LESSON 3

LAW OF CONTRACT

CONTENTS

1. Read the Study Text provided below

2. Assigned readings: Chapter 5 of Hussein
3. Attempt the reinforcing questions given at the end of the lesson
4. Compare your answers with those given in lesson 9

STUDY TEXT

Contents

1. Sources the Kenya Law of Contract

2. Elements of a contract
3. Capacity
4. Consideration
5. Formality
6. Legality
7. Intention
8. Terms of a Contract
9. Vitiating elements in a contract
10. Discharge of contract
11. Remedies for breach of contract
1. SOURCES OF THE KENYA LAW OF CONTRACT

The Law of Contract Act 1961, S. 2(2) provides that, except as may be provided by any written law for
the time being in force, the common law of England relating to contract, as modified by doctrines of
equity and by the Acts of the United Kingdom Parliament specified in the schedule to the Act, to the
extent and subject to modifications in the said schedule, shall extend and apply to Kenya. The U.K. Acts
specified in the schedule are:

(i) The Law Reform (Married Women and Tortfeasors) Act, 1935.

(ii) The Law Reform (Frustrated Contracts) Act, 1943.

(iii) The Disposal of Uncollected Goods Act, 1952. (This Act is no longer applicable, having been
rendered inapplicable by S. 10 of the Kenya Disposal of Uncollected Goods Act, 1987).

1.1 Types of Contract

The common law of England relating to contract classifies contracts into the following categories:

(i) Specialty Contracts - which are executed in a special way (i.e. written, signed and sealed).
The Kenya Law of Contract Act, S. 2(1) provides that no contract in writing shall be void
or enforceable by reason only that is not under seal. This provision constitutes a
significant statutory departure from the English law relating to specialty contracts.

(ii) Contracts of record e.g. court orders.

(iii) Simple contracts - i.e. agreements that are enforceable by the courts.

For the purpose of these notes "the law of contract" means the law relating to "simple contracts".

FORMATION OF A CONTRACT

Definition

This is a legally binding agreement made between two or more parties or persons. It has also been
defined as a promise or set of promises for the breach of which the law provides a remedy and the
performance of which the law recognizes as an obligation.

All contracts are agreements, but all agreements are not contracts. This is because a contract
imposes upon the parties legally binding obligations.

Types of Contracts

Formation of Contract

A contract comes into existence when an offer by one party is unequivocally accepted by another,
both parties must have the requisite capacity and some consideration must pass between them.
The parties must have intended to create legal relations and the purpose of the agreement must
have been legal. Any requisite legal formalities must have been complied with.

The above passage summarises the so-called elements of a contract. In order to constitute a
contact and agreement must be attended by the basic elements.
LESSON 3 LAW OF CONTRACT 3

2. ELEMENTS OF A CONTRACT

1. OFFER

This is an unequivocal manifestation by one party of its intention to contract with another. It is a clear
intimation of intention to contract. The party manifesting the intention is the offeror and the one to whom
it is made is the offeree.

2.2 Nature of An Offer

An offer may take many forms - written, verbal or merely implied from conduct. The cases
which will be referred to in these notes will illustrate this point. But whatever be the manner of its
manifestation, an offer is either a promise made or something done by a person from which the
law will deduce his intention to enter into a contract with another person if that other person does
or promises to do, something required. It must be distinguished from other acts which resemble
it, such as:

(i) Invitation to treat

This is a mere invitation by a party to another or others to make offers. Again the offeror
becomes offeree and invitee the offeror. A positive response to an invitation to treat is an
offer.

(a) A registered company issues a prospectus inviting the public to apply for its shares.
This is an invitation to treat (i.e. an attempt to "attract" offers) and not an offer. It
is not regarded as an offer because of practical reasons: If it was an offer, every
application made pursuant thereto would constitute an acceptance and the company
would be contractually bound to allot all the shares applied for. If the issue were
oversubscribed, the company would be sued by some of the applicants for breach of
contract. As this appears to be unjust, the courts have avoided the eventuality by
regarding the issue of the prospectus merely as an invitation to treat. When
applications are made, they will constitute the offers. The company then finds out
how many shares have been applied for and, if the issue is oversubscribed, accepts
applications which equal the shares available and "rejects" the others. The company
cannot be sued by those to whom shares have not been allotted since there is no
contract between them and the company: they made an offer which was not
accepted by the company - and the company could not accept the offer because it
did not have shares to sell.

(b) The display of goods in a shop or supermarket with price labels attached thereon.
The reasons why the courts decided not to regard this as an offer was explained by
Lord Goddard in Pharmaceutical Society v. Boots. Cash Chemists (Southern)
Ltd. Fisher v Bells.

(c) A government ministry puts an advertisement in the newspapers asking for tenders
for the supply of a specified quantity of goods during a specified period of time.
The advert constitutes an invitation to treat and a trader's response thereto is the
offer which the ministry may accept or reject.

(d) Advertisement of sale by auction

Harris v Nickerson
LESSON 3 LAW OF CONTRACT 4

(ii) Declaration of Intention

A person may do something which, on the face of it, appears to be an offer. An example is
the case of Harris v. Nickerson where it was held that an advertisement about an intended
auction was a declaration of intention (i.e. a public manifestation of an intended act) but
not an offer. Travelling to the advertised venue does not constitute an acceptance of an
offer and the traveller cannot sue the advertiser for breach of contract if the auction is
cancelled, or some of the goods to be auctioned are withdrawn.

2.3 Rules Relating to an Offer

The case law relating to an offer has established the following rules:
(i) The offer may be oral, written or may be implicated from the conditions of the offer.

(ii) An offer must be specific or definite (so that the offeree may truly understand the intention
of the offeror and consider his response thereto): Scammel and Nephew Ltd. v. Ouston in
which an offer that referred to "hire purchase terms” over a period of two years was
declared "void" due to uncertainty over the meaning of "hire purchase terms"

A person cannot be said to have accepted an offer with such conditions: he would not have
understood what he was purporting to accept. However, in Stevens v. Mclean the court
explained that, an offeror must explain a vague offer if asked to do so.

(ii) An offer may be conditional or unconditional.

(iv) An offer can be made to:

(a) The general public, as in Carlill v. Carbolic Smoke Ball Co. Ltd. ;

(b) A class of persons, as in Wood v. Lektric Ltd - where an offer was made to "hair
sufferers"—a class of persons to whom the court held that the plaintiff, -Mr. Wood,
a young man whose hair was prematurely turning grey and was, as a consequence, a
"hair sufferer" within the offer, belonged. Mr Wood had properly accepted the offer
although it was not addressed to him personally, or

(c) A particular person, as in Boulton v. Jones

(v) The offer may prescribe the duration the offer is to remain open for acceptance as
Dicknson v Dodds and Routledge v Grant.

2.4 Termination of an Offer

An offer may come to an end by:

- Insanity
- Revocation
- Lapsing of time
- Counter-offer.
- Death
- Rejection
- Failure of a condition subject to which the offer was made.

(a) Revocation

An offer is "revoked" if the offeror changes his mind and withdraws it (expressly or
impliedly). To be valid, the revocation must have been:
LESSON 3 LAW OF CONTRACT 5

(i) Made before acceptance: Byrne v. Van Tien Hoven - in which it was held that a
letter of revocation posted after a letter of acceptance had been posted was
ineffective (although the offeror did not know that the offeree had posted the letter
of acceptance).

(ii) Communicated (i.e. made known) to the offeree - expressly or impliedly. An

example of the implied revocation is the case of Dickinson v. Dodds (study the
judgment of James, L.J.)

Provided the aforesaid rules are complied with, an offer can also be revoked even
though it was declared to be open for a given period. The offeror can change his
mind at any time before the period expires: Dickinson v. Dodds

Exceptions

(i) Consideration was given for keeping the offer open. Such an offer constitutes an
"Option". An example is a hire purchase agreement. The owner of goods cannot tell
the hirer that he will not, after all, sell the goods to him.

(ii) An application for shares in a company made in response to a prospectus cannot be

withdrawn until after the expiration of the third day after the time of opening of the
subscription lists. This is provided by the Companies Act, S. 52.

(b) Lapse of time

An offer "lapses" (i.e. comes to an end automatically by operation of law) if:

(i) It is not accepted within the stipulated time if any.

(ii) It is not accepted within what appears to the court to be the reasonable time during
which it should have been accepted, e.g. Ramsgate Victoria Hotel Co. v.
Montefiove - an offer to buy shares in a company could not be accepted at the end
of the fifth month after the offer was made. (June - November)

(iii) Virji Khinji v Chutterback

(iv) It is an offer to sell property, and the property is sold to another party before the
offeree accepts the offer: Dickinson v. Dodds (in which Mellish L.J. regarded the
sale as equivalent to the offeror's death because it renders performance of the offer
impossible)

(c) Counter - offer

A counter - offer is constituted by the offeree's qualified acceptance which, in itself,

becomes the fresh offer and cancels the original offer, e.g. Hyde v. Wrench - in which the
"acceptance" to buy the house for £950 was held to have cancelled the offer to sell if at
£1,000.

(d) Death

The death of either party before acceptance terminates a specific offer. However, the offer
only lapses when notice of death of the one is given to the other. As was the case in
Bradbury v Morgan Mellish Js dictum in Dickinson V Dodds is emphatic that after an
offeror dies his offer cannot be accepted.

(e) Insanity

Additionally, the unsoundness of mind of either party before acceptance terminates the
offer. However, the offer only lapses when notice of the insanity of the one is
LESSON 3 LAW OF CONTRACT 6

communicated to the other.

(f) Rejection

This is the refusal by the offeree to accept the offer. The refusal may be express or by
implication. Silence on the party of the offeree amounts to rejection. As was the case in
Felthous v Bindles.

(g) Failure of a condition subject to which the offer was made

An offer made on the basis of a condition or state of affairs existing lapses if the condition
or state of affairs fails to materialize. These are referred to as conditional offers as was the
case in Financings Ltd v Stimson since the conditions of the motor vehicle in question had
changed the dependants offer to take the same on hire purchase terms lapsed and he was
under duty to take delivery or pay instalments.

2. ACCEPTANCE

This is the external manifestation of assent by the offeree. By acceptance an agreement comes
into existence between the parties. Acceptance takes place at a very subjective moment when the
minds of the parties meet, i.e. Consensus ad idem. This is the moment at which an agreement
comes into existence. However, this subjectivity must be “externalised”. This is what is referred
to as acceptance.
This offer and acceptance give rise to consensus, hence agreement. These two elements constitute
the foundation of every contractual relationship but cannot by themselves constitute a contract.

(a) The offeree must have been aware of, and must have intended to accept the offer, when he
did what is alleged to be the acceptance: The Crown v. Clarke ( Australian case and a
persuasive precedent in Kenya). Clarke had made his statement to the police in order to
save himself from the unfounded charge of murder. He had not made the statement in
order to accept the offer which he had forgotten about at the material time. His statement
was not therefore, an acceptance of the offer to pay the reward.

(b) The offeree's assent must be notified, or made known, to the offeror: Household Fire
Insurance C. Ltd. V. Grant.

This can be illustrated by the case of Felthouse v. Bindely in which it was held that the
nephew's information to the auctioneer that the horse had been sold could not constitute an
acceptance of the plaintiff's offer because he (the plaintiff) had not been told anything by
the nephew.

Exception

An uncommunicated acceptance will be effective if, from the words of the offer, the offeror
can be regarded as having waived the right to be informed of the acceptance: Carlill v.
Carbolic Smoke Ball Co. in which Mrs. Carlill was regarded as having accepted the
defendant company's offer although she had not told them that she would buy and use the
carbolic smoke balls.

(c) An offer made to the general public can be accepted by anybody who fulfils, or performs,
the conditions stated therein. Carlill v. Carbolic Smoke Ball Co. - in which Mrs Carlill
was held to have accepted the offer although it had not been made to her personally.

(d) An offer made to a class of persons can be accepted only by a person of that class: Wood v.
Lectrik Ltd. - in which an offer to "hair sufferers" was held to have been properly accepted
by Mr. Wood - a young man whose hair was prematurely turning grey and was regarded by
the court as a "hair sufferer" within the terms of the offer.
LESSON 3 LAW OF CONTRACT 7

(e) An offer made to a particular person can be accepted only by the particular person: Boulton
v. Jones - in which it was held that an offer made by Jones to Brocklehurst could not be
accepted by Boulton.

(f) The acceptance of an offer must be unconditional: Hyde v. Wrench -in which it was held
that the "acceptance" to buy the house at £950 destroyed the offer to sell the house of
£1,000. Neale v Merrett.

An offer terminated by a counter - offer cannot be revived by a subsequent tender of

performance thereof.

(g) An acceptance of an offer communicated to the offeror verbally by the offeree is effective
from the moment the offeror hears the offeree's words: Entores Ltd. v. Miles Far East
Corporation (obiter dictum by Lord Denning)

(h) If the offeror and offeree negotiate by telephone the acceptance is complete the moment the
offeror hears the offeree's words of acceptance: Entores Ltd. v. Miles Far East
Corporation (obiter dictum by Lord Denning).

(i) If the offeror and offeree negotiate by telex the acceptance will be effective from the
moment that the telex message is received by the offeror: Entores Ltd. v. Miles Far East
Corporation - in which it was held that the contract was formed in London when the
offeror received the telex message from Amsterdam.

(j) If the offeror expressly or impliedly authorised the offeree to transmit his acceptance by
post the acceptance will be effective at the moment the letter of acceptance is posted :
Byrne v. Van Tien Hoven - in which it was held that the acceptance was effective when
the plaintiffs posted their letter on October 11th in New York (although the defendants in
Cardiff were not aware of the posting)

Implied Authorization to accept by post occurs if:

(i) The offeror posted his offer but did not tell the offeree not to use the post, as
happened in Byrne's case above.

(ii) The offer was not posted but the court, as a practical matter, regards the post office
as the medium of communication that the parties themselves contemplated, as
happened in Household Fire Insurance Co. v. Grant - in which the company's
letter to Grant by post was held to have been valid acceptance of Grant's offer
although Grant's letter of offer had not been posted but sent to the company by hand.

Express authorization to accept by post occurs if the offerer tells the offeree to reply by
post, as happened in Adams v. Lindsell in which the offeree was told to "answer in course
of post"

Post office is an agent:

In the cases where the offeror expressly or impliedly authorises the offeree to accept by
post, the law regards the post office as the offeror's agent to transmit the acceptance.
Consequently, as soon an the letter is "handed over" to the post office (or merely dropped in
the letter box) the law regards it as having been "handed over" to the offeror personally - in
accordance with the principles of the law of agency.

If the letter of acceptance is in fact lost or delayed in transit, the law disregards that fact:
after all, the letter was already received by the offeror - how can he claim that it was lost or
delayed in transit? Legally, it was not lost or delayed in transit. This is illustrated by the
case of Household Fire Insurance Co. v. Grant in which the fact that the company's
LESSON 3 LAW OF CONTRACT 8

allotment letter never reached Grant was disregarded by the court and Grant ordered to
perform his part of the contract.
(k) An acceptance by post which is neither expressly nor impliedly authorised by the offeror
becomes effective only from the moment the offeror receives the letter of acceptance. In
such cases the post office would be the offeree's agent to transmit his acceptance to the
offeror, and the acceptance would be effective only if the agent actually delivers the
message. This rule appears to be a logical deduction from the explanation given by the
court in Byrne's case.

(l) If the offeror gives a letter containing an offer to a messenger and instructs the messenger
to wait for, and receive, the acceptance thereof, the acceptance will be effective from the
moment the offeree put his letter of acceptance into the messenger's hands: Household
Fire Insurance Co. v. Grant (obiter dictum of Thesinger, L. J.)

(m) An acceptance, once posted, cannot be withdrawn: Household Fire Insurance Co. v.
Grant (Statement of Thesinger, L. J.). This is definitely so when the acceptance was
posted pursuant to an express or implied authorization by the offeror. The legal position
regarding unauthorized acceptance by post is not clear because there is no decided case on
the point.

Examination questions sometimes test candidates' awareness of the uncertainty by asking,

for example, whether an offeree who has posted a letter of acceptance can telephone the
offeror and tell him to disregard the letter of acceptance - the examination question being
so drafted as to raise doubts whether the offer was posted or made by other means.

(n) Unless there are specific reasons to the contrary, the mode in which the acceptance was
transmitted does not matter if the offeror actually received it: Yates Building Co. Ltd. v.
Pulleyn & Sons Ltd. - in which it was held that an acceptance by ordinary post was valid
although the offeror had stated that it had to be by "registered post"

The prescribed mode of acceptance was regarded by the court as "permissive" or optional.
The court's decision might probably have been different if the offeror had told the offeree to
reply by "registered post only", or if the offeror had prescribed any other mandatory mode
of communication.

2.6 Provisional Contracts

Occasionally, an agreement may be described by the parties thereto as being "a provisional
agreement" until a legally binding agreement is prepared by their advocates and signed by them.
In Branca v. Cobarro the court held that the agreement, though described as provisional, was
legally binding already.

The Companies Act, S. 111 uses the word 'provisional' in a very special way and it was held in Re:
'Otto' Electrical Manufacturing Co. (1905) Ltd. that a 'provisional contract' there under does not
bind a company if the company had not received a trading certificate.

2.7 Agreement "Subject to Contract"

An agreement described as being "subject to contract" is not legally binding and merely serves as a
written record of what the parties are negotiating about.

3. CAPACITY

3.1 Capacity to Contract

`Capacity' may be described as the legally recognized right of a person to enter into a legally
binding agreement. The law of contract limits in varying degrees the contractual capacity of the
following persons:
LESSON 3 LAW OF CONTRACT 9

(i) Infants or minors,

(ii) Drunken persons and persons of unsound mind,

(iii) Corporations.

(iv) undischarged bankrupts.

3.1.1 Ractral capacity of Infants or minors

An infant or a minor is any person who has not attained the age of eighteen years: Age of
Majority Act 1974, S. 2. An agreement entered into by an infant may constitute a binding,
voidable or void contract - depending on the object of the agreement.

3.1.2 Binding Contracts

Contracts which are binding on an infant are contracts for:

(i) Necessaries,
(ii) Education, and
(iii) Beneficial service.

(a) Necessaries

'Necessaries' are defined by S. 4(2) of the Sale of Goods Act as "goods suitable to
the condition in life of such infant or minor... and to his actual requirements at the
time of sale and delivery". This provision is explained by Nash v. Inman in which
an infant agreed to buy "an extravagant number of waistcoats" but failed to pay for
them. He was sued for the price but the court held that he was not liable since the
goods supplied did not fall within the statutory definition of necessaries.

To constitute necessaries, the goods:

(i) Must be suitable to the condition in life of the infant, and

(ii) Must be suitable to the infant's actual requirement at the time of sale and
delivery, i.e. the existing stock of goods (if any) was not adequate for the
infant's needs.

Other necessaries include things like lodging, transport to the place of work, legal
advice, etc.

Liability for Necessaries

S. 4(1) of the Sale of Goods Act provides that the infant is liable to pay "a
reasonable price" for necessaries supplied to him. He is not liable for the agreed
price. This provision raises the question whether the infant's liability is contractual
or quasi-contractual.

(b) Education

An infant may legally enter into a contract for educational instruction. Some
textbooks regard education as part of 'necessaries'.

(c) Beneficial Service

A contract of service or apprenticeship is binding on an infant - provided it is

substantially for his benefit.
LESSON 3 LAW OF CONTRACT 10

In Doyle v. White City Stadium it was held that an infant boxer was bound by one
of the rules and regulations of the British Boxing Board of Control, which was not
beneficial to him because the rules and regulations, viewed as a whole, were
beneficial to him.
In Clemens v. London and North Western Rail Co. it was held that the infant
plaintiff was bound by the defendant railway company's railway scheme which fixed
a lower rate of compensation for injuries than the rate fixed by the Employer's
Liability Act because the company's scheme covered a wider range of injuries than
the Act.

In De Francesco v. Barnum the court held that an infant dancer was not bound by a
contract of service whose terms were so bad as to literally put the infant at the
disposal of the employer. In Roberts v. Gray the infant defendant was held liable
for breach of contract by his failure to accompany the plaintiff on a European tour to
play billiards since the contract was substantially for his benefit.

3.1.3 Voidable Contracts

The following contracts are valid and binding upon an infant unless he repudiates them
during infancy or within a reasonable time after attaining the age of eighteen:

- A lease,
- A partnership agreement,
- A contract to purchase a company's shares.

(a) Leases

A lease granted to an infant is binding on him unless he repudiates it within a

reasonable time after attaining the age of eighteen. In Davies v. Beynon - Harris
the court held that an infant tenant was liable for the rent of a flat which had accrued
before he repudiated the lease. In Valentini v. Canali the plaintiff, an infant, had
agreed to become the tenant of the defendant's house and to buy the furniture therein
at £102. He paid £68 on account for the furniture, and after, occupying the house
and using the furniture for some months he repudiated the tenancy agreement and
sued to recover the £68. It was held that he could not recover the money because he
could neither give back the benefit derived from the use of the furniture nor place
the defendant in the position in which he was before the contract.

(b) Partnership Agreement

An infant is bound at common law by a partnership agreement but he is free to

repudiate it at any time during infancy or within a reasonable time after attaining his
majority.

In Bennion v. Harrison the court held that Bennin, an infant who had been a
partner and had held himself out as such to many persons, was liable for the price of
goods which had been sold to the firm because when he became of age, he had not
informed "the world" (i.e. the persons who knew him to be a partner or had dealt
with him as such) that he was no longer a partner. He had in fact ceased to act as a
partner during his infancy.

S. 12 of the Partnership Act provides that a person who is under the age of majority
may be admitted to the benefits of partnership but he cannot be made personally
liable for any of the firm’s obligations. S.13 of the Act provides that an infant
partner becomes liable, attaining the age of majority, for all obligations of the firm
incurred since he was admitted - unless he gives public notice within a reasonable
time of his repudiation of the partnership.
LESSON 3 LAW OF CONTRACT 11

(c) Purchase of Shares

An infant who applies for, and is allotted, a company's shares becomes a member of
the company under S.28 (2) of the Companies Act from the moment that his name is
entered in the register of members. He then acquires membership rights and
becomes subject to membership obligations like any other member. However, he
has a legal right to rescind the contract if there has been a total failure of
consideration for which he paid the money (i.e. the shares have become worthless).

In Steinberg v. Scala (Leeds) Ltd. the plaintiff, an infant shareholder, instituted

rectification proceedings with a view to:

(i) Being relieved from liability on calls, and

(ii) Recovery of money she had already paid.

The court held that she should not recover the money already paid because the
shares had some value although she (the plaintiff) had not received any dividends
from the company. She was however entitled to have her name removed from the
members' register (as the company had agreed to do).

3.1.4 Void Contracts

If the Infant's Relief Act 1874 of England applies to Kenya as a statute of general
application which was in force in England on 12 August, 1897 then the following contracts
which it renders "absolutely void" in England would also be void if entered into by an
infant in Kenya:

- 'Contracts’ for repayment of money lent or to be lent;

- 'Contracts’ for goods supplied or to be supplied (other than contracts for
necessaries),
- All "accounts stated" with infants.

(i) Loans

All loans made to an infant are void and irrevocable. In Leslie Ltd. v. Sheill the
infant defendant had obtained two advances of two hundred pounds each from the
plaintiffs after cheating them that he was an adult. The plaintiff sued him to recover
£475 (the amount of the advances and accrued interest) for:

(a) Breach of contract, or alternatively,

(b) Fraudulent misrepresentation (i.e. deceit)

It was held that the infant was not liable because:

(a) There could not be any breach of a void contract, and

(b) The Infants' Relief Act renders loans to infants "absolutely void" without any
exception (cheating by an infant notwithstanding). The court was also of the
view that making the infant liable in tort (i.e. deceit) would have amounted to
an indirect enforcement of a contract rendered void by statute.
LESSON 3 LAW OF CONTRACT 12

(ii) Loans given for necessaries

It may happen that an infant asks someone for a loan to buy necessaries such as
school uniforms or textbooks. The person, not being aware of the legal prohibition,
agrees to lend the money and eventually does so. What is the legal position? The
loan is irrecoverable and the lender cannot sue, as lender, to recover the money.
This is so because the Act does not contain any exception to the prohibition.

(iii) Subrogation

In Re National Permanent Benefit Building Society the court stated that if an

infant obtains a loan for necessaries and actually spends it in paying for necessaries
the lender could sue in equity and would be allowed to stand in the place of those
who had sold the necessaries and would have had at common law a right to sue him
if he had not been paid. This remedy is known as "subrogation" and the lender is
said to subrogated to the rights of the seller and sues as if he were the seller and
had not been paid.

Ratification

If an adult person makes a promise to pay a debt contracted during infancy or perform a
void contract made during infancy, the promise is void and unenforceable against the
promisor: Infants' Relief Act, S. 2.

Although the Infants Relief Act has been repealed in England by the Minor's Contracts Act,
1987, it appears that it is still a prima facie source of Kenya Law since the repealing Act
has not been made part of the Kenya Law.

3.1.5 Contractual Capacity of Drunken Persons

If a person purported to enter into a contract at a time when he was too drunk to understand
what he was doing and the other party was aware of his mental condition, the contract will
be voidable at his option: Gore v. Gibson in which the court held that the defendant was
not liable on a bill of exchange which he had indorsed at a time when he was, to the
knowledge of the plaintiff, so drunk that he could not appreciate the meaning, nature or
effect of the endorsement.

The basis of the court's decision is not the defendant's intoxication but the plaintiff's
inequitable attempt to take advantage of a person in a weaker position. It would therefore
appear that if both parties were materially intoxicated at the time of contracting they would
be bound by the contract since none of them could take advantage of the other.

The following points should be noted:

(a) Ratification

A drunken man who enters into a voidable contract may affirm or ratify it when he
is sober: Matthews v. Baxter in which the defendant was held liable for breach of
contract to buy some houses from the plaintiff which he had made when he was
drunk but had nevertheless confirmed after he became sober.

(b) Necessaries

A drunken person is liable to pay for necessaries supplied to him pursuant to a

contract which he entered into when too drunk to know what he was doing: Gore v.
Gibson in which Alderson, B. stated that the ground of liability is an implied
contract to pay for the goods which arose from his conduct when sober.
LESSON 3 LAW OF CONTRACT 13

(c) The drunken person is liable to pay "a reasonable price" under S.4 of the Sale of
Goods Act. He is not liable for the agreed price - apparently because, being drunk,
he could not know the correct or fair price of the goods.

3.1.6 Contractual Capacity of Persons of Unsound Mind

A contract entered into by a person of unsound mind is voidable at his option if it is proved
that the other party was aware of his mental condition: Imperial Loan Co. Ltd. v.
Stone, in which Lopes, L. J. stated that "a contract made by a person of unsound mind in
not voidable at that person's option if the other party to the contract believed at the same
time he made the contract that the person with whom he was dealing was of sound mind".
The following points should also be noted:

(a) Ratification

A contract entered into by a person when he is insane can be ratified by him when
he becomes of sound mind.

(b) Necessaries

A person of unsound mind, like a drunken person, is liable to pay for necessaries
supplied to him. However, he is only liable to pay reasonable prices for the
necessaries under S. 4 of the Sale of Goods Act.

3.1.7 Contractual Capacity of Corporations

The courts have developed what is known as the doctrine of "ultra vires" in order to
determine the contractual capacity of legal persons or corporations.

The gist of the doctrine is that a body corporate's contractual capacity is limited to the
attainment of objects or purposes for which it was created. If the corporation purports to
enter into a contract to undertake a transaction which is neither expressly nor impliedly
within its objects. The contract is "ultra vires" (i.e. "beyond the powers of") the corporation
and is void, illegal and incapable of ratification.

This rule applies to statutory corporations, co-operative societies and registered companies.
This can be illustrated by the case of Ashbury Railway Carriage and Iron Co. Ltd v.
Riche in which the House of Lords held that a company whose object was, inter-alia, to
make railway carriages could not contract to build a railway line and Riche could not sue
the company for refusing to pay for the expenses incurred toward the construction of the
railway line.

3.1.8 Married Women

At common law, married women have no contractual capacity because they are presumed
to be non-existent (i.e. they are "part" of their husbands—the two constituting one person
who is the husband.)

This common law rule was changed by the Law Reform (Married Women and Tortfeasors)
Act 1935 of England which is applicable to Kenya under the Law of Contract Act 1961.
The Act gives married women full contractual capacity as if they were " femme sole".

4. CONSIDERATION

For an agreement to constitute a contract the common law of England, as adopted in Kenya, requires that
it must be supported by consideration.
LESSON 3 LAW OF CONTRACT 14

Exception

A "specialty contract" need not be supported by consideration. Such a contract is written, signed by one
party, sealed and then delivered to the other party.

4.1 Definition

There are many definitions of consideration that have been given by various judges in various
cases. The following are some of the definitions:

(i) "... Some right, interest, profit, or benefit accruing to the one party, or some forbearance,
detriment, loss, or responsibility, given, suffered or undertaken by the other", (per Lush, J.,
in Currie v Misa, (1875) L. R. 10 Ex. 153, at p. 162).

An example of consideration which is constituted by a benefit accruing to one party and a

detriment suffered by the other is to be found in Carlill's case

(ii) "Consideration means something which is of some value in the eye of the law, moving
from the plaintiff: It may be some benefit to the defendant, or some detriment to the
plaintiff, but at all events it must be moving from the plaintiff”, (per Patteson. J in Thomas
v Thomas.

(iii) " I am content to adopt from a work of Sir Frederick Pollock, to which I have often been
under obligation, the following words as to consideration. 'An act or forbearance of one
party, or the promise thereof, is the price for which the promise of the other is bought, and
the promise thus given for value is enforceable," (per Dunedin, L.J. in Dunlop Pneumatic
Tyre Co. Ltd. v. Selfridge & Co Ltd.

According to Sir Frederick Pollock, consideration is simply the price paid by a party to a
contract for the promise of the other party. Ultimately it is evident that consideration is
nothing but mutuality.

"Detriment" as consideration

An example of a 'detriment' that will legally suffice as the consideration for a promise is
provided by the case of Carlill v. Carbolic Smoke Ball Co. When Mrs Carlill acted upon
the advertisement by buying and using the carbolic smoke balls as directed she put herself
to some inconvenience at the advertising company's request. The inconvenience she
suffered by having to swallow so many balls for so many days was the 'detriment' which
constituted the consideration for the defendant company's promise to pay the £100 reward.

4.2 TYPES OF/OR CLASSIFICATION OF CONSIDERATION

Consideration may be executory or executed or past in certain circumstances.

(a) Executory Consideration

Executory consideration consists of a promise made by one party and a promise made by
the other party to the contract. The party exchange mutual promises. Performance of the
obligations remain in futura. It is good considerations to support a claim.

Examples

i an unmarried man and a lady agree to be married in the near future. Although
nothing has been done yet, there is a contract to marry between them from the
moment they exchange their promises.

The lady's promise is the price, which she pays for the man's promise, and the man's
LESSON 3 LAW OF CONTRACT 15

promise is the price he pays for the lady's promise.

ii Onyango goes to Munene's shop on the tenth day of the month and asks Munene, a
tailor, to make a suit for him. He promises to pay for the suit at the end of the
month. Munene takes Onyango's measurements and promises to have the suit ready
on the last day of the month.

Here, Onyango's promise is the consideration or price for Munene's promise, and
Munene's promise is the consideration or price for Onyango's promise.

(b) Executed Consideration

Executed consideration is constituted by something done by the plaintiff because of a

promise made by the defendant. It is good consideration to support a contractual claim.

Examples

1. If in example (2) above Onyango had paid for the suit in advance, the payment
would be the executed consideration for Munene's promise.

2. Mutiso puts an advertisement in the newspapers that he has lost his goat of a certain
description and promises to pay Shs200 to anybody who returns it. Onyango reads
the advertisement, goes to look for the goat, finds it in the bushes near the Bomas of
Kenya and returns it to Mutiso.

Here, what Onyango has done is what constitutes the executed consideration
required to make Mutiso's promise binding on him.

4.3 Rules relating to consideration

The following are the rules which the English courts have developed in relation to
consideration:

i Consideration must be sufficient (real) but it need not be adequate.

What the judge had in mind when formulating this rule could be better understood after
studying the decision in the following three cases:

ST LK V. MYRICK (1809)ILK V. MYRICK (1809)

In the course of the voyage from London to the Baltic, two seamen deserted and a captain,
having unsuccessfully attempted to find replacements at the Croneladt, entered into an
agreement with the rest of the crew under which they would be paid the wages of the two
seamen who had deserted if they worked the ship back to London. The crew worked the
ship back to London as agreed but the captain refused to pay whereupon one of them, the
plaintiff, sued to recover his part of the wages. Lord Ellenborough stated:

"Here, I think, the agreement is void for want of consideration. ... the desertion of a part of
the crew is to considered an emergency of the voyage as much as their death; and those
who remain are bound by the terms of their original contract to exert themselves to the
utmost to bring the ship in safety to her destined port".

Foakes v Beer (1884)

On the 11th of August, 1875 Mrs Beer recovered judgment against Dr. Foakes for £2,077
17s 2d for debt and £13 ls 10d for costs. On the 21st of December 1876 a memorandum of
agreement was made and signed by Dr Foakes and Mrs Beer that, if Dr Foakes paid £500 at
LESSON 3 LAW OF CONTRACT 16

once and the balance in instalments of £150 on the first day of July and January or within
one calendar month after each of the said days respectively in every year until the whole of
the £2,090 19s Od was paid, Mrs Beer would not "take any proceedings whatever on the
judgment". Dr Foakes paid the whole sum of £2090 19s Od as had been agreed whereupon
Mrs Beer asked him to pay the interest accrued on the judgement. He refused to do so,
relying on the agreement between him and Mrs Beer. Mrs Beer successfully sued for the
interest after contending that the agreement between her and Dr Foakes was unsupported by
consideration. Dr Foakes' appeal to the House of Lords was dismissed with costs.

Lord Selborne stated:

"No doubt if the appellant had been under no antecedent obligation to pay the whole debt,
his fulfilment of the condition might have imported some consideration on his part for that
promise. But he was under that antecedent obligation; and payment at those deferred dates,
by the forbearance and indulgence of the creditor, of the residue of the principal debt and
costs, could not (in my opinion) be a consideration for relinquishment of interest and
discharge of the judgement"

Collins v. Godefroy

In this case the plaintiff sued to recover six guineas, being the amount of the money he had
been promised as payment for giving evidence in an earlier case to which the defendant
was a party. He told the court that he had agreed to give evidence after being promised the
money. It was held that there was no consideration for the promise to pay. When he gave
evidence, the plaintiff was merely performing an existing legal duty imposed on him by the
law.

Looking at the case of Stilk v Myrick, it will be noted that the sailors were merely doing
what they were already legally bound to do, as an implied term of their contract of
employment as sailors, when they put extra effort to sail the ship back to London. As their
normal salary included payment for working in such contingencies, the captain would have
got nothing for paying the money that he had promised to pay. He was therefore free not to
pay it, "nothing for nothing, something for something" being the basic rule underlying the
common law conception of consideration.

Regarding the case of Foakes v Beer, it should be noted that when Dr Foakes paid the
initial £500 he was merely doing part of something he was already legally bound to do by
the court order of 11th August, 1875. When he completed paying the agreed instalment, he
merely completed doing what he was already bound to do on 11 th August, 1875. Mrs Beer
therefore got nothing for her promise not to ask for interest that would accrue on the
judgement date after 11th August, 1875. She was, as a consequence, free to break the
promise.

These cases illustrate the situations which the courts have dealt with and decided on the
basis that what was done and relied upon by the plaintiff as the consideration for the
defendant's promise was not "sufficient consideration". They are instances in which the
plaintiff had merely performed an existing legal duty. Such performance, per se, does not
constitute consideration for the promise that induced it. For an act to constitute "sufficient
consideration" it must be real (i.e. something which the plaintiff was not already bound to
do).

4.4 EXCEPTIONS TO THE RULE IN PINNELS CASE

The decision in Pinnels Case that payment of a smaller amount of money cannot constitute
consideration for a promise to accept it in settlement of a debt of a larger amount does not apply in
the following situations:

(a) Payment of a smaller sum at an earlier date

LESSON 3 LAW OF CONTRACT 17

(b) Payment of a smaller sum in kind

(c) Payment of a smaller sum at a different place or venue.
(d) Payment of a smaller sum by a third party
(e) Payment of a smaller sum in addition to an object
(f) Payment of a smaller sum in a different currency
(g) Payment of a lesser sum by a debtor when he has entered into an arrangement with his
creditors to compound his debtor.

In Pinnel's Case (1602), Pinnel sued Cole for a debt of £8 which was due for repayment on
11th November 1600. Cole's defence was that, at Pinnel's request, he had paid him £5 on
a 1 October and that Pinnel had accepted this payment in full settlement of the debt. Pinnel
won the case on a technical point of pleading but the court explained that, except for the
technical point, he would have lost the case.
Brian C. J. stated that "payment of a lesser sum on the day in satisfaction of a greater
cannot be any satisfaction (i.e. consideration) for the whole", but that it could be
consideration if paid:

(b) The rule in Welby v Drake is the principle that if the smaller amount is paid by a third
party, at the creditor's request or with his consent, the payment would be sufficient
consideration for the promise to accept it in full settlement.

In Welby v Drake (1825) the plaintiff sued the defendant for the sum of £9 on a debt
which had originally been for £18. The defendant's father had paid the plaintiff £9 after the
plaintiff had agreed to take that sum in full discharge of the debt. It was held that the
payment of the £9 by the defendant's father operated to discharge the debt of £18.

The judge stated that, if the plaintiff were allowed to recover the balance, he would also
have been allowed to commit "a fraud on the (debtor's) father, whom he induced to advance
his money on the faith of such advance being a discharge of his son from further liability".

(c) The rule in Good v Cheesman

If a debtor makes an arrangement with his creditors to compound his debts, the payment of
a smaller amount would discharge a debt of a larger amount.

In such a case, although the creditor is satisfying a debt of a larger sum by the payment of a
smaller, the consideration is the agreement by the creditors with each other and with the
debtor, not to insist upon their full claims.

In Good v Cheesman (1831) the defendant had accepted two bills of exchange of which
the plaintiff was the drawer. After the bills became due and before this action was brought,
the plaintiff suggested that the defendant meet his creditors with a view to reaching an
agreement. The meeting was duly held and the defendant entered into an agreement with
his creditors whereby he was to pay one-third of his income to a trustee to be named by the
creditors, and that this was to be the method by which the defendant's debts were to be paid.
It was not clear from the evidence whether the plaintiff attended the meeting though he
certainly did not sign the agreement. There was, however, evidence that the agreement had
been in his possession for some time and it was duly stamped before the trial. No trustee
was in fact appointed, though the defendant was willing to go on with the agreement.

It was held that the agreement bound the plaintiff and the action was dismissed. The
consideration, though not supplied to the plaintiff direct, existed in the forbearance of the
other creditors. Each was bound in consequence of the agreement of the rest.

THE DOCTRINE OF EQUITABLE OR PROMISSORY ESTOPPEL

(d) (The rule in the "High Trees" Case)

LESSON 3 LAW OF CONTRACT 18

In the Central London Property Trust Ltd. v. High Trees House Ltd it was held that a
landlord who had promised to accept £1,250 instead of the contractual £2,500 as rent was
bound by the promise - even though, at a common law, there was no consideration for the
promise. This decision is variously referred to as "waiver" or "equitable estoppel". Its
basis was explained by Lord Denning as follows:

"If I were to consider this matter without regard to recent developments in the law, there is
no doubt that had the plaintiffs claimed it, they would have been entitled to recover ground
rent at the rate of £2,500 a year from the beginning of the term ... because the variation here
might be said to have been made without consideration ... But what is the position in the
view of developments in the law in recent years? The law has not been standing still since
Jorden v Money. There has been a series of decisions over the last fifty years which,
although they are said to be cases of estoppel, are not really such. They are cases in
which a promise was made which was intended to create legal relations and which, to
the knowledge of the person making the promise, was going to be acted on by the
person to whom it was made, and which was in fact so acted on. In such cases the
courts have said that the promise must be honoured ... As I have said, they are not cases
of estoppel in the strict sense. They are really promises - promises intended to be binding,
intended to be acted on and in fact acted on. Jorden v. Money can be distinguished,
because there the promisor made it clear that she did not intend to be legally bound,
whereas in cases to which I refer the proper inference was that the promisor did intend
to be bound. In each case the court held the promise to be binding on the party making it
even though under the old common law it might be difficult to find any consideration
for it. The courts have not gone so far as to give a cause of action in damages for the
breach of such a promise but they have refused to allow the party making it to act
inconsistently with it. It is in that sense, and that sense only, that such a promise gives
rise to an estoppel. The decisions are a natural result of the fusion of law and equity ...
The logical consequence, no doubt, is that a promise to accept a smaller sum in discharge
of a larger sum, if acted upon, is binding notwithstanding the absence of consideration, and
if the fusion of law and equity leads to this result, so much the better. That aspect was not
considered in Foakes v. Beer".

On the other hand, in the circumstances postulated by Lord Denning, the creditor is not
bound by his acceptance of the smaller sum if his promise was obtained in a manner which
a court of equity would regard as "inequitable". This can be illustrated by the case of D &
C Builders Ltd. v. Rees (1965) in which the facts were as follows.

D & C Builders, a small company, did work for Rees for which he owed £482 l3s ld. There
was at first no dispute as to the work done but Rees did not pay. In August and October,
1964, the wife of Rees (who was then ill) telephoned the plaintiffs, complained about the
work, and said, "My husband will offer you £300 in settlement. That is all you will get. It
is to be in satisfaction." D & C Builders, being in desperate straits and faced with
bankruptcy without the money, offered to take the £300 and allow a year to Rees to find the
balance. Mrs Rees replied: "No, we will never have enough money to pay the balance.
£300 is better than nothing." The plaintiffs then said: " We have no choice but to accept."
Mrs Rees gave the plaintiffs a cheque and insisted on a receipt worded "in completion of
the account." The plaintiffs later brought an action for the balance. The defence was bad
workmanship and also that there was a binding settlement. The question of settlement
was tried as a preliminary issue and the judge, following Goddard v. O'Brien (1880),
decided that a cheque for a smaller amount was a good discharge of the debt, this being
the generally accepted view of the law since the decision of that case. On appeal it was
held that Goddard v, O'Brien was wrongly decided and that the payment by a debtor,
whether in cash or by cheque, of a lesser sum than the amount of the debt was not a
settlement of the debt which was binding at law on the creditor.
In the course of his judgement Lord Denning stated:

"This case is of some consequence: for it is a daily occurrence that a merchant or a

tradesman, who is owed a sum of money is asked to take less. The debtor says he is in
LESSON 3 LAW OF CONTRACT 19

difficulties. He offers a lesser sum in settlement, cash down. He says he cannot pay more.
The creditor is considerate. He accepts the proffered sum and forgives him the rest of the
debt. The question arises: Is the settlement binding on the creditor? The answer is that, in
point of law, the creditor is not bound by the settlement. He can the next day sue the debtor
for the balance, and get judgement. The law was so stated in 1602 by Lord Coke in
Pinnel's Case and accepted in 1889 by the House of Lords in Foakes v. Beer.
Now, suppose that the debtor, instead of paying the lesser sum in cash, pays it by cheque.
He makes out a cheque for the amount. The creditor accepts the cheque and cashes it. Is
the position any different? I think not. No sensible distinction can be taken between
payment of a lesser sum by cash and payment of it by cheque ... This doctrine of the
common law has come under heavy fire. But a remedy has been found. The harshness of
the common law has been relieved. Equity has stretched out a merciful hand to help the
debtor ... We can now say that when a creditor and a debtor enter on a course of
negotiation which leads the debtor to suppose that, on payment of the lesser sum, the
creditor will not enforce payment of the balance, and on the faith thereof the debtor pays
the lesser sum and the creditor accepts it as satisfaction, then the creditor will not be
allowed to enforce payment of the balance, when it would be inequitable to do so ... In
applying this principle, however , we must note the qualification: The creditor is only
barred from his legal rights when it would be inequitable for him to insist upon them.
Where there had been a true accord, under which the creditor voluntarily agrees to
accept a lesser sum in satisfaction, and the debtor acts upon that accord by paying the
lesser sum and the creditor accepts then it is inequitable for the creditor afterwards to insist
on the balance. But he is not bound unless there has been truly an accord between them. In
the present case, on the facts as found by the judge, it seems to me that there was no true
accord. The debtor's wife held the creditor to ransom ... No person can insist on a
settlement procured by intimidation".

4.5 1. Adequacy of consideration

Provided that consideration is sufficient, or real, it need not be adequate. The court
will not compare the value of the defendant's promise with the value of the
plaintiff's act or promise in order to determine the fairness of the transaction. The
parties are presumed to have concluded a fair bargain and the court will not assist
any one of them who alleges that he made a bad bargain. This is illustrated by
Thomas v. Thomas in which it was held that a payment of £1 per year for the use of
a house was binding on the executors of the deceased owner (Thomas) who had
promised to accept the payment.

2. Consideration must move from the promisee

The rule that "consideration must move from the promisee" means that only a
person who has personally given consideration for a promise can sue for breach of
the promise. A person who has not given consideration for a promise cannot sue
the promisor for the simple reason that he cannot expect to get something for
nothing. The common law regards a contract as a bargain between the parties to a
commercial transaction, each of whom has bought the promise of the other with his
own promise or act.

This is illustrated by the case of Dunlop v Selfridge in which the appellants were
motor tyre manufacturers and sold tyres to Messrs Dew & Co. who were motor
accessory dealers. Under the terms of the contract Dew & Co. agreed not to sell the
tyres below Dunlop's list prices, and as Dunlop's agents, to obtain from other
retailers a similar undertaking. In return for this undertaking Dew & Co. were to
receive discounts, some of which they could pass on to retailers who bought tyres.
Selfridge & Co. accepted two orders from customers for Dunlop covers at a lower
price. They obtained the covers through Dew & Co. and signed an agreement not to
sell or offer the tyres below list price. It was further agreed that £5 per tyre so sold
should be paid to Dunlop by way of liquidated damages. Selfridge's supplied one
LESSON 3 LAW OF CONTRACT 20

of the two tyres ordered below list price. They did not actually supply the other,
but informed the customer that they could only supply it at list price. The appellants
claimed an injunction and damages against the respondents for breach of the
agreement made with Dew & Co., claiming that Dew & Co. were their agents in the
matter. It was held that there was no contract made between the parties. Dunlop
could not enforce the contract made between the respondents and Dew & Co.
because they had not supplied the consideration. Even if Dunlop were
undisclosed principals, there was no consideration moving between them and the
respondents. The discount received by Selfridge was part of that given by Dunlop to
Dew & Co. since Dew & Co. were not bound to give any part of their discount to
retailers the discount received by Selfridge operated only as consideration between
themselves and Dew & Co. and could not be claimed by Dunlop as consideration to
support a promise not to sell below list price.

Viscount Haldane stated:

"My Lords, in the law of England certain principles are fundamental. One is that
only a person who is a party to a contract can sue on it....A second principle is
that if a person with whom a contract not under seal has been made is to be able
to enforce it consideration must have been given by him to the promisor or to
some other person at the promisor's request....I am of opinion that the
consideration, the allowance of what was in reality part of the discount to which
Messrs. Dew, the promisees, were entitled as between themselves and the
appellants, was to be given by Messrs Dew on their own account, and was not in
substance any more than in form, an allowance made by the appellants".

Although Viscount Haldane spoke of "a second principle" it would appear that there
is no "second principle" as such. What appears to be a "second principle" is merely
a verbal variation of the basic rule that consideration must move from the promisee -
for only then can he say that he is "a party to the contract " and be entitled to sue on
it as such.

This rule that consideration must move from the promisee is also known as the
"privity of contract" rule and the effect of it is that an agreement between A and B
for the benefit of C, if broken, cannot, generally speaking, be enforced by C.

Exceptions to the doctrine of Privity of contract

There are a number of exceptions to the privity of contract rule of which the
following may be stated:

(a) Agency

A principal may sue on a contract made by an agent.

This exception is perhaps more apparent than real because the principal
rather than the agent is regarded as the contracting party.

(b) Negotiable instruments

A holder in due course of a bill of exchange can sue prior parties thereto
although there is no privity of contract between him and any of them.

This is a statutory exception under the Bills of Exchange Act.

(c) Third party insurance

A person injured in a car accident can sue the insurance company which
LESSON 3 LAW OF CONTRACT 21

insured the car against such risks although he is not a party to the contract
between the owner of the car and the insurance company.

This is an exception under the Motor Insurance (Third Party Risks) Act.

(d) Legal assignment

The assignee of a debt may sue the debtor in his own name under the Indian
Transfer of Property Act, 1882.

(e) Covenants running with land

The plaintiff, in order to succeed in the case, must prove to the court that he was
induced to do what he did by the promise which the defendant made and that he
would not have done what he did if the defendant had not made the promise. In
such a case the plaintiff's act and the defendant's promise constitute a single
transaction or bargain. If the plaintiff performed the act before the defendant made
the promise, the performance of the act would not constitute consideration for the
defendant's promise.

This may be illustrated by the case of Re McArdle. in which the facts were as
follows:

McArdle, his wife and his mother lived in a dwelling-house forming part of the
estate of his father. He and his brothers and sister were to inherit the house under
their father's will after their mother's death. In 1943 and 1944 Mrs McArdle carried
out certain improvements and decorations in and on the house, the cost of which
amounted to £488. In April, 1945 McArdle and his brothers and sister signed a
document addressed to Mrs. McArdle which provided: "In consideration of your
carrying out certain alterations and improvements to the dwelling-house at present
occupied by you, we the beneficiaries under the will of our father hereby agree that
the executors... shall repay to you from the said estate when so distributed the sum
of £488 in settlement of the amount spent on such improvements. Dated April 30,
1945". In 1948 the children's mother (the tenant for life) died, and Mrs. McArdle
claimed payment of £488 which was refused and she sued for the money.

It was held that the consideration for the execution of the document of April 30,
1945, being past, the document was a nudum Pactum and was unenforceable
against the authors. Jenkins, L.J. stated:

"No question of conscience enters into the matter for there is no consideration and
there is nothing dishonest on the part of an intending donor if he chooses to change
his mind at any time before the gift is complete ... as the work had all been done and
nothing remained to be done by Mrs McArdle at all, the consideration was wholly
past, and, therefore, the beneficiaries' agreement for the repayment to her of the
£488 out of the estate was nudum pactum - a promise with no consideration to
support it. That being so, it is impossible for Mrs. McArdle to rely on this document
as constituting an equitable assignment for valuable consideration". A similar
policy was made in Roscorla v Thomas.

Exceptions

A plaintiff may rely on past consideration in the following instances:

(a) Where services are rendered at the express or implied request of the
defendant in circumstances which raise an implication of a promise to pay.
LESSON 3 LAW OF CONTRACT 22

This may be illustrated by the following cases:

(i) Lampleigh v Brathwait

The defendant who had killed a Mr. Patrick Mahume asked the
plaintiff to endeavour to obtain a pardon for him from the King. The
plaintiff thereafter exerted himself to this end, "riding and journeying
at his own charges from London to Royston, when the King was there,
and to London and back, and so to and from Newmarket to obtain
pardon for the defendant for the said felony". After the pardon was
granted by the King the defendant promised to pay the plaintiff £100
for his endeavours but failed to honour the promise.

When sued for the £100 the defendant pleaded past consideration but
the court held him liable.

(ii) Re Casey's patents (1892)

Patents were granted to Stewart and another in respect of an invention

concerning appliances and vessels for transporting and storing
inflammable liquids. Stewart entered into an arrangement, with
Casey whereby Casey was to introduce the patents. Casey spent two
years "pushing" the invention and then the joint owners of the patent
rights wrote to him as follows:

"In consideration of your service as the practical manager in working

both patents we hereby agree to give you one-third share of the
patents".

Casey also received the letters patent. Some time later Stewart died
and his executors claimed the letters patent from Casey, alleging that
he had no interest in them because the consideration for the promise
to give him a one-third share was past.

It was held that the agreement was binding.

These two cases may be explained as follows.

If you ask someone to do something for you and doing it will make
him spend some money, you are under an implied legal obligation to
pay a reasonable amount as compensation for the anticipated
expenses. When you later on promise to pay some money after the
thing has been done, you are merely fixing the reasonable amount
which the law all along expected you to pay. The service rendered is
not past consideration.

(b) Negotiable Instruments

Past services may constitute valuable consideration for a bill of exchange

under s.27 of the Bills of Exchange Act which provides that valuable
consideration for a bill may be constituted by "an antecedent debt or
liability".

If the brothers-in-law in Re McArdle, above had given Mrs. McArdle a bill

of exchange or promissory note for £488 payable after their mother's death
they would have been liable on it even though the work on the house had
been completed by the time of drawing the bill or promissory note.
LESSON 3 LAW OF CONTRACT 23

(c) Acknowledgement of statute barred debt

An acknowledgement of a statute-barred debt is binding under Limitation of

Actions Act 1968 even though it is made in respect of a past debt.

(d) Consideration must be legal

The act or promise offered by the offeree as consideration for the other parties.
Promise must be one permitted by law. Illegal consideration invalidates the
contract.

(e) Consideration must be something in excess of a public duty

Performance by the plaintiff or a public duty imposed upon him by law is not
sufficient consideration for the defendants promise. This is because the
plaintiff is already legally bound to do so as was the case in Collins v
Godefroy. However in England v Davidson and Glassbook Brothers v
Glamorgan country Council consideration was sufficient since the parties had
done more that duty required.

(f) Considerations must be something in excess of an existing contractual

obligation

Performance by the plaintiff of an existing contractual obligation is not

sufficient consideration for the defendants promise. This is because the
plaintiff is already legally bound to do so as was the casein Stilk v Myrrick.
However , if the plaintiff does something of excess of an existing contractual
obligation such a thing constitute good consideration. As was in the case in
Hartley v Ponsonby.

5. FORMALITIES

For an agreement to constitute a valid and enforceable contract it must have been entered into in the
form, or manner, if any, prescribed by law. The general rule at common law is that a contract can be
entered into orally, in writing, partly orally and partly in writing, or may be merely implied from conduct:

Requirements of writing

5.1 BILLS OF EXCHANGE AND PROMISSORY NOTES:

The Bills of Exchange Act defines a bill of exchange as follows:

"A bill of exchange is an unconditional order in writing ...." The Act further states that an
instrument which does not comply with these conditions ... is not a bill of exchange. To be valid,
therefore, a bill of exchange must be made in writing. This requirement also applies to Promissory
Notes under S. 84(1) of the Bills of Exchange Act.

5.2 REPRESENTATIONS REGARDING CHARACTER OR CREDIT:

Statements relating to a person's credit-worthiness will only be actionable if made in pursuance of

a contract which was in writing. The Law of Contract Act, S.3(2) states as follows:

"No suit shall be brought whereby to charge any person upon or by reason of any representation or
assurance made or given concerning or relating to the character, conduct, credit, ability or dealings
of any other person to the intent or purpose that such other may obtain credit, money or goods,
unless such representation or assurance is made in writing, signed by the party to be charged
therewith".
LESSON 3 LAW OF CONTRACT 24

5.3 TRANSFER OF SHARES IN A COMPANY REGISTERED UNDER THE COMPANIES

ACT:

Section 77 of the Companies Act prohibits an incorporated company from registering any transfer
of shares or debentures of the company unless a proper instrument of transfer has been delivered to
the company.

5.4 ACKNOWLEDGEMENT OF STATUTE BARRED DEBTS:

If an action for a simple contract debt has been barred by the limitation period of six years, it is
possible for the right of action to be revived by an acknowledgement or part payment. S.24 of the
Limitation of Actions Act, 1968 provides that for such an acknowledgement to be effective it must
be in writing and signed by the person making it, or his agent.
5.5 TRANSFER OF IMMOVABLE PROPERTY:

S.54 of the Indian Transfer of Property Act, 1882 (Note: This Act is applicable in Kenya) requires
that a transfer of immovable property worth over 100 rupees must be by a registered
instrument. The requirement of registration makes a written document necessary.

The above contracts are void unless they are made in writing.
(b) Requirement of written evidence

These contracts must be evidenced by some note or memorandum.

(i) CONTRACTS OF GUARANTEE:

The Law of Contract Act, 1961, S.3 (1) provides:

"No suit shall be brought whereby to charge the defendant upon any special promise to
answer for the debt, default or miscarriage of another person unless the agreement upon
which such suit is brought, or some memorandum or note thereof, is in writing and signed
by the party to be charged therewith, or other persons thereunto by him lawfully
authorized."

(ii) CONTRACTS FOR THE SALE OF AN INTEREST IN LAND:

The Law of Contract (Amendment) Act, 1968, provides:

"No suit shall be brought upon a contract for the disposition of an interest in land unless
the agreement upon which the suit is founded, or some memorandum or note thereof is in
writing and is signed by the party to be charged or by some person authorised by him to
sign it. Provided that such a suit shall not be prevented by reason only of the absence of
writing, where an intending purchase or lessee who has performed or is willing to perform
his part of a contract-

(i) has in part performance of the contract taken possession of the property or any part
thereof; or

(ii) being already in possession, continues in possession in part performance of the

contract and has done some other act in furtherance of the contract.

NOTE:

(a) The agreement itself need not be in writing, so long as a "note or memorandum" is
in existence. Such note or memorandum must contain the essential terms of
contract - e.g.
LESSON 3 LAW OF CONTRACT 25

(i) the names of the parties:

(ii) description of the property;

(iii) the nature of the consideration.

This evidence could be contained in two documents, provided that the documents
could be connected, as it was in one case where an address on an envelope was
connected with the letter contained therein.

The signature to be attached to such a document must be that of the person against
whom the contract is to be enforced or a person authorised on his behalf. The term
"signature" includes a rubber stamp.

(b) If there is evidence of part performance in the form of possession by the purchaser
or a lessee the Court will permit oral evidence of a contract for the sale of land to be
given, and the Court will award an order of specific performance.

(iii) EMPLOYMENT CONTRACTS FOR OVER ONE MONTH, UNDER

S.5 OF THE EMPLOYMENT ACT.

6. ILLEGALITY

6.1 For an agreement to constitute a legally enforceable contract, it must have been entered into for a
lawful purpose. An agreement to do something which is prohibited by statute or the common law
is not a contract - although such agreements are generally called "illegal contracts"

6.2 ILLEGAL CONTRACTS

There are numerous examples of "illegal contracts" of which the following may be mentioned:

a. Contracts illegal by statute

Whether a particular contract is prohibited by a particular statute depends on the wording of

the statute. For example, employment act, contracts for the payment of wages or salaries
in kind are illegal.

b. Contracts illegal at the common law

A contract which is prohibited by the common law is usually described as being "contrary
to public policy" (i.e. the court is of the view that it is in the public interest that the
contract should not be enforced). Such a contract may be one which:

(i) Tends to promote corruption in the public service, as illustrated by Parkinson v.

College of Ambulance Ltd. (1925),

(ii) Tends to promote sexual immorality, such as in Pearce v. Brooks (1866)

(iii) Tends to interfere with the sanctity of marriage, such as Wilson v. Carnley
(1908).However, in Fender v. St. John - Mildmay (1938) the House of Lords held
that a contract made between decree nisi and decree absolute, for marriage after the
dissolution of the existing marriage is valid (despite the fact that it rendered
reconciliation between parties to the divorce proceedings almost impossible).

(iv) Tends to fetter the freedom of marriage.

LESSON 3 LAW OF CONTRACT 26

(v) Tends to prejudice the administration of justice, such as -

(a) Champerty: Trendex Trading Corporation v. Credit Suisse (1982), or

(b) Maintenance.

(v) Tends to prejudice the administration of justice.

(a) champerty agreement

(b) maintenance: Trendex Trading Corporation v Credit suise.

Effects or Consequences of Illegality

Illegality renders a contract unenforceable. The contract creates no rights and imposes no
obligations on the parties. This is because the contract is beyond the pale of law hence neither
party has a legal remedy. As a general rule money or goods changing lands under an illegal
contract are irrecoverable. This is because gains and losses remain where they have fallen. A
court of law cannot assist parties to adjust their rights if the contract is tainted with illegality.
However money or goods changing hands under an illegal contract may be recoverable where

(a) a party repents or regrets the illegality before the contract is substantially performed.
(b) The parties are not in pari delicto i.e. not equally to blame.
(c) The owner of the goods or money establishes title thereto without relying upon the illegal
contract as was the case in Amar Single Kulubya.

VOID CONTRACTS

These are contracts which the law treats as non-existent. As a general rule illegal contract is only void but not
certain rights may be salvaged by the innocent party. A contract may be rendered by statute or at common law
i.e. courts of law.

Contracts void by the statute.

Wagering contract.

This is a contract whereby two persons or groups of persons with different views on the outcome of an uncertain
future event agree that some consideration is to pass depending on the outcome.

Contracts void at common law

These are contracts declared void by courts of law for being contrary to public policy namely

I. Contract of the courts

II. Contract prejudicial to the statute of marriage
III. Contracts in restraint of trade

CONTRACTS IN RESTRAINT OF TRADE

This is a contract by which a person voluntarily or involuntarily restricts his future liberty to carry on his trader
business or profession in such manner or with such persons as he chooses e.g. an employer restraining an
employee from working for a business rival. At common law contracts in restraint of trade are prima facie void
for being contrary to public policy. However such a contract may be enforced it is proved that;

a) The restraint was reasonably necessary to protect the restraining party’s interest
b) The restraint was reasonable to affected party
c) The restraint was not injurious to the public.
LESSON 3 LAW OF CONTRACT 27

Contracts in restraint of trade are both voluntary and involuntary

Voluntary restraints

These are contracts where by a party consents to be restrained by the other for example

Restraint accepted by an employee

The employer restraints the employee from working for a business rival or setting up a similar business. Such a
restraint may be enforced if reasonable to both parties and is not injurious to the public.

In Automan v Taylor the defendant who was an employee of the plaintiff covenanted not to work in a tailoring
business within 3 years of quitting employment. However he worked in one of the areas before the 3 years
expired, the plaintiff sued for an injunction was granted.

However in Attwood v Lamont where the defendant as the head of the cutting department in a tailoring business
covenanted not to engage in tailoring business within a radius of l0 miles and the plaintiff applied for an
injunction. It was held that the restraint was too wide and hence unreasonable to be enforced.

A similar holding was made in Kores Manufacturing co v Kolok Manufacturing Co where two competing
companies had covenanted not to employee each other’s employee within a duration of 5 years. The defendant
company employed a former employee of the plaintiff with 5 years. It was held that the restraint was
unreasonable to both companies.

Worldwide restraint may be enforced if reasonable and can only be effective if enforced on a worldwide basis. It
was so held in Norclenfelf v Maxim Nordenfelt Guns and Ammunition Company (1984). Nordenfelt was the
manufacturer of a quick firing and loading gun and ammunition. He sold his business to a company for 287 500,
2 years later the company merged with another and employed Nordenfelt as the Managing Director at a salary of
2,000 per year. The contract of employment restrained Nordenfelt from;

1) Carrying on or engaging in the business of manufacturing explosives or ammunition in any part of the
world for 25 years.

2) Competing with the business of the company for 25 years.

The House of Lords held that where as the covenant not to engage in gun trade was reasonable and enforceable
but the covenant not to compete with the company for 25 years was unreasonable.

Restraint accepted by a seller of a business

Under this contract the buyer of the business restraints the seller from setting up a similar business door, this may
be necessary to protect good will. Such a restraint is prima facie void. In enforcing such a restraint the court
considers;

a. The area covered by the restraint

b. Its duration and other relevant circumstances
c. Nature or character of the business

In Dias v Souto (1960) the defendant sold a shop situated on the island of Zanzibar. It is specialized in goods for
expatriate community. He sold the shop to the plaintiff and covenanted not to set up a similar business within
the Zanzibar protectorate. He established a similar business on the island of Pemba, the plaintiff sued for an
injunction. An injunction was granted on the ground that the defendant was likely to injure the plaintiff’s
commercial position by rescission of the specialized nature of the business.

Restraints Restraint accepted by distributors or sellers of goods (sole agreement)

The seller or distributor agrees to purchase all his goods from a particular manufacturer or wholesaler in return
LESSON 3 LAW OF CONTRACT 28

for a specified discount. The purpose of the restraint is to prevent the seller from distributing the products of a
competitor. Sales agreements take any of the following forms;

(a) Tying covenant

This is a contract by which a seller agrees to purchase all his goods from a particular manufacturer or
wholesaler.

(b) Compulsory trading covenant:

This is a contract by which a seller covenants to keep his business open for reasonable hours everyday.

(c) Continuity covenant

This is a contract by which the seller agrees to extract similar covenants from the person who purchases
the business from him. Solus agreements are prima facie void unless reasonable and not injurious to the
public.

A partial restraint may be enforced by a court of law to protect clients, trade secrets etc. However a restraint
whose purpose is to keep off competition is unenforceable.

Involuntary restraints

These are restraints imposed by professional bodies and trade associations on their members for certain purposes
e.g. enhancement of standards of conduct. At common law such restraints are prima facie void but may be
enforced if it is proved that they are reasonable and are not injurious to the public.

Contracts in Restraints of Trade in Kenya

The principles or rules governing contracts in restraint of trade in Kenya are contained in the Contracts in
Restraint of trade Act under sec.2 of the act contracts in restraint of trade in Kenya are legally binding, however
the High court is empowered to declare such a contract void if it is satisfied that the restraint is unreasonable in
that it affords more protection than necessary or is injurious to the public. To make its decision the court must
have regard to

a. The nature of trade, business, occupation or professional

b. Area covered by the restraint
c. Duration of the restraint
d. Other circumstances of the case

7 INTENTION

For an agreement to constitute a contract, the parties thereto must have intended it to have legal
consequences. Consequently, an agreement that contains an express declaration that it is NOT intended
to have legal consequences (e.g. the "Honourable Pledge Clause" in ROSE AND FRANK v.
CROMPTON BROS) will not be enforced by the courts despite its embodying all the other elements of
a valid contract.

In practice, however, parties do not direct their attention to this point when negotiating with each other,
with the consequence that the courts have, as it were, been called upon to "fill the gaps". This they have
done by formulating certain principles or "presumptions" that will apply in the absence of an express
declaration to the contrary.

These presumptions are as follows:

7.1 BUSINESS AGREEMENTS;

There is a rebuttable presumption that parties intended create a legally enforceable agreement for
example in Crlills case, Edwards v Skyways Ltd. However legal intention may be expressly
LESSON 3 LAW OF CONTRACT 29

negative by the use of honour clauses as was the case in Rose and Frank V Crompton Brothers.

7.2 DOMESTIC OR FAMILY AGREEMENTS:

There is a rebuttable presumption that the parties did not intend to create legal relations.

(a) Agreements between husband and wife:

(i) Where the husband and wife are living together amicably, there is a legal
presumption that any agreement they enter into is NOT legally binding:
BALFOUR v. BALFOUR. This principle appears to be a consequence of a legal
apprehension that ill-advised litigation will destroy the domestic tranquillity
generally prevailing in the home, or the love between the parties.

(ii) Where the husband and wife have separated, or are about to separate, so that the
marriage is practically over, any agreement entered into by the spouses is presumed
to have been intended to be legally binding e.g. MERRIT v. MERRIT. In such a
case, there is no love between the parties which litigation might destroy.

(b) Agreement between Parent and Child:

It was held in JONES v. PADAVATTON that an agreement between a parent and a child
(in that case, between mother and daughter) is presumed NOT to have been intended to be
legally binding. The court added that such agreements depend entirely on the goodwill of
the parties thereto.

(c) Agreement between Uncle and Niece or Nephew:

In Jones v. Padavatton, Salmon L.J. stated: "As a rule when arrangements are made
between close relations, for example between husband and wife, parent and child or uncle
and nephew in relation to an allowance, there is a presumption against an intention of
creating any legal relationship".

7.3 SOCIAL AGREEMENTS

Professors Chesire and Fifoot have expressed the view that "to invite a friend for dinner is not to
invite litigation" and it is generally stated that social agreements between friends are presumed
NOT to have been intended to be legally binding.

8 TERMS OF A CONTRACT

The promises which the parties to a contract make to each other are known as the "terms" of the contract.
They are graded by the law into the following categories:

(a) Conditions

This is a term of major stipulation in a contract. It is part of the central themes. It runs to the part
of the contract. consequently, if it is broken, the injured party may -

(i) treat the contract as repudiated and sue the party at fault for damages,

(ii) affirm the contract and sue for damages.

As was the case in Poussard v Spiers and Pond

When it is said that a term which is a condition "goes to the root of the contract" it merely means
that the aggrieved party attached so much importance to the term that, if he had known that there
would be a breach of it, he would not have entered into the contract. For example, there is an
LESSON 3 LAW OF CONTRACT 30

(implied) condition under s.14(2) of the Sale of Goods Act that the seller has "a right to sell" (i.e.
he is the owner of) the goods. If the goods are stolen goods, and the buyer had been aware of this
fact, he would not have entered into the contract. This is a minor term, or a term of minor
stipulation. It is a collateral or peripheral term of a contract. It is not part of the contral theme.

(b) Warranties

There is no precise legal definition of a "warranty" which, in legal nomenclature, is susceptible to

a variety of interpretations. However, for the purposes of the law of contract, it is generally
contrasted with a condition. It is generally described as a stipulation which does not go to the
root of the contract and breach of which does not entitle the aggrieved party to treat the contract as
at an end, but entitles him only to sue for damages. Warranty of quiet possession of goods each of
warranty entitles the innocent party to sue for damages but the contract remains enforceable. As
was the case in Beffini v Gye and in Kampala General Agency v Modys (EA) Ltd This is a
rather lofty or vague phraseology but a more useful approach is to divert to the examples of
warranties implied, or given, in s.14 of the Sale of Goods Act, namely:

- the warranty of "quiet possession", and

- the warranty that the goods shall be free from undisclosed encumbrances.

8.1 Purpose of Categorization

As might have been implicit from their descriptions, the purpose of the legal categorization of
contractual terms is to assist in the determination of the legal consequences of their breach. For
the party contemplating a breach, it is very important to be aware of the legal consequences that
will ensue from implementing his decision.

8.2 Express terms

The terms of a contract are said to be "express terms" if the parties themselves adverted to them at
the time of negotiations and actually agreed upon them (i.e. incorporated them into the contract,
either verbally or in writing). Written terms prevail over unwritten terms. Handwritten terms
prevail over others.

8.3 Implied terms

A term which the parties did not expressly incorporate into the contract may nevertheless be
deemed to be one of the terms of the contract by implication. This may be necessary in order to
"give business efficacy to the contract", as explained in The Moorcock. Alternatively, the term
may be implied by an Act of Parliament, such as the implied conditions and warranties implied by
the Sale of Goods Act.

8.4 Exemption or exclusion clauses

A party to a contract may seek to avoid legal consequences of a breach of a term thereof by
inserting therein a paragraph or sentence to that effect. Alternatively, the clause may be intended
to limit the legal consequences of the breach rather than avoidance thereof. Such sentences or
paragraphs are known as "exemption clauses". They are founded on the theory of freedom of
contract and are common in standard form contracts.

8.5 Judicial attitude

The English judges believed that a contract is an agreement which is freely entered into by parties
who are "sui juris" (i.e. legally at par). Consequently, a party to a contract which contained an
exemption clause was bound by it. After all, why did he agree to enter into the contract despite
LESSON 3 LAW OF CONTRACT 31

the clause?

As a consequence of numerous cases that were brought before them, the English courts formulated
the following rules regarding exemption clauses:

i. An exemption clause must be an integral part of the contract . A clause contained in a

document which is essentially a receipt for money paid will not be regarded as an
exemption clause, as illustrated by: Chapleton v. Barry Urban District Council.
ii. The particular clause in the document must have been brought to the attention of the
party affected by it before he entered into the contract. A purported notification after
the conclusion of the contract is not effective: Olley v. Marlborough Court.
However, the party seeking to enforce the clause may succeed if he proves that he
had dealt with the other party on previous occasions, and had given him similar
documents: Spurling v. Bradshaw.
iii. If the party affected by the exemption clause had signed it, he will be bound by it,
whether he did not read its contents before signing it: L'Estrange v. Graucob.
Exceptionally he may evade some of the clause if, before signing the document, he
had enquired as to what it meant and was given verbal representations which
modified the effect of some of the written words: Curtis v. Chemical Cleaning &
Dyeing Co.
iv. If the clause is ambiguous, it will be interpreted against the party who inserted it and
who is now relying on it. This is known as the "contra preferentem rule" and is
illustrated by: White v. John Warrick & Co. Ltd.
v. As a general rule, an exemption clause cannot be relied upon by a third party: Adler
v. Dickson. This is due to the privity of contract rule.
vi. An exemption clause cannot be relied upon to exonerate a party from the
consequences of a fundamental breach of contract: Nichol v. Godts.

9 VITIATING ELEMENTS IN A CONTRACT

The validity of a contract may be vitiated in the following factors:

9.1 MISTAKE

This is a misapprehension of a tact or fact situation.

The general rule is that mistake is legally irrelevant: Bell v. Lever Bros.

9.1.2 Exceptions:

Mistake is legally relevant in cases of "operative mistake" (i.e. the mistake operates to destroy the
consensus that it is the basis of a contract and the parties are deemed not to have agreed on
anything).

A mistake may be -

i. Common Mistake: This may occur as follows:

(a) "Res extincta" - an agreement to sell goods which, unknown to buyer and seller,
have ceased to exist, e.g. Couturier v. Hastie - Contract void.

NOTE: In McRae v. Commonwealth Disposals Commission (Australian case which is

"persuasive authority" in Kenya) it was held that the "seller" who had agreed to sell goods
which never existed at all was liable for breach of contract: breach of the implied warranty
that the goods actually exist.

(b) "Res sua" - an agreement to buy some property which, unknown to both parties,
already belong to buyer.
LESSON 3 LAW OF CONTRACT 32

Examples - Cooper v. Phibbs - an agreement to lease a fishery which, unknown

to the parties, was the property of the "lessee".

- Cochrane v. Willis.

2. Mutual Mistake:

This occurs if the parties misunderstood each other on a fundamental fact so that there is
actually no true agreement between them.

Example: Raffles v. Wichelhaus in which an offer was made in relation to some

property but misunderstood to refer to other property. Contract void.

ii. Unilateral Mistake:

This is called "unilateral" because only one of the parties is mistaken. The other party is
aware of the mistake because he has fraudulently induced it. This may occur as follows:

(a) Mistaken Identity:

The English cases relating to mistaken identity appear to be in conflict regarding the
effect of the mistake on the contract. These cases are:

(i) Ingram v. Little:

The English Court of Appeal held that the mistake rendered the contract void
- the court's reasoning being that the offer to sell the car had been made to
the person the seller believed he was dealing with, but purportedly
"accepted" by the rogue personally present in front of the seller. So, in
accordance with the rule in Boulton v. Jones that an offer to A cannot be
accepted by B, the contract was void.

(ii) (a) Phillips v. Brooks)

The Court of Exchequer and the Court of Appeal held, respectively,

that the mistake rendered the contract voidable (and not void).

(b) Lewis v. Avery

The court's reasoning in these latter cases was that the offer had been made
to, and accepted by, the same person who was physically present before the
offeror. The rule in Boulton v. Jones was therefore in applicable and a
contract of sale had been formed between the parties.

However, since the buyer had fraudulently misled the seller into believing
him to be a credit-worthy person whose cheque would not bounce, the
deception rendered the contract voidable at the option of the seller.

However, the contract could not be avoided because an innocent third party
(the defendant) would be adversely affected by the avoidance.

NOTE: Technically, Kenyan Courts are not bound by any of these English decisions.
Consequently, if the issue of the effect of unilateral mistake pertaining to
identity were to arise in a Kenya Court, the court might:

(i) follow Ingram v. Little and declare the contract to be void; or

LESSON 3 LAW OF CONTRACT 33

(ii) follow Phillips v. Brooks or Lewis v. Avery and declare the contract
to be voidable.

Mistaken identity may also occur where the parties are not in each other's presence.

A leading example is Cundy v. Lindsay. - in which the contract was held by the House of
Lords to be void as an instance of an offer meant for A being accepted by B.

(iv) Documents Signed By Mistake

A person who has signed a document by mistake may escape liability under the
document if he can establish the defence of "NON EST FACTUM". (it is not my
deed). However, for this defence to succeed the document signed must have been
"radically", "totally", "basically", "fundamentally" or "essentially" different from
that which he believed it to be: Saunders v. Anglia building Society.

Examples:

(i) Saunders v. Anglia Building Society

The defence of "non est factum' failed because the document signed was a
Transfer Deed and the document the lady thought she was signing was also
a Transfer Deed. The document signed was therefore not "radically" or
"fundamentally" different from that she thought she was signing.

The signatory had made a mistake - i.e. a mistake as to the contents of the
document signed. The signatory thought that the transferee named in the
document was her nephew while in fact it was another person altogether i.e.
the nephew's dishonest friend. A mistake as to the contents of a document is
legally irrelevant.

(ii) Foster v. Mackinnon

The defence of "non est factum" succeeded because the document signed - a
bill of exchange - was radically or fundamentally different from that which
the defendant thought he was signing - an insurance document.

9.2 MISREPRESENTATION

A misrepresentation is a false statement of fact which was made by one party to a contract to the
other, at or before the time the contract was made, which induced the other to enter into the
contract. Where an agreement has been made on the basis of a misrepresentation the law will
sometimes grant relief. The relief obtainable depends on whether the misrepresentation was
innocent or fraudulent.

9.2.1 Elements of Definition

(a) A misrepresentation is a statement of fact. A statement of law, a statement of

opinion, such as an advertiser's 'puff' or a statement of intention, is therefore not
covered.

(b) The statement must be false. Clearly if the statement is true the contracting party
has no claim for redress.

(c) The representation must be made by one party to the contract to the other . The
essence of the complaint is that one party misled the other, where the plaintiff has
relied on false information from another source, he cannot blame the contracting
party.
LESSON 3 LAW OF CONTRACT 34

(d) The representation must have induced the other party to enter the contract. If
he did not make the contract, or did not rely on the representation. the plaintiff has
no cause for complaint. Thus he cannot plead that he relied on the
misrepresentation if he did not know of it, or if he knew it to be untrue.

(e) As a general rule silence does not amount to misrepresentation.

Silence

There are the following exceptions. Silence may amount to misrepresentation where:

1. There is a positive duty to disclose, e.g. in fiduciary relationships and contracts of

insurance;

2. Where what has been said is true, but it amounts to a half-truth (e.g. Dimmock v.
Hallent where a vendor accurately reported that certain farms were let but omitted to
say that the tenants had given notice).

3. Where disclosure is a statutory requirement

4. Where the original statement was true when made but had subsequently become
untrue (e.g. in With v. O'Fanagan the vendor of a doctor's practice failed to
disclose the fall in the receipts of the practice since the original valuation).

Misrepresentation renders a contract void at the opportunity of the innocent party.

9.2.2 Remedies

Where there had been a misrepresentation which has been acted upon, the nature of the
remedy will depend on whether it was made innocently or fraudulently.

a) INNOCENT MISREPRESENTATION

An innocent misrepresentation is an untrue statement made in the honest belief that

it is actually true: Derry v. Peek. It is irrelevant that the maker had no reasonable
ground for his belief.

There is no remedy at common law for an innocent misrepresentation. However,

equity developed the remedy of rescission which will be available to an aggrieved
plaintiff unless it is rendered unavailable by the circumstances listed below (under
remedies for fraudulent misrepresentation). Akerhielm v De mare. Indemnity for
any direct financial loss occasioned by the untrue statement. As was the case in
Whittington v Seale-Hayne.

b) FRAUDULENT MISREPRESENTATION

A fraudulent misrepresentation is an untrue statement which is made:

(a) knowingly, or
(b) recklessly, careless whether it be true or false, or
(c) without belief in its truth: Derry v. Peek.

In Derry v. Peek (1839): A company was formed which according to its prospectus
was to undertake the operation of steam trams in Plymouth. The directors when they
issued the prospectus honestly believed that they would have no difficulty in
obtaining the necessary authority from the Board of Trade to run the trams.
LESSON 3 LAW OF CONTRACT 35

However, authority was not given and the company was wound up. The plaintiff
brought an action against the directors for fraud. It was held by the House of Lords
that the directors honestly believed the truth of the statements they had made
therefore no action could lie for fraud. (The Directors' Liability Act 1890 was
passed to reverse this decision with respect to directors. This Act is now s.45 of the
Kenya Companies Act. However, the principle of the case still applies in their
situations).

The party injured by a fraudulent misrepresentation in a contract must prove that the
following elements were present in the misrepresentation:

(i) There was a false representation of fact.

A statement of fact must be distinguished from a statement of opinion. A statement

"This car is a fantastic car!" is merely an opinion and not a fact, and does not
constitute a fraudulent misrepresentation.

There may, however, be fraud through a "suppressio veri", that is, a suppression of
the truth.

As Lord Cairns said in Peek v. Gurney (1873), "There must in my opinion be some
active mis-statement of the fact or at all events such a partial and fragmentary
statement of fact as that the withholding of that which is not stated makes that which
is stated absolutely false."

(ii) The statement was made deliberately with the intention of deceiving or recklessly
without caring whether it was false or true."

We have already seen above in the case of Derry v. Peek (1889) THAT UNLESS
AN ADMITTEDLY FALSE statement is made with the knowledge that it is false,
there is not fraudulent misrepresentation.

(iii) The false representation must actually deceive the injured party and cause him to
enter into the contract.

Horsfall v. Thomas (1862): The vendor of a cannon in which there was a flaw,
filled the flaw with some metal. The purchaser, who had not inspected the article,
burst the cannon upon its first discharge. It was pointed out that as the purchaser had
never inspected the cannon he had not been deceived. "Deceit which does not
deceive is not fraud."

(iv) The person making the misrepresentation must have intended that it should be acted
upon by the party who was actually misled by it. This essential factor precludes a
third party who, not being a party to the contract, could not have been deceived,
from making a claim. The following case illustrates this.

In Peek v. Gurney (1873): A fraudulent statement had been made in the prospectus
issued by a company. The plaintiff, however, had not purchased his shares direct
from the company on the faith of the prospectus but from a former shareholder. He
therefore had no claim, because he himself had not been misled by the fraudulent
statement.

(v) The injured party must actually have suffered some damage.

9.2.3 Remedies for fraudulent Misrepresentation

(a) The injured party may enforce the contract in spite of the fraud. It should be noted
LESSON 3 LAW OF CONTRACT 36

that he himself is, of course, bound by the contract until he takes steps to set it aside.

(b) If he does not wish to be bound by the contract, he may take steps to rescind the
contract. If he applies to the Court for an order of rescission he must show that after
discovering the fraud, he did nothing which would show the intention of continuing
with the contract. He must, however, take his action to avoid the contract within a
reasonable time, otherwise as a result of his delay, an innocent third party may
acquire an interest in the property or the person uttering the fraudulent
misrepresentation may himself change his position vis-à-vis the injured party,
thereby precluding any possible rescission.

In the following circumstances, however, there can be no rescission:

(a) Delay

If third parties have already taken rights under the contract, bona fide and for value,
without notice of the fraud.

Kings Norton Metal Company v. Edridge (1897): W fraudulently represented

himself as being connected with a company "Hallam & Co." which did not exist. He
bought goods from the plaintiffs and sold them to the defendant company. It was
held that the original contract between W and the plaintiffs was not vitiated by
fraudulent misrepresentation and the defendants had acquired a good title to the
goods.

(b) Affirmation
If the injured party after discovering the fraud takes any benefit under the contract or
in any other way affirms it, or is deemed to have affirmed it.

(c) Restitution in integrum not possible

If it is not possible for the court to order a "restitutio in integrum", that is, to order
the parties to be placed in the position that they were in before the contract was
made. For example, A fraudulently misrepresents a cheap watch to be one made of
gold. B. relying on the representation buys it, but on the way home the watch drops
accidentally and is destroyed. He is later told by a friend that the watch is not made
of gold. He is not able to rescind the contract since he is not in a position to put
things back to the original position. He may, of course, still claim for the damages.

(d) Third party rights

It should be pointed out that naturally the guilty party may not plead his own
wrongful action as grounds for rescinding the contract.

(e) The injured party may bring a court action for the return of any property which the
fraudulent party obtained from him. If a person brings an action for the return of
any property, he must himself be ready to restore any property which he may
himself have obtained under the contract.

(f) He may refuse further performance and should he thereupon be sued by the other
party for not carrying out the contract, he may defend the action on the ground of the
other party's fraud

(g) In any case, whether the injured party elects to affirm or rescind the contract, he
nonetheless has a right to sue in damages for the tort of deceit. Any person who
makes a false statement dishonestly commits the civil wrong or tort of deceit and is
liable if sued to pay damages to the person he has deceived.
LESSON 3 LAW OF CONTRACT 37

9.2.4 Silence as Misrepresentation

It is possible for a party who does not actually make a false statement nevertheless to give a
misrepresentation. The general rule is that he who keeps silent makes no
misrepresentation. As Lord Atkin said in Bell v. Lever Bros. Ltd. (1932):

"The failure to disclose a material fact which might influence the mind of a prudent
contractor does not give the right to avoid the contract".

There are three sets of circumstances, however, in which a person who is silent may incur
legal liability, because he has failed to disclose a material fact:

(a) Where his silence affects the accuracy of any previous representation.

(b) Where a confidential or fiduciary relationship exists between the parties, the person
in the position of trust is required to make full disclosure of all the facts in making
any contract with the other party who relies on his advice.

(c) Where the contract requires the utmost good faith or, as the lawyers say, in
"contracts uberrimae fidei" e.g. contracts of insurance.

If full disclosure of the facts is not made, the other party has the right to rescind the
contract, e.g. London Assurance Co. v. Mansel.

9.2.5 DURESS

Duress is the use, or the threat to use, physical violence against the contracting party
himself or against near relations, such as wife, parent or child. Duress may be exerted
either by the other contracting party or by a third person acting at his instigation or with his
knowledge. The threat or actual use of violence, or wrongful imprisonment, the wrongful
threat to seize or the actual seizure of property, and the threat to take criminal proceedings
can all constitute duress.

The threat must be illegal i.e. relate to a crime or tort.

In Cumming v. Ince (1847): A woman was a mental patient in a hospital pending an
enquiry. It was agreed that the woman should be released and that at the same time she
would give up certain deeds in her possession. The agreement to give up the deeds was
made under the fear of confinement in the asylum and so it was not binding upon her.

The threat must be directed to the persons body

In Kaufman v. Gerson (1904): Kaufman coerced Gerson into making a contract by
threatening to prosecute Gerson's husband for a criminal offence which he had committed.
Gerson was held not liable upon the contract, as her consent was obtained through duress.

It renders the contract voidable at the option of the innocent party.

In Maskell v. Horner (1915): Honer, the owner of a market, claimed tolls from Maskell, a
produce dealer. At first Maskell refused to pay, but he did pay when Horner seized his
goods, and continued to pay in the future, under protest. Horner's right to tolls was
subsequently declared illegal, and Maskell recovered the payments made.

9.2.6 UNDUE INFLUENCE

"Undue Influence" is a technical phrase which denotes pressure exerted by one person who
has a moral superiority over another. Where such conditions obtain, as for example,
between solicitor and client, or trustee and beneficiary, any contracts involving both parties
to the relationship may show signs of a stronger character influencing the weaker. It is said
to exist where a party terminates the others will thereby prohibiting his exercise of
independent judgement on the contract.
LESSON 3 LAW OF CONTRACT 38

Undue influence usually arises where one party has contracted without exercising his own
judgement and free will, relying upon the advice of the other party. It renders the contact
voidable.

Where there is no fiduciary relationship between the parties, there is no presumption of

undue influence. In such a case, should it be claimed that moral pressure has been
brought to bear, the burden of proof is upon the party who alleges that he acted under the
undue influence of the other. As was the case in Williams v Bayley.

Where parties have a special relationship e.g. parent/childhood , guardian/ward,

advocate/client doctor/patient, religious leader/disciple, undue influence presumed in
favour of the weaker party. The stronger party can disprove this presumption by evidence.
.

In Smith v. Kay (1859): A young man who had just inherited a fortune was introduced to a
man several years his senior, who suggested that they should tour Europe together, the
older man acting as the guide. After a long tour, much of the younger man's fortune had
disappeared or had been appropriated by the older man. It was held that on the facts the
elder man had exercised undue influence.

The influence must have been exerted by the other party

The modern tendency is to consider duress and undue influence as the same, and to define
it as any moral or physical compulsion which influences the decision of one party to a
contract.

The party seeking to set aside a transaction on the grounds of duress or undue influence
cannot do so in the following circumstances.

(a) If third parties have acquired rights thereunder bona fide and for value.

(b) If there has been unreasonable delay. "Delay defeats Equity". The facts of each
case must determine what constitutes reasonable delay.

In Allcard v. Skinner (1887): A young lady entering the convent made over her
property to the convent. However, after a year she left the convent but delayed for
five years before applying to Court to rescind her gift. It was held that she was
defeated because of the unreasonable delay. Once she had left the convent, any
undue influence had ceased and she should have taken prompt action in the matter.

Relief is afforded by Equity in cases where undue influence is claimed over blind and
illiterate persons.

10 DISCHARGE OF CONTRACT

10.1 A contract is said to be discharged when the obligations created by cease to bind the parties that
who area now freed from performance. It may be discharged .

10.1.1 BREACH, which occurs if there is a failure to perform it strictly as was agreed. This is
non-performance or tendering a defective. It is either anticipatory or actual.

Example:
The Sale of Goods Act, s.13 provides that where a seller delivers less, or more, than the
quantity of goods agreed to be bought, the buyer may reject what is delivered and sue for
damages for breach. This is a codification of the common law rule of strict performance.
Breach does not discharge a contract but entitles the other party to treat it as repudiated.
LESSON 3 LAW OF CONTRACT 39

10.1.2 PERFORMANCE as agreed under the contract.

.A contract is discharged by performance if both parties have dutifully performed

their obligations. Originally , at common law, a party could only be discharged by
performance if every part of the contract was performed. Contractual obligations
had to be observed to the letter. This is the so called doctrine of “precise and exact”
as exemplified by the decision in Cutter v Powell where Mrs Cutter was denied
compensation since her husband had not performed his obligations precisely and
exactly.

However, the harshness of this common law principle led to the admission of a
number of exceptions where in parties are discharged without performing precisely
and exactly, namely

(a) Substantial performance Marshides Mehta and Co ltd v Barron Verhegen

(b) Partial performance If accepted by the other party. Sumper v Hedges
(c) Separable/divisible contracts Ritchie v Atkinson
(d) Prevented Performance Planche v Colburn
(e) Tender of performance
(f) Frustration of contract

EXPRESS AGREEMENT

Discharge of contract by agreement justified on the premise hat whatever is created by agreement may be
extinguished by agreement. Discharge by agreement may be executory or executed. Where contractual
obligations are executory a in either party has performed discharge is bilateral where each party charges
the other from performance. Their mutual promises constitute consideration where contractual
obligations are executed i.e. one party has performed discharge is unilateral where the party that has not
performed is discharged by the other from performance. Unilateral discharge may take any of the
following terms;

(i) Waiver:
This may occur where the contract is still executory and one party is unable to perform his part.
The other party may release him from the obligations under the contract by a deed (i.e. he waives
his right to performance of the contract). A deed is required in order to make the agreement
binding, since there is no consideration given by the released party.

(ii) Accord and satisfaction:

This occurs where the contract is discharged by a new contract between parties. An example
would be where A. agreed to sell a white PEUGEOT pick-up to B. He is now unable to procure
one and persuades B to accept a white DATSUN Pick-up, and B. agrees to this.

(iii) Assignment:
This occurs where the rights of a contract are transferred to another party, as where A lends B
money to be repaid at the end of the month. Before the end of the month A. tells B. to pay the
money to C. when the time to pay comes. Assignments are not recognized by the common law
but may be effected under the Indian Transfer of Property Act 1882 which is applicable in Kenya.

(iv) Novation:
This occurs where the OBLIGATIONS or duties under a contract are transferred from one party to
another, as where A lends money to B to be repaid at the end of the month. Before that time
arrives, it is agreed that B's father (C) will repay the loan.

10.1.4 (v) Frustration:

contract charged by frustration then performance f obligation is considered impossible, illegal or
commercially futile by reason of foreseen or extraneous circumstances for which other party is to
LESSON 3 LAW OF CONTRACT 40

blame.

According to Professors Chesire and Fifoot, frustration is a relatively new legal concept which the
courts have yet to develop fully. It is therefore not possible to tabulate or classify all the
circumstances in which a contract may be discharged by frustration. However, the decided cases
illustrate that the contract may be discharged by frustration in one of the following ways:

(a) Destruction of subject matter of the contract before the time of performance arrives,

Example: TAYLOR v. CALDWELL

(b) Non-occurrence of an event i.e. a new situation has arisen which renders it impossible to
perform the contract as originally anticipated.

Example: KRELL v. HENRY

(c) supervening illegality caused by a change in the law, or government interference, so that it
becomes illegal to perform the contract.

Example: METROPOLITAN WATER BOARD v. DICK, KERR & Co.

(d) Death or permanent incapacitation which renders it impossible for a party to a contract to
perform it because of unexpected or sudden illness.

(e) government intervention Where government acts or steps render performance impossible
Metropolitan Water Board v Dick Kerr and Co.
(ADJUSTMENTOF THE RIGHTS OF THE PARTIES)

Example: CONDOR v. THE BARRON KNIGHTS BAND

10.1.5 EFFECT OF FRUSTRATION

The effects of frustration on a contract are detailed in the Law Reform (Frustrated
Contracts) Act 1943 of England which is applicable in Kenya under the Law of Contract
Act 1961.

The Act provides that when a contract is frustrated –

(a) The contract is terminated

(b) Money paid is recoverable.

(c) Money payable ceases to be payable.

(d) The parties may recover expenses incurred under the contract, or retain the relevant
sum from money received if any.

(e) If any party to the contract has incurred expenses in part performance of the contract
which has conferred "a valuable benefit" on the other party, he is entitled to payment
of a reasonable compensation on a quantum merit.

The doctrine of frustration does not apply:

i. Where the parties anticipated the would-be frustrating event and made express provision
for it in the contract, as in Clark v. Lindsay (1903).

ii. Where the frustrating event is self-induced, as illustrated by Maritime National Fish
Ltd. v. Ocean Trawlers Ltd. (1935).
LESSON 3 LAW OF CONTRACT 41

iii. Where the contract is a lease or one for the sale of land - but there is some doubt
regarding this: Cricklewood Property and Investments Trust v. Leighton's
Investments Trust Ltd. (1945).

11 REMEDIES FOR BREACH OF CONTRACT

The remedies available to a party who sues for a breach of contract are divisible into:

(a) Common law remedies, and,

(b) Equitable remedies.

11.1 COMMON LAW REMEDIES

The only remedy available at common law for breach of contract is financial compensation known
as "damages".

11.2 Types of damages

Damages are classified into the following categories:

(a) Nominal damages which are awarded to a plaintiff to vindicate his right to the
performance of the contract. This occurs if the plaintiff has not suffered any actual
financial loss as a result of the breach of the contract.

(b) Actual or substantial damages which are awarded to the plaintiff as compensation for
actual loss occasioned by the breach. They are calculated, generally speaking, in
accordance with the rule in Hadley v. Baxendale.

It should however be noted that:

(i) punitive or exemplary damages are not awarded by the court: Addie v.
Gramophone Co., and

(ii) damages cannot exceed the loss suffered by the plaintiff so that the plaintiff finds
himself in a better financial position than if the contract had been properly
performed: C. & P. Haulage v. Middleton.

(c) Liquidated damages which are provided for by the contract. But a sum provided for by
the contract will not be recoverable if it is "a penalty".

RULES THAT GOVERN THE MEASURE OF DAMAGES FOR BREACH OF CONTRACT

(a) The purpose of a monetary award in damages for breach of contract is to compensate the innocent
party for the loss suffered. The essence is to put that party where it would otherwise have been if
the contractual obligations had been performed

(b) The loss of damage suffered by the innocent party must be proved. It is the duty of the plaintiff to
prove loss.

(c) The plaintiff must prove that he suffered loss or damage by reason of the defendant to breach of
contract. The plaintiffs loss must be traceable to the defendant in breach there must be a nexus
between the two failing which damages are said to be too remote and therefore irrecoverable as
was the case in Hadley v Baxendale. This case is authority for the proposition whenever a breach
of contract occurs, the plaintiff can only recover such loss as is reasonably foreseeable as likely
result from the breach. In this case the profits lost by reason of closure of the mill were too remote
and therefore irrecoverable.
LESSON 3 LAW OF CONTRACT 42

(d) Where a party is in possession of special information about the contract but fails to act on it
whereupon the other party suffers loss, such party is liable for the loss. It was sol held in Victoria
Laundry (Windsor) Ltd v Newman Industries. In the Heron II where the plaintiff suffered a
loss of 4,011 by reason of a delay delivery of a consignment of sugar by the defendant (appellant)
who was aware that the respondent was a sugar merchant. It was held that the appellant was liable
for the loss as the same was traceable to the detour he made resulting in the delay.

(e) Where parties to a contract have already fixed the amount payable to the innocent party in the
event of breach, and a breach of contract occurs it is for the court to determine whether the sum so
fixed is payable as damages or is a penalty in which case it is not enforceable. In Dunlop
Pheumatic Tyre co v New Garage and Motor co Lord Dunedin formulated the presumption,
courts of law rely on in determining whether the sum fixed is liquidated damages or a penalty.

(f) Whenever a breach of contract occurs it is the duty of the innocent party to take such reasonable
steps as are necessary in the circumstances to reduce the loss it would otherwise have suffered
from the breach. The law imposes a duty on the innocent party to act reasonably. However,
whether he has so acted is a question of fact as illustrated by the decision in Musa Hassan v Hunt
and Another. In assessing damages the amount by which loss ought to have been reduced by the
acts of the innocent party is not reasonable from the defendant.

(g) As a general rule, courts of law do not award punitive damages for breach of contract.

The loss of damage

11.3 Distinction between liquidated damages and penalty.

Liquidated damages were defined by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New
Garage and Motor Co. Ltd. as "a genuine covenanted pre-estimate of damages" for an
anticipated breach of contract. A penalty was defined in the same case as "a stipulation in
terrorem of the offending party".

The rules by which the courts distinguish liquidated damages from penalties were formulated by
Lord Dunedin in the above case as follows:

(i) Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may
prima facie be supposed to mean what they say, yet the expression used is not conclusive.
The Court must find out whether the payment stipulated is in truth a penalty or liquidated
damages. This is illustrated by Elphinstone v. The Monland Iron and Coal Co. Ltd.;
Cellulose Acetate Silk Co. v. Widnes Foundry.

(ii) "The essence of a penalty is a payment of money stipulated as in terrorem of the offending
party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.

(iii) The question whether a sum stipulated is penalty or liquidated damages is a question of
construction to be decided upon the terms and inherit circumstances of each particular
contract, judged at the time of making the contract, not as at the time of the breach.

(iv) To assist this task of construction various tests have been suggested, which, if applicable to
the case under consideration, may prove helpful or even conclusive.
Such are:

(a) It will be held to be a penalty if the sum stipulated for is extravagant and
unconscionable in amount in comparison with the greatest loss that could
conceivably be proved to have followed from the breach.
LESSON 3 LAW OF CONTRACT 43

(b) It will be held to be a penalty if the breach consists only in not paying a sum of
money, and the sum stipulated is a sum greater than the sum which ought to have
been paid.

(c) There is a presumption (but no more) that it is a penalty when a single lump sum is
made payable by way of compensation, on the occurrence of one or more or all of
several events, some of which may occasion serious and others but trifling damage.

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that
the consequences of the breach are such as to make precise pre-estimation almost an
impossibility. On the contrary, that is just the situation when it is probable that pre-
estimated damage was the true bargain between parties.

11.5 Equitable remedies

The equitable remedies for breach of contract are:

(a) Injunction

This is an order of the court which restrains (i.e. prevents) a party to a contract from doing
something which, if done, will occasion a breach of the contract. For example, if Onyango
has agreed to sell some unique goods to Kamau and promised to deliver them at end of the
two weeks. On the third day after the contract was formed, Kamau learns that Onyango has
entered into another contract with Abdullah and intends to deliver the goods to Abdullah
within two days. Kamau may institute legal proceedings in the High Court with a view to
restraining Onyango from delivering the goods to Abdullah.
An injunction may also be issued in order to restrain a breach of a negative stipulation in a
contract. For example, if a tenancy agreement contains a clause prohibiting the tenant from
using charcoal for cooking in the rented premise, an injunction may be issued to prevent
him from doing so.

An injunction, being an equitable remedy, is not automatically available but is issued at the
discretion of the court. A common ground for the exercise of the court’s discretion is the
court's belief that it is "just and equitable " to do so.

(b) Specific performance

As can be deduced from its name, specific performance is an order of the court which
orders the defendant to perform the contract precisely (i.e. specifically) as he had promised
to do. It is decreed at the discretion of the court but will not be decreed in the following
cases:

(i) Where damages would be adequate compensation for the plaintiff.

(ii) Where the court cannot supervise performance of the contract, such as a building
contract.

(iii) Where the contract is one of personal services: Warner Bros v. Nelson. However,
the court may grant an injunction restraining the defendant from doing something
inconsistent with the contract, as in Warner Bros v. Nelson, above.

(iv) Where the contract is a money-lending contract.

(v) Where one of the parties is an infant.

(c) Recession
(d) Trading
(e) account
LESSON 3 LAW OF CONTRACT 44

(f) winding up

REINFORCING QUESTIONS
1. Outline the ways in which a contract may come to an end".

2. (a) What principles will the court apply when assessing unliquidated damages for breach of contract?

(b) A, who lives in Nairobi, boards a bus to Mombasa to finalize an important contract which will
bring him a profit of £50,000. The bus breaks down and he reaches Mombasa very late and loses
the contract.

Explain the liability of the bus company.

3 (a) What are the rules which govern the acceptance of an offer?

(b) Mike writes to Peter "I will sell you my car for £ 2,000. If I hear nothing from you before next
Saturday, I will take it that you have accepted". Peter does not reply by Saturday. Mike is now
threatening to sue Peter for breach of contract to buy the car.

Advise Peter.

Check your answers with those given in Lesson 9 of the Study Pack