LAW CONTRACT

(Commercial Law)
By Dr. Alex Kamau
 THE NATURE OF A CONTRACT

a. A contract is a legally binding agreement between two or more parties with

enforceable obligations.

b. In Kenya, contracts are governed by the Law of Contract Act (Cap 23).

c. Contracts can involve the exchange of goods, services, or promises and

must fulfill certain requirements to be considered valid.

 ESSENTIAL ELEMENTS OF A CONTRACT

1. Offer: an unequivocal and clear manifestation by one party of its intention to contract with another.

2. Acceptance: This is the external manifestation of assent by the offeree

3. Consideration: The price, value, or benefit exchanged between parties to form a binding contract.

4. Intention to Create Legal Relations: The parties’ intention to form a legally binding agreement enforceable by law.

5. Capacity: The legal ability of individuals or entities to enter into a contract ( not being a minor or mentally
incapacitated).

6. Lawful Object: The subject matter of the contract must be legal and not against public policy.

7. Free Consent: Both parties must agree to the contract willingly, without coercion, fraud, or undue influence.

8. Possibility of Performance: The contract must be capable of being performed; it should not involve impossible acts.

9. Certainty of Terms: The terms of the contract must be clear and specific, not vague or ambiguous.
 CLASSIFICATION OF CONTRACTS 1/4

Express and Implied Contracts

1.Express Contract:
a. A contract where the terms are clearly stated, either orally or in writing.
b. Example: A written agreement to sell a car for KES 500,000.

2.Implied Contract:
a. A contract formed through the actions, behavior, or circumstances of the parties
involved, rather than written or spoken words.
b. Example: Visiting a restaurant implies you agree to pay for the food served.
 CLASSIFICATION OF CONTRACTS 2/4

Executed and Executory Contracts

3. Executed Contract:
a. A contract in which both parties have fully performed their obligations.
b. Example: A contract for services where payment has been made and the service
completed.

4. Executory Contract:
a. A contract where one or both parties still have obligations to fulfill in the future.
b. Example: A lease agreement where rent is paid monthly, and the tenant continues
to occupy the property.
 CLASSIFICATION OF CONTRACTS 3/4

5. Valid, Void, and Voidable Contracts

a. Valid Contract:
i. A contract that meets all the essential elements of a contract (offer, acceptance, consideration, legal intent,
etc.) and is enforceable by law.
ii. Example: A valid employment contract with agreed terms.

b. Void Contract:
i. A contract that is not legally enforceable because it lacks one or more of the essential elements.
ii. Example: A contract for illegal activities such as smuggling.

c. Voidable Contract:
i. A contract that is valid but can be canceled or voided at the option of one of the parties, usually due to
factors such as fraud, undue influence, or incapacity.
ii. Example: A contract entered into by a minor, which the minor can void upon reaching adulthood.
 FORMATION OF CONTRACTS (ESSENTIAL ELEMENTS OF VALID
CONTRACT EXPLAINED IN DETAIL)
OFFER: Offer is defined as an expression of willingness to contract on definite terms once
accepted. An offer becomes binding on the person making it as soon as it is accepted by the
other party.
Distinction between:
1. Offer and invitation treat: An invitation to treat is an inducement to customers to come
and make an offer. It is an invitation to negotiate but not an offer.
2. Offer and declaration of intention: A declaration of intention to do something does not
constitute an offer.
3. Offer and mere supply of information: if a customer request for a quotation and that
quotation is sent to him, it does not amount to an offer but is simply supply of a requested
information.
 RULES OF AN OFFER:
1. An offer must contemplate giving rise to legal consequences if accepted.
2. The terms of the offer must be certain i.e. they should not be vague, ambiguous, or loose in
expression.
3. Offer must be communicated to the offeree. Communications of an offer that is posted (through a
letter) will take place when the letter is received by the offeree. If the letter is lost, there is no offer.
4. An offer once accepted becomes a contract and cannot be revoked or withdrawn.
5. Conditions may be attached to the offer, but they must be communicated as well.
6. There must be knowledge of the offer before acceptance.
7. An offer cannot bind the other party without his/her consent.
8. Two identical cross-offers do not constitute a contract. Cross offers arise where the parties make
identical offers to each other in ignorance of each other's offer
 TERMINATION OF OFFER
1. Acceptance: An offer automatically comes to an end once it has been accepted and a contract is created.

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

3. Revocation/withdrawal: An offer will come to an end when it is revoked by the offerer at any time before acceptance.

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

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

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

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

8. Counteroffer: A counteroffer is a variation of the original terms of an offer. It will automatically extinguish the
original offer.
 ACCEPTANCE
Rules of Acceptance
1. Acceptance can be done orally or in writing or through action (implied)
2. Acceptance is only possible if the offer is still open.
3. Acceptance must be absolute, unconditional, and unqualified i.e. offer must be accepted exactly in
accordance with the terms of the offer.
4. Acceptance must be communicated to the offerer.
5. Acceptance must be within a given time or within a reasonable time.
6. Acceptance must be in the manner prescribed.
7. The party accepting must have been aware of the existence of the offer.
8. Acceptance subject to contract is incomplete acceptance.
9. An offer made to a class of people or to a particular person can only be accepted by members of that
class or that specified person.
 CONSIDERATION

Consideration is defined as:

1. The price paid by one party for the promise of another.
2. It is the legal value bargained for and given in exchange for a promise.
3. It is a promise for a promise, something for something situation i.e. a
status of equality or “quid pro quo”.
4. It is some rights, interests, benefits, or profits occurring to one party and
some forbearance, loss, detriment, or responsibility given, suffered, or
undertaken by the other party. The benefit accruing and the loss sustained
must be in return of a promise.
 RULES OF CONSIDERATION
• Rule 1: Consideration is necessary for all simple contracts
• Rule 2: Consideration must be real although it needs not be adequate i.e. consideration must
be something for value but whether it is enough or not is not a concern of law.
• Rule 3: Consideration must not be past.
• Rule 4:Consideration must move from promisor to promisee: This rule is also called the
doctrine of privity rule. It states that strangers or 3rd parties cannot be able to enforce a
contract that they aren’t party to even if it is for their benefit.
• Rule 5: Consideration must be in excess of existing consideration: Fulfilling an existing
contractual duty does not count as new consideration. To be valid consideration, a person
must offer something beyond their current obligations
 CAPACITY TO CONTRACT

• Capacity is the ability to incur legal obligations and acquire legal rights.

• Persons are generally presumed by the law to have the ability to enter into
contracts. However, such capacity may be absent or impaired. Capacity
may be determined by age, mental or legal status. Different rules apply to
minors, bankrupts, drunkards, insane persons and corporations.
 CAPACITY OF MINORS/INFANTS

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

1. Minors should be protected from their own incompetence and

inexperience.

2. The law does not intend to cause unnecessary hardships to those

dealing with minors.

• Contracts with minors may be valid, void or voidable.

 INTENTION TO CREATE LEGAL RELATIONS

A valid contract should have the intention to create legal relations. To this effect, courts have formulated certain
principles that will apply where legal consequences have not been expressed. These are classified into:
1. Domestic and family agreements: Agreements between husband, wife, children, uncles, aunts, cousins, etc.
are considered not to create legal relations except if they constitute a commercial agreement. Where
husband and wife are separated, any agreement between them is legally binding.

2. Social agreements: These are agreements between friends and are presumed not to carry any legal
consequences except if they constitute commercial agreements.
3. Commercial agreement: These are business contracts and are presumed to have legal consequences unless
an agreement to the contrary is expressed.
4. Collective bargaining agreements: These have no legal consequences unless they are in writing and have
been registered with the industrial court.
5. Mere advertisement puff: These are opinions and exaggerations by salesmen and advertisers and have no
legal consequences
 VITIATING FACTORS

These are factors that affect the free consent required in a valid contract. They include:
1. Misrepresentation: False statements that induce a party to enter into the contract.
2. Mistake: This is an error committed in relation to some matter of fact affecting the
rights of one of the parties to a contract.
3. Duress: When one party is forced to enter a contract under threat or coercion.
4. Undue Influence: Unfair manipulation by one party, especially in fiduciary or trusting
relationships.
5. Illegality: The law relating to illegal contracts is founded on the principle that no action
can arise out of an illegal transaction. The illegality of the subject matter renders the
contract void.
 TERMINATION AND DISCHARGE OF A CONTRACT 1/3
Contracts may be terminated or discharged in the following ways:

1. Discharge by Performance:

a. The contract is discharged when both parties have fulfilled their respective obligations as outlined in the agreement.

b. This is the most straightforward way to discharge a contract.

c. Once all duties are performed, the contract is completed, and neither party has further obligations. For example, if a
supplier delivers goods and the buyer makes the full payment, the contract is discharged by performance.

2. Discharge by Agreement (Mutual Consent):

The parties to a contract may mutually agree to terminate or modify the contract, discharging their obligations. This can
occur through:

a. Novation: Where the original contract is replaced by a new contract with different terms or parties.

b. Rescission: Where both parties agree to cancel the contract and return to their pre-contractual positions.

c. Alteration: Where the terms of the contract are changed, and the old obligations are replaced with new ones.
 TERMINATION AND DISCHARGE OF A CONTRACT 2/3
3. Discharge by Frustration:

a. A contract is discharged if an unforeseen event, through no fault of the parties, renders the performance of the contract impossible or
radically different from what was originally agreed.

b. In Kenya, the principle of frustration applies where the contract can no longer be performed due to events such as natural disasters,
changes in law, or the death of a party in a personal service contract. Example: If a building contractor is hired to construct a house,
and an earthquake destroys the land, the contract is frustrated.

4. Discharge by Breach:

If one party fails to perform their contractual obligations or does so in a manner that fundamentally undermines the contract, the contract
may be discharged by breach. The aggrieved party has the right to terminate the contract and may seek remedies such as damages or
specific performance. A breach may be:
a. Material Breach: A significant breach that allows the other party to terminate the contract and seek compensation.
b. Anticipatory Breach: Where one party indicates that they will not fulfill their obligations before the due date, allowing the
other party to terminate the contract immediately.
 TERMINATION AND DISCHARGE OF A CONTRACT 3/3
5. Discharge by Operation of Law:

Certain legal events or rules may discharge a contract. Some examples include:
a. Bankruptcy: When one of the parties becomes insolvent, their contractual obligations may be discharged under
bankruptcy laws.
b. Death: In contracts involving personal services, such as employment or partnership, the death of one party may
discharge the contract.
c. Merger: If one party takes over the other (e.g., through acquisition), their obligations may be discharged through
operation of law.

6. Discharge by Lapse of Time:

If a contract is not performed within a specified or reasonable time, it may be discharged by the passage of time. Under the
Limitations of Actions Act in Kenya, certain contracts have a statutory period within which claims or enforcement must be
made. After this period, the contract is deemed discharged, and no legal action can be taken. For example, a debt contract
might have a limitation period of 6 years. If no action is taken within this period, the contract is discharged, and the creditor
can no longer claim the debt.
 REMEDIES FOR A BREACH OF CONTRACT

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

3. Specific performance is an order of the court requiring the party in breach to carry out his/her contractual obligations.
4. Recession: the aggrieved party is allowed to set aside a contract because of a breach of the other party.
5. Rectification: the court will allow the party in breach to rectify the breach and carry on with the contract.

6. Court injunction: an order of the court restraining a party from repeating an act of breach
7. Restitution: returning the injured party back to the position he/she would have been if the contract had been
concluded.
8. Action for agreed sum: in anticipatory breach the contract will always provide for a certain sum payable in the event
of breach by either party. The aggrieved party can sue for this amount.

9. Action for damages: the aggrieved party will be awarded unliquidated damages.