO.

4. The statement must have actually induced him to enter into

the contract.
Here court applies the “but for” test which requires the plaintiff to show
that;
a) the statement did come to his notice,
b) he believed it to be true,
c) because of the belief, he entered into the contract.
If the plaintiff knew that the statement was untrue, or if there were no
reasonable grounds to believe it, or if the representee actually did not

19
believe the statement to be true but relied on other considerations to
enter into the contract, then he cannot claim misrepresentation.

Silence as Misrepresentation
The basic rule is that silence does not amount to misrepresentation
because a contracting party has no legal obligation to volunteer the facts
within his knowledge and therefore, a person can’t be held liable for
remaining silent. Under the law, no person has the obligation to speak.
However, there are exceptions whereby silence may amount to
misrepresentation i.e.
a. Where the contract in question is a contract founded on
utmost good faith (uberimma fides)
This is a contract where all the material facts are in the possession
of one party and cannot be easily accessed by the other. The party
having knowledge of these facts has the duty to disclose to the
other. Material facts are those which a party needs to determine
whether to enter a contract and on what terms

b. Where there exists a fiduciary or special or professional

relationship
A fiduciary relationship is one founded on trust, normally where the
parties are of unequal power such that the weaker party has put
herself in the hands of the stronger party. e.g. family arrangements.

In the case of Gordon v Gordon TT 1976 HC 53;

Facts
A distribution of the property of a deceased man was based on the
assumption that the first son was illegitimate. 19 years later, it was
discovered that at the time of the distribution, the younger son
knew that the parents had entered into a private marriage
ceremony before the birth of the elder son with the effect that he
was legitimate and entitled to a substantial share.

Held

20
 The distribution was set aside because the younger son had
breached his fiduciary duty. Others include advocate/client,
parent/child, trustee/beneficiary, fiancé/fiancée, BUT not husband or
wife.

c. Where silence distorts a positive assertion already made.

When in the course of negotiating a contract, a party asserts facts
that are at that time correct, but before the contract is concluded
the facts change substantially, he must disclose the new state of
affairs and will be held liable for misrepresentation by silence if he
does not.

In the case of With v O’Flanagan [1936] Ch 575;

Facts
The claimant entered into negotiations with the defendant for the
purchase of the defendant’s medical practice. During the
negotiations, the defendant represented to the claimant that the
practice took in around £2,000 per year. The defendant signed the
contract for the purchase some five months later, but by this date,
the practice had declined significantly as a result of the ill health of
the defendant. When the claimant took possession of the practice, it
was discovered that it was now almost non-existent. The claimant
sought to rescind the contract on the basis that the representation
as to the income had been a misrepresentation. At first instance, it
was held that the representation was, at the time it was made,
accurate and therefore, because this meant that the claimant could
not demonstrate that the representation was untrue, the claim must
fail. The defendant appealed.

Held
Court of Appeal reversed the decision at first instance. It was held
that the representation made by the defendant was intended to
induce the claimant to enter into the contract and therefore would
be considered ongoing until the contract was signed. This meant
that at the time that the contract was signed, the representation

21
 was untrue. The defendant ought to have told the claimant of the
change of circumstances.

TYPES OF MISREPRESENTATION
It is important to distinguish the various types of misrepresentation
because the remedies available in law depend on the type. These include;
-
1. Fraudulent Misrepresentation
Lord Herschell in the case of Derry v Peek (1889) 14 App Cas 337
defined fraudulent misrepresentation to mean a false statement made
knowingly and without belief in its truth, recklessly and careless as to its
truth or falsity.

Fraud was also defined in the case of Buffalo Tungsten Inc. v SGS
Uganda (Civil Suit No. 230 of 2009) on pg. 10 using the 6th Edition of
the Black’s Law Dictionary Page 660 as

“The intentional perversion of truth for purposes of inducing another in

reliance upon it to part with some valuable thing belonging to him/her or
to surrender a legal right.”

Fraudulent misrepresentation was discussed in the case of Edgington v

Fitzmaurice (1885) 24 Ch D 459 by Cotton Lord Justice who held that
the statement of purpose was fraudulent and that a misrepresentation
need not be the sole cause of entering a contract so long as it is an
influence.

It should be noted that where consent is caused by misrepresentation or

silence which is fraudulent, then the contract is not voidable if the party
whose consent was obtained had means of discovering the truth with
ordinary diligence.

In the case of Derry v Peek (1889) 14 App Cas 337,

Facts
In the prospectus released by the defendant company, it was stated that
the company was permitted to use trams that were powered by steam,
rather than by horses. In reality, the company did not possess such a right

22
as this had to be approved by a Board of Trade. Gaining the approval for
such a claim from the Board was considered a formality in such
circumstances and the claim was put forward in the prospectus with this
information in mind. However, the claim of the company for this right was
later refused by the Board. The individuals who had purchased a stake in
the business, upon reliance on the statement, brought a claim for deceit
against the defendant’s business after it became liquidated.

Held
The claim of the shareholders was rejected by the House of Lords. The
court held that it was not proven by the shareholders that the director of
the company was dishonest in his belief. The court defined fraudulent
misrepresentation as a statement known to be false or a statement made
recklessly or carelessly as to the truth of the statement. On this basis, the
plaintiff could not claim against the defendant company for deceit.

Sec 14 of the Contracts Act, Cap. 284 provides that a contract shall
be said to be influenced by fraud if any of the following acts is seen or
there has been connivance of the party with intent to deceive the party;
a) A suggestion to a fact which is not true made by a person who does
not believe it to be true.
b) The concealment of a fact by a person having knowledge or belief of
a fact
c) A promise made without any intention of performing it
d) Any act intended to deceive the other party
e) Any act or omission declared fraudulent by law
2. Negligent misrepresentation
This refers to a statement made with no reasonable ground to believe it is
true or where one fails to exercise reasonable care or competence to
obtain or communicate information that is true or correct
Negligent misrepresentation, which is more applicable to professionals as
it arises only where there exists a duty of care and involves an aspect of
skill and expertise.

23
In the case of Esso Petroleum Co. Ltd v Mardon [1976] QB 801
Facts
The plaintiff, Mr. Mardon, entered into a tenancy agreement with the
defendant, Esso Petroleum, in respect of a petrol station owned by the
latter. During the course of the negotiation of the agreement, ‘expert’
advisers employed by the defendant had provided an estimate of the
sales which the petrol station could expect which was based on inaccurate
information and consequently was significantly inflated. The value of the
rent on the agreement had been calculated based on this inflated figure.
As a result, it was impossible for the plaintiff to operate the petrol station
profitably.

Held
The Court of Appeal held that the contract could not be voided for
misrepresentation as the defendants presented the inflated figure as an
estimate rather than as a hard fact. On the other hand, as the defendant
had taken it upon themselves to employ experts for the purpose of
providing an estimate of sales, they owed a duty of care to the plaintiff to
ensure that this was done on the basis of accurate information. The
plaintiff was therefore able to recover the losses which he had suffered as
a result of the defendant’s negligent misstatement.

The law of negligence was further expounded in the case of Donoghue V

Stephenson [1932] A.C. 562 where Lord Atkins highlighted the
elements that constitute negligence and these include;
a) That the defendant had a duty of care towards the plaintiff
b) That the defendant breached the duty of care that they had towards
the plaintiff
c) That the defendant suffered a damage or injury
At common law, a person can only succeed under negligent
misstatements when there is a contractual relationship.

24
Moreso, in case of Hedley Byrne & Co Ltd v Heller & Partners Ltd
[1964] AC 465, they developed the law of negligent statements to make
even third parties capable of suing.

The court found out that the relationship between the parties was
"sufficiently proximate" as to create a duty of care. It was reasonable for
them to have known that the information that they had given would likely
have been relied upon for entering into a contract of some sort. That
would give rise, the court said, to a "special relationship", in which the
defendant would have to take sufficient care in giving advice to avoid
negligence liability. The relationship was that the plaintiff trusted the
defendant with the information and therefore the defendant ought to
have been honest
However, on the facts, the disclaimer was sufficient to discharge any duty
created by Heller's actions. There were no orders for damages, because,
[4]
A man cannot be said voluntarily to be undertaking a responsibility if at
the very moment when he is said to be accepting it he declares that in
fact he is not.

In the case of Candler v Crane, Christmas & Co [1951] 2 KB 164,

even professionals later on could be held liable for negligent statements,
for example, lawyers, Accountants, medical doctors for their omissions
during professional duties.

It is important to note that for one to successfully claim negligent

misrepresentation, one must prove skill or experience.

3. Innocent misrepresentation
This is where a false statement is made in an honest but mistaken belief
that they are true.

In the case of Bisset v Wilkinson [1927] AC 177

Facts
The defendant in this matter was the purchaser of land in New Zealand
which was purchased by the claimant for the purpose of sheep farming.

25
The appeal, to which this judgment relates, is on the defendant’s
counterclaim. During the purchase process, the claimant informed the
defendant that the land being purchased was capable of sustaining 2000
sheep. However, after the purchase the defendant discovered that this
was only possible if very careful land management was carried out, and
that the land as it stood could not sustain this number of sheep. The
defendant therefore sought to rescind the contract on the basis that the
claimant’s statement was a misrepresentation.

Held
It was held that the claimant’s statement was nothing more than an
opinion as to the capacity of the land, based on the claimant’s knowledge
of farming, together with the defendant’s knowledge of the current stock.
The statement was not therefore held to be a representation. In any
event, the defendant had not been able to demonstrate that the land was
not capable of carrying the 2000 sheep that the claimant had stated, and
therefore the claimant’s appeal was allowed and the contract could not be
rescinded.

In the case of Oscar Chess v Williams [1957] 1 WLR 370,

The Court of Appeal found that the defendants’ comments did not
constitute a warranty and set out a number of considerations that should
be made when assessing whether a statement is a warranty.
a. Where an assumption is fundamental to a contract, it does not
mean that it is a term of the contract.
b. The term warranty means a binding promise as well as a subsidiary,
non-essential, term of a contract.
c. A warranty must be distinguished from an innocent
misrepresentation.
d. Whether a warranty is intended must, judged objectively, be based
on the parties’ words and behaviour.
e. Where one party makes a statement, which should be within his
own knowledge, but not the knowledge of the other, it is easy to infer a

26
warranty. If the party states that it is not within his knowledge and is
information passed from another, a warranty is less easily inferred.
f. An oral representation repeated in writing suggests a warranty, but
the issue is not conclusive. Neither is the fact that it is not stated in
writing.
In vivid comprehension of this type of misrepresentation, reference can be
made to the case of Redgrave v Hurd (1881) 20 Ch D 1
court held that a contract can be rescinded for innocent
misrepresentation even when the defendant was not under a duty to
inspect the papers and that his reliance on the plaintiff’s
misrepresentation was enough.

REMEDIES FOR MISREPRESENTATION

A remedy is defined by the Black’s law dictionary to mean anything that
court can do for a litigant who has been wronged or who is about to be
wronged. Article 126(2)(c) of the 1995 constitution of the Republic
of Uganda as amended provides that in adjudicating cases of both civil
and criminal in nature, courts shall accord adequate compensation to
victims of wrongs.

The following are the remedies available under misrepresentation;

1. Rescission.
This is where upon breach, the aggrieved party seeks to be placed or
restored in the position he or she would have been had the contract not
been entered as discussed.

In the case of Solle v Butcher [1950] 1 KB 671

Facts
Mr. Charles Butcher, the landlord, had leased a flat in Maywood House,
Beckenham, to Mr. Godfrey Solle, the tenant, at £250 a year, both parties
believing that the Rent Acts did not apply to the property. Mr. Solle later
claimed that he should be repaid money over the regulated rent for the
flat. Mr. Butcher counterclaimed that their contract should be void

27
because both were mistaken about rent regulation applying. Butcher was
in fact in a business partner, doing real estate, with Solle. In 1947,
Butcher had bought that flat, with four others, that were damaged by a
land mine in the war. He spent money renovating them and leased them
out. In 1939, the first flat had been leased out to a third party at the
regulated rent of £140 a year. In fact, the Rent Acts did apply, so without
going through statutory procedures for letting, the true rent should have
been fixed at the first flat's previous rent, £140. Solle and Butcher's
business relationship had deteriorated, and so when Solle realized the
mistake about rent regulation, he claimed the overpaid rent back (i.e.
restitution) from Butcher. Butcher counterclaimed to rescind the whole
contract for common mistake.

Held
The Court of Appeal held by a majority (Jenkins LJ dissenting) that there
should be no order for restitution of the overpaid rent, and the contract
should be rescinded on terms (i.e. with conditions attached) which Solle
be allowed to choose whether to have a lease at £250, or whether to
leave the flat

Sec 14 of the Contracts Act, Cap. 284 provides that a party who
rightfully rescinds a contract is entitled to compensation for any damages
sustained through the non-fulfillment of the Contract.

The condition for rescission is that the contract should not have been
concluded and if already concluded should not have been discharged
therefore
rescission in a contract is restitution before the contract is concluded, and
when the contract is already concluded, then the rescission is
compensatory.
Conclusively, there are situations where the right to rescission will
be lost such as where a contracting party, aware of the other party’s
misrepresentation, continues with the contract as was

in the case of Leaf v International Galleries [1950] 2 KB 86 where

Lord Denning held that in the event of lapse of too much time between

28
the making of the contract and the decision to rescind, the right to rescind
is lost, where rescission is impossible, and where the rescission affects
the right of a third party.

Mode of rescission
One can rescind a contract informally, that is, by merely communicating a
notice to the representor that you no longer consider yourself bound by
the contract. The requirement of communication of rescission to the
representor will be satisfied if the representee does any overt act deemed
reasonable in the circumstances.

In the case of Car and Universal Finance Co Ltd v Caldwell [1965] 1

QB 525
Fact
Mr. Caldwell owned a Jaguar. A rogue named 'Mr. Norris' convinced him to
sell it for a £965 cheque and a £10 deposit. On 13 January when he tried
to cash the cheque it was dishonored. Mr. Caldwell told the police and the
Automobile Association straight away. Mr. Norris sold the car to some
dealers, who sold it on, and it was sold on again and again to Car and
Universal Finance Ltd. They bought the car in good faith without any
notice. The question was whether Caldwell had validly rescinded before
the car was acquired by a bona fide purchaser for value without notice.

Held
Lord Denning held that the contract was validly rescinded. It was so
without communication, but through an unequivocal act of election,
demonstrating Caldwell no longer wished to be bound.

Under common law, the representee could only claim damages. The logic
behind rescission is that a party should not be forced to remain in a
contract that he entered into when he was misled. Being an equitable
remedy, the right to rescind is lost if the canons of equity are not satisfied.
In particular, the right to rescind in any of the following situations; -

29
a. Affirmation of a contract – when the representee chooses to
proceed with the contract after he has learnt of the facts, he loses the
right to rescind.
b. Laches/lapse of time – when the contract is not rescinded within a
reasonable time from the discovery of the falsehood, then the representee
is taken to have affirmed the contract.

2. Damages.
This means monetary compensation granted at the discretion of court to
the aggrieved party.

Case law has also defined damages in Ronald Kasibante v Shell

Uganda as monetary compensation granted at the discretion of court to
the aggrieved party, arising from natural consequences of breach of
contract.

According to the case of Robinson v Harman (1848) 1 Ex 850

Facts
Harman wrote to Robinson offering him a 21-year lease of a dwelling
house in Croydon. He subsequently changed his mind and refused to
complete the lease when he discovered the property was worth more
than the agreed price. Robinson’s solicitor had enquired as to the nature
of Harman’s title, and had been assured he was absolutely entitled to
grant the lease. The property was actually vested in trustees and Harman
was only entitled to a portion of the property. Robinson brought an action
for damages.

Held
Robinson successfully recovered damages for his expenses and for the
loss of the bargain. Where a party agrees to grant a good lease in full
knowledge that he does not hold the full title, the other party may recover
damages which would so far as possible place him in the same position he
would have been had the contract been performed.

In the case of Gullabali Ushillani v Kampala Pharmaceuticals Ltd

(Civil Appeal No. 6 of 1998)

30
court stated that the principle of restituo integram provides that damages
exist to place the aggrieved party in the position they would be had the
contract not existed. It follows that courts have adopted measures to
consider before giving the award of damages since the purpose is to
compensate and not to punish as seen hereunder;
1) Expectation loss
This is the basic measure of contractual damages which are proved
by documents. This principle was laid down in the case of Robinson
v Herman that court looked at the future expectations of the
claimant with respect to the contract at hand.

2) Reliance loss
This provides an alternative in the assessment of damages and is
also referred to as loss of expenditure. It is used when the claimant
is unable to prove the financial benefit that would accrue to him as
was in the case of Anglia TV v Reed wherein the plaintiff was unable
to establish the profits his TV show would have made and
consequently claimed for the expenditure he had incurred.
Damages are further categorized into;
a. General damages.
General damages were defined in the case of Stroms v
Hutchinson to be such as the law will prescribe to be natural or
probable consequences of the act complained of general damages
therefore are purposely meant to compensate the claimant for the
non-monetary aspects of the occasioned harm. These damages are
easily quantifiable and hence depend on the individual
circumstances of the claimants.

b. Special damages
These are such as the law will not infer from the nature of the act.
They are special in character and must be specially claimed and
strictly proven as was in the Supreme Court case of Uganda Telecom
Ltd v Tanzanite Corporation.

31
c. Exemplary damages;
McCurdie J in Butterworth v Butterworth 14 So. 2d 59 (La.
1943) defined exemplary damages to mean damages for example's
sake. They are punitive in nature. These therefore exist to act as an
example to the general public.
Damages ought not to be remote; it is trite law under Sec 61(1) of the
Contracts Act, Cap. 284 provides that where s contract is breached and
a sum is named in the contract as the amount to be paid in case of a
breach or where a contract contains any stipulation by way of penalty, the
party who complains of the breach is entitled whether or not actual
damages or loss is proved to have been caused by the breach, to receive
from the party who breaches the contract, reasonable compensation not
exceeding the amount named or the penalty stipulated as the case may
be.

This was further discussed in the case of Hardley v Baxendale Hadley

v Baxendale (1854) 9 Exch 341
Facts
The claimant, Hadley, owned a mill featuring a broken crankshaft. The
claimant engaged Baxendale, the defendant, to transport the crankshaft
to the location at which it would be repaired and then subsequently
transport it back. The defendant then made an error causing the
crankshaft to be returned to the claimant a week later than agreed,
during which time the claimant’s mill was out of operation. The claimant
contended that the defendant had displayed professional negligence and
attempted to claim for the loss of profit resultant from the unexpected
week-long closure. The defendant retorted that such an action was
unreasonable as he had not known that the delayed return of the
crankshaft would necessitate the mill’s closure and thus that the loss of
profit failed to satisfy the test of remoteness.

Held

32
The Court found for the defendant, viewing that a party could only
successfully claim for losses stemming from breach of contract where the
loss is reasonably viewed to have resulted naturally from the breach, or
where the fact such losses would result from breach ought reasonably
have been contemplated of by the parties when the contract was formed.
As Baxendale had not reasonably foreseen the consequences of delay and
Hadley had not informed him of them, he was not liable for the mill’s lost
profits.

3. Indemnity
This refers to money payment by the misrepresentor in respect of the
expenses necessarily created in complying with the terms of the contract
and is different from damages.

In the case of Whittington v Seale-Hayne (1900) 82 LT 49

Facts
Mr. Whittington bred prize poultry. He bought a long farm lease, induced
by Seale-Hayne's representation that the premises were sanitary and in
good repair. However, the water supply was poisoned, Mr. Whittington's
manager got very ill and the poultry died. Under the lease, Mr.
Whittington had covenanted to carry out repairs required by the council,
which were needed after the council declared the premises unfit for
habitation and the drains needed renewing. It was undisputed that
Whittington was entitled to indemnity for rates paid or repairs costs.
Whittington sought rescission and indemnity for loss of poultry, profits and
medical expenses

Held
Court held no further losses could be claimed because it was beyond the
ambit of the indemnity to which Mr. Whittington was entitled. The losses
did not result in a benefit to Seale. Since the representation was not
fraudulent, there could be no damages and therefore no compensation
either. It was not the case that the rescinder should be in a position status
quo ante because 'to make good by way of compensation for the
consequences of the misrepresentations is the same thing as asking for

33
damages' Section 9 of the Contract’s Act Cap.284, defines a contract
as an agreement made with the free consent of parties with capacity to
contract, for a lawful consideration and with lawful object, with the
intention to be legally bound. The following are the elements of a valid
contract;

An offer, acceptance, capacity, consideration, and legality.

VITIATINGFACTORSTHATUNDERMINEACONTRACT.

Section9oftheContract’sActCap.284,definesacontractasanagreementmadewi
ththefreeconsentofpartieswithcapacitytocontract,foralawfulconsiderationandwithl
awfulobject,withtheintentiontobelegallybound.Thefollowingaretheelementsofavali
dcontract;

Anoffer,acceptance,capacity,consideration,andlegality.

Section12ofthecontractsActCap.284istotheeffectthatconsentofpartiesistaken
tobefreewhereitisnotcausedby;

(a)Coercion

34
(b)Undueinfluenceasdefinedinsection13

(c)Fraudasdefinedinsection14

(d)Misrepresentation,or

(e)Mistake,Subjecttosection16and17

AccordingtoBlack’slawdictionary12thedition,vitiatingfactorsarethosethatcanm
akeacontractvoidableorvoid.Thisiswhenfreeconsentismissingfromanagreement.

Therefore,Vitiatingfactorsinclude;

Mistake

Misrepresentation

Duress

Undueinfluence

Illegality

Fraud

Frustration

DURESS.

Black'sLawDictionary(8thed.2004)definesDuressasathreatofharmmadetoco
mpelsomeonetodosomethingagainsttheirwillorjudgment;especiallyawrongfulthre
atmadebyonepersontocompelamanifestationofseemingassentbyanotherpersonto
atransactionwithoutrealvolition.Duressincontractlawrelatestowhereapersonenters
anagreementasaresultofthreats.Anykindofthreat,violenceorotheractionwhichisuse
dtocoercesomebodyintodoingsomethingagainsttheirwillamounttoduress.

Whereapartyentersacontractbecauseofduresstheymayhavethecontractsetaside.D
uressnullifiesfreeconsentwhichisanessentialcomponentintheformationofavalidcon
tract.Therefore,anyagreementobtainedbythreatsorunduepersuasionisinsufficient.
Section9ofthecontractsact,definesacontractasanagreementmadewiththefreecon
sentofpartieswithcapacitytocontract,foralawfulconsiderationandwithalawfulobje
ct,withtheintentiontobelegallybound

35
Thelawdoesnotrequireviolencetohaveoccurred.Threatsofviolencearesufficient.For
example,threattoimprisonapersoninordertogetthispersontoenteracontractwoulda
mounttoduress.Theonusofprovingduressrestswiththepersonallegingit.Originally,th
ecommonlawonlyrecognizedthreatsofunlawfulphysicalviolence,however,inmorere
centtimesthecourtshaverecognizedeconomicduressasgivingrisetoavalidclaim

Case.

BartonvArmstrong.

Facts.

Theplaintiffarguedhehadsignedadeedforthepurchaseofthedefendant’ssharesinaco
mpanybecauseofduressbythedefendant.Thecourt,decidedthatthreatshadbeenma
debythedefendantagainsttheplaintiff’slifebuttheplaintiffwasmotivatedtosignthede
edforbusinessreasons.Theplaintiffappealedandtheappealwasdismissedbasingonth
efactthattheplaintiffhadnotestablishedthathewouldnothaveexecutedthedeedbutfo
rthedefendant’sthreats.TherewasfurtherappealtothePrivyCouncil.

Decision.

Thecourtheldthattheexecutionofthedeedbytheplaintiffhadbeenmadeunderduress.
Thecourtstatedthatthethreatsandunlawfulpressureimposedbythedefendantcontri
butedtotheplaintiff’sdecisiontosignthedocument.

TYPESOFDURESS.

Duresstakesformofthefollowing;

Duresstotheperson

Duressagainstthegoodsand

Economicduress.

DuresstothePerson

Thisreferstoasituationwhereapartyiscoercedintoacontractthroughtheuseofactualo
rthreatenedviolenceorforceagainsttheirperson,andcompelsthatpersontoenterinto
acontractoragreetotermstheywouldotherwisenothaveagreedto.

36
BartonvArmstrong[1976]AC104PrivyCouncil

InBartonvArmstrong,theplaintiffarguedhehadsignedadeedforthepurchaseofthedef
endant’ssharesinacompanybecauseofduressbythedefendant.BartonandArmstron
gweremajorcompanyshareholders.Followingameeting,itwasagreedthatBartonwou
ldbuyArmstrong’sinterest.BartonandArmstronghadanagreementdrawnupanditwa
sexecuted.BartonthenbroughtanactionagainstArmstrongclaimingthathewascoerc
edintobuyingArmstrong’sshareandthatArmstronghadthreatenedtohavehimmurde
redifhedidnotbuyit.BartonalsoallegedthatArmstrongalsoexertedunlawfulpressure
overhim,whichBartonclaimedmadethetermsoftheagreementvoidable.

Issues:WhetherBartonwasinfactcoercedorwhetherhesignedtheagreementoutofco
mmercialnecessityandthecoercionamountedtoanancillarymotive.Ineitherevent,w
hethertheagreementwasvoidable.

Decision:Thecourtheldthattheexecutionofthedeedbytheplaintiffhadbeenmadeund
erduress.Thecourtstatedthatthethreatsandunlawfulpressureimposedbythedefend
antcontributedtotheplaintiff’sdecisiontosignthedocument.Theplaintiffappealedan
dtheappealwasdismissedbasingonthefactthattheplaintiffhadnotestablishedthathe
wouldnothaveexecutedthedeedbutforthedefendant’sthreats.

Duressagainstgoods.

Atcommonlaw,thereisnoremedyforthesituationwheretheduressisaddressedtogood
sandnottotheperson.Therationaleisthatapersonmayfindithadtoresistviolenceorthr
eatstothemselvesbecauseoffear,butresistanceshouldbepossibleiftheviolencethrea
tsareagainstgoods.Goodscanbereplaced,andanydamagetothemcouldbecompensa
tedbythepaymentofmoney.

InthecaseofSkeatevBeale

Alandlordwasowedmoneybyatenant.Heseizedgoodsownedbythetenantandthreate
nedtosellthemimmediatelyunlessthetenantenteredanagreementforrepaymentoft
hesumsowned.Thetenantagreedtotherepaymenttermsbutthensoughttohavetheag
reementsetasideforduress.Itwasheldthatgoodswillnotsufficetorenderacontractvoi
dable

Economicduress.

37
Thelawrecognizeseconomicduress.Itrecognizesthatpurelyeconomicthreatsmadeto
induceapartytoenteracontractmayamounttoduress.

Aneconomicthreatisonethat,ifcarriedout,couldcausemonetarylosstothepartyenteri
ngthecontract.Situationsinwhicheconomicduresshavearisenarewherethepartiesar
einacontractualrelationshipandonepartyseekstheotherpartytoenterintoanotherles
sprofitable,contract.

Case.

NorthoceanshippingcompanyltdvHyundaiconstructioncompanyltd.

Facts:

Hyundai(thedefendantcompany)agreedtobuildatankerfortheplaintiffcompany.The
pricewasfixedinusdollars.TherewasdevaluationoftheUSdollarandthedefendantde
mandedthatthepricebeincreased.TheplaintiffagreedunwillinglyandHyundaiprovide
dconsiderationbyvaryingtheoriginalcontract.

Decision.

Thecourtheldthateconomicpressure(duress)hadbeenextendedbyHyundaiandthisw
ouldgivetheplaintiffarighttorescindthecontract.Thecourtfound,howeverthattheplai
ntiffhadlosttherighttorescindbyaffirmingthecontract.

CockerillvWestPacBakingCorporation.

Facts.

InthecourseofnegotiationsrelatingtoCockerill’sfinances,WestPacwasgrantedarelea
sefrompotentiallegalclaimsarisingfromoffshoreloansestablishedbyWestPacforCoc
kerill.

ThereleasefollowedathreatbyWestpacttoappointareceiverandamanagertosellasse
tswhichhadbeenmortgagedbycockerill.

Decision.

ThehighcourtofAustraliafoundthatthethreattoappointreceiversandmanagersbyWe
stPacamountedtoeconomicduressduringnegotiations.ThisthreathadresultedinWes
tPacobtainingtherelease.

38
Inordertoavoidtheappointmentofareceiverandmanager,cockerillhadnochoicebutto
acceptthecourseofactionproposedbyWestpac.

Theeffectofduressonacontractisthatitwillbevoidableattheoptionoftheinjuredparty.

Rescissionofthecontractispermittedbecausetheelementsofrealtyoffreeconsentisab
sent.

UNDUEINFLUENCE

Undueinfluenceisalegaltermwhereamorepowerfulpartyexertsitsinfluenceoverales
spowerfulpartyinordertoachieveitsdesiredoutcome.

Section13(1)providesthatacontractisinducedbyundueinfluencewheretherelation
shipsubsistingbetweenthepartiestoacontractissuchthatoneofthepartiesisinapositi
ontodominatethewilloftheotherpartyandusesthatpositiontoobtainanunfairadvanta
geovertheotherparty.

Thesamesectionfurtherundersubsection(2)providesthatapartyistakentobeinaposit
iontodominatethewillofanotherparty,where;

Thepartyholdsarealorapparentauthorityovertheotherparty;

Thepartystandsinafiduciaryrelationshiptotheotherparty.

Thementalcapacityoftheotherpartyistemporarilyorpermanentlyaffectedbyreasono
fage,illness,mentalorbodilydistress.

Thedoctrineofundueinfluenceprovidesaremedywherecontractshavebeenenteredin
toasaresultofimproperpressure.Thisusuallyoccursduetoarelationshipbetweenthep
artiesbeingexploitedtogainanadvantage.

Undueinfluenceissimilartoduressinnature,butthedoctrineofundueinfluenceisanequ
itabledoctrineasopposedtothecommonlawbasisofduress.Thekeydifferingfactoristh
atduressisbasedonathreat,whilstundueinfluencewillbebasedonarelationshipthatha
sbeenexploited.

Thetypesofundueinfluence

Actualundueinfluence

Presumedundueinfluencewhichcanbecategorizedas:

39
Protectedrelationships-pre-
determinedpresumptionsastorelationshipswhichwillgiverisetoapresumedinfluence

Othercases-
relationshipsinwhichinfluencecanbepresumed,butisnotautomaticallydoneso

Theevidentialburdensofthedifferenttypes

Beforeexploringtheexactrequirementsofthedifferingtypesofundueinfluence,theim
portanceofthedifferenttypesofevidentialburdensshouldbeoutlinedbrieflyforafullun
derstandingofthedoctrineswhenwegoontoexplorethemingreaterdetail.

Inrelationtocategory‘2a’,protectedrelationships,thereisnoburdenontheclaimantto
provethattherelationshipwasonethatgivesrisetopresumedinfluence,butvirtueofthe
relationshipthisisalreadyproven.Therefore,theclaimantmustsimplyprovethatthatp
artyexploitedthenatureofthisrelationship.

Incategory‘2b’,onlyiftherelationshipisonewhereinfluencecannotbeprovedwillthecl
aimanthavetoprovideevidencethattherelationshipwasonewhereinfluencearose.Fol
lowing,thecourtswillassesswhethertheconductamountstoundueinfluence.

Incategory1,theclaimantdoesnothavetoprovethereisanexistenceofanyspecialrelat
ionship.Theevidentialburdentheyaresubjecttoisprovingthattheirfreewilltoenterapa
rticularcontractwasovercome,whichisnoteasytoestablish,thisisthesamestandarda
saclaimforduress,andwasestablishedinHaytonSAvPeterCremerGmbH&Co[1999]1L
loyd’sRep620.

Actualundueinfluence

Thisclassofundueinfluencecanbeseentobeanalternativemanifestationofduress,bei
ngconceptuallysimilar.Actualundueinfluencehasbeendescribedasactsofimproperp
ressureorcoercionsuchasunlawfulthreats,whichseemstodrawaparallelwithduress.

Ascanbeseenfromtheassessmentsoftheburdensofproof,inaclaimforundueinfluence
ithastobeproventhattheundueinfluencesovercometheirfreewill.Thisissimilartothes
tandardofduress,butofcourseincasesofduressitismucheasiertoprove.Itwillbeanextr
emelyhighthresholdtoprovethatundueinfluencelefttheclaimantwithnochoiceatall.I
ncasesofpresumedundueinfluence,alltheclaimanthastodoistoprovethatonepartye
xploitedthenatureoftherelationship,whichisamuchlowerevidentialstandard.

40
Therefore,youmaybequestioningwhyapartywouldpursueaclaimforactualundueinfl
uencewithsuchahighburdenofproof.Asmentioned,thereisnoneedforanexistingrelat
ionshipbetweenthepartiestoproveactualundueinfluence,whichisadvantageousinth
eeventthisisthecase,asitwouldpreventaclaimforpresumedundueinfluencefromope
rating.Furthermore,thecontractattemptingtobevoided forundueinfluencedoesnoth
avetobeofmanifestdisadvantagetotheclaimant.

Caseinfocus:CIBCMortgagesplcvPitt[1994]1AC200

Facts

ThePittswerehusbandandwife.Thehusband,puttingherunderpressure,convincedhis
wifetotakeoutaloanonthesecurityoftheirmatrimonialhomeinordertopurchasestock
marketsharesandthusimprovetheirstandardofliving.CIBCofferedaloansecuredonth
ehomeforthepurposeofremortgage–
however,theproceedsweretobeusedforthepurchaseofasecondproperty,whichthewi
fedidnotknowabout.Thecouplesignedtheofferwithoutthewifereadingthedocument
andbecomingawareoftherealpurposeoftheloanorthelegalchargesexecutedinfavou
rofCIBC.Thehusbandboughtsharesinhisownnamefromtheborrowedmoney,whichhe
thenchargedtoborrowmoremoneyandbuymoreshares.TheStockMarketsooncrashe
dandthehusband’ssharesweresoldbythecreditors.CIBCthenwantedtotakepossessi
onofthePitts’home.

Issues

Thewifeclaimedthatshewasavictimofundueinfluenceandmisrepresentationofthelo
an’srealnature.Thetrialjudgeagreedthatundueinfluencewasexercisedandthatthewi
fesufferedseriousdisadvantage.However,hefurtherheldthatthehusbandwasnotCIB
C’sagentandthushismisconductdidnotaffectthebank.Hedismissedthemisrepresent
ationclaim.CIBCreceivedtheorderforpossessionandforthepaymentoftheamountina
rrears.TheCourtofAppealalsofoundagainstthewife.

Decision

Followinginthefootstepsofthelowercourts,theHouseofLordsalsodecidedagainstthe
wife.Itheldthatatransactioncanbesetasideevenwithoutproofofdisadvantageiftheac
tualundueinfluenceisshown(asitwasshownhere).However,thiswouldonlyaffectCIBC
ifthehusbandwasactingasitsagentinprocuringthewife’sagreementor,ifCIBChadact
ualorconstructiveknowledgeoftheundueinfluence.IntheCourt’sview,thehusbandwa
snotCIBC’sagentandtherewasnoevidencethatCIBChadanyknowledgethattheagree

41
mentwasnotforthecouple’sjointbenefit.Consequently,CIBCwasentitledtoenforceth
eorderforpossessionandsecurethepaymentofthearrears.

Presumedundueinfluence

Presumedundueinfluencereferstoalegaldoctrinewherearelationshipbetweenpartie
s,likesolicitorandclientorparentandchild,createsapresumptionthatonepartyexerte
dundueinfluenceovertheother,requiringthedominantpartytoprovethetransactionw
asfairandvoluntarily.

ThekeytestisinTurkeyvAwadh[2005]EWCACiv382:

Facts

ASaudiArabiancouplepurchasedahomeinLondonwiththehelpofamortgage.Theyren
tedthehousetothewife’sfatherwholivedtherewithhiswife.Theyoungcoupleoccasion
allystayedthereaswell.Atalaterstage,theyoungcoupleagreedwiththefatherthattheh
ousewouldbetransferredtothefatherifhe£93,000immediatelyanddischargedmortg
ageandotherdebtsobligationsforit.Thefatherpaidtherequestedsumandalsodischar
gedthemortgageandsomedebts.Hedemandedspecificperformanceoftheagreemen
t–i.e.hewantedthehousetobetransferredtohim.

Issue

Theyoungcouplearguedthatthefathermadeseveralmisrepresentationsandthatthed
eedshouldbevoidonthebasisofhispresumedundueinfluenceonthem.

Held

TheCourtofAppealdismissedtheyoungcouple’sappeal.Thefirstlimbofpresumedund
ueinfluenceistoprovetheexistenceofarelationshipoftrustandconfidencebetweenth
eparties.Oncethisisestablished,thesecondrequirementisthatthetransactionshould
beofanaturethat“callsforanexplanation”–
i.e.thetransactionwassuchthatapresumptionofundueinfluenceshouldberaised–,ort
hatthetransactioncannotbeexplainedinanywayotherthanundueinfluence.Ifthepres
umptionisraised,itisforthepersonaccusedofexercisingundueinfluencetoprovethatu
ndueinfluencehasnotinfactbeenpresent.Showingthattheagreementwasenteredint
obytheclaimantathis/
herownfreewillwouldusuallydischargethisburden.Inthisparticularcase,fatherandda
ughterclearlyhadacloseenoughrelationshipandthetransactionwassuchthatit“calle

42
dforanexplanation”.Thefatherwouldhavebeenunabletorebutapresumptionofundue
influenceastheyoungcouplehadnothadthebenefitofindependentlegaladvice.Howe
ver,thetransactioncouldbeexplainedotherwise(inthegivencircumstances)sothefat
herwasentitledtothespecificperformance.

Category2A-Protectedrelationships

Thelawhasdeemedcertainrelationshipsspecial,meaninginfluencebetweenthemcan
automaticallybepresumedintheabsenceofanyotherfacts.Herearesomeexamplesof
suchrelationships:

Parentandchild(butnotbetweenaparentandanadultchild-
AvonFinanceCoLtdvBridger[1985]2AllER281

Solicitorandclient

Doctorandpatient

Oncetheexistenceofoneoftheserelationshipshasbeenestablished,theclaimantmust
provethattheinfluenceexertedwasundue.Thecourtwillassesstheevidenceanddecid
ewhetherthetransactionwassuspicious,andifso,undueinfluencewillbepresumed.Itis
thenuptothepartywhoexertedtheundueinfluencetoprovenoundueinfluencewasexe
rcised.

Category2B-Othercases

Iftherelationshipdoesnotfallintoanyofthespecialrelationshipswithincategory2A,ifitc
anbeshownthattherelationshipwasbasedontrustandconfidence,itmaybepresumed
tobearelationshipofinfluence.ThedifferenceincomparisonwithCategory2Aisthatthis
presumptionisrebuttablebytheotherpartyiftheyprovetherewasnotrustorconfidence
.

Courtshaveconsideredanumberofspecificrelationshipsthatdonotamounttocategor
y2Arelationships,butmaywellamounttocategory2Brelationships.Inthefollowingsect
ionthemostimportantoftheserelationshipsareexplainedandexaminedwithreferenc
etocaselaw.

HusbandandWife

InBarclaysBankplcvO’Brien[1994]1AC180

Facts

43
Thedefendantswereamarriedcouplewhotookoutasecondmortgageontheirhomeass
ecurityforoverdraftfacilitiesextendedbyBarclaystothehusband’scompany.Thewife
hadnointerestinthebusiness.Beforeexecution,thebranchmanageradvisedthecoupl
etoseeklegaladvicepriortosigningthedocuments.Thewifeeventuallysignedthedocu
mentsrelyingsolelyonherhusband’s(false)representationthatthedeedwaslimitedto
£60,000andwouldlastthreeweeksonly.Intheend,thehusband’scompanyreacheda£
154,000overdraft,asaresultofwhichBarclayssoughtanorderforpossessionofthemor
tgagesecurity–i.e.thecouple’shome.Thewifeappealed.

Issues

Thewife’sappealwasdismissedforlackofevidenceofherhusband’smisrepresentation
.TheCourtofAppealthenallowedherappealbasedonthespecialprotectionshewasowe
dinequity.Itheldthatthemortgagewasonlyenforceableagainsthertotheextentof£60,
000–theamountshebelievedthemortgagewasfor.

Decision

TheHouseofLordsfoundinfavourofthewifeaswell–
albeitnotonthebasisofaspecialequitableprotection.TheCourtheldthatthehusbande
xercisedundueinfluence,misrepresentedthedeed–i.e.committedalegalwrong–
andthusinducedhertosignthedeed.Asaresult,thewifehadequityagainstherhusbandt
osetthedeedaside.Suchequitywasenforceableagainstathirdpartywhohadconstructi
veoractualnoticeofthesituationthatgaverisetotheequityorforwhomthehusbandwas
anagent–
Barclaysinthiscase.Thecreditorwouldhaveconstructivenoticewhenthetransactionin
questionwasnottothewife’sfinancialadvantageandwhichcarriedasignificantriskofh
erhusbandcommittingawronginlaworequity.

Duethenatureofthehusbandandwiferelationship,itisnotenoughtomerelyshowthatt
herehasbeeninfluencerelatingtoatransactionwhichisnottotheclaimant’sadvantage
.Ithasbeenshownthathusbandandwifewilloftendoselflessactsnottotheiradvantage,
andthenlaterattempttoreversethemunderduress.Thecourtswillfocusontheextreme
circumstances,thereforeitissuggestedthe‘manifestdisadvantage’testmayapplyher
e,puttingahigherevidentialburdenontheclaimants.

OtherCohabitees

Theapplicationofthehusbandandwifepresumptionwasalsosaidtoextendtoothercoh
abiteeswhowereinanemotionalrelationshipwitheachother,thisisapplicableregardle

44
ssofmarriagestatusorsexuality.InMasseyvMidlandbankplc[1995]1AllER929it
wasalsoruledthatindividualsinlongtermemotionalrelationshipswhohadchildrenwou
ldqualifyunderthiscategory,eveniftheydidnotcohabit.Thispresumptioncanalsoexte
ndtocohabitingadultchildrenandparents(AvonFinanceCoLtdvBridger[1985]2A
llER281).

Bankandcustomer

Therelationshipbetweenabankandacustomerisonewhichispossibletofallundercate
gory2B.ThepresumptionwassuccessfullyproveninLloydsBankLtdvBundy[1975]
QB326,inwhichthedecisivefactorswere:

Thecustomerhadbankedatthebranchforalongtimeandreliedonthebankmanagerfor
allhisfinancialadvice

Themanagerrecognizedthefactthecustomerdidputthisconfidenceinhim

Thetransactionwasnotintheinterestsofthecustomer

Commandingofficerandsoliderinthearmy

WetouchedonthecaseofRvHMAttorney-
GeneralforEnglandandWales[2003]UKPC22intheduresschapter.Toremindus,t
hesoliderwasrefusingtosignaconfidentialityagreement,andwasthreatenedwithbein
gremovedfromhisspecialunitifhedidnotsigntheagreement.Thisdidnotgiverisetoacl
aimforduress,butthecourtsdidsuggesttherecouldbeadegreeofundueinfluenceinvol
vedinthetransaction.

Duetothedegreeoftrustandconfidencethesoliderplacedinhiscommandingofficer,th
erelationshipfellundercategory2Bofonewithapresumedinfluence.Therewasmixedo
pinionsfromthejudges,withsomearguingthattherecouldnotbetrustandconfidencein
somebodywhowasattemptingtocoercehim.Itwasconcludedtherewasnoundueinflue
nce,butitiscleartherelationshipbetweensoldiersandtheirsuperiorsmayamounttoare
lationshipofpresumedinfluenceforthepurposesofcategory2B.

Becarefulindistinguishingadisadvantageouscontractfromonethatissuspicious.Ther
ewilloftenbecontractswhereonesideofthebargainisinherentlybetter,butthisdoesnot
meanitissuspiciousforthepurposesofprovingundueinfluence.

Rebuttingthepresumptionofundueinfluence

45
Onceithasbeenprovenbytheclaimantthattherewasinfluenceofanunduenature,thed
efendantmayrebutthepresumptionofundueinfluencebyprovingthattheclaimantent
eredintothecontractfreelywithoutinfluence.

Themostcommonwayinwhichthispresumptionmayberebuttediswheretheclaimanth
asundertakenindependentadvicewithregardstothetransactioninwhichundueinflue
ncehasbeenclaimed.InHowardvHoward-
Lawson[2012]EWHC3258(Ch.)theclaimantsoughtandreceivedindependentlega
ladviceinrelationtosigningsomedeeds.Thecourtsconcludedduetothisindependenta
dvice,theundueinfluencewouldnotbethekeyfactorandinfluenceinenteringthetransa
ction,meaningaclaimforundueinfluencewouldnotbeactionable.

However,receivingindependentadvicemaynotalwaysbeconclusive.Thefactsofeach
casewillneedtobeassessingtoconsiderwhethertheundueinfluencewasstilltheinduci
ngfactororwhethertheindependentadvicewassignificantinthisregard(RoyalBankof
ScotlandvEtridge(No2).

ILLEGALITY

AccordingtoBlack'sLawDictionary,"Illegality"referstoanactthatiscontrarytoorf
orbiddenbylaw.Itcanalsorefertothequalityorstateofbeingillegal.Inthecontextofcont
racts,illegalitycanrenderacontractunenforceableifitinvolvesanillegalactorpurpose.
Anillegalcontractmaybedefinedasanagreementorpromisewhichbyitsnatureisprohi
bitedbylaw.Theconsiderationandorobjectoftheagreementorpromiseisillegal.

Anillegalcontractmaybedefinedasanagreementorpromisewhichbyitsnatureisprohi
bitedbylaw.Theconsiderationorobjectoftheagreementorpromiseisillegal

Illegalityasavitiatingfactormeansacontractisunenforceableifit'sbasedonorinvolvesi
llegalactivities,andthiswasclearlyillustratedinthecasesof BigosvBousted[1951]1
AllER92

Facts

Thedefendant,Boustead,wantedtosupporthiswifewhileshestayedinItalyforherhealt
h.Heagreedwiththedefendantthatinreturnforaloanof£150inItaliancurrencyforthisp
urposehewoulddepositasharecertificateinacompanywiththeplaintiffassecurityforth
eloan.BothpartiesknewthatthisagreementwasillegalundertheExchangeControlA
ct1947s.1(1)andsigneddocumentstodisguisethisasaloan.Theplaintifflaterfailedtos

46
upplythemoneyandrefusedtoreturnthesharecertificate.Thedefendantclaimedforth
ereturnofhissharecertificate.

Issues

Theplaintiffarguedthatthecontractfortheloanwasvoidbecauseitwasillegal.Therefor
e,thedefendantcouldnotenforceanyofhisrightsundertheagreement. Thegeneralrul
eisthatifthepartiesareinparidelicto,meaningtheyareequallyatfault,thelawfavoursth
epersonresistingtheclaim. However,thedefendantarguedthatanexceptiontothisrul
eapplied,ashehadwithdrawnfromtheagreementbeforetheillegalpurposeiscarriedo
ut.

Decision

Thecourtfoundfortheplaintiff.Thecontractwasillegaland,therefore,void.Atthetimeth
econtractwasformedbothpartieswereinparidelicto.However,PritchardJsaidthatther
ewasadifferencebetweenwithdrawingduetorepentanceandwithdrawingsimplybeca
usethecontractwasfrustratedbeforeitwascarriedout.Here,Boustedhadnotrepented
andwithdrawn.Thecontracthadsimplybeenfrustratedbytheplaintiff’srefusaltocarryi
tout.Consequently,Boustedcouldnotrecoverhissharecertificateunderthecontract.

Thegeneralruleisthatcourtswillnotenforceanillegalcontract.Anillegalcontra
ctisonewherethepurposeofthecontract,orthemannerinwhichitisperformed,violates
alaworpublicpolicy.Forexample,ifJosephpromisesJohnonemillionshillingstokillJosep
h’swifeandJohnexecutesthejob,butjosephrefusestopayJohntheagreedonemillion,Jo
hncannotseekenforcementofthecontractincourtbecausetheformationandperforma
nceoftheagreementisagainstthelawwhichcriminalizestheillegalact.

ContractsActCap.284Section18(1)(a),(b),(cand(e),
(d)providesthataconsiderationoranobjectofanagreementisunlawfulifitisforbiddenb
ylaworisofsuchnaturethatifpermittedwoulddefeattheprovisionsofanylaw,isfraudul
entorinvolvesorimpliesinjurytoapersonorpropertyofanotherpersonorisdeclaredim
moraloragainstpublicpolicybyacourt.

Section18(2)ofContractsActCAP.284,Furtherprovidesthatanagreementwhose
objectorconsiderationisunlawfulisvoidand,nosuitcanbebroughtinrespectofthatagr
eement.

47
Inthischapter,theselegalprovisionsshallbehandled;

a)Contractsprohibitedbylaw

b)Contractcontrarytopublicpolicy

c)Effectsofillegality

a).ContractsProhibitedbyLaw

Whereacontractisprohibitedbylaw,suchacontractisillegal,inthiscontext,lawrefersto
statutesmadebyparliament,decreesandstatutoryinstrumentsmadebyexecutivean
dotherorganswhichareauthorizedbyparliament.

Forexample,underArticle237ofthe1995constitutionoftheRepublicofUgandaandS
ection2ofthelandActCap.236,it’sprovidedthatalllandinUgandashallvestintheciti
zensofUgandaandshallbeownedinaccordancewiththelandtenuresystemshereunde
r,customary,freehold,mailoandleasedhold.Thismeansnon-
citizensareprohibitedfromowningmailoorfreeholdland

Section41(3)ofthelandsActistotheeffectthat,anon-
citizencanonlybegrantedaleasenotexceeding99years.

InMistryAmarSinghVSSerwanowofuniraKulubya,therespondent,anAfricanwa
stheregisteredproprietorofthreeplotsofmailolandwhichhepurportedbyagreements
tolease,foryearstotheappellant,anon–
African.Intheirthreetransactions,theconsentoftheLukiikoasrequiredbysection2(d)
ofthepossessionoflandlawandthegovernorasrequiredbySection2oftheLandTransfe
rOrdinancewerenotobtainedforanyofthetransactions.Therespondentpurportedtore
coverthepossessionoftheplots.Itwasheldthattherespondentwasn’tobligedtobasehi
sclaimonanillegalagreementwhichhehadentered.Hewasn’tinparidelicto(inequalf
ault"or"equallyculpable,)withtheappellantsincehewasamemberoftheprotectedclas
s.

It’salsoanoffenceforanon-
citizentoacquirelandusingfraudulentmeansandthepenaltyonconvictionisonethous
andcurrencypoints(20,000,000million)orimprisonmentnotexceeding3yearsorboth.

Atransactionwhichalsodenieswomenorchildrenorpersonswithdisabilityaccesstoow
nership,occupationoruseofanylandorimposesconditionswhichviolateArticle33Rig

48
htsofwomen,Article34RightsofchildrenandArticle35Rightsofdisabilitiesasprovid
edforinthe1995constitutionofUgandashallbenullandvoid.

Section40(1)oftheemploymentactCap226,alsoprohibitspaymentofwagesotherth
aninlegaltendertotheentitledemployees.

InJambaAliVSDavidSalaam,theplaintiffhadadvancedaloantothedefendantwhich
hehadfailedtopay.Itwasheldthatsincetheplaintiffwascarryingoutthebusinessofmon
eylendingillegallywithoutalicence,theagreementwasunenforceablebycourt.

Theconstitutionalsoprovidesthatnoagreement/
contractordocumenttowhichthegovernmentispartyshallbeconcludedwithouttheleg
aladvicefromtheAttorneyGeneral.

InNsimbeHoldingLtdVAGandAnother.Courtofappealheldthatcontractswhichth
egovernmentofUgandaisapartymustbeconcludedwiththeadviceoftheA.Gthusitwas
heldunconstitutionalandthusvoid.

b)ContractsContrarytoPublicPolicy

Section18(1)
(e)oftheContractsActCap.284,providesthatthecontractisillegaliftheconsiderati
onorobjectisdeclaredimmoraloragainstpublicpolicybyacourt.

InChristforallnationsVApolloinsuranceCo.ltd,thecourtstatedthatpublicpolicyc
oversanythingthatisinconsistentwiththeconstitutionorthelawsofKenyaorisagainstn
ationalinterestofKenyacontrarytojusticeandmorality.

Examplesofcontractsthathavebeenheldtocontravenepublicpolicyarecons
ideredindetailbelow

c).ContractstoCommitaCrimeorTortorCivilWrong

Courtscannotenforceanillegalitybecausethelawdoesn’tallowapersontobenefitfrom
hisownwrong.

InBeresfordVsRoyalInsuranceco.ltd,

Facts

In1925MajorRowlandsontookoutfivelifeinsurancepoliciesonhisownlifewiththedefe
ndants,RoyalInsuranceCoLtd,amountingto£50,000.Eachpolicycontainedtheconditi

49
on:“Ifoneofthelivesassuredshalldiebyhisownhand,whethersaneorinsanewithinone
yearfromthecommencementoftheassurance,thepolicyshallbeexceptvoid”. In1934
MajorRowlandsonshothimself.Theclaimant,MajorRowlandson’sadministratrixsuedt
hecompanyclaimingtheamountoftheinsurance.

Issues

ThedefendantspleadedthatasMajorRowlandsonhadcommittedsuicide,thepoliciesh
adbecomevoid.

Decision

TheHouseofLordsheldthatontrueconstructionofthecontracttheinsurancecompanyh
adpromisedtopaytheamountassuredifMajorRowlandsonintentionallykilledhimself
whilesane.However,theythenlookatwhetherthecontractwasenforceableinlaw.Itwa
sestablishedatthattimethatsuicidewasacrimeinEnglishlaw.Thecourtreferredtocase
ssuchasCrippen’sCase[1911]P108inwhichitwasheldthattheestateofamanwhom
urderedhiswifecouldnotbenefitfromhiscrime.LordAtkinsaid(at599):

“IthinkthattheprincipleisthatamanisnottobeallowedtohaverecoursetoaCourtofJusti
cetoclaimabenefitfromhiscrimewhetherunderacontractoragift…to holdotherwisew
ouldinsomecasesofferaninducementtocrimeorremovearestrainttocrime”.

Therefore,theirLordshipsrefusedtoallowtheadministratrixtoclaimtheinsuranceonth
egroundsofpublicpolicyeventhoughthecontractwaslawful.

d)ContractsPrejudicialtoTheAdministrationofJustice.

Whereapartyattemptsbymeansofacontracttopreventtheforceoflaw,suchacontracti
sillegal.

InEgertonVsBrownlow,courtstatedthatanycontractorengagementhavingatende
ncy,howeverslight,toaffecttheadministrationofjusticeisillegalandvoid.E.g.anagree
menttosuppressprosecutionofacrimewillbenullandvoid.

AnothercategoryofcontractsunderthisarecalledChampertyandmaintenancecontra
cts.Thisiswhereapersonisgivenassistanceinbringinganactioneitherfinanciallyorbyp
rovisionofevidence.

InKawamaraSamVsRichardJjuko.Thedefendantengagedtheplaintiffashisagentt
opursuehisclaimof216millionagainstthegovernmentofUgandawhichwasawardedto

50
himascompensationbytheHighCourtatanallegedcommissionof45,000,000/
whentheplaintiffsoughttoenforcethetransaction.JusticeKaryabwireheldthatitwasa
Champertyagreementthusnullandvoid.

e)ContractsTendingtoCorruptPublicLife.

AContracttoprocureatitleofapersoninconsiderationofamoneypaymentisillegalandv
oid.

InParkinsonVSCollegeofAmbulance,thesecretaryofacharitablesocietypromise
dtheplaintiffthathewouldprocurehimaknighthoodat3000ponds.Theplaintiffpaidbut
didn’treceivethetitle,whichwasinthepowersofthegovernmenttogive.Hesuedforther
ecoveryofthemoneyandcourtheldthatthesubstanceoftheagreementwasillegal.

f)ContractstoDefraudRevenue.

AcontracttodefraudURA,KCCA’srevenueisillegal.

InMillerVSKarlinski,thetermsofacontractofemploymentwerethattheemployeesh
ouldreceivethesalaryoftenpoundsweeklyandarepaymentofhisexpenses,butthathe
shouldbeentitledtoincludeinhisexpenses,accountofincometaxdueinrespectofhiswe
eklysalary,hesuedforarrearsandcourtheldthattheincometaxarrangementwereafra
udontherevenueandthushecouldn’tenforcethesumowed.

g)ContractsthatAreSexuallyImmoral.

InJonesVsRandall,LordMansfieldheldthatanimmoralcontractisillegal,forexample
anagreementtoprocureaprostituteforXisillegalsinceprostitutionisprohibitedinUgan
da.

Aprostitutecannotsueforprostitutionfees,agreementtoletoutahouseforuseofchilds
ex,purportedagreementbetweenmenandmen,sincetheconstitutionprohibitssames
exmarriages.

h)ContractsinRestraintofTrade.

Article40(2)ofthe1995constitutionofUgandaprovidesthateverypersoninUgandah
asarighttopracticehisorherprofessionandtocarryonanylawfuloccupation,tradeorbu
siness.

51
Section20(1)ofthecontractsactcap.284,providesthatanagreementwhichrestrains
apersonfromexercisingalawfulprofession,trade,orbusinessofanykindisvoidunlesst
herestrainisreasonable,Irespecttointerestsofpartiesconcernedandinrespecttointer
estsofpublic.

Furmstondefinesacontractinrestraintoftradeasonebywhichapartyrestrictshisfutur
elibertytocarryonhistrade,businessorprofession.

Thusacontractthatrestrictsanemployeeonleavinghisemploymentfromworkingfora
notheremployerorsettinguparivalbusinesswillbedeclaredvoidunlessthefirstemploy
ercanshowthattherestrictionisreasonableinscope.

Thegeneralruleisthatacontractinrestraintoftradeisprimafacievoidbutbec
omesenforceableifitisprovedthattherestrainisreasonableinthecircumsta
nces.

InGiellaVSCassmanBrownandCoLtditwasheldthatcontractsinrestraintoftradea
regenerallyinvalidbutapartialrestraininacontractofemploymentmaybevalidifit’srea
sonableininterestsofbothparties.

Section20(2)oftheContractsActCap.284,providesthatanagreementinrestraintoftr
adeisn’treasonableinrespecttotheinterestsoftheparties,wheretherestraintexceeds
whatisreasonablynecessarytoproprietaryinterestofapromise.

InMasonVsProvidentClothingColtd,acanvasserwhohadbeenemployedtosellclo
thesinIslingtonwasrestrainedfromenteringintosimilarbusinesswithin25milesofLond
on.Therestrainwasheldtobetoowideandunreasonable.

InHerbertMorrisltdVsSaxebay,thecourtobservedthatincontractsforasaleofabus
inesstogetherwithitsgoodwill,it’sproperforthepurchasertorestrainthevendororselle
rfromactingincompetitionwiththebusinesshehadjustsoldtopurchasergiventhattheg
oodwillisappropriatelyinterestlegitimatelycapableofprotection.

Fromthediscussionabove,itcanbenotedthat,

Firstly,acontractinrestraintoftradeisprimafacievoid.

Secondly,fortherestraintoftradeclausetobevalidandbinding,itmustbereasonable.

Thirdly,therestrainmustbereasonablenotonlyasregardsthePartiestothecontractbut
alsoastheinterestofpublic

52
Fourthly,theonusofprovingthattherestrainisreasonableliesonthepersonwhoalleges
ittobeso20(3)ofthecontractsact.

GamingorWageringContract

Section23(1)ofthecontractsActCap.284,providesthatanagreementmadebywayof
anunlicensedwagerisvoid.

Section23(2)providesthatforthepurposesofthissection,wagermeansapromisetop
aymoneyorotherconsiderationontheoccurrenceofanuncertainevent.

GamingorwageringislegalinUgandaexceptifcarriedwithoutlicence.

THEEFFECTOFILLEGALITY

S.18(2)providesthatanagreementwhoseobjectorconsiderationisunlawfulisvoidan
dasuitshallnotbebroughtfortherecoveryofanymoneypaidorthingdeliveredorforany
compensationforanythingdoneundertheagreement

InGordonVSMetropolitan;Itwasheldthatnopersoncanclaimanyrightorremedyina
nillegaltransactioninwhichhehasparticipated.

InMakulaInternationalVSHisEminenceEmmanuelCardinalNsubuga.Itwashe
ldthatanillegalityoncebroughttotheattentionofthecourtsoverridesallmattersincludi
ngpleadingsandalladmissionsmade.

Section20(1)ofthecontractsActCap284,providesfortheexceptionstothegeneralrul
e.

Firstly,wheretheplaintiffwasignorantoftheillegalityoftheconsiderationorobjectofthe
agreementatthetimetheplaintiffpaidthemoneyordeliveredthethingsoughttobereco
veredordidthethinginrespectofwhichcompensationissought.However,theplaintiffar
guedthatunderthelaw,thetransactioninquestionwasillegal,sinceignorantiajurisn
eminenexcusat.Thatisignoranceofthelawisnoexcuse.

Wheretheillegalconsiderationorobjecthadn’tbeenaffectedatthetimetheplantiffbec
ameawareoftheillegalityandrepudiatedtheagreement.Therepudiationofwithdrawal
fromtheagreementmustbevoluntary.

Thirdly,wheretheconsentoftheplantiffwasindeedbyfraud,misrepresentationorundu
einfluence

53
ThecaseofHolmanvJohnson(1775)1Cowp341isauthorityforthegeneralprincipleofi
llegality-
thattheillegalcontractwillbeunenforceable.However,aswehaveseen,dependentont
hecircumstances,oneornoneofthepartiesmayenforcethecontract,andonoccasiono
nlypartofthecontractwillbeunenforceable.Thissectionwillconsiderthedifferenteffec
tsofillegality,separatingthemintodistinctcategoriesthat;

Severableillegalcontracts

AswetouchedoninNordenfeltvMaxim,thecourtshavethepowertoenforceacontrac
t,butonlywhentheillegalpartsofthecontracthavebeenremoved.Thereisathree-
parttesttoapplywhenattemptedtoseverpartsofthecontract.ThetestcomesfromSad
lervImperialLifeAssuranceCoofCanadaLtd(1988)IRLR388:

The‘bluepencil’test-
cantheillegalprovisionberemovedwithoutmodifyingthewordsoftheremainingterms.
Theseremainingtermsmustbegrammaticallyandverballyseparated.Itisreferredtoas
the‘bluepencil’testasthebestwaytoassessthisissimplybycrossingouttheillegalterm
s.Ifitstillmakessense,theillegalprovisioncanberemoved.

Caseinfocus:GoldsollvGoldman[1915]1Ch.292

Thiscaseinvolvedadefendantwhowascompetingwiththeplaintiffinthebusinessofimit
ationjewelry.Thedefendant’sagreedtonolongercompetewiththeplaintiffinacontract
fortwoyearsinanycapacity.Theclausecovered‘London,England,Scotland,Ireland,W
ales,oranypartoftheUnitedKingdomofGreatBritainandIrelandandtheIsleofManorFra
nce,theUnitedStatesofAmerica,Russia,Spain,orwithintwenty-
fivemilesofPotsdamerstrasse,Berlin,orStStefan’sKirche,Vienna’.

Thecourtsdecidedthatthecontractwasvalid,exceptforthegeographicalrestraintstha
twereunreasonable.The‘bluepencil’rulewasusedtoremovethewordsfollowing‘orFra
nce’,sothatthelimitationonlyappliedtotheUnitedKingdom.

Theremainingtermsfollowingthe‘bluepencil’rulemustbesupportedbyconsideration

‘Youwillbepaid£250permonthtonotcompetewiththecompanyinanycapacityintheUn
itedKingdomandtheUnitedStatesofAmerica’.

54
Ifthe‘andtheUnitedStatesofAmerica’wasremovedaspartofthebluepencilrule,the£2
50partwouldstillbeincludedinthecontract,andthereforethecontractwouldstillinclud
esomevalidcontract.However,ifthecontractwasdraftedinthismanner:

YoumustnotcompetewiththecompanyinanycapacityintheUnitedKingdom

YoumustnotcompetewiththecompanyinanycapacityintheUSA,andinconsiderationf
ornotcompetingintheUSA,youwillbepaid£250permonth.

Nowifweattempttousethebluepencilruletoremovethepartoftheclauserelatingtothe
US,itisevidentthatthetermthatincludesthepaymentof£250wouldhavetoberemoved
.Thismeansonlyterm‘a’wouldremain,andthereisalackofconsiderationinthecontract
.

Followingthebluepencilrule,thecontractmustcontinuetobethesamesortofcontractt
hatthepartiesenteredintointhefirstplace.Itcannotbechangedtotheextentthatitchan
gesthecharacterofthecontract.

Caseinfocus:AttwoodvLamont[1920]3KB571

Inthiscase,onepartyownedatailoringbusiness,whilsttheotherpartywasanemployee.
Thecontractofemploymentpreventedtheemployeefromworkingforanyothertailorwi
thintenmilesofthestoreinthecontextofbeinga‘tailor,dressmaker,draper,milliner,hat
ter,haberdasher,gentlemen’s,ladies’orchildren’soutfitter’.Theimportantfactinthisc
asewasthattheemployeewasonlyacutterinthetailoringdepartment.

Thecourtsheldthisrestrictionwasfartoowide,astheemployeesonlyskillwasasatailor.
However,theclausecouldnotbesevered,astoseveritwouldchangethescopeandinten
tionoftheagreement.

Collateralcontracts

Wherethereisoneillegalcontract,butthereisacollateralcontractthatallowsarecovery
ofallorpartofthecontract,thismaybeenforceable,butonlyifprovidingforaremedyund
erthecollateralcontractisnotequaltoenforcingtheillegalcontract.

FishervBridges(1854)3El&Bl642isonesuchexampleofthis.Inthiscase,acollateral
contractprovidingforsecurityofanillegalcontractwasmade.Thiscollateralcontractis‘
tainted’bytheillegalityoftheillegalcontract,andcanthereforenotbeenforced.

55
Acollateralcontractmusthavetheeffectofprotectinganinnocentpartytowhomapromi
seormisrepresentationhasbeenmade.

Claimsbasedonanillegalcontract

Thegeneralruleisanyclaimbaseduponanillegalcontractisinvalid,unlesstheclaimisrel
atedtoanunrelatedpartortransactionofthecontractwhichtheillegalitydoesnotaffect.
InEuro-Diam

Recoveryunderillegalcontracts

Thefinalassessmenttomakewhenconsideringanillegalcontractiswhetherornotanym
oneyorpropertymayberecoveredsubjecttothecontract.

Bothpartiesareguilty

Whenbothpartiesareguiltyinrelationtotheillegalcontract,thegeneralrulefromHolma
nvJohnson(1775)1Cowp341isthattherecanbenorecoveryofanykindofmoneyorprop
erty.

ThisrulehasbeenchallengedasbeingcontrarytoArticleoneoftheHumanRightsAct-‘no
oneshallbedeprivedofhispossessionsexceptinthepublicinterest’.InthecaseofShan
shalKishtaini

Onepartyunfairlyinducedintotheillegalcontract

Ifbothpartiesareguiltyofenteringanillegalcontract,butonepartyhasbeenforcedintot
hecontractasaresultofduressorundueinfluence,thecontractwillnotbeenforced,butt
hevictimmaysuccessfullyrecovermoneyorpropertytheyhavepassedsubjecttotheco
ntract,asperHughesvLiverpoolVictoriaLegalFriendlySociety[1916]2KB482.

Onepartywithdrawsfromthecontract

Ifonepartywithdrawspriortotheillegalpartofthecontractcomingintoeffect,thedoctrin
eoflocuspoenitentiaecomesintoeffect.Theresultofthisisthatthepartywhowithdre
wmayrecoveranymoneyorpropertysubjecttothecontract.Itshouldbenotedthatthew
ithdrawaldoesnotneedtobewithgenuineregretorsorry,thefactonepartyhaswithdrew
willsuffice-
TribevTribe[1996]Ch107.Thishasbeenjustifiedasprovidingastrongincentiveforthe
claimanttowithdrawfromanillegalcontract.

56
Therehasbeensomedebateastowhenthewithdrawalfromthecontractmustoccur.The
twoconflictingcasesonthismatterareTaylorvBowers(1876)1QBD291andKearleyv
Thomson(1890)24QBD742.InTayloritwassuggestedthatwithdrawalisallowedatanyt
imebeforethecompletionofthecontract,whereasinKarleyitwassuggestedoncetheill
egalpartorpurposeofthecontracthasstarted,withdrawalcannotoccur.Obiterstateme
ntsinColliervCollierTaylorisworthmentioning,youshouldapplythelawinKearley.

FRAUD

FraudisprovidedforunderSection12(c)oftheContractsActCap.284lawsofUgand
athat,ConsentofpartiesistakentobefreewhereitisnotcausedbyFraud,asdefinedinSe
ction14(1)oftheContractsActCap.284.Thissectionprovidesthat,Consentisinduc
edbyfraudwhereanyofthefollowingactsiscommittedbyapartytoacontract,orwiththe
connivanceofthatparty,orbytheagentsofthatparty,withintentofdeceivingtheotherp
artytothecontractortheagentoftheotherparty,ortoinducetheotherpartytoenterintot
hecontract;

(a)asuggestiontoafactwhichisnottrue,madebyapersonwhodoesnotbelieveittobetru
e;

(b)theconcealmentofafactbyapersonhavingknowledgeorbeliefofthefact;

(c)apromisemadewithoutanyintentionofperformingit;

(d)anyactintendedtodeceivetheotherpartyoranyotherperson;or

(e)anyactoromissiondeclaredfraudulentbyanylaw.

Undercommonlaw,FraudwasdefinedbyLordHerschelinthecaseofDerryVPeek(18
89)14AppCase337asafalsestatementthatismade;Knowingly,withoutbeliefinitstru
th,RecklesslyORcarelesslyastowhetheritbetrueorfalse.

Itwasalsoconcludedunderthiscasethat,ifsomeonemakesastatementwhichtheyhon
estlybelieveistrue,thenitcannotbefraudulent.Therefore,theimportantthinginFraud
istheintentiontomisleadtheotherparty.

CIRCUMSTANCESUNDERWHICHFRAUDCANOCCUR.

Asuggestiontoafactwhichisnottrue,madebyapersonwhodoesnotbelieveit
tobetrue;Section14(1)(a).

57
InPeekV.Gurney(1873)6H.L.377,theprospectusissuedbyacompanydidnotrefert
otheexistenceofadocumentdisclosingliabilities.Theimpressiontherebycreatedwast
hatthecompanywasaprosperousone,whichwasnotthecase.Itwasheldthat,thesuppr
essionoftruthamountedtofraud.Incontrast,acompanyissuedaprospectusgivingfals
einformationabouttheunboundedwealthofNevada.Asharebrokerwhotooksharesont
hefaithofsuchaninformationwantedtoavoidthecontract.Itwasheldthat,hecoulddoso
sincethefalserepresentationintheprospectusamountedtofraud.

Theconcealmentofafactbyapersonhavingknowledgeorbeliefofthefact;

Section14(1)(b).

InSpiceGirlsLtdvApriliaWorldServiceBV.Here,thedefendantshadsignedaspons
orshipagreement,butnowresistedpaymentsayingthatoneofthefive,Geri,hadgivenn
oticetoleavethegroup,substantiallychangingwhathadbeenpromised.Courtheldthat
,thepresenceofallmembersofthegroupatthefilmingofthecommercialamountedtoar
epresentationthatnoneofthemintendedtoleavethegroupandnoneofthemwasaware
thatonememberintendedto.Assuch,takingpartinthefilmingofthecommercialwasafa
lsestatementoffactmadebytheirconductinattending.

Apromisemadewithoutanyintentionofperformingit;Section14(1)(c).

Incontrast,inEdgingtonvFitzmaurice(1885)29Ch.D459,Theclaimantpurchased
somesharesinthedefendantcompany.Thecompanyprospectusstatedtheshareswer
ebeingofferedtoraisemoneytoexpandthecompany.Infact,thecompanywasexperien
cingfinancialdifficultyandthemoneyraisedfromthesaleoftheshareswasgoingtobeus
edtopaythecompanydebts.Courtheldthat,eventhoughthestatementrelatedtoastat
ementoffutureintent,itwasanactionablemisrepresentationasthedefendanthadnoin
tentionofusingthemoneytoexpandthecompany.

Anyactintendedtodeceivetheotherpartyoranyotherperson;Section14(d).

Incontrast,inthecaseofBartholomewNdyanaboVPetronidaNyamukama,Nyam
ukamasoldlandtoNdyanabodescribingitas40X60paces.Itwasinfact40X60feet.Thec
ourtheldthatitwasmisrepresentationbecauseofFraudasNyamukamaknewthatthear
eawaslessthatwhatwasstated.Furthermore,thecourtstatedthattherespondent’sco
nsenttothecontractwasinducedbyfraud.Shewasentitledtorepudiateondiscoveringt
hetrueposition.Ithasbeensaidthatdeceitwhichdoesnotdeceiveisnotfraud.

58
Anyactoromissiondeclaredfraudulentbyanylaw.

VariousstatutesandActsofParliamentprovideforomissionsoractsthatamounttoFrau
dunderthelaw.Forexample,Fraudsonsaleormortgageofpropertythatisanypersonwh
o,beingasellerormortgageofanyproperty,orbeingtheadvocateoragentofanysuchsel
lerormortgagor,withintenttoinducethepurchaserormortgagetoacceptthetittleoffer
edorproducedtohimorher,andwithintenttodefraud;

Concealsfromthepurchaseormortgageanyinstrumentmaterialtothetitleoranyencu
mbrance.

Falsifiesanypedigreeonwhichthetitleofferedorconcealsanyfactsmaterialtothetitle,c
ommitsamisdemeanourandisliabletoimprisonmentfortwoyears.

Section14(2)ofthecontractsActCap.284spellsouttheGeneralrulewhichistoth
eeffectthatmeresilenceastofactslikelytoaffectthewillingnessofapersontoenterintoa
contractisnotfraud,unlessthecircumstancesofthecasearesuchthat,itisthedutyofthe
personkeepingsilencetospeak,orunlessthesilenceisequivalenttospeech.

Wherethereisdutytospeak.Thisisespeciallyforacontractofuberrimaefidei. Thati
soneofutmost goodfaithsuchas;fiduciaryrelationships,aninsurancecontractforexa
mple,InHIHCasualtyandGeneralInsuranceLtdvChaseManhattanBank, HNA
anagentofChaseManhattanBankobtainedaninsurancepolicybutindoingsomadecert
ainmisrepresentationsbecauseoffraudandfailedtodiscloseareportthatsuggestedth
efilmswereunlikelytomakeaprofit.Theinsurancecompanyrefusedtopayoutclaimingt
orescindthecontractformisrepresentationandafailuretodiscloseamaterialfactorasw
asrequired.Courtheldthat, theinsurerswereentitledtorescindthecontractofinsuranc
ethroughboththeFraudandthenon-disclosure.

Changeofcircumstances.Sometimesastatementmaybetruewhenitismadebutdu
etochangeincircumstancesitmaybecomefalse.InWithvO’Flanagan[1936]Ch575
Adoctorsellinghispracticestatedthetrueincomeatthebeginningofnegotiationsbutby
thetimeofthesalethishaddwindledtoanegligiblefigure.Sincehefailedtorevealthis,itw
asanactionablemisrepresentation.

Onceithasbeenestablishedthattherewasfraud,thecontractwillberenderedvoidabl
e.Whereconsenttoanagreementisobtainedbyfraud,theagreementisacontractvoida
bleattheoptionofthepartywhoseconsentwasobtainedbyfraud.However,thecontract
isnotvoidableinthefollowingcircumstances;

59
Inducement,itisnecessaryforthe representeetodemonstratethatthefalsestateme
ntinducedthemtoenterthecontract.Therecanbenoinducementifthe representeewa
sunawareofthefalsestatement.Forexample,inHousefulv.Thomas.Theclaimantpu
rchasedagunwhichhadaconcealeddefect.Hisactionformisrepresentationfailedashe
hadn'tinspectedthegunbeforepurchasingit.Therefore,themisrepresentationdidnoti
nducehimtoenterthecontractashewasunawareofit.

Duediligence,whereconsentiscausedbymisrepresentationorbysilencewhichisdee
medfraudulentwithinthemeaningofsection15,thecontractisnotvoidable,iftheparty
whoseconsentwasobtainedhadthemeansofdiscoveringthetruthwithordinarydiligen
ce.InRedgravevHurd Asolicitorpurchasedintothepartnershipinthesolicitors'firm.
Hewastoldthepartnershiphadanincomeof£300peryearandwasgiventheopportunity
tolookattheaccounts.Hedeclinedtheoffertochecktheaccountsandtookthemattheir
word.Infact,theincomewasonly£200peryear. Courtheldthat,Hewasentitledtorescin
dthecontractashereliedonthestatement.Thefactthathehaddeclinedtheoffertochec
kthebooksreinforcedratherthannegatedthatreliance.

PRINCIPAL-AGENTRELATIONSHIPINRELATIONTOFRAUD

Anagentisapersonemployedbyaprincipaltodoanyactforthatprincipalortorepresentt
heprincipalindealingwithathirdpersonandaprincipalisapersonwhoemploysanagent
todoanyactforhimorherortorepresenthimorherindealingwithathirdperson.Section
169(1)ofthecontractsActCap.284providesthatFraudifcommittedbyanagentacti
nginthecourseofbusinessforaprincipal,hasthesameeffectonanagreementmadebyt
heagentasiftheFraudhasbeencommittedbytheprincipal.InBriessvWoolley[1954]
AC333,duringpre-
contractualdiscussionsbyashareholderinacompany,thedefendantwassubsequentl
yauthorizedbytheothershareholderstocontinuethenegotiationsastheiragent,andin
duecourseacontractwasconcluded.Theshareholderswereheldliableindamagesforth
efraudulentactionofthedefendant.However,wherefraudiscommittedbyanagent,ina
matterwhichdoesnotaffecttheauthorityofaprincipal,doesnotaffecttheprincipal. Int
he case ofBelmontFinanceCorporationversusWilliam'sFurniture[1979]1C
H250,BuckleyLJheldatpage261thatwherean agent commits fraud againsttheprinc
ipal,theknowledgeofthe agent isnottobeimputedontheprincipal.

DOCTRINEOFVICARIOUSLIABILITYINRELATIONTOFRAUD.

Vicariousliabilityistheimpositionofliabilityononepersonfortheactionableconductofa
nother,basedsolelyontherelationshipbetweenthetwopersons;indirectorimputedleg

60
alresponsibilityfortheactsofanother;forexample,theliabilityofanemployerfortheact
sofanemployee,or,aprincipalforthetortsor[actions]ofanagent.InLloydv.Grace,Sm
ith&Co.Courtheldthat, Vicariousliabilitycanextendtofraudulentactsoromissionsift
hosewerecarriedoutduringtheemploymentorwithinthescopeoftheapparentauthorit
y,albeitbyanemployeeorapartnerconductingthebusinessofatypewhichhehadaright
toconduct.Theprincipalwasliableforthefraudoftheagentbecauseconveyancingispar
toftheordinarybusinessofsolicitors.Furthermore,whereanagentispersonallyliable,a
persondealingwiththeagentmayholdtheagentorprincipalorbothliable.

CONTRACTUALORCOURTAWARDEDREMEDIESTOANAGGRIEVEDPARTYOFF
RAUD.

Understatute,Rescissionisavailableasaremedy.Hereapartytoacontract,whosec
onsentisobtainedbyfraud,may,wherethatpartythinksfit,insistthatthecontractisperf
ormedandthatheorsheisputinthepositioninwhichheorshewouldhavebeeniftherepre
sentationsmade,hadbeentrue.

CourtawardedremediesWheretherehasbeenamisrepresentationasaresultoffrau
d,theinnocentpartyisentitledtoclaimdamagesundercommonlaw.Thedamagesthata
reawardedarenotbasedoncontractualprinciplesbutthedamagesavailableinthetorto
fdeceit.Thatistoputtheclaimantinthepositionhewouldhavebeeninifthetorthadnotoc
curred,ratherthanthecontractmeasurewhichistoputtheclaimantinthepositionthath
ewouldhavebeeninifthecontracthadbeenproperlyperformed.InClefAquitaineSAR
LvLAPorteMaterials(Barrow)Ltd,theclaimantenteredintolong-
termagreementsasaresultoffraudulentclaimsbythedefendant.Theagreementswer
enotasprofitableastheywouldhavebeenifthetruthhadbeentoldatthetimeofcontracti
ng.Theclaimantwasabletorecoverdamagesforthelossofprofit.LordDenningexplai
nedthisinDoylevOlbyltd[1969]2QB158:‘thedefendantisboundtomakereparation
forallthedamageflowingfromthefraudulentinducement’

FRUSTRATION

Frustrationisthedoctrinethatactsasadevicetosetasidecontractswherean unforese
enevent eitherrenderscontractualobligationsimpossible,orradicallychangesthepa
rty'sprincipalpurposeforenteringintothecontract

61
Section65(1)ofcontractsActCap.284providesthatwhereacontractbecomesim
possibletoperformorisfrustratedandwhereapartycannotshowthattheotherpartyass
umedtheriskofimpossibility,thepartiestothecontractshallbedischargedfromthefurt
herperformanceofthecontract.

Thedoctrineoffrustrationdischargesbothpartiesfromtheircontractualobligationswh
erefollowingtheformationofthecontract,performanceofthecontractualobligationsb
ecomeeither:

Impossible;or

Radicallydifferent

Essentially,whatthedoctrineoffrustrationallowsforisaremedyincaseofachangeofcir
cumstances.Thisdoesseemcontradictorytothelawofcontractandthecontractualfree
domthelawallows.Ifthelawdoesnotprotectapartyfromabadbargain,whydoesfrustra
tionprotectagainstanunfortunateone?Beforethedoctrineoffrustrationwasformed,

CaseofParadinevJane[1647]EWHCKBJ5

Theplaintiff,Paradine,broughtanactionagainstthedefendant,Jane,fortherentarrears
forthelandsthatParadinehadleasedtoJane.Thedefendantacknowledgethatheowedt
hemoneyfortherent.However,thereasonwhyhedidnotpayitwasbecausethelandwasi
nvadedbytheenemyoftheKing,hiscattlewasdrivenawayandhewasexpelledfromthel
and,soeffectively,hecouldnotenjoyit.

Issues

Shouldalesseewhowasexpelledfromhislandbeliableforrentforaperiodinwhichhehas
beenexpelledfromtheland.

Decision

(1)Whereapartycreatesadutyorchargeuponhimselfbyvirtueofacontract,heisboundt
operformthedutyorpaythecharge,notwithstandinganyaccident.Thereasonwhythisi
sso,isbecausethepartycouldhaveinsertedaclauseinthecontract,whichprescribeswh
atistobedonewiththerentincaseofanaccident.

(2)Intheabsenceofanexpresscovenant,thelesseeisequallyliableastherentisanoblig
ationcreateduponthereservation.

62
(3)Thelesseeinthepresentcaseisboundtopayrent,despitethefactthatthehousemay
havebeenburntbylightning,throwndownbyenemiesandalthoughhemayhavebeene
xpelledfromthelandorthelandmayhavebeeninundated.

Understandingthejustificationforthedoctrineoffrustrationisbestdonewithreferencet
oabasicexample.IfIpaid£50,000forameetandgreetwithafamouscelebrity,andbefor
ethemeetandgreet,thecelebritydied,woulditbefairthatIwouldstillbeforcedtopaythe
£50,000?
Thedoctrineoffrustrationwouldinterveneatthispoint.Ofcourse,thisisaverybasicexa
mpleandthingscanbealotmorecomplicatedthanthatasyouwillsee!
ThecasewhichestablishedthedoctrineoffrustrationwasTaylorvCaldwell(1863)3B
&S826

Caseinfocus:TaylorvCaldwell(1863)3B&S826

Inthiscase,theclaimantshadhiredoutthedefendant’sconcerthallforfourdaysatthepri
ceof£100eachday.Afterthecontractwasenteredinto,butbeforethedayofrentalbegan
,thehallwasdestroyedbyfire.Theclaimantcouldnolongerhosttheirconcerts,andasar
esultlostasignificantamountofmoney.Theclaimingarguedthatthedefendantshoulda
ccountforthoselosses,whilsttheclaimantarguedthattheycouldnotbeliableforanacci
dentaldestructionoftheconcerthall.

Itwasheldthatthedefendantswerenotliableforthelosses.BlackburnJheldtherewasani
mpliedterminthecontractthattheconcerthallwouldexistatthetimeofthecontract.Thi
simpliedtermformedthebasisofthelawoffrustrationuntilthecaseofDavisContracto
rsLtdvFarehamUrbanDistrictCouncil[1956]AC696

Caseinfocus: DavisContractorsLtdvFarehamUrbanDistrictCouncil[1956]A
C696

Inthiscase,theDavisagreedwiththeclaimantstobuild78housesovereightmonthsfor£
92,425.Thebuildingactuallytooktwenty-
twomonths,becauseDavisdidnothavetherequiredstafformaterials.Davisarguedthe
contractwasfrustratedduetotheirchangeincircumstance-
itwasassumedthattheywouldhaveacertainamountofstaffandmaterialstoworkwith,
wheninfacttheydidnot.

Itwasheldthatthecontractwasnotfrustrated.TheobligationsofDavishavebecomemo
redifficult,butnotradicallydifferent.Theimportanceofthiscasewasthemoveawayfro
mthedoctrineoffrustrationinsertinganimpliedtermcoveringthechangeofcircumstan

63
ce.Instead,theconstructionapproachwasapplied.Theconstructionapproachrequires
anassessmentofthechangesinlightofthecontextofthecontractinordertoassesswhet
herperformanceisimpossibleorradicallydifferent.Thisconstructionapproachhascont
inuedtobeapplied.

Animportantqualityoffrustrationisthatitmustbebasedonanassumptionmadebyboth
parties.Intheexampleused,bothpartieshavemadetheassumptionthatthecelebritywi
llbealiveforthemeetandgreet.Hereisasimpleexampleofwhereonlyonepartymakesa
nassumption:

PartyAcontractswithPartyBtosellacarfor£5,000

PartyAhasmadethecontractontheassumptionthattheycanbuytheexactcarfor£4,00
0fromPartyC

PartyC’scaristhendestroyed,andPartyAcanonlyfindareplacementfor£10,000

AsonlyPartyAhasmadeanassumptionaboutthecar,frustrationcannotbereliedon.If,h
owever,itwasmadepartofthecontractwasthatPartyAwouldpurchasethiscarfromPart
yCfor£4,000beforesellingittoPartyB,bothpartieswouldhavemadetheassumption,an
dfrustrationcouldbereliedon.

Thetestforfrustration

Therearethreemainelementswhenassessingwhetherfrustrationappliestoacontract:

Hasthecontractallocatedtheriskoftheparticulareventoccurring?

Hastherebeenaradicalchangeinobligations?

Wastheradicalchangeduetothefaultofoneoftheparties?

Hasthecontractallocatedtheriskoftheparticulareventoccurring?

Frustrationcanonlyoperatewherethepartieshavenotthemselvesallocatedtheriskofl
ossbetweenthemselvesinthecontract.Inotherwords,whereapartyhasagreedtobeart
herisk/lossofsomesort.

Ifwethinkbacktotheexamplecontractofthemeetandgreetwithacelebrity,iftherewas
aterminthecontractthatstated‘intheeventofdeathofthecelebrity,thesellerwillbeart
heriskandstillpaythe£50,000’,theriskhasbeenallocatedtotheseller,andtheyhaveac

64
ceptedtheriskbyenteringintothecontract,thereforetheycouldnotrelyonthedoctrine
offrustration.

Thereisnorequirementthattheallocationofriskhastobeexactordefinite,justthatthere
isatleastsomemechanismfordealingwithparticularchangesincircumstances.

Hastherebeenaradicalchangeinobligations?

Thereareavarietyofwaysinwhichtheobligationsunderacontractcanchange.Previous
caselawhascreateddistinctcategoriesthatprovidefordifferentpresumptionsandrule
srelatingtotheapplicationoffrustration.Therefore,thischapterwillcoverthemeachint
urn.Theyareasfollows:

Non-occurrenceofanevent

Increasedexpense

Destructionofsubjectmatter

Illegality

Alterationofmannerofperformanceorimpossibilitybyoneparty

Outbreakofwar

Delayorinterruption

Non-occurrenceofanevent

Thefirstofourcategoriesoffrustrationiswhereaneventfailsthatatleastoneofthepartie
shasassumedwilloccur.Theoperationoffrustrationinsuchcircumstancesisbestunder
stoodwithreferencetotwoofthemostfamouscasesonfrustration,knownasthe‘corona
tioncases’,astheybothrelatetothecoronationofKingEdward.

CaseinfocusKrellvHenry[1903]2KB740

InthecaseofKrellvHenry[1903]2KB740,thedefendantformedacontractwiththecla
imanttohireaflatoutonPallMallfromthe26thofJunetothe27thofJune,theexactdateofKin
gEdwardVII’scoronationservice,whichwasduetopassthroughthestreet.Theflatback
edontothestreetwithabalcony,meaningthisparticularflatwouldhavehadanexcellent
viewoftheprocession.Thecontracthadnoexpressreferencetothecoronationorthepur
posetheflatwashiredfor.Thecontractwasonlyhiredforthedaytime,andwouldnotbeav
ailableovernight.KingEdwardfellill,andthecoronationprocessionwascancelled.Thec

65
laimantattemptedtoclaimthehirepricefromthedefendant,buttheyrefusedtopayont
hegroundsthatthecontractwasfrustratedduetothecancellationofthecoronation.

Itwasheldthatbothpartieswereawarethatthecoronationprocessionwasthefoundatio
nofthecontract,andtheroomhadbeenhiredonlytoviewtheprocession,thereforethec
ontractwasfrustratedforthenon-
occurrenceoftheevent.Theimportantfactorofthecasewasthattheclaimanthasadvert
isedthehireoftheirroomspecificallyfortheviewingofthecoronation.Therewasnoother
valuetotheroom,asitcouldnotbestayedinovernight,itwassolelyfortheviewingofthec
oronation.

Caseinfocus:HerneBaySteamBoatCovHutton[1903]2KB683

InthecaseHerneBaySteamBoatCovHutton[1903]2KB683,aspartofthecoronati
onofKingEdward(thesameoneasinKrellvHenry)anavalreviewwastotakeplace.Acont
ractwasformedbetweenthedefendantandclaimantforthehireofasteamshiptotakepa
ssengersforadaycruiseroundthefleet,andtoviewthenavalreview.AsaresultofKingEd
ward’sillness,thenavalreviewwascancelled.Thedefendantsthenrefusedtohirethebo
at,arguingthecontractwasfrustratedduetothenon-occurrenceofthenavalreview.

TheexactsamejudgesasthoseinKrellvHenrydecidedthiscasewasnotfrustrated.The
reasoningbehindthiswasthatthehappeningofthenavalreviewwasnotthefoundation
ofthecontract.Whentheclaimanthiredtheirshipout,theydidnothireitoutforthesolepu
rposeofsomebodyviewingthenavalreview.Thehappeningofthenavalreviewwasonly
thedefendant’smotiveforenteringthecontract;itwasnotbothoftheparties’foundatio
n.Thehiredboatcouldstillbeusedtocruisethereviewandviewthemooredfleet.Thehiri
ngoftheshiphadnothinginparticulartodowiththenavalreview.

NOTE:Thesecasescanbedifficulttoreconcile,butthekeydifferenceisthatinKrellvHe
nry,thecoronationwasthefoundationofbothpartiesenteringintothecontract,theyha
dbothmadetheassumptionthatthecoronationeventwouldgoahead.However,inHern
eBay,onlythedefendantwasconcernedwiththenavalreview,therewerenoassumptio
nsfromtheclaimant.

InhisjudgmentinKrellvHenry,VaughanWilliamsLJsetoutahypotheticalexamplethats
houldhopefullyhelpyourunderstandingfurther.Theexampleinvolvesataxidrivertaki
ngsomebodytoafamoushorseraceonderbyday.Thetaxidriverwouldchargeanincrea
sedfareforthejourneyduetothecircumstances.Iftheracewascancelled,thecontractfo
rthetaxiridewouldnotbefrustrated.Despitethehigherpricepaid,andthepurposeforw

66
hichtheindividualbookedthetaxinotoccurring,thetaxihasnoparticularqualifications
orspecialismfortheparticularoccasion;anyothertaxidriverwouldhavebeenthesame.

Ifyouconsidertheaboveexampleinlightofthecoronationcases,thefacttheroomwashi
redforthepurposeofthecoronationprocessioninKrellvHenrywasnotenough,butthefa
cttheroomwasonlyrentedfortheday,andhadparticularcharacteristicssuchasabalco
nyoverlookingtheprocessionwhichmostotherroomswouldnothave,madethefounda
tionofthecontract,andwouldthereforebeabletobefrustratedfornon-
occurrenceoftheevent.

Inrelationtothetaxiexample,whatiftheindividualhadpaid£1,000totakethetaxiandbe
escortedtotheVIPareawheretheyhadfrontrowseatsfortherace?
ItthenbecomesmorecomparabletoKrellvHenryduetothespecialismoftheseatsforthe
race.

Torecap,thethreepointsfromKrellvHenrywhichidentifythatthecoronationwasthefou
ndationofthecontractwere:

Theadvertisementoftheroomexpresslyadvertisedaviewingofthecoronation,notare
gularlettingoftheroom

Theuseoftheroomwasonlyduringtheday,andnotthenight

Theclaimantwasnotinthebusinessofrentinghisroomoutregularly,hehadonlydoneito
nthisparticularoccasion

Thesefactorsshowthattherewasajointassumptionbythepartiesthattheeventwouldg
oahead,anditwasnotjustoneofthepartiesmakingtheassumption,whichisoneoftheke
yrequirementsoffrustration.

Increasedexpenseincontractfrustration

Thecourtshavetendedtorulethatanincreasedexpenseforonepartycanneverfrustrat
eacontract.TheleadingcaseinthisareaisthealreadymentionedDavisContractorsLtdv
FarehamUrbanDistrictCouncil.Aspartoftheirclaim,DavisContractorscitedtheextra£
17,000costtheyhadincurred,whichthenresultedinthemlosingmoneyonthecontract,
whereastheywereexpectingtomakemoney.Thecourtsjustificationfornotallowingani
ncreasedexpensetofrustrateacontractisthatwhereonepartyentersacontractundert
heassumptiontheycanmakeaprofit,justbecausetheassumptionisincorrectdoesnot

67
meanthecontractcanbefrustrated.Theotherpartyhavenotmadethisassumption.Thi
salsorelatestotheideathatthecourtswillnotprotectanindividualfromabagbargain.

InTsakiroglou&CoLtdvNobleeThorlGmbH[1962]AC93itwassuggestedthatani
ncreasedexpense,nomatterhowonerous,couldneverfrustrateacontract.Onlyonejud
ge,LordReid,disagreedwiththisnotion.Hearguedthatinthecaseofextremeincreasesi
nexpense,thecontractshouldbefrustrated.Thisisaninterestingpoint,butundercurre
ntEnglishLawacontractcanneverbefrustratedforincreasesinexpense,nomatterhow
extreme.Thejustificationbeingforthisthatincreasedexpenseisthebusinessofonepart
yalone.

Destructionofsubjectmatter

Similartothenon-
occurrenceofanevent,acontractmaybeformedwithaparticularsubjectmatterinmind
.Thissectioncoverswhatwillhappenwherethesubjectmatterisdestroyed.

Wehavealreadycoveredthekeycaseinrelationtodestructionofsubjectmatter,Taylor
vCaldwell(1863).Asyouwillremember,inthiscase,aconcerthallwashiredoutandsubs
equentlydestroyedinafire.Generallyspeaking,wherethesubjectmatterofacontracth
asbeendestroyedduetonofaultofeitherparty,thecontractwillbefrustrated.

AnotherexampleofthiscomesfromApplebyvMyers(1867)LR2CP65,whereacontract
wasformedforthedefendanttoinstallmachineryintheclaimant’sfactory.Thepremises
andmachinesweredestroyedbeforecompletionofthecontract,whichresultedinfrustr
ationofthecontract.

Inthesecases,thepartieshavebothmadeanassumptionthatthesubjectmatterwillexis
tatthetimeofthecontract.Youensurethatthisisthecase,andthatthedestroyedthingist
heactualsubjectmatterofthecontract.

Examconsideration:Considertheimportantoftheassumptionofbothparties.Apartym
ayenterintoacontractforpublictransporttovisitafamouschurch,butthechurchissubs
equentlyburntdown-wouldthisbeacasefordestructionofthesubjectmatter?
ThiswouldbemoresimilartothetaxiexamplefromKrellvHenry-
onlyonepartyhasmadetheassumptionaboutthechurch.

Illegality

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Illegalityreferstowherethepartiesformacontract,andsubsequently,beforeorduringp
erformance,thecontractbecomesillegaltoperform.Thegeneralruleisthatthiswillfrust
ratethecontractiftheeffectonthecontractisseriousenough.Iftheeffectisminimalando
nlypartial,thedoctrineoffrustrationwillnotapply.

Itisimportanttorememberthattherulesofillegality,coveredinapreviouschapter,willa
pplywherethecontractisillegalatthetimeofformation.Frustrationhereonlyapplieswh
erethecontractbecomesillegalfollowingitsformation.

Themostcommonexampleofillegalityiswherelegislationisenactedwhichrendersthe
contractillegal(Denny,MottandDicksonvJamesB.Fraser&CoLtd[1944]AC265).

Caseinfocus:FibrosaSAvFairbairnLawsonCombeBarbourLtd[1943]AC32

Inthiscase,Fibrosa,whowerebasedinPoland,createdacontractforthepurchaseofsom
emachineryfromFairbairn,whowerebasedinEngland.
£1,000ofthe£4,800waspaidinJuly1939.Subsequently,beforealloftheobligationsund
erthecontractwerecompleted,GermanyinvadedPolandandwarwasdeclared.Fairbai
rnrefusedtopaytherestofthemoniesowed,citingthefactthatthecontractwasnowilleg
alastheoutbreakofwarmadeitillegalforBritishcompaniestotradewithPoland.Essenti
ally,Fairbairnarguedthatthecontracthadbeenfrustratedduetotheoutbreakofwar.

Itwasheldthatthecontractwasfrustratedasaresultoftheillegalityofthecontract.Asafu
rtherpoint,thecourtsheldthatthe‘losslieswhereitfalls’,meaningFibrosacouldnotreco
verthe£1,000paid.

Insomecases,theillegalityofthecontractistemporary.Ifthelengthoftimeisshortenoug
h,thecontractmaynotbefrustratedandthepartieswillsimplyhavetowaitouttheperiod
oftimebeforecontinuingthecontractualobligations.Thecourtswhichconsidertheleng
thoftimethecontractwilloperatefor,combinedwiththelengthoftimeoftheillegality.In
NationalCarriersLtdvPanalpina(Northern)Ltd[1981]AC675,therewasacontractwhic
hallowedaccesstoawarehousefortenyears,andthecouncilbannedaccesstothewareh
ousefortwentymonths.Inlightoftheten-
yearterm,thetwentymonthswasnotasignificantenoughperiodoftimetoamounttoille
gality.

Examconsideration:Remember,ifthereisnotagivenperiodoftimefortheillegalityiteit
hermaybepermanentorunknown(suchasanoutbreakofwar).Ensuretoidentifythisan
dexplainhowitaffectsanyfrustrationclaims.

69
Alterationofmannerofperformanceorimpossibilitybyoneparty

Whereaneventresultsinachangeinobligationsorimpossibilityforoneparty,therewilln
otbefrustrationofthecontract.Remember-
frustrationmustbeanassumptionbothpartiesmake,anditmustresultinimpossibilityfo
rbothparties.

InBlackburnBobbinCoLtdvAllen(TW)&SonsLtd[1918]1KB540,therewasanagreeme
nttosellsomeFinnishtimbertoapurchaser.Duetotheoutbreakofwar,thesellercouldno
longerobtainthetimberfromtheirsupplierinFinland.Thecontractwasnotfrustrated,as
thiswastheseller’sissuealone,thepurchaserofthetimberwasnotconcernedwithwher
ethesellergotthetimberfrom.

Theimportantideatorememberthathowonepartyconductstheirbusinessistheirprobl
em,andtheybeartheriskofanybusinessdecisionstheymakewhichresultincircumstan
cessuchasinBlackburnBobbin.TheytookariskbynotalreadyhavingtheFinnishtimber
beforeformingacontractwiththepurchaser.Howtheyconducttheirbusinessistheirris
kalone,andtheotherpartyshouldnotbepenalizedforthis.

Outbreakofwar

Aswehavealreadyseen,theoutbreakofwarcancausevariouscontractualissues.Anoth
ergoodexampleistheoutbreakofwarbetweenBritainandEgypt.Theresultofthisoutbr
eakwasblockageoftheSuezCanal,whichresultedinmanybreachedinternationaltrade
andshippingcontracts.Again,theseassumptionshaveonlybeenmadebyoneparty,me
aningthecontractscannotbefrustratedforthisreason.

Wherebothpartieshaveassumedperformancewillbedoneinaspecificwaywhichisren
deredimpossiblebytheoutbreakofwar,thismayamounttofrustration.InTsakiroglou
&CoLtdvNobleeThorlGmbH[1962]AC93,acontractwasheldnottobefrustrateddu
etotheSuezCanalblockages.However,itwasconsideredbythejudgesthatifitwasvitalt
othecontractthatthegoodsweredeliveredbytheSuezCanal,perhapsduetotimebeing
oftheessenceandotherroutestakingtoolong,thecontractmayhavebeenfrustrated.

Delayorinterruption

Asmentionedconcerningtemporaryillegality,theremaybeadelayorinterruptionthati
simpossibletoavoid.Theissueswithsuchdelaysisthatthepartiescannotbecertainhow
longthedelaywilllast,itcouldbetendays,whichwouldnotfrustratethecontract,butitco
uldbetenyears,whichalmostdefinitelywouldfrustratethecontract.

70
Thefamousacademic,Chitty,hassuggestedthatinorderforadelaytofrustrateacontra
ct,thedelay‘mustbesoabnormal,initscause,itseffects,oritsexpectedduration,sothat
itfallsoutsidewhatthepartiescouldreasonablycontemplateatthetimeofcontracting’.

Thecourtswillalsoconsiderthesefactorsindecidingwhetheracontractmaybefrustrate
dfordelay(The“SeaAngel[2007]EWCACiv547)

Howdidthedelayarise?

Wasthedelayforeseeable

Howdoesthecontractdistributetheriskinothersimilarcircumstances?

Wastheradicalchangeduetothefaultofoneoftheparties?

Ifonepartyisatfaultforthefrustratingevent,itislesslikelythatthecontractwillbefrustra
ted.ThecaseofTheSuperServantTwo[1990]1Lloyd’sRep1explainedthatafrustrating
eventshouldbeuncontrollableandanextraneouschangeofsituation.Inotherwords,th
efrustratingeventshouldbebeyondthecontroloftheparties.

Importantly,ifonepartyisatfaultforthefrustratingevent,althoughthatpartymaynotm
akeaclaimforfrustration,theinnocentpartycandosoandwillbeabletoclaimdamagesf
oranylossthatresultedfromthecontract.

Caseinfocus:TheEugenia,OceanTrampTankersCorporationvV/
OSovfracht[1964]2QB226

ThisisyetanothercaseinvolvingtheSuezCanalclosure!
Itwasacontractforthechapterofaship,andtherewasaconditionthattheshipshouldnot
betakenintoanywarzoneunlesstheowneroftheshipgavepermission.Theshipentered
theSuezCanal,awarzone,whichbreachedthecontractualconditionregardingnoentry
towarzones.Itwasarguedthecontractwasfrustratedduetotheblockageofthecanal.

Thecourtheldthattheradicalchangeinobligationswasduetothefaultofthecharterers-
thepositiontheywereinwasduetotheirownbreachofcontract.

Aswellasabreachofcontract,anegligentactwhichresultsinthefrustratingeventwillam
ounttofault.ThiswasdiscussedbythejudgesinTaylorvCaldwell-
iftheburningdownoftheconcerthallwasaresultofsomenegligenceoftheowners,theco
ntractwouldnothavebeenfrustrated.

71
Goingevenfurther,DGMCommoditiesCorporationvSeaMetropolitanSA[2012]EWHC
1984(Comm)confirmedthat‘fault’hasaveryloosedefinitioninthiscontext.Theredoes
notneedtobeanelementofbreachofcontractornegligence,itcanjustbeapositiveactio
nfromthepartyoranindividualwhomthepartyisresponsiblefor(ie.Anemployee).

Caseinfocus:MaritimeNationalFishLtdvOceanTrawlersLtd[1935]AC524

Thisistheleadingcaseonfaultinthedoctrineoffrustration.Thiscaseinvolvedfishingboa
tswhichrequiredlicensesfromtheMinisterofFisheries.Thedefendantrequiredfivelice
nsesforfiveboats,butwasonlygrantedthree.Oneoftheboatswastheplaintiff’s.Thedef
endantchosetoallocatethethreelicensestothreeboats,leavingtwoboatswithoutalice
nse,oneofwhichwastheplaintiffs.Thedefendantthenclaimedthatthecontractforthec
harteroftheboatwiththeplaintiffwasfrustrated,asitwasimpossibleforthemtouseitdu
etothembeingunabletoacquirealicense.

Thecourtheldthatthedefendantwasatfaultfortheimpossibility.Theyhadbeengivenali
censewhichtheycouldhaveallocatedtotheplaintiff’sboat,butoptednotto,thereforeb
eingatfaultandtheywereunabletoclaimforfrustrationofthecontract.

Thelegaleffectoffrustration

Effectonthecontract

Nowwehavefullyexploredthelegalissuesandoperationofthedoctrineoffrustration,w
ecanmoveontoitseffects.Itisimportanttobeabletoaccuratelyexplainwhatitmeansfor
theoutcomeofthecontract.

ThecaseofHirjiMuljivCheongYueSteamshipCoLtd[1926]AC497confirmstheeffectoff
rustrationisthatitbringsthecontracttoanimmediateend,whetherornotthepartieswis
hthistobetheresult.Inotherwords,itisvoid,notvoidable(asisthecaseforrepudiatorybr
eaches).

Financialeffects

Previously,underthecommonlaw,allobligationsunderthecontractceasedineventoffr
ustration.Thisincludedbothprimaryobligationsofthecontract,andsecondaryobligati
onsinrelationtobreaches,suchasdamages.Therefore,thegeneralrulewasthattheloss
lieswhereitfalls.WetouchedonthisslightlyinthecaseofFibrosaSAvFairbairnLawsonC
ombeBarbourLtd,whereFibrosawereunabletoreclaimthe£1,000theyhadpaidundert

72
hecontract,thelosshadfellwiththem.Therearetwodifferentcircumstancesforthesep
urposes:

Wherethemoneyispaidinadvance

Wherethemoneyispaidoncompletion

Wheremoneyhadbeenpaidinadvance,theadvancepaymentscouldberecoveredifthe
rewasatotalfailureofconsiderationbytheotherparty.Thisapproachwasheavilycriticis
edduetoitsimpactoftheotherparty.Advancepaymentsareusuallyusedasaformofinsu
ranceagainstfrustratingeventsorbreachesofcontract.Therefore,bythecourtsallowin
gtheadvancepaymenttoberecovered,theywereessentiallydisallowingthepurposeof
theinsurancebywayofadvancepayment.

Wheremoneyispaidoncompletion,therewasanunfaireffectonthepartywhohaveparti
allycompletedtheirobligations.Onepartycouldbe95%ofthewaythrougha£1,000,000
constructionprojectbeforeaneventwhichfrustratesthecontractoccurs.Asthelosslies
whereitfalls,theconstructorwouldbe£950,000outofpocket,whilsttheotherpartyhasl
ostnothing.Evidently,thiswasnotsatisfactoryeither.Anexampleofsuchanoccurrence
isfoundinApplebyvMyers(1867)LR2CP651.

Asaresultofthesefinancialimplicationsoffrustrationundercommonlaw,theLawRefor
m(FrustratedContracts)Act1943(LRA)wasformed.However,thecommonlawposition
isstillimportanttoknow,becausetheLRAwillnotalwaysapply,andifitdoesnot,thecom
monlawpositionwillapplytothecontract.

LawReform(FrustratedContracts)Act

S.1(2)oftheactapplieswheremoneyhasbeenpaidinadvanceorispayableinadvance.It
statesthatmoneyalreadypaidisrecoverable,andmoneythatispayableneednotbepai
d.Theremustbeatotalfailureofconsiderationinorderforthistoapply.

Youmaybethinkingthatthisisanidenticalpositiontothatofthecommonlaw,butthereis
anotherimportantfactorwhichpreventsunjustresultssuchasthoseintheFibrosacase.
Thecourtshavethediscretiontoallowtheotherpartytoretainanyadvancepaymenttoc
overanyexpensesincurred,solongastheamountofmoney

Doesnotexceedtheintendedadvancepayments,andisaformofinsuranceforthecontr
act;or

Doesnotexceedtheactualvalueortheactualexpensesincurred

73
Essentially,thissectionpreventsadvancepaymentsfromautomaticallybeingforfeited
intheeventoffrustration.

Indecidingwhethertoallowtheretentionofanyadvancepayments,thecourtwillconsid
erwhethertheexpensesincurredmayberecoveredinanalternativeway.Forexample,t
akeacontractforthesaleofacarhasbeenfrustrated,butthepartysellingthecarpurchas
edthecarfromsomebodyelseonedayearlier.Intheory,theywouldhaveincurredtheex
penseofbuyingthecar.However,itislikelytheycouldrecovertheseexpensessimplyby
sellingthecartoanotherbuyer,meaningtheretentionofanyadvancepaymentwouldbe
unfairandwouldresultinanextragain.

S.1(3)statesthatwherenoadvancepaymenthasbeenmadeorwillbemadeundertheco
ntract,therecanbenocompensationforexpensesincurredintheperformanceofafrustr
atedcontract.Again,thisseemsverysimilartothepositionunderthecommonlaw.

However,iftheperformancehasconferredavaluablebenefitontheotherpartypriortoth
efrustratingevent,thecourthasthediscretiontoallowaclaimfortheincurredexpense.T
heamountwillbeassessedasfollows:

Itcannotexceedtovalueofthebenefitconferredtotheotherparty;

Thecourtmustconsidertheexpensesincurredbythepartyreceivingthebenefit

Thecourtmustconsiderthebenefitreceivedandhowthefrustrationhasaffectedsuchbe
nefit.

InGamercoSAvICM/
FairWarning(Agency)Ltd[1995]1WLR1226astadiumwaspreparedforaconcert,
butthecontractwassubsequentlyfrustrated.Itwasheldthatthepreparationofthestadi
umdidnotconferanytangiblebenefittothedefendant.

ThecaseofBPExplorationCo(Libya)LtdvHunt(No.2)
[1979]1WLR783sawanapplicationofSection1(3).RobertGoffJconfirmedthecorrecta
pproachtocalculatetheamountallowedforexpenditure:

Identifyandvaluethebenefittothepartyreceivingthebenefit,thisbecomestheupperli
mitofaward

Withinthelimitfrom(a),decidewhatsumisjustwithreferencetofairness,theeffectoffru
stration,andtheexpensesincurredbythepartyreceivingthebenefit.

74
ContractswhichtheLRAdoesnotapplyto

TheLRAdoesnotapplytocertaincontracts.Inmostcases,thecommonlawruleswillthen
apply.

Wherethecontracthasmadeexpressprovisionfortheconsequencesoffrustration(Sec
tion2(3))

Wherethecontractualobligationshavebeenwhollycompleted(Section2(4))

Contractsforthecarriageofgoodsbysea(Section2(5)(a))

Contractsforinsurance(Section2(5)(b))

Contractsforthesaleofspecificgoodswhicharefrustratedduetotheperishingofgoods(
Section2(5)(c)

Frustration-Handsonexample

Inordertoidentifyaproblemquestionrelatingtofrustration,youshouldlookoutforsituat
ionsinwhichacontractbecomesimpossibleorradicallydifferent.Obviousthingstolook
outforarethenon-
occurrenceofevents,thesubsequentillegalityofacontractorthedestructionofthesubj
ectmatterofthecontract.

Hereisasuggestionapproachwhentacklingaproblemscenariorelatingtothedoctrineo
ffrustrationthatshouldallowyoutoanswerthequestionfullyandspotalltherelevantiss
ues:

Hastherebeenanallocationofriskofthatparticulareventbetweentheparties

Doestheeventresultinthecontractbeingimpossible,ormaketheobligationsradicallyd
ifferent?

Canyouapplyanyofthepresumptionstotheevent?

Applytothelawofthepresumptiontotheevent

Isthefrustrationbasedonanassumptionmadebybothoftheparties?

Waseitherofthepartiesatfaultforthefrustratingevent?

DoyouapplythecommonlawallocationoflossortheLawReformAct1943allocation?

75
Scenario

Sashaisanentrepreneurandisexperimentingwithanumberofdifferentbusinessideas.
Shehashadsomeawfulluckandtherehasbeenanumberofeventswhichmayleaveheri
nadifficultpositionasfarashercontractualobligationsareconcerned.

Contractoneiswithanartisancheeseshop.Shehascontractedtosellthem£10,000wort
hofSwedishcheese.ThereisonlyonesupplierofSwedishCheese,whoislocatedinSwed
en.Unfortunately,beforethedeliveryofthecheese,awarhasbrokenoutbetweenSwed
enandEngland.Alltradingbetweenthecountriesistobeceasedandisnowillegal.

CanSarahusethedoctrineoffrustrationtoreleaseherselffromthecontract?

Contracttwoisacontractforthehireofalargewoodenmarketstandinthecenteroftheto
wnsmarket.Subsequenttothemakingofthecontract,theownerofthemarketstandwas
cleaningit.Aftertakingabreakforacigarette,heaccidentlydroppedthestilllitcigarette,
resultinginthemarketstandbeingdestroyedbyafire.

Wouldthedestructionofthestallmeanthecontractfortherentalofthestallisfrustrated?

ContractthreeismadewithJoe,whoispayingSasha£3000forhertobuildhisbusinessaw
ebsite.Sashawasconcernedhemaynotpayher,sotookanadvancepaymentof£1,500.
Thecontracthasnowbeenfrustratedduetoalawwhichrendersthecreationofthispartic
ulartypeofwebsiteillegal.Joeisnowtryingtoclaimhisadvancepaymentback.Sashahas
spentoverfiftyhoursworkingonthewebsite,andherusualhourlyrateis£20.

Followingthefrustrationofthecontract,canJoeclaimtheadvancepaymentback?
Ifso,willhebeentitledtotheentire£1,500orjustpartofit?

Thesubsequentillegalityofacontractmayrenderacontractfrustrateddependentonth
elengthoftimethecontractwouldbeillegal.Inthiscase,itwouldbeuncertainhowlongth
ewarwilllast,thereforeitismorelikelythatfrustrationwouldbeabletobesuccessfullyar
gued.

However,inthiscase,thecontractbetweenSashaandtheartisancheeseshopisnotilleg
al,onlySasha’ssupplycontractfortheSwedishcheeseisillegal.Thisissimilartothecase
ofBlackburnBobbinCoLtdvAllen(TW)&SonsLtd[1918]1KB540.Inthatcaseitwasheldt
hattheoriginalcontractwasnotfrustratedjustbecauseoftheimpossibilityoftheonepar
ty.Onlyoneparty,Sasha,hadmadetheassumptionthatthesupplyofcheesewouldbele

76
gal.Inorderforfrustrationtooperate,bothpartiesmustmaketheassumption,whichisn
otthecasehere.Therefore,thecontractwouldnotbefrustrated.

Thesecondcontractualissuerelatestothedestructionofthesubjectmatter.InTaylorv
Caldwell(1863)3B&S826itwasconfirmedthatwherethesubjectmatterofacontract
isdestroyed,thecontractwillbefrustrated.However,inthiscasethereisanelementoffa
ult.Itwastheownerofthestallsfaultthesubjectmatterwasdestroyed,duetotheirneglig
entactofdroppingalitcigaretteonthewoodenstand.Whereonepartyisatfault,thecont
ractwillnotbefrustrated(MaritimeNationalFishLtdvOceanTrawlersLtd[1935]
AC524). TaylorvCaldwellconfirmsanegligentactwillbesufficienttoamounttofault.

TheLawReform(FrustratedContracts)actgivesguidancewhathappensintheeventtha
ttherehasbeenanadvancepaymentmadeforacontractthatissubsequentlyfrustrated
.Section1(2)oftheactrulesthatanadvancepaymentmayberetained,solongastheamo
untdoesnotexceedthespecifiedadvancepaymentunderthecontract,anddoesnotexc
eedtheexpenditureofthepartywhohasreceivedthepayment.

Inthiscase,Sasha’sexpenditurecanbecalculatedbymultiplyingherhourlyrate,
£20,bythenumberofhoursshespentcreatingthewebsite.Therefore,Sasha’sexpendit
ureamountsto£1,000.ThismeansSashacanretainamaximumof£1,000fromtheadva
ncepayment,meaningJoewillbeentitledtoareturnoftheremaining£500

The Law of Agency.

The law of agency is an area of commercial law dealing with contractual,
quasi-contractual and non-contractual fiduciary relationships that involve

77
a person, called the agent who is authorized to act on behalf of another
called the principle to create legal relations with a third party.
Agency is a fiduciary relation which results from the manifestation of
consent by one party to another that the other shall act on his or her
behalf and subject to his or her control, and consent by the other so to
act. The one for whom action is to be taken is the principal and the one
who is to act is the agent.
Section 117 of Contract Act Cap 284 defines an agent to mean a person
employed by a principal to do any act for that principal or represent
principal in dealing with a third party, and principal means a person who
employs an agent to any act for him or her or to represent him or her in
dealing with a third party. In the same section sub-agent means a person
employed by and acting under the control of an agent in the business of
the agency.

It’s a relationship between a principal and an agent where the principal

expressly or implicitly, authorizes the agent to work under their control
and on their behalf. The agent is thus required to negotiate on behalf of
the principal or bring them and the third parties into contractual
relationship.
Section 121 of the Contract Act Cap 284 provides that authority of agent
may be express or implied.
The law of agency separates and regulates relationships between:
 Agents and principals (internal relationship), known as the principal-
agent relationship.
 Agents and the third parties with whom they deal on the principal’s
behalf (external relationship)
 Principal and third parties when the agent deal.
Prerequisites and effect of agency. Where an agent acts on behalf of a
principle within the scope of his authority, which has been granted to him
expressly or can be implied from the circumstances, his acts bind the
principal unless it follows from the circumstances of the case that the
agent undertakes to bind himself only.

78
The scope of the agent’s authority must be determined through
interpretation of the terms of power of attorney (in case of an express
authority) or principal’s conduct or the circumstances from which the
principal’s intention to confer authority on agent can be inferred (implied
authority). Even absent an express or implied authority, the acts of the
agent may bind the principal and vis-à-vis third party in case of apparent
authority.
section 122 provides for extent of authority of agent, and subsection 1
provides for an agent with authority to do an act, has authority to do
anything which is necessary to do the act, and subsection 2 provides that
an agent with authority to carry on business has authority to do anything
which necessary for the purpose of carrying on the business or which is
usually done in the course of conducting the business.
The role of an agent and scope of their authority affect how the agent is
described, for example:
 Universal agents are authorized to perform all lawful acts that the
principal could personally perform.
 General agents are authorized to transact all the principal’s
business in a particular place or a particular kind.
 Special agents are authorized to perform either a specific
transaction or task

Actual authority.
Section 121 of the Contract Act Cap provides for authority of agent may
be express or implied.
Either the principal may have expressly conferred authority on the agent,
or authority may be implied. Authority arises by consensual agreement.
An agent, as a general rule, is only entitled to indemnity from the principal
if they have acted within the scope of their actual authority, and if they
act outside of that authority they may be in breach of contract, and liable
to a third party for breach of the implied warranty of authority.

79
Express actual authority. Means an agent has been expressly told they
may act on behalf of a principal.
Section 121 (2) provides that authority is express where it is given by
spoken or written words.

Implied actual authority.

Section 121(2) provides that authority is implied where it is to be inferred
from the circumstances of a case.
It is also called ‘usual authority”, authority an agent has by virtue of
being reasonably necessary to carry out his express authority. As such, it
can be inferred by virtue of a position is held by an agent. Example,
partners in the firm, there liability being joint and several. In a
corporation, since a corporation can only act through natural person
agents, the principal is bound by the contract entered into by agent, so
long as the agent performs within the scope of the agency, and therefore,
all executives and senior employees with decision-making authority by
virtue of their position have authority to bind the corporation. In the case
of Hely-Hutchinson v Brayhead Ltd (1968) 1 QB 549 is a landmark
decision in English company law and the law of agency, particularly
regarding actual and apparent authority of company officers.
Facts:
Hely-Hutchinson was the chairman of Perdix investments Ltd, which lent
money to Brayhead Ltd.
Mr. Richards, the chairman of Brayhead, personally assured Hely-
Hutchinson that Brayhead would guarantee Perdix’s debts and indemnify
him any personal losses.
However, Brayhead’s board never formally approved these assurances.
When Perdix failed, Hely-Hutchinson sought to enforce the guarantees
against Brayhead.
Issues:
Did Mr. Richards have the authority to bind Brayhead Ltd to the
guarantee?
Court of Appeal Decision:

80
Lord Denning held that Mr. Richards had ‘implied actual authority’.
 Even though there was no formal board resolution, he had acted as
the company’s de facto CEO and had been making decisions with
board knowledge.
 Since the board acquiesced in his actions, this was enough to imply
board knowledge.
 Alternatively, he had ‘apparent authority’.
 The company held him out as having authority, leading Hely-
Hutchinson to reasonably believe he could make binding
agreements.
The significancy of the case is to the effect that the case is a key
precedent in company law regarding the authority of directors and
officers.
It distinguishes between:
 Actual authority (express or implied from company conduct).
 Apparent authority (where a company represents someone as
having authority, leading third parties to rely on it).

The recent case that examines the principles of actual and apparent
authority is Ciban Management Corporation v Citco (BVI) Ltd (2020)
UKPC 21.
Facts:
The parties involved Ciban Management Corporation Ltd, the appellant
and Citco (BVI) Ltd, the respondent, among others.
The case involved the unauthorized sale of property owned by
Spectacular Holdings Inc., a company beneficially owned by Mr. Byington.
Mr. Costa, acting without explicit authority, instructed Citco, a registered
agent, to execute documents facilitating the sale. Mr. Byington had
previously allowed Mr. Costa to manage the company’s affairs, creating
an impression of authority.

Issues:

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  Whether Mr. Costa had apparent authority to bind Spectacular
Holdings Inc. in the property sale.
 The applicability of the Duomatic principle, which allows informal
shareholder consent to validate company decision.
Court decisions:
 Apparent authority: court held that Mr. costa had apparent authority
due to Mr. Byington’s conduct. By allowing Mr. Costa to act on
behalf of the company without objection, Mr. Byington created a
situation where third parties, like Citco, could reasonably assume
Mr. Costa’s authority.
 Duomatic Principle: the court applied this principle, concluding that
Mr. Byington’s tacit approval of Mr. Costa’s actions amounted to
shareholder consent, thereby validating the unauthorized
transaction.
Significancy of the case
 The case underscores the importance of clearly defining and
communicating the authority of the company.
 The case highlights that acquiescence or passive approval by
company owners can lead to unintended legal consequences as it
may confer apparent authority on individuals acting on behalf of the
company.

Incidental authority. Where an agent is supposed to have any authority

to complete other tasks which are necessary and incidental to completing
express actual authority, it must be no more than necessary. Incidental
authority refers to implied powers an agent possesses to perform a task
necessary to execute their expressly authorized duties.
Section 122 (2) provides that an agent with authority to carry on a
business has authority to do anything which is necessary for the purpose
of carrying on the business or which is usually done in the course of
conducting the business. It is more defined in Section 123 of the Penal
Code Act provides for authority of agent in emergency, which is to the
effect that an agent has authority to do any act for the purpose of

82
protecting a principal from loss, as would be done by a person of ordinary
prudence, under similar circumstances.
In case of Watteau v Fenwick (1893) 1 QB 346, A pub manager
exceeded his explicit authority by purchasing goods not authorized by the
owners. The court ruled the owners liable, emphasizing that certain
actions fall within the usual authority of such an agent.

Ford v Unity Hospital (1947) 299 N.Y.119, 85 N.E.2d 616. A hospital

administrator made financial commitments beyond their express
authority. The court found that such actions were incidental to their role,
and the hospital bound by the agreements.

United States v Standard oil Co. (1947) 332 U.S. 301. In the
government contract case, an agent made promises not explicitly
authorized. The court clarified that agents sometimes have implied
authority to negotiate certain terms necessary for fulfilling their duties.

The following are the principles for incidental authority.

The court general recognizes the incidental authority when:
 The act is necessary to carry out an expressly authorized duty.
 The act is customary for agents in similar roles.
 The principal benefits from the agent’s actions.

Apparent authority. Also called Ostensible authority, exists where the

principal’s words or conduct would lead a reasonable person in the third
party’s position to believe that the agent was authorized to act, even if
the purported agent and the principal had never discussed such
relationship. For example, when one person appoints a person to a
position which carries with agency-like powers, those who know of the
appointment are entitled to assume that there is apparent authority to do
things ordinarily entrusted to one occupying such a position. If a principal
created an impression that the agent is authorized but there is no actual
authority, third parties are protected so long as they acted reasonably. It’s

83
also called agency by estoppel or the ‘doctrine of holding out’, where
principal will be estopped from denying the grant of authority if third
parties have changed to their detriment in reliance on the representations
made except for the execution of instruments under seal or for the
conduct of transactions required by statute to be authorized in a particular
way, apparent authority to do an act is created as to a third person by
written or spoken words or any conduct of the principal which reasonably
interpreted, causes the third person to believe that the principal consents
to the act done on his behalf by the person purporting to act for him. In
the case of Rama Corporation Ltd v Proved Tin and General
Investments Ltd (1952) 2 QB 147, Slade J ‘Ostensible or apparent
authority is merely a form of estoppel, indeed, it has been termed agency
by estoppel and you cannot call in aid an estoppel unless you have three
ingredients: (i) a representation, (ii) reliance on the representation, and
(iii) an alteration of your position resulting from such reliance’.
In the case of Watteau v Fenwick (1893) 1 QB 346. Coleride CJ
concurred with an opinion by Wills J that a third party could hold
personally liable a principal who he did not know about when he sold
cigars to an agent that was acting outside of its authority. Wills J held that
‘the principal is liable for all the acts of the agents which are within the
authority usually confided to an agent of that character, notwithstanding
limitations as between the principal and the agent, put upon that
authority’.
The case of Sign-O-Lite Plastics Ltd v Metropolitan Life Insurance
Co. (1990) 73 D.L.R. (4th) 541. by the British Columbia Court of Appeal
in 1990. It centered on the liability of an undisclosed principal for
unauthorized contracts entered into by its agent.
Facts
In 1978, Sign-O-Lite Plastics Ltd entered into a 61-month rental
agreement with calbax properties ltd to install and maintain an electronic
sign at market mall shopping center in Calgary. This agreement included
an automatic renewal clause for an additional 60 months unless either

84
party provided written notice to the contrary more than 30 days before
the end of the initial term.
Prior to the renewal in 1984, Metropolitan Life Insurance Co. acquired
ownership of the shopping center and assumed the existing rental
agreement with Sign-O-Lite. Metropolitan appointed The Baxter Group Ltd
as the mall’s manager, granting them limited authority to enter into
contracts on its behalf.
In 1985, unaware of the change of ownership, Sign-O-Lite entered into a
new rental agreement with the Baxter Group Ltd believing they were
contracting with the same entity as in 1978. This new agreement
intended to replace the original, was authorized by Metropolitan Life and
lacked provisions for cancellation on 60 days’ notice.
Legal proceedings:
Sign-O-Lite sued Metropolitan Life for damages due to breach of the 1985
contract. The trial court ruled in favor of Sign-0-Lite based on the 1978
agreement.
Court of Appeal Decision:
The British Columbia Court of Appeal ruled in favor of metropolitan life,
holding that an undisclosed principal is not liable for unauthorized acts of
its agent, even if those acts fall within the agent’s usual authority.
This decision made a departure from the precedent set by Watteau v
Fenwick, which had held undisclosed principals liable for such acts.
The significancy of this case in agency law is that it clarifies the limitations
of an undisclosed principal’s liability by an agent

Liability.
1. Liability of agent to third party.
If the agent has actual or apparent authority, the agent will not be liable
for acts performed within the scope of such authority, as long as the
relationship of the agency and the identity of the principal have been
disclosed. When the agency is undisclosed or partially disclosed, both
principal and the agent are liable. Where the principal is not bound
because the agent has no actual or apparent authority, the purported

85
agent is liable to the third party for the breach of the implied warranty of
authority.
The following are cases on the liability of an agent to third party in agency
law:
1. Agent Acting Without Authority.
Yonge v Toynbee (1910) 1 KB 215 (CA). A solicitor acted on behalf of
a principal who was unknowingly insane. Since the principal lacked
capacity, the agent was held personally liable for entering into contracts
without authority.
Collen v Wright (1857) 8 E& B 647, 120 ER 241. An agent
misrepresented their authority to contract on behalf of a principal. The
court held the agent personally liable to the third party for breach of
warranty of authority.
2. Undisclosed or Partially Disclosed Principle.
Keighley Maxsted &Co. v Durant (1901) AC 240 (HL). An agent
entered into a contract without disclosing that he was acting on behalf of
the principal. The third party sued the agent, and the court held that since
the principal was undisclosed, the agent was personally liable.
Humble v Hunter (1848) 2 Exch. 313, 154 E.R 947. An agent signed
a contract in their own name without mentioning the principal. The court
ruled the agent liable since the third party believed they were dealing
directly with the agent.
3. Agent’s Fraud or Misrepresentation
Cornfoot v Fowke (1872) LR 8 CP 1. An agent unknowingly made a
false statement while selling a property. The court ruled that if the agent
acted in good faith without knowledge of the fraud, they might not be
personally liable.
Dresner v Mason (1878) 3 QBD 726. An agent knowingly
misrepresented a product’s condition. The court held the agent
personally liable for fraudulent misrepresentation.
4. Breach of Warranty of Authority.
Firbank’s executors v Humphreys (1885) 33 Ch D 1. An agent
falsely claimed to have the authority to contract for principal. The third

86
party suffered a loss, and the agent was held personally liable for the
breach of warranty of authority.
5. Negligence by an Agent
Turpin v Bilton (1843) 5 Man. & G. 455, 134 ER 1261. An insurance
agent failed to obtain coverage as promised. The agent was held
personally liable to the third party for negligence.
The general rule is that an agent can be personally liable to a third party if
they:
 Act without authority.
 Fail to disclose the existence of a principal
 Engage in fraud or misrepresentation.
 Breach a warranty of authority.
 Act negligently in fulfilling their duties.

2. Liability of agent to principal

If the agent acted without actual authority, but the principal is
nevertheless bound because the agent had apparent authority, the agent
is liable to indemnify the principal for any resulting loss or damage.
The following are some cases on the liability of an agent to principal in
agency law.
1. Agent Exceeding Authority.
Lloyd v Grace, Smith & Co. (1912) AC 716. A law firm’s clerk
fraudulently transferred property without authority. The court held the
firm liable, but it also reinforced that an agent can be personally liable if
they exceed their authority.
Boston Deep Sea Fishing & Ice Co. v Ansell (1888) 39 Ch D 339. A
company director secretly took commissions from contracts. The court
ruled he breached his fiduciary duty and was liable to return the profits.
2. Agent Acting Without Disclosing Principal
Keighley, Maxsted & Co. v Durant (1901). An agent entered into a
contract without disclosing that he was acting on behalf of the principal.
Since the third party did not know of the principal’s existence, the agent
was personally liable.

87
3. Agent’s Negligence or Misconduct
Section 145(2) provides an agent shall compensate a principal in respect
of the direct consequences of his or her own neglect, lack of skills or
misconduct but not in respect of loss or damage which are indirectly or
remotely caused by the neglect, lack of skill or misconduct of the agent.
Turpin v Bilton (1843) 5 Man. & G. 455, 134 ER 1261. An insurance
broker failed to obtain the requested insurance policy, causing the
principal a financial loss. The agent was liable for negligence.
Chaaya v Bahous (2018). An agent gave misleading investment advice
and was held personally liable for damage caused to the principal.
4. Unauthorized Contracts.
Garnca Grain Co. Inc. v H.M.F. Faure & Fairclough Ltd (1967) 2 All
ER 353. An agent entered an agreement without proper authorization.
The court ruled the agent personally liable since they had no real
authority.
The general rule is that an agent can be held personally liable to
the principal if they:
 Act beyond their authority.
 Fail to disclose they are acting on behalf of a principal
 Are negligent in carrying out their duties.
 Engage in fraud or breach of fiduciary duty.

3. Liability of principal to agent.

If the agent has acted within the scope of the actual authority given, the
principal must indemnify the agent for payments made during the course
of relationship whether the expenditure was expressly authorized or
merely necessary in promoting the principal’s business.
Section 155 (2) provides that where the principal employs an agent to do
an act and the agent does the act in good faith, the principal is liable to
indemnify the agent against loss, liability and consequences of that act,
although it may affect the rights of a third person.

1. Principal’s Duty to Compensate Agent

88
Lampleigh v Brathwaith (1615) 80 ER 255. The court held that a
principal must compensate an agent for services rendered, even if there
was no formal agreement, as long as the agent acted at the principal’s
request.
Way v Latilla (1937) 3 All E.R. 759 (H.L). An agent was promised
compensation for finding business opportunities but was not paid. The
court ruled that the principal was liable to pay for the agent’s work.
2. Reimbursement of Expenses.
Ireland v Livingstone (1872). A shipping agent incurred costs while
following the principal’s instructions. The court held that the principal was
liable for reimbursing those reasonable expenses.
Great Northern Railway Co. v Swaffield (1874) L.R. Ex 132. An
agent had to pay for storing a horse when the principal failed to provide
delivery instructions. The court ruled the principal was responsible for the
costs.
3. Principal’s Duty to Indemnify Agent.
Section 155 of the Contract Act Cap 284 provides indemnity of agent and
subsection 1 provides a principal shall indemnify an agent against the
consequences of all lawful acts done by the agent in exercise of authority
conferred upon the agent.
Adams v Lindsell (1818) 1 B & Ald 681,106 ER 250. The principal
was held liable for losses suffered by an agent due to following the
principal’s faulty instructions.
Baring v Stanton (1876) 1 Ch D 1. A principal failed to support an
agent in a legal dispute arising from agency duties. The court held that
the principal must indemnify the agent for legal costs incurred while
acting in good faith.
4. Principal’s Breach of Contract
Read v Anderson (1884) 13 QBD 779. A principal refused to honor a
bet placed by his agent. The court ruled that the agent was entitled to
reimbursement, as he had acted within his authority.
The general rule is that a principal is liable to an agent if they:
 Fail to pay agreed compensation.

89
  Do not reimburse the agent for reasonable expenses.
 Do not indemnify the agent for losses incurred while acting within
authority.
 Breach contractual duties owed to the agent.

Duties.
An agent owes the principal a number of duties, and these are:
1. A duty to underate the task or tasks specified by the terms
of the agency.
Section 144 of the Contract Act Cap 284 provides that an agent shall
conduct the business of a principal according to the directions given by
the principal or, in the absence of any directions, according to the usage
and customs which prevail in doing business of the same kind at a place
where the agent conducts business.
A duty to follow the instructions. In the case of Lilley v Doubleday
(1881) 7 QBD 510. An agent must strictly follow the instructions of the
principal. In this case, a warehouse keeper was held liable for deviating
from instructions regarding goods storage.
Fray v Voules (1859) 5 Jur NS 395. An agent must not act beyond the
scope of authority granted by the principal.

2. A duty to discharge his duties with care, skill and due

diligence.
Section 145 of the Contract Act Cap 284 provides for skill and diligence
required from agent and subsection 1 provides that an agent shall act with
reasonable diligence and conduct business of the agency with as much
skill as is generally possessed by a person engaged in similar business,
unless the principal has noticed the lack of skill by the agent.
Subsection 2 provides an agent shall compensate a principal in respect of
the direct consequences of his or her own neglect, lack of skills or
misconduct.

90
Turpin v Bilton (1843) 5 M & G 455. An agent must exercise
reasonable care and diligence in performing their duties. In this case, an
insurance broker failed to secure a policy, leading to liability.
Chaaya v Ireland (2020) EWCA civ 1746. An agent may be liable for
negligence if they fail to perform their contractual obligations with due
skill and care.

3. fiduciary duty and loyalty.

An agent must not accept any new obligations that are inconsistent with
the duties owed to the principal. An agent can represent the interests of
more than one principal, conflicting or potentially conflicting, only after full
disclosure and consent of the principal. An agent must not usurp an
opportunity from the principal by taking it for himself or passing it on to a
third party.
In the case of Aberdeen Railway Co. v Blaikie Bros (1854) 1 Macq
461. An agent must avoid conflicts of interest and act in the best
interests of the principal. In this case, a director had a personal interest in
a contract with a company, which was deemed a breach of duty.
Boardman v Phipps (1967) 2 AC 46 (HL). An agent must not make an
unauthorized profit from their position. Even if they act in good faith,
undisclosed profits can be recovered by the principal.

The principal owes the agent a duty to fully disclose all information
relevant to the transactions that the agent is authorized to negotiate. In
the case of Chaaya v Ireland (2020) EWCA civ 1746. A principal must
not act in a way that undermines the agent’s ability to perform their
duties effectively.
Liverpool City Council v Irwin (1977) AC 239. It establishes the
principle that certain duties such as cooperation and fair dealing may be
implied in contracts.

Termination of agency.

91
Termination of agency is provided under Section 134 of Contract Act Cap
284.
An agency is terminated where;
(a). a principal revokes his or her authority. Further in Section 136
provides that a principal may revoke the authority given to an agent at
any time before the authority is exercised to bind the principal.
Section 137 provides that revocation where authority is partly exercised, a
principal shall not revoke the authority given to an agent after the
authority is partly exercised, with respect to acts and obligations that
arises from act already done under the agency.
(b). an agent renounces the business of the agency.
© . the business of the agency is completed.
Rhodes v Forwood (1876) 1 App Cas 256. If an agency exists for
specific tasks, the completion of that task terminates the agency.
Luxor (Eastbourne) Ltd v Cooper (1941) AC 108. If an agency
contract is for a specific purpose or duration, it automatically terminates
once that purpose is fulfilled, or the time expires.
Burbin v Robertson (1903) 2 KB 40. A contract for agency services
that specifies duration comes to an end automatically at the expiration of
the agreed period.
(d). a principal or an agent dies
(e). a principal or an agent suffers from mental illness.
(f). a principal or an agent is adjudicated an insolvent under the law.
(g). the principal and agent agree to terminate the agency.
Agency relationships may be dissolved by mutual agreement between the
principal and agent, either explicitly or implicitly.
Sibbald v Globe Insurance Co. (1891) 4 Q.B.D 403. An agency
relationship can be terminated if both parties agree, even if it was initially
for a fixed term.
Freeman v Buckinghamshire County Council (1994) 2 All ER 806. If
an agreement exists between the principal and the agent to end the
agency, this is binding provided both parties consented.
(h). the purpose of the agency is frustrated.

92
Consequences of Termination of Agency
1. Agent’s authority ceases.
Watteau v Fenwick (1893) 1 QB 346. After termination, an agent no
longer has actual authority, but third parties may still assume they do if
proper notice is not given (risk of apparent authority).
Drew v Nunn (1879) 4 QBD 661. A principal must notify third parties of
termination, or they may still be bound by the agent’s acts.

2. Confidentiality and Restrictive Covenants.

Robb v Green (1895) 2 QB 315. An agent must not misuse confidential
information obtained during the agency even after termination.

DISCHARGE OF CONTRACT

Discharge of a Contract, a contract comes into existence by the

agreement of the parties. Therefore, the term Discharge of a Contract
means ending of contractual relationship between the parties. contract is
said to have been discharged when ceased to operate.

The following factors discharge a contract.

93
1.Discharge by Agreement.
Refers to the mutual assent between the parties involved to terminate or
discharge the contract. The agreement can be reached at any point during
the performance of the contract, provided both parties consent freely to
end their obligations under the contract.
After the contract is discharged, the parties no longer obliged to fulfill the
original contract’s future obligations. however, they may still need to deal
with any rights or duties that had already accrued.
If one party has already fulfilled their obligations, the other party may
need to provide consideration to discharge the contract. In this case, a
separate contract should be created to outline new consideration.
British Russian Gazette v Associated Newspapers (1933).
Facts:
A publishing company, British Russian Gazette, entered into a contract
with Associated Newspapers for printing and distribution services. Both
parties agreed to terminate the contract due to changing circumstances.
However, a dispute arose regarding the terms and conditions of the
termination.
Issues:
Whether the agreement to discharge the contract was valid and binding.
Decision:
The court held that discharge by agreement was valid if there is a clear
and mutual understanding between the parties and consideration to
terminate.
In this case, the mutual agreement to terminate the obligations satisfied
the requirement for consideration, making the discharge legally
enforceable.

Other way to discharge the agreement include:

Section 50 of the contract Act Cap 284 provides for effect of novation,
rescission, and alteration of contract which is to the effect that where the
parties to a contract agree to substitute for the original contract a new

94
contract or to rescind or alter the original contract, the original contract
need not to be performed.

Alteration. In contract law refers to a situation where the terms of an

existing contract are modified or changed by mutual agreement of the
parties. these changes can affect the rights and obligations of one or more
parties to the contract. Alteration may lead to a continuation of the
original agreement (with modifications) or, in some cases, result in a new
contract.
United Indian Insurance Co. Ltd v M.K.J. Corporation (1996)
A policyholder and an insurance company entered into an agreement
regarding insurance coverage. Later, the terms of the policy were altered
without mutual consent.
The Supreme court of India ruled that a unilateral alteration to the
contract was invalid because it lacked mutual agreement.
This case emphasizes that alteration must be agreed upon by all parties
to remain enforceable.

Rescission. In contract law refers to the process of cancelling or setting

aside a contract, thereby releasing the other parties from their obligations
and returning them to their pre-contractual positions. Rescission can occur
by mutual agreement, court order, or unilateral action if justified.
Section 52(1) of the Contract Act Cap provides that where a person at
whose option a contract is voidable, rescinds it, the other party to the
contract need not to perform any promise contained in the contract.
See Section 62.
Section 52(2) of the Contract Act Cap provides that a person who rescinds
a voidable contract shall, if that party received any benefit from the other
party to the contract, restore the benefit to the person whom it is
received.
 Key grounds for Rescission are;
 Mutual mistake (Bell v Lever Brothers Ltd (1932)
 Misrepresentation (Derry v Peek (1889)

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  Duress or Undue Influence Barton v Armstrong (1976)
 Lack of Capacity
 Illegality

Novation.
Is a legal concept in contract law that involves the replacement of one
party or obligation with a new one, effectively creating a new contract.
This requires consent of all the parties involved. It is commonly used to
transfer rights and obligations under a contract from one party to another.
A key case that illustrates the concept of novation is.
Scotson v Pegg (1861).
Facts:
Scotson, the plaintiff was a coal supplier who contracted to deliver coal to
a third party. The third party instructed Scotson to deliver the coal to peg,
the defendant who agreed to unload the coal. Scotson claimed that Pegg
failed to unload the coal as agreed and sued him. Pegg argued that no
new contract existed between them since Scotson was already bound by
the earlier agreement to deliver the coal.
Issue:
The primary legal question was whether Scotson’s performance of an
existing contractual obligation could constitute valid consideration for a
new contract with peg.
Decision:
The court ruled that Scotson’s performance of the pre-existing duty under
the first contract constituted valid consideration for the second agreement
with Pegg.

2. Accord & Satisfaction.

Accord in discharge of contract refers to a new agreement between the
contracting parties to alter or settle the original contractual obligation.
Satisfaction is the fulfillment of the agreed-upon accord, leading to the
discharge of contract.

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It occurs when one party offers a substitute for what was originally owed
(the accord), and the other party accepts this substitution as a
performance leading to satisfaction. Subsequently, the original obligation
is discharged.
For example: if Maate owes Ajina UGX 1M under a contract. Maate and
Ajina agree (the accord) that Maate will instead deliver 5 pieces of H.W
Hodgins contract law text books worth UGX 800,000, and Ajina Accepts
this as full settlement. Once Maate delivers the 5 text books (satisfaction),
the original UGX 1M debt is discharged.
The following are the key elements of Accord and Satisfaction.
 Offer. One party proposes a substitute performance.
 Acceptance. The other party agrees to this substitute.
 Lawful Consideration. There must be something of value
exchanged to support the new agreement.
 Performance (Satisfaction). The party who owes the obligation
must fulfill the altered obligation. In case of any discrepancy with
this performance (satisfaction), the original obligation remains in
place, and it will not be discharge of contract.
 Consensual agreement. The parties to the original contract must
voluntarily agree to the accord. If one party is coerced or misled into
accepting the terms, it will not be valid form of discharge of
contract.
This doctrine was clearly explained by the court in Boghara Polyfab case.
The Boghara Polyfab case refers to the supreme court of India’s judgment
in National insurance Co. Ltd. V M/S. Boghara Polyfab Pvt. Ltd. On
September 18, 2008. This case is significant in understanding the
application of the doctrine of accord and satisfaction within Indian
contract law.
Facts
M/S. Boghara Polyfab Pvt ltd. Held a fire and special perils insurance policy
within national insurance co. ltd. Covering goods stored in their Surat
godowns. Following a natural disaster that caused substantial damage,
the insurer assessed the net loss and offered a settlement amount of

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£2,33,94,964.00, which was less than the initially assessed loss of
£3,18,26,025.00. The insured accepted this amount and provided a full
and final discharge voucher. Subsequently, Boghara Polyfab sought to
invoke arbitration, alleging that the discharge voucher was signed under
coercion

Supreme Court Analysis

The court examined whether a dispute could be referred to arbitration
after insured had executed a full and final discharge voucher. It was
observed that a discharge voucher or a no-dues certificate extend only to
those vouchers or certificates which are validly and voluntarily executed.
If such a document is alleged to have been obtained under coercion,
undue influence, or fraud, the dispute regarding its validity can be
referred to arbitration.

Implications of the judgment:

This rule clarifies that the mere execution of a full and final settlement
does not automatically preclude arbitration. If the party claims that such a
settlement was reached under coercion or undue influence, this
contention itself constitutes a dispute that can be arbitrated. The
judgment underscores the importance of genuine consent in settlements
and upholds the principle that arbitration clauses remain enforceable even
when the validity of the settlement is in question.
In summary, the Boghara Plyfab case highlights the nuanced application
of the doctrine of accord and satisfaction in Indian law, emphasizing that
settlement must be entered into voluntarily and without coercion to effect
discharge contractual obligation.

In the case of Stour Valley Builders v Stuart (1992) CILL 774

The case addressed the principles of accord and satisfaction in the context
of dispute debts and payments marked as ‘full and final settlement.’
Background

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Stour valley builders performed construction work for Mr. and Mrs. Stuart.
After disputes arose over certain charges, the builders revised their
invoice to £10,163. In response, the Stuarts sent a cheque for £8,471,
explicitly stating it was in ‘Full and final settlement’ of the account. The
builders deposited the cheque but, two days after it cleared, informed the
Stuarts that they did not accept this amount as full and final settlement
and pursued the remaining balance.
Court’s Analysis and Decision.
The court examined whether the builder’s actions constituted acceptance
of of the cheque as full settlement. It emphasized that determination
hinges on the creditor’s conduct and the communication between parties.
the referenced the precedent set in Day v Mclea (1889), which established
that if a creditor promptly notifies the debtor that a payment marked as
full and final settlement is not accepted as such, then no accord and
satisfaction is reached. In this case since the builders informed the Stuarts
shortly after the cheque cleared that they did not accept it as full
settlement, court concluded that there was no binding accord and
satisfaction.
In case of Foakes v Beer (1884) UKHL, this case confirmed Pinnel’s
case where a creditor agrees to accept less than the full amount due still
has the right to claim the balance later. The importance of this case
emphasized the need for consideration in any accord and satisfaction.

3. Discharge by Performance.
Occurs when the parties to a contract fulfill their respective obligations as
stipulated in the agreement, thereby bringing the contract to an end. It is
the most straightforward and common way to discharge a contract.
The general rule is that the parties must perform precisely all the terms of
the contract in order to discharge their obligations.
For example, in a contract for sale of goods, Section 14(1) of Sale of
Goods and Supply of Services Act 292 provides that where there is a
contract for the sale of goods by description, there is an implied condition

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that the goods shall correspond with the description. The precise
requirement was illustrated in the case of Re Moore and Landauer1
There was an agreement for the sale of 3,000 tins of canned fruit packed
in cases of 30 tins. When delivered it was discovered that half the cases
contained only 24 tins although the total number of tins was still 3,000.
The market value was not affected.
The court of Appeal held that notwithstanding that there was no loss to
the buyer, he could reject the whole consignment because of the breach
of Section 13 of Sale of Goods Act (goods must correspond with the
description).
You can see2.

The case of Cutter v Powell (1795)

Is a landmark English contract law case that established the doctrine of

substantial performance and reinforce the concept of entire contract.

Facts.

Powell, the defendant, hired Cutter, the plaintiff’s husband, as a second

mate on a voyage from Jamica to Liverpool. Cutter was to be paid £30 for
his services, but the payment was conditional on completing the voyage.
Cutter begun the voyage and worked until he died a few weeks before the
ship reached Liverpool. After Cutter’s death, his widow attempted to claim
a proportionate amount of the wages for the work Cutter had completed.

Issues:

Was Cutter (or his estate) entitled to a proportionate payment for the work
he had performed up to the time of his death, even though he did not
complete the voyage?

Decision:

The court held in favor of Powell, the employer.

Reasoning.

1
(1921) 2 KB 519
2
(1795) 6 Term Rep 320

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  The contract between Cutter and Powell was an entire
contract, meaning payment was contingent upon the
complete performance of the agreed task. (the entire voyage).
 Since Cutter did not complete the voyage, no payment was
due under the terms of the agreement.
The significancy.

If a contract is entire (performance is indivisible), the party

performing cannot claim payment unless they fulfill their
obligations in full.

Modern Exceptions:

while this case established the strict application of entire

contract, later cases introduced the concept of quantum
meruit and substantial performance, allowing claims for
partial performance in certain circumstances.

Partial performance.

The case of Hoeing v Isaac (1952) is an important English contract law

case that addresses the concept of substantial performance in relation to
contracts.

Facts:

Hoeing, the plaintiff, an interior decorator, entered into a contract with

Isaac, the defendant to furnish and decorate a flat for £750. Upon
completion of the work, Isaac paid £400 but refused to pay the remaining
£350, claiming that there were defects in the work. The cost of remedying
these defects was estimated to be £55. Hoeing sued Isaac for the
outstanding balance of £350.

Issues:

Can a contractor claim contract price if the performance is substantially

complete but contains minor defects?

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Decision:

Substantial performance:

The court held that the work was substantially performed, meaning the
majority of the contractual obligations were completed satisfactorily. The
minor defects did not justify withholding the entire outstanding payment.

The court allowed a deduction of £55 (the cost of rectifying the defects)
from the remaining balance.

Hoeing was awarded £295 (£350-£55).

The significancy.

The modification of the general rule of performance can be seen in several

instances as noted below.
A. Divisible Contracts.
A contract may be entire of divisible. An entire contract is one where
the agreement provides that complete performance by one party is a
condition precedent to contractual liability on the part of the other
party.
Divisible contract is where part of the consideration of one party is off
set against part of the performance of the other party.
In the case of Sumpter v Hedges3.
Facts.
The claimant was a builder. He contracted with the defendant to build
several buildings for a lump sum fee. The claimant abandoned the
contract after completing some but not all of the buildings. They then
sued for a fee and costs based on Quantum Meruit.

Issue
Whether the claimant could recover money for the work performed?

Decision.

3
(1898) 1QB673

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 Smith LJ held that where there is a contract to do work for a lump sum,
until work is completed the price of it cannot be recovered. This is the
‘entire contract’ rule. In this kind of scenario, the claimant cannot claim
quantum meruit either, unless there is fresh contract permitting this.

B. Acceptance of partial performance.

Where the party to whom the promise of performance was made
receives partial performance of the promise under such circumstances
that he is able to accept or reject the work and if he accepts the work
then, the promise is obliged to pay a reasonable price for the benefit
received.
However, it must be possible to infer from the circumstances a fresh
agreement by the parties that payment shall be made for partial
performance of contract.
In the case of Christy v Row4

Facts
A ship freighted to Hamburg was prevented ‘by restraint of princes’
from arriving. Consignees accepted the cargo at another port to which
they had directed it to be delivered.
Decision
The consignees were held liable upon an implied contract to pay freight
pro rata itineris (ie, for freight at the contract rate for the proportion of
the voyage originally undertaken which was actually accomplished). A
contract was implied from their directions to alternative port of
delivery.

C. Completion of performance is prevented by the promisee

Where a party to an entire contract is prevented by the Promisee from
performing all his obligations, then he can recover a reasonable price
for what he has done on a quantum meruit basis.
4
(1808) 1 Taunt 300

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 In the case of Planche v Colburn5
Facts
The plaintiff was to write a book on ‘Costume and Ancient Armour’ for
series and was to receive £100 on completion of the book. After he had
done the necessary research but before the book had been written, the
publishers abandoned the series. He claimed alternatively on the
original contract and on quantum meruit.
Decision
The court held that (a) the contract had been discharged by defendant
breach, (b) no new contract had been substituted, and (c) the palitiff
could obtain 50 guineas as the reasonable renumeration on a quantum
meruit.

D. Substantial performance
Where a person fully performs the contract, but subject to such minor
defects that he can be said to have substantially performed his
promise, it regards as far more just to allow him to recover the contract
price reduced by the extent to which his breach of contract lessened
the value of what was done, than leave him with no right of claim at all.
In the case of
Dakin v Lee6 is a key English contract law case that addresses the
concept to substantial performance.
Facts:
Dakin & Co Ltd were builders contracted by Lee to carry out repairs
on a property for a specified price. The builders completed the
repairs, but there were some minor defects in the work. Lee refused
to pay, arguing that the contract had not been performed
completely as agreed.
Issue:
Whether the builders were entitled to payment despite the presence
of minor defects in their performance of the contract.
Decision:
5
(1831) 8 Bing 14
6
(1916) 1 KB 566

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 The ruled that:
Substantial performance: the builders had substantially performed
the contract, and therefore, they were entitled to payment.
Deductions for Defects: the payment could be reduced by an
amount equivalent to the cost of rectifying the minor defects.

4. Discharge by Breach.
Where a party fails to perform his or her side of the contract, he or she
said to be in breach. A contract is said to be breached when its terms are
broken. Failure to honor one’s contractual obligation is what constitutes a
breach of contract.

Section 34 of the contract Act Cap 284 provides for refusal of party to
perform promise. Where a party to a contract refuses or disables himself
or herself from performing a promise in its entirety, the promisee may put
an end to the contract unless he or she signifies by words or conduct, to
its continuance.

Uganda Building Services v Yafesi Muzira t/a Quick Builders

HCCS No. 154 of 2005
Is a Ugandan Hight Court decision addressing the breach of contract. It
involved a contractual dispute where Uganda building services supplied
construction materials to Yafesi Muzira. The plaintiff alleged that the
defendant failed to pay as agreed for materials delivered on credit,
thus breaching the contract.

It was held that a breach of a contract occurs when a party fails to

fulfill the obligations under the agreed terms of the contract. In this
case, it was determined whether the defendant had breached the
agreement by not making payments. Consequently, the court ruled in
favor of Uganda Building Services, affirming the breach and ordering
damages for unpaid amounts.

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The innocent party is entitled to a remedy which will depend on the type
of breach the other party has committed.
However, the breach will always give rise to a claim for damages
regardless of the nature of the breach.
Is the term in question a condition or a warrant?
The discharge of contract by breach may be in two forms, and the
A. An anticipatory / repudiation breach of contract.
It occurs when one party to a contract indicates, either through actions or
words, communicates their intention not to fulfill their contractual
obligation before the performance is due. It allows the non-breaching
party to take legal action and seek remedies even before the actual
breach occurs.
The non-breaching party may choose to terminate the contract.
In the case of Hochester v De La Tour (1853)
Where the defendant entered into a contract in April to employs the
plaintiff in June as courier. In May he wrote to the plaintiff telling him
the no longer required his services. The plaintiff sued for damages
before 1st June and succeeded.
The court held that he was entitled to choose to treat the contract
as discharged immediately and to sue for damages even though the
date of performance had not arisen.
It was held that a party to an executory agreement may, before the
time of executing it, break the agreement either by disabling himself
from fulfilling it, or by renouncing the contract, and that an action
will lie for such breach before the time for performance of the
agreement.
The innocent party must prove that the other party has made his
intention clear that he or she no longer intends to perform his or her
side of the bargain.
The repudiation of obligations that are not yet ripe for performance is
called anticipatory breach.
a. A material / fundamental breach

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 Is a significant violation of a contract terms that fundamentally
undermine the agreement’s purpose, thereby allowing non
breaching party to terminate contract and seek damages. It has the
following characteristics;
1. Failure to perform. The breaching party fails to fulfill a critical
obligation under the contract, rendering the entire contract
ineffective.
2. Irreparability. The breach is so severe that it cannot be
effectively resolved by simple fixes or minor adjustments.
3. Significant impact. The breach must have a significant impact
on the over all purpose of the contract and benefits the non-
breaching party expected to receive.
The example of material breach are;
A construction company hired to build a commercial property fails to meet
critical safety standards, making the building unsafe for occupancy.

A software developer fails to deliver a fully functional application by the

end of deadline, causing significant financial losses to the client.
This is a breach that goes to condition term of contract.
Condition is a fundamental term and goes to the heart of contract.
In Ewadra v Spencon Services Limited (Civil Suit No. 0022 of 2015)
Clause common to six contracts imposed upon the defendant the
obligation to ‘level the area where murram is excavated with the available
material around the area (topsoil which is removed) by the end of the
agreement’’. by the time this matter came to court, the defendant had
failed to honor that contractual obligation and at the end of those
contracts, left large open pits on the plaintiff's land.
Court held that the breach occurs when a party neglects, refuses or fails
to perform any part of its bargain or any term of the contract, written or
oral, without any legitimate legal excuse and as such the defendant had
fundamentally breached the contract.

b. Minor breach.

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It is also known as partial breach, where a party has performed their
essential obligations under the contract but may fail to perform something
insignificant such failure to fulfill a small detail of the contract. However,
the remainder of the contract continues without altering the purpose of
the contract.
This breach goes to the warrant term of the contract, and it does not
discharge the contract.

4.Discharge of a Contract by Frustration

Section 65 of the Contract Act Cap 284 provides for discharge by
frustration, (1) provides that where a contract becomes impossible to
perform or is frustrated and where a party cannot show that the other
party assumed the risk of impossibility, the parties to the contract shall be
discharged from the further performance of the contract.
Frustration is the impossibility of the performance of a contract caused by
an unforeseen event that happens after forming the contract, which was
not the fault of either party and which makes the contract impossible to
perform, illegal or something radically different from what the parties had
intended.
If a contract is frustrated, it comes to an end automatically at the time of
the frustrating event and the parties do not have to perform their
obligations.
As there is no breach of contract when a contract is frustrated, the
remedies associated with breach of contract (e.g. damages) will not be
available.
In Hirji Mulji v Cheong Yue Steamship Co Ltd (1926) AC 497.
Facts.
The dispute arose from a charterparty agreement, where a ship was
leased by the appellants for aa specific term starting in March1917. Before
the charter period begun, the government requisitioned the vessels for
wartime use, rendering the contract impossible to perform.
Issues.

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Frustration of the Contract: the court had to determine whether the
government’s requisition of the ship constituted frustration, thereby
discharging the contract.
Decision.
Frustration Doctrine Applied. The court held that the requisition of the ship
amounted to frustration, as it made the fulfillment of the contractual
obligations impossible.
This discharged the contract entirely.
Legal impact.
The case clarified that frustration brings a contract to an end
automatically, making it ‘void’ rather than ‘voidable’. The principle was
fundamental in later developments of contract law influencing both
common law and statutory reforms.
However, the courts are reluctant to invoke the doctrine of frustration
where the contract has simply become a bad bargain for one of the
parties.

Original Common Law Rule

The general rule is that if someone is contracted to do something, he is
not discharged because he finds the task impossible to perform.
Originally at common law, if a party assumed an absolute obligation in a
contract, then if the circumstances made performance of the obligations
impossible, he will still be bound.
The court would not allow him to escape obligations where there was no
suitable provision to protect the party.
This rule was established in the case of Paradine v Jane (1647) EWHC
KB J 5. The claimant was claiming arrears of rent. The tenant was unable
to take possession of the land for 3 years because war was bound by
contract. The court held that if a party by his own contract creates a duty
upon himself, he is bound to make it good irrespective of an inevitable
accident or necessity.

Modification of The Original Common Law Rule

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 Implied Term Theory.
The modification of the original common law was set out in the case of
Taylor v Caldwell (1863) EWHC QB J 1. Caldwell agreed to let a hall to
the plaintiff for several concerts. But before the event, the hall was gutted
by fire. Neither party were at fault.
Decision.
Blackburn LJ said that the existence of the hall was essential to the
fulfillment of the contract. He thought there was an implied condition to
the contract that the parties would be excused if performance become
impossible. The contract was discharged by frustration.
 The above case is also applicable in a situation where the subject
matter of the contract is destroyed.
 Government Intervention. It is not every government intervention that
will frustrate a contract; it depends on the effect which the intervention
has on the contract.
 The frustrating event must not have been provided for in the contract.
The contracting parties always often use force majeure clauses to
exempt liability from the acts of God, illness, extreme weather
conditions. In case of
Metropolitan Water Board v Dick Kerr & Co (1918).
Facts.
In 1914, the metropolitan water board contracted Dick Kerr & Co. to
construct a reservoir with six years. The contract included a clause to
extend the construction period if delays occurred.
In 1916, the British government ordered Dick Kerr & Co. to stop work due
to WW1 so that the men and equipment could be used in the war effort.
The government requisition made it impossible for the company for the
company to complete the reservoir as per the original terms.
Issue.
Did the government’s intervention and requisition of resources constitute
a frustration of the contract, discharging parties from further obligations?
Decision.
Court held that:

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  Frustration Applied: the government’s intervention fundamentally
altered the nature of the contractual obligations. The delay caused
by the government’s order was not temporary interruption but a
permanent and fundamental change.
 The extension clause Inapplicable: the clause allowing for an
extension of time did not cover such extraordinary events as the
government’s requisition, which went beyond the scope of
foreseeable delays.
Legal significancy:
The case reinforces the principle that a contract can be frustrated if
unforeseeable events fundamentally change its nature, making
performance impossible or radically different from what was agreed.
It distinguishes between ordinary delays (which might be managed
through contractual terms) and extraordinary circumstances that frustrate
a contract entirely.
The frustration does not apply where the event was foreseeable,
or ought to have been foreseeable, by the parties at time of
conclusion of the contract.
The sea Angel case (Edwinton Commercial Corp v Tsavliris Russ,
(2007) EWCA Civ 547).
Facts:
The dispute arose when a vessel, chartered for a salvage operation, was
detained by government authorities for over 100days due to port
clearance issue in Pakistan, for exceeding the original 20-day charter
period. The charter claimed that the contract was frustrated due to delay.
Decision.
The English court of Appeal ruled that the contract was not frustrated. The
court determined that the delay, while unexpected in its length, fell within
the realm of the foreseeable risks associated with such operations. The
Judges emphasized that frustration requires a supervening event to make
performance fundamentally different from what the parties intended when
the contract was made.

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In this case the detention was foreseeable in the salvage industry, and the
contract’s risk allocation suggested the charter bore the burden of such
delays. Justice Rix stressed a ‘multi-factorial approach’ to assess
frustration, considering the event’s foreseeability, its impact, and the
contract’s terms and expectations of the parties.
personal incapacity
It only frustrates if the contract involves personal services.
Condor v The Barron Knights Ltd (1966) 1 WLR 87
A drummer engaged to play in a pop group was contractually bound to
work on seven nights a week when work was available. After an illness,
Condor’s doctor advised that it was only safe to employ him on four nights
a week, although Condor himself was willing to work every night. It was
necessary to engage another drummer who would safely work for seven
nights each week.
The court held that Condor’s contract of employment had been frustrated
in commercial sense. It was impracticable to engage in a stand-in for three
nights a week when Condor could not work, since this involved double
rehearsals of the group’s music and comedy.
Frustration of purpose or non-occurrence of a particular event on
which the contract depends.
Krell v Henry (1903) 2 KB 740
Henry hired a room from Krell for two days, to be used as a position from
which to view the coronation procession of Edward VII, but the contract
itself made no reference to that intended use. The King’s illness caused a
postponement of the procession.
It was held that Henry was excused from paying the rent for the room. The
holding of procession on the dates planned was regarded by both parties
as basic to enforcement of the contract.
Contrast:
Herne Bay Steamboat Co v Hutton (1903) 2 KB 683.
Herne agreed to hire a steamboat to Hutton for a period of two days for
the purpose of taking passengers to Spithead to cruise round the fleet and
see the naval review on the occasion of Edward VII’s coronation. The

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review was cancelled, but the boat could have been used to cruise round
the assembled fleet.
It was held that the contract was not frustrated. The holding of naval
review was not the only event upon which the intended use of the boat
was dependent. The other object was to cruise round the fleet, and this
remained capable of fulfilment.

5.Discharge by Operation of the Law

Section 32(1) provides that the parties to a contract shall perform or offer
to perform their respective unless the performance is dispensed with or
excused under this Act or any other law.
Discharge by operation of the law occurs when a contract is terminated
due to legal principles or statutory provisions, rather than the actions or
intentions of the parties.
If changes in law render the performance of the contract illegal, it is
discharged.
Example: trade contracts are void if new legislation bans the trade of the
goods involved.

6.Death of the party.

If contract involves personal services or obligations that cannot be
performed by someone else, the death of the obligated party discharges
the contract.
Example: a singer contracted for live performance cannot fulfill the
contract if they pass away.
7.Lapse of time.

Under limitation laws, a contract may be discharged if a party fails to

enforce their rights within the prescribed period.

Bank of India Ltd v Lekhimani (1967)

Facts:

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A borrower failed to repay a loan, and the lender delayed enforcement of
their rights. The borrower argued that debt was unenforceable due to the
limitation of the period.

Decision:

The court held that the contract was discharged due to the lapse of the
statutory limitation period.

8.Bankruptcy or Insolvency.

When a party is declared bankrupt, their obligations under the contract

may be discharged as part of insolvency proceedings.

Example: under insolvency laws, the bankrupt party’s debts may be

restructured or written off.

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Remedies.

In contract law remedies refer to the legal solution available to an injured

party when a contract is breached. The remedies aim to compensate the
non-breached party and ensure fairness.

It is the means by which a court enforces a right, imposes a penalty, or

makes another court order to

The remedies are broadly classified as monetary and non-monetary

remedies.

1. Damages.
Is compensation for the loss suffered by a party following a breach of
contract by the other party. The purpose of an award for damages is to put
the injured party in a position he would have been in if the breach had not
occurred.

Section 60 of the Contract Act Cap 284 provides for compensation for loss
or damage caused by breach of contract, and (1) states that where there
is a breach of contract, the party who suffers the breach is entitled to
receive from the party who breaches the contract, compensation for any
loss or damage caused to him or her.

Hadley v Baxendale (1854).

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A mill owner (Hadley) sued a carrier (Baxendale) for the late delivery of a
crankshaft, which halted mill operations. Hadley sought compensation for
profits caused by the delay.

The court held that damages are only recoverable if they arise naturally
from the breach, and they were within the contemplation of both parties
at the time of contract formation.

1a. Nominal Damages.

These are small rewards reflecting the plaintiff’s right to success but
showing that he has not suffered substantial harm or financial loss.

Nalumba v Uganda Wildlife Ltd.

The plaintiff had been employed in the company of the defendant as an

appropriate hunter under a contract that provided for free medical
treatment and personal accident insurance equal to five times the plaintiff
annual salary. The defendant never took out insurance and when the
plaintiff injured his knee, he sued to recover from the employer £2750
representing five times his annual salary. Faud CJ. Dismissed the claim for
that amount and awarded nominal damages of 40/=

1b. Compensatory Damages.

These are designed to restore the injured party to the position they would
have been in had the wrong not occurred. Reflects the financial loss
suffered or at least the amount that court is willing to recognize as flowing
directly or naturally from loss. Entitles the aggrieved to real money.

They are further divided into:

1b1. Special (Economic) Damages

Tangible, Quantifiable losses, such as: medical expenses, loss of wages or

earnings, property damage, and other out-of-pocket expenses.

1b2. General (Non-Economic) Damages

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Intangible losses that are harder to quantify, such as: pain and suffering,
emotional distress, loss of companionship or consortium, and loss of
enjoyment of life.

According to Black’s Law Dictionary 8 th Edition, general damages are

damages which law itself implies or presumes to have accrued from wrong
complained of, for the reason that they are its immediate, direct and
proximate result.

The burden is on the plaintiff to prove to the satisfaction of the court the
damages suffered.

Kaloli Sempa v Latif’s Garage Ltd

The plaintiff had taken a car on a hire purchase terms from the defendant.
The car was later re-possessed for alleged nonpayment of the
installments. The plaintiff successfully proved that fled the country and he
was unable to make the payment. He demanded the return of the car and
special damages to cover the loss of profits he would have made when
using the car to sell secondhand clothing in the outlying markets of
Kampala.

The court ordered the return of the car or its value but rejected the claim
for special damages on the basis that the plaintiff had alleged but not
proved such loss.

Liquidated damages.

Damages are liquidated when parties to a contract agree in the contract

that in case of a breach, damages shall be fixed sum of money to be
calculated in a particular way paid by the breaching party if contractual
obligation is not fulfilled. They are agreed upon at the time the contract is
formed and are meant to estimate the losses that may be difficult to
quantify later. The amount must be a reasonable estimate and not a
penalty. Courts distinguish liquidated damages from penalties. If deemed
excessive or punitive, the clause may be invalid.

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Dunlop Pneumatic Tyre Co. Ltd v Garage & Motor Co. Ltd (1915)
A.C 79

Is a landmark English case that established key principles regarding

liquidated damages and their distinction from penalty clauses in contracts.

Facts:

Dunlop Pneumatic Tyre Co. Ltd (plaintiff) entered into a contract with New
Garage & Motor Co. Ltd (defendant), where the defendant was to sell
Dunlop’s tyres. The contract included a clause specifying that the
defendant would pay a set amount of money if they failed to perform
certain terms of the agreement. The specific clause stipulated that if the
defendant breaches the agreement, they would pay £5 per tyre sold in
breach of contract. When the defendant sold the tyres below the agreed
conditions, Dunlop sought to enforce the liquidated damages clause.

Issue:

Whether the clause in the contract was an enforceable liquidated

damages clause or unenforceable penalty? A penalty clause is one that
seeks to impose excessive or punitive damages that do not reflect actual
loss but rather punish the breaching party.

Decision:

House of Lords ruled in favor of Dunlop, holding that clause specifying £5

per tyre sold in breach was a genuine pre-estimate of the loss that Dunlop
would suffer from the breach and thus it constituted liquidated damages.

Penalty clause is if the sum is excessive or disproportionate to the

anticipated loss and is intended to punish the breaching party, it is
penalty and unenforceable.

Cellulose Acetate Silk Co. v Widnes Foundry Ltd (1933) AC 20

Widnes agreed to build a plant on certain date also agreed to pay £20 for
every week they took beyond the agreed date. They were 30 weeks late
and were supposed to pay £600 in a real sense, but Cellulose demanded

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£5850 representing their actual loss for the delay. On trial court held that
Widnes agreed to pay £20 per week delay and were not liable for more.
And it is from this case where it was defined that liquidated damages
won’t be awarded if there is not a genuine estimate of loss so if they are
excessive, they are regarded as penalty.

Causation. The general rule is that where breach can be shown to be

actual cause of loss, then the fact that there is another contributing cause
will not prevent the existence of causation. So, under certain causation,
you are only liable for losses caused by the breach of contract and the
breach must be an effective cause of loss. In the case of

County Ltd v Gironzentrate Securities (1996) 3 ALLER 832 E and

Francis Q(2005) The law, the plaintiff bank agreed to under write the
issues 26 million shares in a public quoted company. The defendant was a
stockbroker who was engaged by the plaintiff to approach potential
investors in the shares. The brokers breach the terms of their contract and
in the due cause, the plaintiff found themselves with some 4.5 million
shares having fallen, represented loss of nearly 7 million. They sued the
stockbroker and the main issue in court was whether the plaintiff’s loss
was caused by a defendant’s breach of contract. It was held that the
defendant’s breach of contract was the cause of effective loss.

Mitigation. The doctrine of mitigation of damages states that although

the defendant is in a breach, the plaintiff should take a step to cut down
the losses. The plaintiff seller must try to sell the goods on the open
market just as a plaintiff buyer must endeavor to buy elsewhere.

The court will only attempt to assess the damages after the plaintiff has
made the efforts to mitigate the damages. And test is what a reasonable
man would have done in the particular circumstances of the case.

Musa Hassan v Hunt & Another (1964) E.A 201

The appellants contracted to buy all milk produced by the respondents for
1 year, the contract contained special provisions in the event of a breach
of contract. The appellant rejected the milk arguing that it did not conform

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to the agreed quality, so he sued for breach of contract. On trial, the
appellant argued that even if they are in breach the respondents should
have attempted to sell the remaining milk in open market rather than
converting it to ghee that late fetched him lower prices.

Court of Appeal for East Africa held that the respondents had acted
unreasonably in their efforts to mitigate their loss which they failed to do:
So, the court regarded their conduct unreasonable.

Remoteness of Damages. In assessing his own losses, the plaintiff often

makes claims which although they may be traceable to the breach are
nevertheless unacceptable by the court. The reason is that the court do
not in a contract hold a defendant liable for every financial loss that can
be traced back to the breach.

Victoria Laundry (Windsor) Ltd v Newman Industrial Ltd (1949)

2KB 528

Asquith LJ remarked that liability to result from the breach meaning that
the loss must have a connection to the breach.

Thereby, the damages aim at compensating the innocent party for

financial loss, but the compensation is only given for those losses which
would not have occurred if the contract is not breached. This is to put
aggrieved party to his or her original position he or she would be if the
contract had not been breached.

EQUITABLE REMEDIES.

Are solutions provided by courts based on fairness when monetary

damages are inadequate to resolve legal dispute. Equitable remedies are
not granted as of right but are discretionary. A party who suffers loss as a
result of breach of contract is entitled to damages as a matter of right, but
the court will grant equitable remedy only when it considers it just and
equitable to do so.

Specific Performance

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Section 63 of the Contract Act Cap 284 provides for the right to specific
performance, and (1) states that where a party to a contract is in breach,
the other party may obtain an order of court requiring the party in breach
to specifically perform his or her promise under the contract.

Is an equitable remedy issued by the court which compels the wrong doer
to carry out his contractual obligations. He can be forced to complete his
obligation instead of asking for damages. For example, in the sale of land
agreement, the defaulting party may be forced to complete the transfer of
the land rather than offer damages.

Specific Performance is an equitable remedy. Since equity acts in

personam, the order of specific performance takes effect upon a particular
party. If that party fails to comply, he will be in contempt of court. This will
expose the person to fines and even imprisonment. Therefore, an order of
specific performance is considered exceptional remedy in contract law
because, normally when a defendant breaches a contract, he expects to
pay damages.

The order of specific performance will only be granted when the plaintiff
convinces the court that the damages are not adequate in the
circumstances.

Sky Petroleum Ltd v VIP Petroleum Ltd (1974)

Is a significant legal precedent in contract law, particularly regarding

specific performance as a remedy for contracts for the sale of goods.

Facts:

Sky Petroleum entered into a contract with VIP Petroleum for the supply of
petrol and diesel fuel for its business. The contract had a fixed term, and
VIP Petroleum agreed to supply fuel exclusively to Sky petroleum during
this period. VIP petroleum later terminated the contract, claiming that Sky
Petroleum had breached certain terms. Sky Petroleum sought an
injunction to prevent VIP Petroleum from stopping the supply of fuel,
arguing that the fuel was essential for their business operations.

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Issue:

Whether specific performance could be granted in sell of goods,

particularly where the goods (fuel) were not unique?

Decision:

Although fuel is generic commodity and not unique (typically damages

would be sufficient in such cases), the court noted that Sky Petroleum had
no practical alternative source of supply at the time due to the ongoing
energy crisis. Without the fuel, Sky Petroleum’s business would have been
irreparably damaged. The inability to procure fuel elsewhere made the
circumstances exceptional, justifying specific performance as a remedy.

Significancy.

This case highlights an exception to the general rule that specific

performance is not granted for contracts involving non-unique goods. It
underscores that courts may intervene where damages would be
inadequate remedy, particularly in situations of commercial necessity or
irreplaceability due to market conditions.

See. Sulaiman Mukasa v ArchMotors (Uganda ltd)

The court’s discretion to grant order of specific performance is exercised

in accordance with fixed and settled rules/principles, so the decision is not
arbitrary one.

1. Mutuality. The courts will only grant the remedy of specific

performance, if it’s certain that should the position of the parties be
reversed, it could grant specific performance to either party. In other
words, the general principle is that specific performance will not be
awarded unless the order is available to both parties, that is the
availability of the award is mutual.
In Flight v Bolland (1828), an application for specific
performance by a minor failed since the award would not have been
available against minor by the other party because of the minor’s
lack of capacity.

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 2. Clean Hands. Equity will not generally speaking, grant equitable
relief to a person who acted badly, ‘since he who comes to equity,
must come with clean hands’. Specific performance may, therefore,
not be granted in favor party who has acted badly.
The plaintiff must approach the court free from any blame on his
part. If there is any evidence of fraud, mistake, misrepresentation or
illegality on the plaintiff’s part then the court will grant him an
equitable remedy for specific performance.
3. Lashes or Delay. The court will not grant an order for specific
performance where the plaintiff unreasonably delayed in his request
for relief and that the delay affects the defendant’s position. In
Mzee Bin v Allibhoy, the remedy of specific performance was not
granted on ground that the plaintiff had slept on his rights.
4. Defendant’s Hardship. The court will not grant equitable relief, if
to do so, would cause severe hardship. The court will reject the
plaintiff’s claim for specific performance, if it will cause undue
hardship to the defendant.
‘Courts of equity must take account of all the circumstances known
to exist at the time when an order is sought, as well as of
circumstances likely to occur subsequently, when they are called
upon to decide whether the effect of ordering specific performance
will be to cause such great hardship as to amount to an injustice’.
Mohamed Nasar Abdalla v Ibrahim Abdalla el Garai.
The court refused to grant specific performance in a contract of sla
of land because the defendant was suffering from a mental disorder,
and the plaintiff in all probability knew of it.
See Patel v Ali (1984) Ch 283.
5. Constant supervision. If the award of specific performance would
require constant supervision to see that it is complied with, then the
court will not grant it.
6. Contract of Personal Service. The court will not grant specific
performance of a contract of personal services, because this would
entail forcing an unwilling person to continue working or to continue

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 a person’s employment against the employer’s wishes. In
Industrial Court Uganda Union and Clerical, Commercial and
Technical Employers.
The court held that in a case of wrongful dismissal only available
remedy was damages and not re-instatement, for this would really
amount to specific performance.
See section 63(2) (a)-(f) provides circumstances under which a party
is not entitled to specific performance of a contract.

Injunction.
Is an equitable remedy that orders the defendant not to do
something, or in certain limited circumstances requires him to
perform a specific act.
An injunction is an equitable remedy whose award is discretional
and may be granted in the following conditions;
1. Monetary compensation (damages) is inadequate
2. It is necessary to maintain the status quo
3. He has a prima facie case with a high probability of success
4. If the order is not granted, he is likely to suffer irreparable loss or
injury.

Types of Injunctions
Injunctions are classified as;
1. Prohibitory and Mandatory Injunctions.
2. Interim or Temporary and permanent injunctions
Prohibitory Injunction.
This is an injunction which restrains a party from doing or
continuing to do a particular thing.
Mandatory injunction.
This is an injunction which compels a party to do something. The
mandatory injunction directs defendant to put right what he has
wrongfully done.
Temporary or Interim Injunction.

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 It is also known as interlocutory injunction. It an injunction whose
legal effect is restrict to a specified time, usually until another
hearing is granted so that the whole matter can be dealt with in a
greater dept.
However, the specified time may be extended by the court on an
application by the plaintiff, but it can also be lifted by the
defendant.
Permanent or Perpetual Injunction.
This is an injunction whose legal effect is permanent. There is no
time limit attached to it.
Ibrahim Habib Makii v Sheikh Brothers Investments Ltd
(1972).
The plaintiff had been appointed by the defendants to collect rent
from the defendant’s tenants for which they were to receive 10%
commission. The plaintiff alleged agreement gave them exclusive
right to perform their duties and the fact that the defendant
themselves now started to collect rent was a breach of the
agreement. Therefore, they asked the court for an injunction
prohibiting the defendants from interfering with the plaintiff’s
rights.
The court of Appeal for East Africa overrule the High Court of
Kenya and lifted the injunction on ground that damages would
sufficiently compensate the plaintiff.

Quantum Meruit.
Is literally means ‘as much as earned or deserved’. It is
compensation for the work done. The plaintiff is paid for
proportion of the task completed.
Quantum meruit is an equitable remedy and its award is
discretional. It may be awarded where;
1. The contract does not specfify the amount payable
2. Contract is divisible.
3. The contract is substantially performed

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 4. Partial performance is accepted.
5. A party is prevented from the performance of its obligations.
Planche v Colburn (1831) is landmark decision in English
contracts specifically addressing the doctrine of quantum
meruit.

Facts:

Plance (plaintiff), a writer, and Colburn (defendant), a publisher.

Planche was hired by Colburn to write a book as part of a series

called “The Juvenile Library’’. The contract promised Planche
£100 upon completion. Planche began the work and completed
significant portions of it. However, Colburn abandoned the series
and cancelled the contract before Planche could complete the
book. Planche sued for payment for the work done.

Issue:

Could Planche recover payment for partially completed work

when the contract was terminated prematurely by Colburn?

The court ruled in favor of Planche. He was entitled to recover

under the principle of quantum meruit (a reasonable sum for the
work done), even though he had not completed the book.

Limitation of Action (Loss of Remedy)

When a person’s legal or equitable rights are violated, he is

entitled to a cause of action, for example, breach of contract,
nuisance, negligence, defamation e.t.c. however, it is important
to note that the enforcement of causes of action is not perpetual.
The law prescribes the duration within which the cause of action
must be enforced.

The Limitation of Action Act prescribes the duration within which

causes of action must be enforced. If not enforced within the
prescribed time, the action becomes statute barred and is

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 unenforceable. For example, breach of contract must be enforced
within 6 years.

As a general rule, times starts running on the date the cause of

action arises. However, the running of time may be postponed in
certain circumstances.

1. If the prospective plaintiff is an infant or minor, time starts

running when he attains the age of majority or dies, whichever
occurs first.
2. If the prospective plaintiff is of unsound mind, time starts
running when he becomes of unsound mind or dies, whichever
occurs first.
3. If the prospective defendant is the president, time starts
running when he leaves office or dies, whichever comes first.
4. When the prospective plaintiff is labouring under ignorance,
fraud or mistake, time starts running when he ascertains the
fact or when a reasonable person would have ascertained.

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