BUSINESS LAW

TOPIC 4

LAW OF CONTRACT

DEFINITION OF CONTARCT

A contract is an agreement of promises which is legally binding or enforceable by law.

According to Salmond a contract is an “agreement creating and defining obligations

between the parties.”

According to Sir William Anson, “A contract is an agreement enforceable at law made

between two or more persons, by which rights are acquired by one or more to acts or
forbearances on the part of the other or others.

Sir William Anson further observes as follows: “As the law relating to property had its
origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the
law of contract is intended to ensure that what a man has been led to expect shall come to
pass; and that what has been promised to him shall be performed.”

Based on the above definition a contract exist when there is

1. an agreement
2. the agreement is enforceable by the law

The law of contract imposes an obligation to the parties involved to see that they have
performed their promise, failure to do so attracts legal implications. This usually involves
compensating the aggrieved party once the party responsible has been found liable for the
act or omission.

CLASSIFICATION OF CONTRACTS

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

1. Express and Implied Contract

An express contract is one in which the parties specifically agree about the nature and terms
of their relationship. There is then said to be an express agreement. For example, if A
agrees to sell his goods to B for KSH. 10,000/= and B agrees to buy the goods at that price,
there is said to be an express contract for the sale of goods at an agreed price.

www.someakenya.co.ke Contact: 0707 737 890 Page 141

 BUSINESS LAW

On the other hand, there is no specific agreement in an implied contract. The conduct of the
parties, as well as all the surrounding circumstances, must be taken into account in order to
ascertain whether or not a contract exists. Thus where A hires a taxi and boards it there is an
implied contract that the taxi man shall convex A up to his destination and that A shall pay
such fare is usually paid for that trip.

2. Unilateral and Bilateral contracts

A Unilateral Contract is one in which only one party is bound. It is a rare type of contract
which arises, for instance, where there is an offer of a reward. Thus, if ‘A’ offers a reward
to anyone who will recover his lost property, no one is bound to recover the lost property
but ‘A’ himself is bound to give the promised reward to anyone who might recover the
property.

Most contracts are bilateral. A bilateral contract is one in which both parties are bound.
Thus, if
A agrees to sell his goods to B and B agrees to buy them at a stated price, both parties are
bound.
A is bound to deliver the goods to B and B is bound to accept them to pay the price.

3. Valid, Void and Voidable Contracts.

A valid contract is an agreement enforceable by law. An agreement becomes enforceable

by law when all the essentials of a valid contract discussed above are present. A void
contract is an agreement which is not binding or enforceable by law. This is because it has
no legal effect at all and is, therefore, not binding on any of parties. A contract is rendered
void in certain cases where both parties were mistaken, where it is prohibited by law of
where it is entered without consideration e.t.c.

A voidable contract is one which is enforceable by law of the option of one of the parties.
Usually a contract becomes voidable when this consent of one of the parties to the contract
is obtained by undue influence, or misrepresentation. Such a contract is voidable at the
option of the aggrieved party of the party whose consent was s caused.

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

Car and Universal Finance Co. V. Caldwell (1965)

www.someakenya.co.ke Contact: 0707 737 890 Page 142

 BUSINESS LAW

X bought a car from the defendant and paid by cheque. X took the car with him. The
cheque bounced the next day, but X had disappeared. The defendant reported the
matter to the police and the Automobile Association, requesting them to recover the
car. Subsequently, X sold the car to Y, who knew X’s title to be defective. Y in turn
resold the car to the plaintiffs, who bought in good faith.
Held: By setting the police and Auto mobile Association in motion, the defendant
had clearly shown that he intended to resend the contract; this meant that the
ownership of the car reverted to him and therefore Y had no title to pass to the
plaintiffs. The defendant was therefore entitled to recover the car from the plaintiffs.

The right to avoid the contract is lost if the innocent party, upon discovering the true facts,
subsequently affirms it. It is also lost where an innocent third party had acquired an interest
in
the subject matter of the contract, which is likely to be affected by the avoidance of the
contract.

Newtons of Wembley, Ltd. V. Williams (1965)

X bought a car from the plaintiff and paid by cheque. He took the car with him. The
cheque was dishonoured, but in the meantime X had disappeared. X subsequently
resold the car to the defendant, who bought in good faith. The plaintiff sought to
recover the car from the defendant.
Held: Title to the car had passed to the defendant; it could not therefore be recovered
by the plaintiff.

Notes: The facts in the above two cases are similar. In Caldwell’s Case the car was
recovered because the innocent purchaser acquired it from a seller who had no title since
the contract had already been rescinded; the seller had bought from X in bad faith. On the
other hand, in Williams’s Case the car could not be recovered because the innocent
purchaser has acquired it, in good faith, from a person who had right to sell it.

There are many other instances of voidable contracts, e.g. contracts entered, into under a
unilateral mistake, duress or undue influence as well as minors’ contracts.

4. Specialty Contracts and simple Contracts.

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

www.someakenya.co.ke Contact: 0707 737 890 Page 143

 BUSINESS LAW

is that its validity is independent of consideration i.e. B need not have furnished anything of
value as pre-condition for enforcing A’s promise.

A simple contract is an agreement, express or implied, which gives rise to legal

obligations. A simple agreement may be in writing or agreed orally, or even be implied
from the conduct of parties. A simple contract may be made also made partly orally and
partly in writing.

In England, conveyances of land or leases of land for periods of more than three years,
transfers of British ships and gratuitous promises must be under seal.

Section 2 (1) of the Law of Contract Act states that no contract in writing shall be void or
unenforceable merely on the ground that it is not under deed. But such contracts, if not
made under deed must be supported by consideration.

The following contracts must be in writing:-

a) Bills of Exchange and Promissory Notes.

b) Representations regarding credit worthiness or character.
c) Acknowledgement of Statute Barred Debts.

The following contracts must be evidenced by writing:

a) Contracts of Guarantee
b) Contracts for the Sale of Land
c) Contracts for the Sale of Goods over Two Hundred shillings
d) Employment Contracts over one month
e) Hire Purchase Contracts
f) Money Lending Contracts

6) Contracts Uberrimae Fidei

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

www.someakenya.co.ke Contact: 0707 737 890 Page 144

 BUSINESS LAW

(i) Family settlements (where full disclosure is required);

(ii) Contracts for the sale of land (where the seller must disclose defects relating to
title);
(iii) Contracts of partnership (where every partner must exhibit utmost good faith in his
dealings with the other partner (s).

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

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

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

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

9. Executory contract
It is one in which both the obligations are understanding, one on either party to the contract,
either wholly or in part, at the time of the formation of the contract. In other words, a
contract is said to be executory when either both the parties to a contract have still to
perform their share of obligation or there remains something to be done under the contract
on both sides.

For example, T agrees to coach R, a C.P.A student, from first day of the next month and R
in consideration promises to pay to T Kshs. 1,000 per month, the contract is executory
because it is yet to be carried out.

www.someakenya.co.ke Contact: 0707 737 890 Page 145

 BUSINESS LAW

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

ESSENTIAL OF A VALID CONTRACT

The essential elements of valid contract as follows:

1. Offer and acceptance- There must be a ‘lawful offer’ and a ‘lawful acceptance’ of
the offer, thus resulting in an agreement. The adjective ‘lawful’ implies that the offer
and = acceptance must satisfy the requirements of the Contract Act in relation
thereto.

2. Intention to create legal relation-There must be an intention among the parties that
the agreement should be attached by legal consequences and create legal obligations.
Agreements of social or domestic nature do not contemplate legal relations, and as
they do not give rise to a contract e.g. an agreement to dine at a friend’s house or a
promise to buy a gift for wife are not contracts because these do not create legal
relationship.
In commercial agreements an intention to create legal relations is presumed. Thus, an
agreement to buy and sell goods intends to create legal relationship is a contract
provided other requisites of valid contract are present.
3. Lawful Consideration-Consideration has been defined as the price paid by one
party for the promise of the other. An agreement is legally enforceable only when
each of the parties to it gives something and gets something. The something given or
obtained is the price for the promise and called consideration.

4. Capacity of parties-The parties to an agreement must be competent to contract,

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

5. Free Consent- Free consent of all parties to an agreement is another essential

element of a valid contract. ‘Consent’ means that the parties must have agreed upon
the same thing in the same sense. There is absence of ‘free consent’; if the agreement
is induced by

www.someakenya.co.ke Contact: 0707 737 890 Page 146

 BUSINESS LAW

(i) coercion,
(ii) undue influence,
(iii) fraud,
(iv) Mis-representation, or
(v) Mistake.

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

7. Possibility of Performance - Another essential feature of a valid contract is that it

must be capable of performance. If the act is impossible in itself, physically or
legally, the agreement cannot be enforced at law.

All the above elements must be present. If one or more elements are absent then the
contract may be void, voidable or unenforceable.

FORMATION OF A CONTRACT

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

a) The offer
b) The Acceptance
c) Consideration
d) Contractual capacity
e) Intention To Create A Legal Relationship

The Offer
An offer is defined as an expression of willingness to enter into a contract on definite terms,
as soon as these terms are accepted. It is made by a person known as the offeror and
addressed to the offeree. Thus, if A writes to B stating his desire to sell his property to B at
a specified price,
A is said to have made an offer to B. A is the offeror and B the offeree. An offer may be
express (where the offeror specifically makes his intentions known to the offeree, whether

www.someakenya.co.ke Contact: 0707 737 890 Page 147

 BUSINESS LAW

in writing or by word of month), or it may be implied from the conduct of the parties,
particularly the offeror.
An offer is valid only if its terms are definite, but not where they are vague.

Offer and “Invitation to Treat”

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

Pharmaceutical Society of Great Bruam V. Boots (1953)

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

Fisher V. Bell (1960)

A shopkeeper displayed a flick-knife in his shop window with a price tag behind it. He was
charged with the offence of offering a flick-knife for sale. The court had to determine
whether the shopkeeper’s act amounted to offering the flick-knife for sale.
Held (Lord Parker, CJ): “It is clear that, according to the ordinally law of contract, the
display of an article with a price on it a shop window is merely an invitation to treat. It is in
no sense an offer for sale the acceptance of which constitutes a contract”. Since there was
no offer for sale, the shopkeeper was not liable.
Another example of an act that amounts to an invitation to treat rather than an offer is to be
found in advertisements inviting tenders. The advertiser merely invites tenders for a
particular purpose. It is the tenderer who, by his tender, makes an offer to the advertiser and
the latter is thereby converted into an offeree; and it is upon the offeree to accept or reject a
particular tender. (A tender is an offer for the supply of goods or services).

www.someakenya.co.ke Contact: 0707 737 890 Page 148

 BUSINESS LAW

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

Consideration
The offer and acceptance are not enough to bring about a valid and binding contract. In the
case of simple contracts, these are required to be supported by consideration, otherwise the
contract is void. Specialty contracts are an exception.

Why does the law insist on consideration before a valid contract can be made? The rationale
behind this requirement is that the law of contract generally enforces only bargains and not
bare promises for which no value is given. This follows from the fact that, the law of
contract is generally intended to promote commercial relations. These are relations which
necessarily impose an element of bargain, an element without which there would be no
commerce at all.
Indeed, it is on this element that the whole doctrine of consideration is centered.

When we talk of bargain, what we have in mind is an exchange of relationship within the
context of a money economy. This is clear from the fact that a party seeking to enforce a
contract must prove that consideration has moved from him and that it consists of money or
money’s worth.

Types of Consideration

a) Executory of Consideration
The word executory is used to denote that the promised act is yet to be done. Thus A
promises to sell and deliver to B sacks to charcoal in return for a price to be paid by B.
Before delivery of the charcoal, A’s promise to B is in the nature of executory consideration
for B’s promise to pay the price. Similarly, before payment of the price, B’s promise to A is
in the nature of executor consideration for A’s promise.

b) Executed Consideration
The word executed is used here to denote that the promised act has already been done. To
take the example given above, after A has delivered the charcoal to B, A is said to have
furnished executed consideration for B’s promise to pay the price. Similarly, after B has

www.someakenya.co.ke Contact: 0707 737 890 Page 149

 BUSINESS LAW

paid the price he is said to have furnished executed consideration for A’s promise to sell
and deliver to him three sacks of charcoal.

Under a given contract, it is possible for the consideration furnished by one of the party to
be
executory, while that furnished by the other party is executed. Thus, in the above example if
it is agreed that A is to deliver the charcoal in a week’s time but that B is to pay the price
immediately, at that stage consideration furnished by A is executor while that furnished by
B is executed.

The distinction between executor and executed consideration is particularly important while
considering performance of the contract by the parties and the remedies available to the
innocent party in the event of a breach of the contract by the other party. Thus where B has
furnished executed consideration by paying the price but A has failed to deliver the charcoal
B is said to have performed his part of the contract and he is entitled to recover the price
from A ad also to damages from A for breach of contract; whereas if B’s consideration was
merely executory but he was willing to pay the price, E would be said t be willing top
perform the contract ad he would in this case be entitled to damages alone.

c) Past Consideration.
Once negotiations are over and the parties have struck a bargain, any subsequent or fresh
promise made by either party in relation to that bargain is known as past consideration. The
law is that for d promise to constitute valid consideration is must have been made during the
negotiations. As such, past consideration is not valid consideration for the bargain in respect
of which it is given ; it is in fact no consideration at all and the promises(promised party )
cannot rely on it.

After selling a horse to the plaintiff, the defendant promised the plaintiff in the following
terms
:” in consideration that the plaintiff at the request of the defendant, had bought of the
defendant a certain horse, at and for a certain price, the defendant promised the plaintiff that
the said horse was sound and free from vice. But the horse proved not to be “sound and free
from vice” ands the plaintiff sued on the above Held: The defendant’s promise was given
after the d sale and without any fresh consideration; it therefore amounted to past
consideration, which the plaintiff could not rely on.
d) Sufficiency of Consideration
Consideration need not be adequate. Freedom of contract demands that the parties must be
free to make their own bargain .No court of law will concern itself with the question
whether the price agreed upon is worth the goods supplied. In short, the consideration
furnished by one party need not be equal or proportionate to that furnished by the other
party. Thus, a creditor’s forbearance to sue (i.e. a promise not to sue) may be sufficient
consideration for a promise given by the debtor relation to a particular debt.

www.someakenya.co.ke Contact: 0707 737 890 Page 150

 BUSINESS LAW

Alliance Bank, Ltd. v Broom (1864)

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

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

Intention to Create a Legal Relationship

A contract apparently supported by consideration will not result in a binding contract unless
it was the intention of the parties to enter into, or create legal relationship. It, for example,
X, promises to take out Y for lunch and Y accepts ad patiently waits for X, there is no
legally binding agreement and Y cannot sue X failure to honour his promise.

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

Complications arise where there is nothing on the face of the transaction to negative an
intention to create legal relations. Generally there is a presumption that there was such
intention, in the case of commercial agreements. This presumption is rebutted by a
provision to the case of social or domestic agreements. Here, there is no presumption of an

www.someakenya.co.ke Contact: 0707 737 890 Page 151

 BUSINESS LAW

intention to create legal relations; such intention must be specifically proved, otherwise the
person seeking to enforce the agreement will fail in his action:

Balfour V. Balfour (1919)

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

Merritt V. Merritt (1970)

The plaintiff and defendant were husband and wife. Their matrimonial home was in their
joint names, and was subject to a mortgage. The husband left the matrimonial home and
went to live with another woman. Later it was agreed that the husband would pay the wife #
40 per month out of which she was to pay the outstanding mortgage payments. The husband
signed a document stating that “In consideration of the fact that you will pay charges in
connection with (the matrimonial home), until such time as the mortgage repayment has
been completed, when the mortgage has been completed I will agree to transfer the property
to your sole ownership”. The wife paid off the entire amount outstanding on the mortgage,
but the husband refused to transfer the house into her sole name. Held: The parties had
intended to create legal relations; there was therefore a binding contract which the husband
had breached.

Note: Domestic agreements are not restricted to those between spouses. They extend to
agreements between parent and child (see, e.g. Jones V. Padavation, (1969) and also those
between persons who may not in fact be relatives. “Domestic” is used here are to simply to
distinguish those agreements from those which are of a commercial nature.

Contractual Capacity
An essential ingredient of a valid contract is that the contracting parties must be ‘competent
to contract’. Every person is competent to contract who is of the age of majority and who is
of sound mind, and is not qualified from contracting by any law. Only a person who has
contractual capacity be a party to a contract. This includes artificial as well as natural
persons.

The general rule is that any person may enter into any kind of contract. But special rules
supply to the following persons:-

a) Minors
b) Persons of Unsound Mind and Drunken Persons
c) Married Women
d) Aliens or Non Citizens

www.someakenya.co.ke Contact: 0707 737 890 Page 152

 BUSINESS LAW

e) Corporations
f) Co-operative Societies
g) Trade Unions

These special rules are explained below;

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

A contract made by minors may be binding, voidable of void.

These are discussed as under:-

a) Binding Contracts
There are two types of contracts which are binding on minors.

i) Contract for the Supply of Necessaries

Certain things are regarded as “necessaries”. These are things without which the minor
could hardly live; are therefore things which are essential to his maintenance. Under the
Sale of Goods
Acts “necessaries” are defined as “goods suitable to the condition in life of a particular
infant or minor, and to his actual requirements at the time of the sale and delivery”.
Included here are things like food, clothing, and medicine. But whether a particular
commodity falls within the category of necessaries depends on the circumstances of a
particular case; and in particular items of luxury are excluded. Thus, while a suit may be an
item of necessaries in the case of a minor who hails from a well to do family it might be an
item of luxury to a peasant’s son, particularly where there are cheaper alternatives within a
peasant’s means. Once a particular item has been placed within the category of necessaries
the next question is: To what extent can the other contracting party enforce the contract on
sale against the minor? Under the above Act, a minor is liable to pay a “reasonable price”
for goods which are necessaries. He is not therefore necessarily liable for the actual or
contract price, and anyone dealing with a minor should bear this in mind as he is likely to
lose in case the minor defaults to payment, particularly where the goods were supplied to
minor on credit.

It is clear from the definition above that in reckoning whether or no t particular goods are
“necessaries” account must be taken of minor’s actual requirements at the time of sale and
delivery. It must therefore be proved that the minor was not sufficiently provided with

www.someakenya.co.ke Contact: 0707 737 890 Page 153

 BUSINESS LAW

goods in question at the time when they were sold and delivered to him; otherwise the
goods are not necessaries and the contract cannot be enforced against the minor.

Nash v. Inman (1908)

A tailor supplied an infant with 11 fancy waistcoats, but the infant failed to pay. The
infant was a university undergraduate. His father gave evidence that the infantwas
adequately supplied with proper clothes according to his station in life.
Held: The clothes were not necessaries and the infant was not liable to pay from them.
The fact that a minor has a sufficient allowance does no prevent him from contracting
for necessaries on credit: Burghart v. Hall (1839). The lender is still entitled to a
reasonable price for the necessaries supplied by him.

Where a minor gets a loan o buy necessaries, the lender may recover his loan under the
doctrine of subrogation, i.e. he does not recover in his own right as lender but instead he
stands in the place of the person who supplied the necessaries and it is only in this latter
capacity that he may recover the money. However, he will only be able to recover the
money to the extent that it has been used to buy necessaries and only to the extent of a
reasonable price for the necessaries.
Besides goods, certain services and expenses are also considered to be necessaries.
Examples includes lodging, legal advice, and funeral expenses for the infant.

ii) Beneficial Contracts of Service

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

Clements v. London and N.W. Railway Co. (18940

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

De Francesco V. Barnum (1890)

X, a minor of 14 years, joined the plaintiff as an apprentice in order that she might be
taught stage dancing. The apprenticeship was to an agreed sum per night, that she
would not marry and that she would not accept any other professional engagement
without the plaintiff’s permission.
The plaintiff was not bound to engage X or to maintain her while unemployed; the
amount payable for X’s services was a trifling sum and moreover, the plaintiff was at
liberty to terminate the contract in the event of X being found unfit for stage dancing.

www.someakenya.co.ke Contact: 0707 737 890 Page 154

 BUSINESS LAW

Held: The agreement as a whole was unreasonable and completely put X at the mercy
of the plaintiff; it was not beneficial to X and was therefore not binding on her. Thus,
whether a particular contract is beneficial to a minor and hence binding on him
depends on the circumstances of the case. It is binding only when, considered as a
whole, it appears to be advantageous or beneficial to the minor. But where the other
party to the contract has more to gain from the minor, the contract and his own
interests under the contract outweigh those of the minor, the contract will not be
considered as being beneficial to the minor and consequently the minor will be bound
by it. Certain contracts can never be enforced against a minor, however beneficial they
may be to him.
This is particularly so in the case of trading contract. A minor is never by such contracts:

Cowern V. Nield (1912)

X, a minor, set himself up in business as a hay and straw dealer, Y paid for
consignment of hay, which X failed to deliver. Y sued X for the price.
Held: Being a minor, X was not bound by the contract entered into with Y, since it
was a trading; accordingly X was not liable to repay the price to Y

According to the above case, beneficial contact entered into with a minor is binding on him
only if it is either a contract of service or of apprentices, or something close to this. Thus, in
Doyle’s Case given above, the contract in question was held to be very closely connected
with a contract since it was designed to develop the minor’s skill as a boxer.

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

Davies V. Beynon- Harris (1931)

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

www.someakenya.co.ke Contact: 0707 737 890 Page 155

 BUSINESS LAW

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

(i) Contracts for the repayment of money lent or to be lent (i.e. loan contracts).
(ii) Contracts for goods supplied or to be supplied other than necessaries;
(iii) All accounts stated (or “settled accounts”).

None of these three types of contract can be enforced against a minor.

Smith V. King (1892)

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

Valentini V. Canali (1889)

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

R. Leslie, Ltd. V. Sheill (1914)

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

Persons of Unsound Mind and Drunken Persons

A contract made with a person of unsound mind (PUM) is binding on him only if it was
during a lucid interval, i.e. an interval during which he is sane. For this purpose, it is
immaterial that the other party may have been aware of the PUM’s mental capacity. Apart
form this, a contract that is entered into a PUM with a person who knows him to be

www.someakenya.co.ke Contact: 0707 737 890 Page 156

 BUSINESS LAW

mentally incapacitated, is voidable at the instance of PUM. However, where the PUM has
obtained necessaries under the contract, he is, like a minor, liable to pay a reasonable price
for the Sale of Goods Act.

As for a drunken person, his contractual capacity is generally the same as that of a PUM. If
the drunkenness is, to the knowledge of the other party, such as to render him incapable of
appreciating his acts, a contract entered into in these circumstances is voidable at the
instance of the drunken person upon sobering up. But like a minor and PUM, he is liable to
pay reasonable price for necessaries: Sale of Goods Act.

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

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

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

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

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

www.someakenya.co.ke Contact: 0707 737 890 Page 157

 BUSINESS LAW

TERMS OF CONTRACT

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

The terms of a contract are as follows;

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

Oscar Chess, Ltd. V. Williams (1957)

The defendant offered the plaintiffs a second-hand Morris as part of the consideration
for a hire purchase contract. The registration book of the Morris stated that the car
was a 1948 model, and this was confirmed by the defendant in good faith. But it
turned out later that the car was in fact a 1939 model, which should have been valued
at lower figure. The plaintiffs who were car dealers sued the defendant for the
difference in value. The court had to determine whether his statement as to the age of
the car was a term of the contract or a mere representation.
Held: The statement as to the age of the car was not a term of the contract but a mere
representation. The plaintiffs were not therefore entitled to recover the difference in
value.

Dick Bentley Productions, Ltd. V. Harold Smith Motors Ltd. (1965)

The defendants sold a Bentley car to the plaintiffs, stating that the car had done only
20,000 miles from the time it was fitted with a replacement engine and gearbox. This
statement turned out to be false, the car proved unsatisfactory and the plaintiffs sued.
The court had to determine whether the defendant’s statement as to mileage was to
term of the contract or a mere representation.
Held: The statement as to mileage was a term of the contract; and the plaintiffs were
entitles to damages for breach of contract.

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

www.someakenya.co.ke Contact: 0707 737 890 Page 158

 BUSINESS LAW

position to ascertain the age of the car independently of any statement made by the
defendant.

As car dealers they were possessed of some special knowledge or skill; the defendant’s
statement would not therefore mean much to them and it was rightly held to be mere
representation. On the other hand, in Dick Bentley Case, the defendants had been in
possession of the car and were on a better position, compared to the plaintiffs, to tell the
mileage which had been done by the car; their statement therefore had to be a term of the
contract.

Besides the state of knowledge or skill of the respective parties, the question whether a
particular statement is a term or a mere representation may be determined in another way.
Where the parties make an oral agreement, which is subsequently reduced to writing, only
those statements which are incorporated in the written agreement will be regarded as terms
of the contract, while the oral statements left out of he noted, however, that much depends
on the peculiar circumstances each case and no hard and fast rule can be laid down.

Express and Implied Terms

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

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

Conditions and Warranties

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

www.someakenya.co.ke Contact: 0707 737 890 Page 159

 BUSINESS LAW

VITIATING ELEMENTS OR FACTORS

A contract supported by consideration, in which there is an intention to enter into legal

effect where if is affected by a vitiating factor. A vitiating factor (or element)is one which
tends to affect the validity of the contract. The vitiating elements consist of:-

a. Mistake
b. Misrepresentation
c. Duress (or Coercion)
d. Undue Influence
e. Illegality

These are explained below

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

(i) Mistake of law

(ii) Mistake of fact

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

i. Mistake of general law of the country,

ii. Mistake of foreign law
iii. Mistake of private rights of a party relating to property and goods.

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

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

These are explained below:-

www.someakenya.co.ke Contact: 0707 737 890 Page 161

 BUSINESS LAW

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

Conturier V. Hastie (1853)

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

ii) Mutual Mistake

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

Scott V. Littledole (1858)

In a contract of sale of goods by sample, the plaintiff bought from the defendants 100
chests of tea, which were then lying in a specified place. The plaintiff thought he was
buying the tea contained in the 100 chests, but the defendants thought they were selling
to the plaintiff only tea of the same quality as the samples. The tea in the chests turned
out to be of a higher quality than the samples submitted to the defendants and the
defendant refused to deliver it to the plaintiff.
Held: There was a valid contract between the plaintiff and defendant, and the defendant
was liable to deliver the 100 chests.
Note: The above case is sometimes cited as authority for saying that mistake as to quality is
not an operative mistake.

iii) Unilateral Mistake

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

www.someakenya.co.ke Contact: 0707 737 890 Page 162

 BUSINESS LAW

Misrepresentation
At representation means a statement of fact made by one party to the other, either before or
at the time of contract, relating to some matter essential to the formation of the contract,
with an intention to induce the other party to enter into contract, with an intention to induce
the other party to enter into the contract. It may be expressed by spoken or written or
implied from the acts
or conducts of the parties) e.g. non-disclosure of a fact).

A representation when wrongly made, either innocently or intentionally, is termed as a

misrepresentation. To put in differently, misrepresentation may be either innocent or
intentional or deliberate with intent to deceive the other party. In law, for the former kind,
the term
‘Misrepresentation’ and for the latter the term “fraud” is used.

Types of Misrepresentation

There are three types of misrepresentation. These are:-

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

ii) Negligent Misrepresentation

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

Remedies for Misrepresentation

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

Duress
Duress refers to actual violence or threats violence calculated to produce fear in the mind of
the person threatened. The requirement of agreement in the establishment of a contractual
relationship presupposes that each of the parties is free contracting agent. But the freedom
of the party subjected to duress (or coercion) is obviously restricted. Duress as such, is a
vitiating factor which is actionable at common law (and is sometimes referred to as legal
duress).

www.someakenya.co.ke Contact: 0707 737 890 Page 163

 BUSINESS LAW

For a threat to amount to duress, it must be a threat to the person, not to goods. It must also
relate to an unlawful thing; a threat to do a lawful thing is immaterial, subject only to the
requirements of public policy. Also, the threat must have induced the threatened party to
enter into the contract.
The dominant view is that contract entered into under duress (or coercion) is voidable at the
instance of the party coerced.

Undue Influence
“A contract is said to be induced be undue influence where, (i) the relations subsisting
between the parties are such that one of the parties is in a position dominate the will of the
other, and ii) he uses the position to obtain an unfair advantage over the other”.
Undue influence is another factor which tends to restrict the freedom of a party in entering
into a particular contract. It is based on the equitable principle that no person may take an
unfair advantage of the inequalities between him and another party so as to force an
agreement on the other party.
A person who seeks to rely on undue influence as a defence must prove that the other party
has in fact influence over him and that he would not otherwise have entered into the
contract. But where a confidential (or fiduciary) relationship exists between the parties,
undue influence is presumed, and the burden is shifted on to the other party to prove that
there has been no undue influence on his part.
The following are relations in which undue influence is presumed:-
1. Parent and Child
2. Doctor and Patient
3. Trustee and Beneficiary
4. Advocate and Client
5. Guardian and Ward
6. Religious Adviser and Disciple

It should be noted that Husband/Wife relationships do not raise the presumption of undue
influence; undue influence must in this case be specifically proved by the party seeking to
rely on it.

Where undue influence is sufficiently proved to have existed at the time of the contract, the
contract is voidable at the instance of the party unduly influenced and may on this ground
be set aside.

Williams V. Bayley (1866)

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

www.someakenya.co.ke Contact: 0707 737 890 Page 164

 BUSINESS LAW

Illegality

An illegality contract is one which is prohibited by law e.g. making a contract to break into
a house to steel goods is an illegal contract.

Besides statute, there are certain contracts which are prohibited by, and therefore illegal at
common law. These are contracts which offend against public policy, i.e. those which are
prejudicial to public morality and public well-being.

They are as follows:-

1. Contracts to commit a crime, tort or fraud;

2. Contracts that are prejudicial to the administration of justice;
3. Contracts liable to corrupt public life;
4. Contracts that are prejudicial to public safety;
5. Contracts to defraud the revenue;
6. Contracts that are sexually immoral;
7. Contracts that are prejudicial to the country’s foreign relations.

ILLEGAL CONTRACTS

An illegal contract is one which is prohibited by law or which contravenes a provision of

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

Void and illegal contracts, both cannot be enforced by law but the two differ in some
respects.
All illegal agreements are void but all void agreements are not necessarily illegal. For
example, an agreement with a minor is void as against him but not illegal. Similarly, when
an agreement is illegal, other agreements which are incidental or collateral to it are also
considered illegal, provided the third parties have the knowledge of the illegal or immoral
design of the main transaction. For example, ‘A’ engages ‘B’ to murder ‘C’ and borrows
KSH. 5000 from ‘D’ to pay ‘B’. We assume ‘D’ is aware of the purpose of the loan. Here
the agreement between A and
B is illegal and the agreement between A and D is collateral to an illegal agreement. As
such the loan transaction is illegal and void and D cannot recover the money. But the
position will change if D is not aware of the purpose of the loan. In that case, the loan
transaction is not collateral to the illegal agreement and is valid contract.

www.someakenya.co.ke Contact: 0707 737 890 Page 165

 BUSINESS LAW

An unenforceable contract is one which though valid, cannot be enforced because none of
the parties can sue or be sued to it. For instance, section 6 (1) of the Sale of Goods Act (Cap
31) provides.

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

DISCHARGE OF CONTRACT
A contract is said to be discharged (or terminated) when the parties to it are freed from their
mutual obligations. In other words, when the rights and obligations arising out of a contract
are distinguished, the contract is said to be discharged or terminated. A contract may
discharge in any of the following ways:-
1. Discharge by performance
2. Discharge by Agreement
3. Discharge by Frustration
4. Discharge by Breach
5. Discharge by Operation of Law
Discharge by Performance

When a contract is duly performed by both the parties, the contract comes to happy ending
and nothing more remains. The contract, such a case, is discharged or terminated by due
performance. But if one party performs his promise, he alone is discharged. Such a party
gets a right of action against the other party who is guilty of breach.

Performance of a contract is the principal and most usual mode of discharge of a contract.
Performance may be:
(1) Actual performance; or
(2) Attempted performance or Tender.

1. Actual performance
When each party to a contract fulfils his obligation arising under the contract within the
time and in the manner prescribed an amounts to actual performance of the contract and the
contract comes to an end or stands discharged

2. Attempted performance or tender

When the promisor offers to perform his obligation under the contract, but is unable to do
so because the promise does not accept the performance, it is called “attempted

www.someakenya.co.ke Contact: 0707 737 890 Page 166

 BUSINESS LAW

performance or tender”. Thus “tender” is not actual performance but is only at “offer to
perform” the obligation under the contract. A valid tender of performance is equivalent to
performance.

For performance to discharge a contract, the general rule is that it must be precise and exact.
Circumstances do exist, however, n which a partial performance by one party may not
entitle the other party to consider himself as discharged, e.g. in cases of substantial
performance or of divisible contracts like those in which delivery of goods is to be done in
installments: in these cases the performing party is entitled to payment for what has been
done by him under the contract.

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

Discharge by Agreement

Where a contract is still executory, i.e. where each of the parties is yet to perform his
contractual obligation, the parties may mutually agree to release each other from their
contractual obligation: each party’s promise to release the other is consideration for the
other party’s promise to release him.

Where one party has fully performed his part of the contract, he may agree to release the
other party from his contractual obligation. In this case, however, the discharge is effective
only if made under seal or where the party being discharged has furnished consideration for
it; otherwise the party giving the discharge will not be bound and the other party remains
liable .A unilateral discharge, supported by valuable consideration, is known as an Accord
and Satisfaction. “The accord is the agreement by which the obligation is discharged. The
satisfaction is the consideration which makes the agreement operative’

Discharge by Frustration

A contract is said to be frustrated if an event occurs which brings its further fulfillment to
an abrupt end; and upon the occurrence of the frustrating event the contract is immediately
terminated and the parties discharged. But the doctrine of frustration only relates to the
future.
This means that the parties are discharged from their future obligation under the contract
but remain liable for whatever rights that may have accrued before the frustration. Thus,
goods supplied or services rendered before the frustration must be paid for, although the
parties are both excused from further performance of the contract.

www.someakenya.co.ke Contact: 0707 737 890 Page 167

 BUSINESS LAW

Parties to a contract are under a duty to fulfill their respective obligations created by the
contract.
The fact that an event or events may subsequently occur, introducing hardships or
difficulties in the performance of the contract is not in itself sufficient to discharge the
contract:

It is difficult to determine the frustrating events. Some examples of frustrating events are
given below:-

i) Destruction of subject Matter

“In contracts in which the performance depends on the continued existence of a given
person or thing, a condition is implied that the impossibility of performance arising from
the perishing of the person or thing excuse the performance”. This statement of law was
made by Blackburn J. in the case given below:-
Taylor V. Caldwell (1862)
A let a music-hall to B in order that B might use it for holding concerts on specified
days. Before the concerts could be held the music- hall was accidentally destroyed by
fire. B sued A for breach of contract.
Held: The destruction of the music-hall had frustrated the contract and B’s action could
not be maintained.

ii) Death or Incapacity

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

ii) Frustration of Common Venture

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

Krall V. Henry (1903)

The plaintiff agreed to let a room to the defendant for the day when Edward VII was to
be crowned. Though not spelt out in the agreement itself, both parties understood that
the purpose of the letting was to enable the defendant view the coronation process. The
King subsequently became ill and the coronation was cancelled.

www.someakenya.co.ke Contact: 0707 737 890 Page 168

 BUSINESS LAW

Held: The cancellation of the coronation discharged both parties from their contractual
obligation, because the process was the foundation of the contract and its cancellation
meant that the substantial purpose of the contract could no longer be achieved.

Discharge by Breach

Breach of contract by a party thereto is also a method of discharge of a contract, because

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

A breach of contract may take place when a party:

(i) Repudiates his liability before performance is due.
(ii) Disables himself from performing his promise.
(iii) Fails to perform his obligations.

Discharge by Operation Of Law

A contract may be discharged by operation of law in certain cases. Some important

instances are as under:-

i) Lapse of Time
If a contract is made for a specific period then after the expiry of that period the contract is
discharged e.g. partnership deed, employment contract e.t.c.

ii) Death
The death of either party to a contract discharges the contract where personal services are
involved.

iii) Substitution
If a contract is substituted with another contract then the first contract is discharged.

iv) Bankruptcy
When a person becomes bankrupt, all his rights and obligations pass to his trustee in
bankruptcy.
But a trustee is not liable on contracts of personal services to be rendered by the bankrupt.

www.someakenya.co.ke Contact: 0707 737 890 Page 169

 BUSINESS LAW

REMEDIES FOR BREACH OF CONTRACT

Whenever there is a breach of contract, the injured party becomes entitled for some
remedies.
These remedies are:-
a) Damages
b) Quantums Meruit
c) Specific Performance
d) Injunction
e) Rescission
These are explained below

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

The damages recoverable for breach of contract are governed by the rule in Hadley V.
Baxendale (1894) which is as follows:-

“Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such breach of contractshould be, either
such as may fairly and reasonably be consideredarising naturally, i.e. according to the usual
course of things, from such breach of contract itself, or such as may reasonably be supposed
to have been in the contemplation of both parties at the time they made the contract, as the
possible result of the reach of it”.

This is the general rule. The plaintiff can only recover for loss arising naturally from the
defendant’s breach or for such loss as was in the contemplation of both parties at the time
when the contract was made. In this way, it is sought to do justice to both parties. In fact the
above case goes on to explain that where a contract is made under special circumstances it
is the duty of the party seeking to rely on those special circumstances to communicate them
to the other party; and in the absence of such communication any loss arising from the
special circumstances is not recoverable:

Hadley V. Baxendale (1854)

A miller sent a broken crankshaft by a carrier to deliver to an engineer for copying and
to make a new one. The miller informed the carrier that the matter was urgent and that
there should be no delay. The carrier accepted the consignment on those terms. The

www.someakenya.co.ke Contact: 0707 737 890 Page 170

 BUSINESS LAW

miller did not inform the carrier that the mill would be idle and unable to work. The
carrier had no reason to believe that the delayed delivery of the crankshaft was an
essential mechanism of the mill. The carrier delayed delivery of the crankshaft to the
engineer; and as a consequence, the mill was idle for longer than it need have been.
Held: that the carrier was not liable for the loss of profits during the period of the
delay.

The Heron II (1969)

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

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

The aggrieved party may file a suit upon quantum meruit and may claim payment in
proportion to work done or goods supplied.

The court must then determine a reasonable sum tobe paid for those goods or services; and
the plaintiffs is said to have broughthis suit on a quantum meruit. In the case of contracts for
the sale of goods, this remedy has been codified by the Sale of Goods Act. It provides;
“where the price is not determined, the buyer must pay a reasonable price. What is a
reasonable price is a question of fact dependent on the circumstances of each particular
case”.The plaintiff may also sue on a quantum meruit where the original contract has been
replaced by a new one and work has been done by him under the new one. As Lord Atkin
has said: “If I order from a wine merchant twelve bottles of whisky and two of brandy, and i
accept them i must pay a reasonable price for the brandy”: Steven V. Bromley & Son (1919).

A claim under quantum meruit sum does not apply, however, where the contract requires
complete performance as a condition of payment e.g. a contract to do one piece of work in
its entirety in consideration for lump-sum payment.

www.someakenya.co.ke Contact: 0707 737 890 Page 171

 BUSINESS LAW

Sumpter V. Hedges (1898)

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

Specific Performance
This is an equitable remedy. Specific performance means the actual carrying out of the
contract as agreed. Under certain circumstances an aggrieved party may file a suit for
specific performance, i.e. for a decree by the court directing the defendant to actually
perform the promise that he has made.

A decree for specific performance is not granted for contracts of all types. Itis only where it
is just and equitable so to do i.e. where the legal remedy is inadequate or defective, that the
courts issue a decree for specific performance.

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

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

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

www.someakenya.co.ke Contact: 0707 737 890 Page 172

 BUSINESS LAW

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

Rescission
When there is a breach of contract by one party, the other party may rescind the contract
and need not perform his part of obligations under the contract and may sit quietly at home
if he decides not to take any legal action against the guilty party. But in case the aggrieved
party intends to sue the guilty party for damages for breach of contract, he has to file a suit
for decision of the contract. When the court grants rescission, the aggrieved party is freed
from all his obligations under the contract; and becomes entitled to compensation for any
damage which he has sustained through the non-fulfillment of the contract.
Illustration: A contracts to supply 100 kg of tea leaves for sh. 1,500 to B on 15 th April. If
A does not supply the tea leaves on the appointed day, B need not pay the price. B may treat
the contract as rescinded and may sit quietly at home. B may also file a “suit for rescission”
and claim damages.

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

www.someakenya.co.ke Contact: 0707 737 890 Page 173