Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009

A. INTRODUCTION

Definition of law

Osborn’s: A Concise Law Dictionary

• A law is an obligatory rule of conduct
• A law is a rule of conduct imposed and enforced by the state
• The law is the body of principles recognized and applied by the state in the
administration of justice.

Oxford Advanced Learner’s Dictionary

• A law means a rule established by authority or custom, regulating the
behaviour of members of a community, country, etc.

Shivji et al. Constitutional and Legal System of Tanzania (2004)

• Law may be defined as a body of binding rules or norms imposed on a given

society breach of which leads to exercise of direct, indirect or ultimate force by
a centralized organ (state) having the monopoly of violence. [Constitutional
and Legal System of Tanzania, I.G. Shivji et al. Mkuki and Nyota Publishers,
2004, p.6
• A law is a rule established by authority or custom, regulating behaviour of
members of a community, country, etc. ibid. p.4

We may define law as:

A set of rules made by some authority to regulate behaviour of
members of a community, country, etc.
 Laws passed by Parliament - The National Assembly and the
President
o Act of Parliament
o Acts passed by the Legislative Council (LEGICO)

 By-laws made by local authorities – Subsidiary or delegated

legislation
 Regulations made by Ministers – Orders –
Subsidiary/Delegated legislation.

A set of rules governing relationships between persons
 Laws made by Parliament (Acts) – Law of Contract Act/Law of
Marriage Act
 By-Laws
 Laws made by the people themselves to regulate their
relationships - Contract
 A set of rules recognized as giving certain rights to certain
persons and imposing certain obligations on certain persons
- Tort

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Functions of law

(i) Structuring of public power - Constitutional law provides for various

organs/branches of the state, namely the executive, parliament and the
judiciary.
(ii) Facilitating and regulating private relations – contract, property, marriage,
etc.
(iii) Resolving conflicts - the state through law may set up institutions, e.g.
courts, tribunals to resolve disputes.

Sources of law

(i) Received law – common law principles of equity and statutes of general
application
(ii) Local law – statutory law (Acts and Acts), delegated legislation (by-laws)
(iii) Customary law and religious law – customs of communities, Islamic law,
personal and other religious laws

Branches of law

(i) Municipal law (within a state)

o Public law – concerned with enforcement of a code of conduct upon the

citizens

 Criminal law – criminalizes and punishes certain acts and

omissions e.g. stealing, rape, treason, murder etc.
 Constitutional law – regulates relationship between citizens and
state organs
 Administrative law – confers powers on officials
 Regulatory law, e.g. Company law – oversees certain private
relations.

o Private law – available to citizens to settle disputes among themselves

 Contract –Governs bargains between persons
 Tort – Deals with civil wrongs
 Property – Deals with rights over land and chattels
 Succession – How property devolves on death
 Trusts – Regulates relations between trustees and beneficiaries

(ii) International Law

o Public international law
o Private international law
Law which attempts to establish acceptable codes of conduct on matters of
international interest and to overcome `conflict of law` in such matters as
interpretation of contracts, movement across national frontiers, air, sea and
space travel etc.

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Divisions of law

Criminal law and civil law

Public law and private law
Substantive law and procedural law

Criminal v. Civil law

Criminal law
• Deals with crimes and punishment
• Deals with relationship between state and individual
• Republic v. Accused
• Accused is prosecuted by the Republic (police and state attorneys – public
prosecutors) – if found guilty is convicted and sentenced – fine and/or
imprisonment.

Civil law
• Deals with relationships and disputes between persons
• The person who is wronged sues the wrongdoer
• Plaintiff v. Defendant

Public v. Private law

Public law
• Deals with relationship between state and individual
• Deals with how public power is exercised
• Examples are criminal law and administrative law

Private law
• Deals with relationship between persons
• Examples are law of contract, law of torts

Substantive v. Procedural law

Substantive law
• Deals with different rights and relationships which give rise to rights and
obligations
• Provides for remedies for injuries or damage suffered
• Examples are law of contract, law of torts

Procedural law
• Deals with the procedure to follow in establishing a right

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Definition of ethics

Oxford Advanced Learner’s Dictionary

• A science that deals withy morals
• Moral correctness – sets standards of correctness
 Professional ethics
 Medical ethics
 Business ethics

• Ethics means moral philosophy

 A systematic study of the ultimate problems of human conduct – what

is right and what is wrong. And ethics provides for sanctions for moral
conduct.
 Ethics like morality is based on the cultural values of a given society
and individual behaviour is patterned according to the culture of that
society. Such patterns of behaviour are popularly called custom.
 What is ethically or morally accepted as being good over a period of
time becomes a custom of a particular society.
• Customs are rules that govern the behaviour of individuals in a given society.
Notorious customs are referred to as customary rules/laws

Principles of ethics

• Ethics are made up of principles which set standards within which persons
must act and/behave
• An officer or manager, director, should act with honesty, compassion (pity for
the suffering of others, making one want to help them), sobriety, continence
(control of one’s feelings especially in sexual matters) and temperance
(moderation and self restraint in one’s behaviour or in eating and drinking)
with a view to conserving and enhancing confidence and trust in the integrity
(quality of being honest and morally upright), objectivity and impartiality of his
office/business.
• An officer or manager or director should perform his official duties and arrange
his private affairs in such a manner that the two do not conflict. And, where the
two do conflict, he/she should resolve in favour of office/business. Do not put
yourself in a position where your personal interests conflict with those of your
office/business.
• An officer, manager or director should make his/her decisions in accordance
with law, in the public interest or interest of the business /office and with
regard to merits of each case.
• An officer, manager or director shall not knowingly take advantage of or
benefit from information which is obtained in the course of official duties and
responsibilities,
• An officer, manager or director is not expected to solicit or accept transfers of
economic benefits other than incidental gifts, customary hospitality or other

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benefits or nominal value unless the transfer Is pursuant to an enforceable
contract or property right.

Relationship between law and ethics

Ethics Law

• Sets standards of what is good/bad • Rules made to sanction bad

behaviour behaviour

• Based on conscience, beliefs

• Formulated and imposed by the
• Sanctioned by public opinion, state or agreed between the parties
disapproval, possibly ridicule and involved.
exclusion from a particular society
• Has fixed and powerful sanctions
• Has regard to thoughts and
feelings
• Has regard to acts/omissions
• Moral principles must be applied
with reference to individuals and • Legal rules are of general and
circumstances. absolute application

Why ethics?
Principles of ethics set the moral standards of behaviour.

Professional ethics set standards within which a professional must act

Medical ethics provide standards within which medical personnel must
act.

Business ethics set standards within which business community must
act

Ethics provide for principles which one may be required to comply with.

Why law?

Forbids certain actions/omissions

Permits certain actions/omissions

Provides sanctions against law breakers

Meaning and purpose of business law

• Meaning of business law

Rules and principles that govern the conduct of the participants engaged
in negotiating and performing transactions by which economic
objectives are achieved.

Rules and principles that govern the formation, business relationships
and exit from business entities

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Business laws include the law of contract, sale of goods law, banking
law, insurance law, law of agency, law of partnership, company law,
bankruptcy/insolvency law.
• Purpose of business law

Regulates formation, operation and exit of business entities

Controls anti-social activities, e.g. employer dismissing employee out of
spite.

Regulates harmful activities, e.g. forbids sale of adulterated foodstuffs.

Provides for remedies who have private grievances – the law spells out
the rights and obligations of parties. If a right is violated the injured
party may seek remedy (compensation). So, business law protects
legitimate interests of the parties.

Sources of business laws of Tanzania

• Received laws – common law, principles of equity and statutes of general
application
• Local laws

Acts of Parliament

Acts of the colonial Legislative Council

Subsidiary/delegated legislation – by-laws
• Customary laws

Uncodified except Haya and Sukuma Customary Laws

Unwritten
• International business principles, customs and usages

THE TANZANIA LEGAL SYSTEM

I. The Court System

• Based on a hierarchy – from primary court to the court of Appeal of Tanzania.
• Judiciary is not a union matter – So Zanzibar has got its own court system.
• For Tanzania Mainland the court system is as follows:

Primary Court
• Is the lowest court
• Is established in and for a district
• However there are many primary courts in a district, each with its geographical
boundaries
• Is presided by a primary court magistrate whose qualification used to be a
certificate in law from a recognized institution. Now the qualification is a
diploma in law.
• Jurisdiction of a primary court

Has original jurisdiction to hear and determine both civil and criminal
cases. This court has no power to hear serious criminal cases e.g.
murder, treason, economic sabotage cases, etc.

Geographical jurisdiction of a district court is, in theory, within the
district in which it is established. However, in practice the jurisdiction

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of a primary court is limited within the area that has been demarcated
for it.

Pecuniary jurisdiction of a primary court has been fixed as follows:
o Where the subject matter of the suit is movable property, then a
primary court can hear a case the value of whose subject matter
does not exceed T. Shs. 10 million.
o Where the subject matter is immovable property, the value of
subject matter should not exceed T.Shs. 12 million.

District Court
• Established for a district
• Presided by a District Magistrate whose qualifications used to be a diploma in
law from a recognized institution. Now a district magistrate has to have a first
degree in law.
• Jurisdiction

Original jurisdiction to hear both criminal and civil cases

Appellate jurisdiction to hear appeals from primary courts

Geographical jurisdiction to hear cases emanating from the area for
which the court is established – within the district.

Pecuniary jurisdiction to hear cases as follows
o In the case involving movable properties, where the value of the
subject matter does not exceed T.Shs. 100 million.
o Where immovable property is concerned the value of the subject
matter should not exceed T.Shs. 150 million

Has no power/jurisdiction to hear and determine serious criminal cases
such as murder, manslaughter, treason, economic sabotage cases, etc.

Resident Magistrates` Court

• Established for a region
• Presided by a resident magistrate whose qualification is a first degree in law
(LL.B) from a recognized university.
• Jurisdiction

Like that of a district court

However a resident magistrate can preside over cases in any of the
district courts of the region in which he is resident magistrate.

May be given extended jurisdiction in which case may hear and
determine serious cases including murder.

High Court of Tanzania

• Established for the whole of Tanzania Mainland.
• For administrative purposes there have been established high court zones e.g.
Dar es Salaam, Arusha, Mwanza, Tabora, Songea, Mbeya, etc. Thus we have
High Court of Tanzania at Dar es Salaam, Mwanza, Tabora, etc.
• The Land Court and Commercial Court of Tanzania are divisions of the High
Court of Tanzania.
• Presided over by a High Court Judge whose qualifications are a first degree in
law from a recognized university and experience in judicial matters
• Jurisdiction

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Original jurisdiction to hear and determine criminal and civil cases

No limitation to pecuniary jurisdiction

Has appellate jurisdiction to hear appeals from district and resident
magistrates` courts.

Court of Appeal of Tanzania

• Is a union matter, hence extends to Tanzania Zanzibar.
• Has appellate jurisdiction only; no original jurisdiction
• Presided by justice of appeal whose qualification is first degree in law plus
many years of experience in judicial matters.

The quasi judicial bodies with (Civil Jurisdiction)

• Land: The system under the Land Courts Act, 2002
• Employment: System Under the Employment and Labour Relations Act, 2004
and Labour Institutions Act, 2004
• Tax: The system under the Income Tax Act, 2004
• Fair Competition: The system Under the Unfair Competition Act, 2003

II. Laws
• The Constitution

The mother law (Grundnorm). The Constitution of the United Republic
of Tanzania, 1977.

All laws get their legitimacy from the Constitution

Provides for basic rights of citizens and also obligations – bill or rights
and obligations

Provides for the three pillars of the state
o The executive
o Parliament
o Judiciary

Provides for separation of powers and checks and balances among the
pillars.

Provides for the rule of law, i.e. no one is above the law. For any act or
omission one must show the legal basis for it. Even the President is not
above the law.
• Other laws

Derive their legitimacy from the constitution

These include
o Acts of Parliament
o Received laws
o Customary laws
o Case law (judge-made law).

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B. ETHICAL DIMENSIONS OF BUSINESS

LAW

(i). Law of contract

Introduction:

The law of contract is a foundation upon which the superstructure of modern business
is built. In business transactions quite often promises are made at one time and
performance follows later. It follows therefore that the law of contract lays down the
legal rules relating to promises, their formation, their performance and their
enforceability.

Law of contract defined:

Law of Contract may be defined as:-

A set of rules made by the people themselves to govern their contract relations. An
authority, say parliament, may have made rules to provide for general
principles/guidelines to give the scope and limits within which private persons may
make their own rules.

Sources of Contract Law

- Law of Contract Act, [L.C.A] 1961 Cap. 345 closely follows the
Indian Contract Act 1872
- Common law, principles of equity and statutes of general
application
- Customary law
- Courts – judge - made law - precedent

CLASSIFICATION OF CONTRACTS

There are several classifications:

1. Oral and written contracts:

Oral: Made by word of mouth
Written: Terms are put into writing.

2. Executed and executory

Executed: When one or both of the parties have done all that the contract
requires

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Executory: when the obligations of one or both of the parties remain to be
carried out.

3. Specialty and simple contracts

Specialty contracts: Also called contracts under seal or deeds. All terms of
these contracts are reduced into writing and then the contract is signed,
sealed, attested. (witnessed and delivered.
Simple contracts: Sometimes called parole contracts. This includes all
contracts not under seal and for their enforcement they require
consideration. They may be made orally or in writing, or they may be
inferred from the conduct of the parties. There must be an offer and
acceptance.

4. Unenforceable, voidable, void and illegal contracts

This is a classification of contracts with regard to their status owing to their
respective defects.
(this will be clarified clearly later)

THE FORMATION OF CONTRACT

Basic concepts
Promise, Agreement, Contract
Promise: Offer + Acceptance. s. 2(1) (b) L.C.A.
Agreement: Promise or set of promises forming consideration for each other.
S. 2(1) (e) L.C.A.
Contract: An agreement enforceable by law. S. 2(1)(h) L.C.A.

Essentials of a Contract:
To be enforceable by law an agreement must have the following elements:
1. Parties
2. Offer and Acceptance
3. Lawful Object
4. Capacity

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5. Intention to create treaty
6. Lawful consideration
7. Free consent

NB: Some of these elements are enumerated under s. 10 of the Law of Contract
Act.

What is the effect of lack of either one or more of these elements?

The effect is the formation of a defective contract namely void contract, voidable
contract, unenforceable agreement and illegal agreement.

Unenforceable contracts
An enforceable contract is valid in all respects except that it cannot be enforced in a
court of law by one or both of the parties should the other refuse to carry out his
obligations under it.

This is because the enforceability of these contracts is conditional upon fulfillment of

certain requirements. Thus failure to comply with such conditions makes the contracts
to be unenforceable. ss 2(1) (g) and 2 (i) (j) L.C.A provides that unenforceable
contracts are void but s.2 (2) provides that there may be contracts which are
unenforceable but not void.

Illegal contracts
These are contracts whose object or consideration is unlawful or is contrary to public
policy. The effect of illegality is to render the contract void. s.23 (2) L.C.A provides
that every agreement which the object/consideration is unlawful is void.

Voidable contracts
These are agreements which are enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others.

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A voidable contract is a contract with full legal force unless and until one of the
parties, who is entitled to bring it to an end does bring it to an end.

The right to rescind the contract has got limitations, a party must exercise his right
within reasonable time otherwise estoppels may apply; where the entitled party has
taken a benefit under the contract and he cannot return it then he may not avoid the
contract; and where the third parties have acquired right under it, the right to rescind
ends.

Void contracts
The term void connotes that the agreement is of no legal effect. A void contract is an
agreement which the court hold to be no contract at all, a nullity from the beginning.

ss. 2(1) (g), 2(1)(j), 11 (2), 20, 23 (2), 24-30, 32, 35, 36, 56, 57 of the Law of Contract
Act, refer to void contracts.

Rationale for treating certain contracts as unenforceable, illegal, voidable or void

1. To limit enforceability of actions with a view to ensuring fair play in
contractual transactions.
2. To protect:
a) the proprietary interests of an owner of property.
No one can obtain better title than owners.
b) The proprietary interests of a bonafide purchaser for value without
notice of any defect in the seller’s title. Commercial transactions have to
be protected.

PARTIES TO A CONTRACT
In every contract there must be two parties. These parties may be natural persons or
artificial persons. Natural persons are the individuals. For instance Neema, Juma, Rose
etc. Artificial persons are persons created by law such as corporate bodies. For
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Example companies, corporations and other associations or organizations which are
empowered by law to enter into contracts. Therefore a contract may be between natural
persons and natural persons, natural person and artificial persons or artificial persons
and artificial persons.

OFFER/ PROPOSAL
An offer may simply be defined as a set of terms moving from one party to another.
An offer or proposal is defined under s. 2(1)(a) of the Law of Contract Act as a
signification by one person to another of his willingness to do or abstain from doing
anything with a view of obtaining the assent of that other to such act or abstinence.
A contract therefore is an agreement and it comes into existence when one party
makes an offer which the other accepts.
The person making the offer/proposal is called the offeror/ proposer and the
person to whom it is made is called the offeree/ proposee.
Example: Suppose X says to Y “ I will sell you this watch for 5/=” and Y says “I
agree.” An express offer and acceptance have been made; X is the offeror and Y
is the offeree.

Characteristics of an offer
1. It must be made willingly: ie. The offeror must be willing to be bound by the
terms he has stated.
2. It must be clear and certain: ie. Clarity and certainty of an offer are essential
because the person to whom the offer is made should be in a position to know
what the offer is. If the terms of the offer are not certain yet the offeree accepts
the offer the agreement reached will be treated by the law as no agreement at
all. Under s. 29 of the Law of Contract Act, agreements, the meaning of which
is not certain or capable of being made certain are void.
3. Final Expression: an offer must be firm and final expression by the offeror of
his willingness to be bound should his offer be accepted.

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To whom can offer be made?
An offer can be made to specific persons or group of persons or to the world at
large.

In Carlill v. Carbolic Smoke Ball Co., (1893) 1 QB 256

The defendants were proprietors of a medical preparation called “the carbolic smoke
ball.” They inserted advertisements in various newspapers in which they offered to pay
£100 to any person who contracted influenza after using the ball three times a day for
two weeks. They added that they had deposited £1000 at the Bank for that purpose.
The plaintiff, a lady, used the ball as advertised, and was attacked by influenza during
the course of treatment. She sued for £100.

The Company raised the following defences to which the court held as follows:

a) The company argued that the offer was too vague since no time limit was
stipulated in which the user was to contract influenza. To this the court held:
that it must have been the intention that the ball would protect its user during
the period of its use.
b) The Company suggested that the matter was an advertisement “puff” and that
there was no intention to create legal relations. To this the court held: that the
deposit of £1000 at the bank was clear evidence of an intention to pay claims.
c) It was further suggested that this was an attempt to contract the whole world
and this was not possible in English law. To this the court held: that the
advertisement was an offer to the whole world and that, by no analogy with the
reward cases, it was possible to make an offer of this kind.
d) The Company claimed that the plaintiff had not supplied consideration. To this
the court held: that using this inhalant three times a day for three weeks or
more was sufficient consideration.
e) The defendant suggested that there had been no communication of acceptance.
To this the court held: that looking at reward cases, contracts of this kind,
acceptance may be by conduct.

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Making of offers under various situations

Offer/proposal vs. Invitation to treat

Sometimes what looks like an offer may be no more than an invitation to make an
offer, or as it is sometimes called an invitation to treat.
The invitation to treaty unlike proposal is not final, clear in expression but merely an
invitation to be bound in those terms. The inviter process certain terms on which he is
willing to negotiate.
He invites any person to make an offer which he may accept or reject.

Common cases for invitation to treat

(a) Where goods are displayed for sale: This is merely invitation to treat even if
they bear price tags in a self service shops/stores.

Re: Fisher v.Bell (1961) 1 Q.B. 398,

In this case Bell was charged with offering for sale a flick knife in violation of
the Restriction of Offensive Weapons Act, 1959, the relevant provision which
read in part “ any person who manufactures, sells, or hires or offers for sale or
lends or gives to any person …a flick knife shall be guilty of an offence.”
The trial court decided that there had not been an “offer for sale” of the flick
knife. On appeal to the Queens Bench it was held that in the absence of a
definition of “offer for sale” in the Act, the words were to be construed as they
are in the law of contract.
The court observed that it is clear that according to the ordinary law of contract,
the display of an article with a price on it in a shop window is merely an
invitation to treat. It is in no sense an offer for sale the acceptance of which
constitutes a contract.

Also see Pharmaceutical Society of Great Britain v. Boots Cash Chemists

(Southern) Ltd. (1953) 1 QB 401
The defendants’ branch was adapted to the self service system. Customers
selected their purchases from shelves on which the goods were displayed and
put them into a wire basket supplied by the defendants. They then took them to
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the cash desk where they paid the price. In every case involving sale of a drug a
pharmacist supervised that part of transaction which took place at the cash desk
and was authorized by the defendant company to prevent, if he thought fit, any
customer from removing any drug from the premises. One section of shelves
was set out with drugs included in the poisons list under the Pharmacy and
Poisons Act, 1933 which were required to be sold in the presence of a qualified
registered pharmacist. These drugs had price tags.

The plaintiffs which was a body empowered to enforce that law sued the
defendants for infringing the provisions of the said law by selling drugs in
contravention of the laid down procedure.

The plaintiff Society argued that by their deliberately devised self-service

system, the defendant was making an offer to sell and the customer accepted
the offer when he picked an article from the shelf and put it in the basket and
the contract of sale was concluded.

The court held that the self-service system did not amount to an offer by the
defendant company to sell but merely an invitation to the customer to offer in
case of a drug, to buy; that such an offer was accepted at the cashier’s desk
under the supervision of the registered pharmacist; and that there was,
therefore, no infringement of the section.

(b) Advertisements: These are mere invitations to treat.

In Patridge v. Critendem (1968) 2ALLER 421

The appellant had placed an advertisement indicating that he had certain wild
birds for sale. The advertisement did specify the price but gave no details about
delivery or quantities available. It was an offence to offer such birds for sale.
In order to prove the offence it was necessary to prove that the advertisement
was an offer.
The trial court was satisfied that the advertisement was an offer and thus
convicted the accused. On appeal it was argued that the advertisement was not

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an offer but a mere invitation to treat because, first, the advertisement was not
sufficiently specific to amount to an offer. Secondly the court said that it would
not be reasonable to think that the appellant was willing to be bound by any and
every acceptance made.

(c) Request for information: A request for information is an invitation to treat.

In Harvey v. Facey (1893) AC 552
The appellant sent a telegram to the respondent asking “will you sell us
Bumper Hall Pen? (this was a piece of land) telegraph lowest cash price, reply
paid.” The respondent replied simply “ lowest price of Bumper Hall Pen
£900.” The appellant then purported to accept this offer. The respondent
denied that his reply was an offer. The Court held that no offer had been made
which the appellants could accept. The reason given by the court for its
decision is that the respondents did not reply to the first part of the question “
will you sell us Bumper Hall Pen?” Rather that the reply was limited to the
second part of the question “ telegraph the lowest cash price”

(d) Contracts by tender: In contracts by tender offers are made by those tendering.
The law is to the effect that where a person is invited to tender under certain
conditions and he complies then he acquires a right to have his tender
considered along with other tenders. But it should be noted that a person who
invited tenders must accept the tender. The right is limited to the tender
being opened and considered. Thus this is a mere invitation to treat.

(e) Auction sales: The Advertisement of an auction is an invitation to treat. At an

auction a bid is an offer, the auctioneers request for bids is an invitation to
treat. The sale is complete when the hammer falls.

ACCEPTANCE
Once an offer is proved it must be satisfied that the offeree has accepted the offer for
there to be a contract. Thus the person who accepts the offer must be aware that the
offer has been made.

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Under the Law of Contract Act s.2(1)(b) – Acceptance is defined as an assent to the
proposal by the person to whom it was made.

Acceptance must be firm and final: The signification of acceptance must be a firm and
final expression of assent to the terms of the proposal as communicated by the
offeror/proposer.

Conditional acceptance: An acceptance must be absolute and unconditional. If the

acceptance is qualified it ceases to be accepted instead it becomes a counter offer to the
original proposal. The original proposal would be free to accept or reject the counter
offer.

One form of conditional assent is an acceptance “ subject to contract.” The law has
placed a special significance on these words, and they are always construed as
meaning that the parties do not intend to be bound until a formal contract is prepared.
In Winn v. Bull (1877) 7 Ch. D. 29
The defendant had entered into a written agreement with the plaintiff for lease of a
house, the term of the lease and the rent being agreed. However, the written agreement
was expressly made “ subject to the preparation and approval of a formal contract.” It
appeared that no other contract was made between the parties. The plaintiff sued for
specific performance of the agreement.
It was held that the written agreement provided a memorandum under law (s.4 of the
Statute of Frauds, 1677) but there was no binding contract between the parties because,
although certain covenants are normally implied into leases, it is also true that many
and varied express covenants are often agreed between the parties. That words “
subject to contract” indicated that the parties were still in a state of negotiation and
until they entered into a formal contract there was no agreement which the court could
enforce.

But there is a different position if the statement is qualified and the terms of a proposed
contract can be identified. In this case the court will enforce it.

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In Filsby v. Hounsel (1896) 2 Ch. 737

Property had been offered for sale by auction but had not been sold. An offer was then
made to buy the property, stating that if the offer was accepted the purchaser would
sign a contract “on the auction particulars.” This offer was accepted “subject to
contract as agreed.”
It was held that the parties were bound by a contract drafted on the auction particulars,
although they had not signed a formal contract.

Counter offer: A counter offer is a rejection of the original offer and in some cases has
the effect of canceling it. Where the counter offer introduces a new term, the original
offer is cancelled.
Hyde v. Wrench (1840) 3 Beav. 334
In this case the defendant offered to sell his farm at £1000 to the plaintiff on June 6.
The plaintiff’s agent immediately called on the defendant and made an offer of £950
which the defendant wished to have a few days to consider.
On June 27 the defendant wrote to say that he could not accept the offer of £950 .
On June 29 the plaintiff wrote “ accepting” the offer of June 6. The defendant refused
to sell his land to the plaintiff at £1000
The plaintiff filed a case asking the court to award an order of specific performance. Ie.
To order the defendant to sell him the farm at £1000.

The court held that the plaintiff could not enforce this “acceptance” because his
counter offer of £950 was an implied rejection of the original offer to sell at £1000 (of
June 6). So when the plaintiff purported to “accept” the June 6 offer, in fact there was
no such offer.

Rules governing acceptance

To constitute acceptance the offeree’s signification of assent to the proposal must:

(a) Be made in response to the offer
(b) Exactly match the terms of the offer

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(c) The matching acceptance must be communicated to the offeror.

Communication of Acceptance
Acceptance may be made in various ways. It may be made in writing or orally,
but it must in general be communicated and communication must be made by a
person authorized to make it.
In Powell v. Lee (1908) 99 L.T. 284
The defendants were managers of a school and wished to appoint a headmaster. They
passed a resolution appointing the plaintiff (Powell) among other two applicants to be
the headmaster but gave no instruction that this decision was to be communicated to
him. One of the managers was instructed to inform one of the candidates (Parker) that
he had not been selected. This manager without authority also informed Powell that he
had been selected.

Later the matter was reopened and Parker was properly appointed. Lee then informed
the plaintiff that this appointment had been made. The plaintiff sued the six managers
for damages for breach of contract.

The court held that there was no contract because there was no authorized
communication of the intention to contract by the managers.
See also Felthouse v. Bindley (1862), 11 C.B. (N.S.) 869

Principally, acceptance must be communicated to the offeror. However, it can also be

communicated to an agent of the offeror who is authorized to receive acceptance.
Thus, where the authority given to the agent is merely to transmit no acceptance is
complete until it reaches the principal.

However, there are some cases in which the offeror is deemed to have waived
communication of the acceptance. This most often occurs in the case of unilateral
contracts such as a promise to pay money in return for some act to be carried out by
the offeree. Performance of the act operates as an acceptance, and no communication is
required. Re. Carlill v. Carbolic Smoke Ball Co. Ltd. (supra)

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The mode of communication of acceptance
Under common law communication of acceptance is normally by post either through a
letter or a telegram. The main issue has always been “when is communication of
acceptance complete?” Due to this the courts have developed the postal rule. The
postal rule states that once a mail is correctly addressed , a proper stamp put on it and
put in right hands of the postal officer, that is effective communication unless
expressly excluded by the offeror.
Therefore, on correctly posting the letter of acceptance both parties become
irrevocably bound. However the same rule applies to acceptance by telegram. A
better view is that under Common Law an acceptance cannot be recalled once it has
been posted even though it has not reached the offeror.
Despite all this position, the offeror may signify the mode of acceptance which is
different from the use of post eg telex, email, fax etc. But under common law
sometimes the court may refuse to recognize some modes of acceptance. For instance
in Entores v. Miles Far East Corporation (1955) 2Q.B. 327 the plaintiff a London
company and the defendants, an American Coreporation with agents in Amsterdam
made an offer by telex to the defendants’ agents who accepted also by telex. When the
dispute arose the Court of Appeal of England held that the parties were in the same
position as if they had negotiated in each other’s presence, thus no binding contract
was created until the plaintiffs in London had received acceptance.

With regard to e-mail services, the European Union Parliament passed a rule that a
contract is formed when acceptance is confirmed.

Some important authorities on posting rule

Adam v. Lindsell (1818)
In this case it was held that where acceptance is communicated by post a contract
arises on the date when the letter of acceptance is posted.

Household Fire and Accident Insurance Co. Ltd. v. Grant (1879)

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Here it was held that “ an acceptance which only remains in the breast of the
acceptor without being actually and by legal implication communicated to the
offeror is no binding acceptance… But if the post be treated as agent of both
parties, then as soon as the letter of acceptance is delivered to the post office, the
contract is made as complete and final and absolutely binding as if the acceptor
had put his letter into the hands of a messenger sent by the offeror himself as his
agent to deliver by the offer and to receive the acceptance…”

Bryne v. Van Tienhoven (1880)

It was held that a contract is complete on posting letter of acceptance even though the
letter may not reach the offeror (its destination).

Henthorn v. Fraser (1892)

It was held that where circumstances are such that it must have been within the
contemplation of the parties that, according to the ordinary usage of mankind,
the post might be used as a means of communicating the acceptance of an offer,
the acceptance is complete as soon as it is posted.

Communication of Acceptance under the L.C.A.

Mode of communication
There is no an express rule governing postal services under the Act but the s.4(2)
reads:
“Communication of an offer is complete:
(a) as against the proposer, when it is put in the course of transmission to him so as
to be out of the power of the acceptor.
(b) as against the acceptor, when it comes to the knowledge of the proposer.”

Therefore, the parties are bound at different times. Unlike the position under the
Common Law in which after the acceptor has put the acceptance into the mode of
transmission both parties are irrevocably bound. Thus under the Act, the rule is that
where an acceptor posts his letter of acceptance so that the letter is out of his power,

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then the proposer is bound but not the acceptor himself. The acceptor is bound when
his acceptance comes to the knowledge of the proposer.

As far as the other modes such as telex, fax, and e-mail there is no authority at the
moment in Tanzania but the English authorities are persuasive.

Revocation
Revocation means to withdraw or to recall. The offeror may revoke his offer, but to be
effective, this must be done before the acceptor has parted with his acceptance. This is
a position under both the Common Law and the L.C.A. Thus under s.5 (1) An offer
may be revoked at any time before the communication of its acceptance is complete as
against the proposer but not afterwards.

In the same way under the L.C.A. the acceptor may revoke his acceptance but also this
must be done before his acceptance comes to the knowledge of the offeror. Thus s.5
(2) provides that “an acceptance may be revoked at any time before the completion of
its communication.” This position is not the same under the Common Law where the
rule is that once the acceptance has been duly posted it cannot be revoked by a faster
means because both parties are irrevocably bound.

Thus for example under Common Law if X has posted an acceptance to Y, he cannot
withdraw the same by telephoning Y and asking him to ignore the letter of acceptance
when it arrives. And Y can hold X bound by the contract if he wishes to do so.

If successful, the revocation has an effect of nullifying the offer (if it is a

revocation of an offer) or acceptance (if it is a revocation of acceptance).

Note: -The L.C.A. position is more favourable to the acceptor than the
common law position as regards revocation.
- Revocation of an acceptance is not effective until its communication is
complete.

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-Revocation discussed above is a revocation done by the offeror
sending a notice of revocation to the offeree. (S.6 (a)

Revocation of proposal / termination of an offer

Under the L.C.A there are many other circumstances in which a proposal can be
revoked. These are provided for under s. 6. These include:
1. Revocation by notice: As discussed above
2. Lapse for want of acceptance
An offer may provide that it will remain open for a specified period of time –
This acceptance must be effected within times limit. Where time is not
indicated the offer must be accepted within a reasonable time.
3. Death/insanity of the offeror
Death/insanity renders the offer to be incapable of acceptance. Under the
L.C.A this happens where the fact of death/insanity is known to the acceptor
before acceptance – S.6 (d). The law seems to suggest that if the fact of death
is not known to the acceptor at the time of acceptance then he should be
entitled to accept the offer.
4. Failure of the acceptor to fulfill conditions:
This happens when the acceptor has failed to fulfill the conditions precedent to
acceptance.

Formation of an Agreement

Once an offer has been accepted a binding contract is formed:

Anson holds that an acceptance to an offer is what a lighted match is to a raining of
gunpowder; It produces something which cannot be recalled or undone. In other words
when the offer is accepted, both the offer and acceptance are terminated / they come to
an end and in their place a contract comes to existence.

LAWFUL OBJECT
The object of the contract must be lawful or legal. An agreement in which the object is
unlawful is void. (s.23(2))

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For instance the agreement to carry out an act which is forbidden by public law is void.
The same applies to an agreement which is contrary to public policy.

CAPACITY TO CONTRACT
Capacity to contract refers to competence to contract. The general rule is only sane,
sober persons of contractual age are capable of making valid contracts.

This means that certain groups of persons natural and artificial may have the
disabilities to contract.

Under s.11 of the L.C.A refers to competency. Thus minors, persons of unsound mind,
and person disqualified by law can not qualify to make contracts.

Factors Vitiating Capacity

There are factors which vitiates / negatives the capacity to contract. These factors
include age, soundness of mind and disqualification by law.

Age
A minor or an infant is not competent to contract as a general rule. (see s. 11(1).
Minors or infants are persons who have not attained the age of majority. The age of
majority is mature age. Sometimes this age is referred to as being the contractual age.
The age of majority is determined by laws, to which a particular person is subject.
Such an age therefore may differ from one country to another.

In Tanzania mainland the Age of Majority Act, Cap.431 and the Laws of Zanzibar
Cap.53, provide that the age of majority is 18 years.
In Kenya – Age of Majority Act 1974 – 18 years
In Uganda – Uganda Contract Act Cap.75 – 18 years
In England before 1969 – It was 21 years but The Family Law Reform Act established
18 years.

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Why is age competence important in contracts?

A person without capacity lacks intellectual maturity, lacks experience to exercise

sound judgment and as a result he may not know or appreciate the effects of the
agreement upon himself. Thus, since he cannot protect himself then he needs the
protection of the law.

Note: The protection by law in some cases is not absolute. There are circumstances
where the legal protection can be waived.

But despite the above legal position, the true fact remains that minors / infants enter
into agreements with majors everyday.

How is the conflict resolved?

Two principle ideas are advanced concerning the law on minors / infants.
1. That the law protects minors from their inexperience, hence to invalidate agreements
which are unfair to the minors or which are wasteful.
2. The law is not to cause unnecessary hardship to adults who deal fairly with minors.

It is under the second principle idea that the law recognizes some contracts with
minors as being valid and others as voidable.
Additionally a minor may be liable on quasi-contract and in equity where he is found
guilty of fraud.
Therefore contracts by a minor may be valid, voidable or void depending on the
principles explained above.

(a) Valid contracts by a minor:

The Common Law position
The position under the Common Law is that all agreements for necessaries and
beneficial contracts of service with a minor are valid. It should be borne in mind that
the latter category (ie. Contracts for the benefit of a minor) apply only to the contracts
of the nature of apprenticeship, education or analogous contracts.

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The Tanzanian position
The Law of Contract Act provides that the effect of incapacity is to render the contract
to be void. It is silent on the issue of contractual liability of a minor. The Act however
regards some agreements entered into by a minor as being “relations which resemble
those created by a contract.” Thus s. 68 provides:

“If a person incapable of entering into a contract, or any one whom he is

legally bound to support, is supplied by another person with necessaries suited
to his condition in life, the person who has furnished such supplies is entitled to
be reimbursed from the property of such incapable person”

Therefore it can be seen that a contract with a minor is not recognized as a contract but
as a relation resembling a contract and where a person has supplied necessaries to a
minor he is entitled to reimbursement from the property of the minor.

Also the Sale of Goods Act, a minor who has been supplied with necessaries must pay
a reasonable price.(s. 4 proviso Cap. 214)

What are necessaries?

Necessaries are not defined under the L.C.A. but the Sale of Goods Act, defines
necessaries as:

“goods suitable to the condition in life of such infant/minor or other person

and to his actual requirement at the time of sale and delivery.” (see s.4
proviso, Cap. 214)

This definition may not be satisfactory. One may say that necessaries are things or
services without which an individual cannot reasonably exist. Thus food, shelter and
clothing are necessaries and in addition education and medical services may be
included on the list of necessaries. One ought to note that what is or is not a necessary
will depend on the condition in life of the minor. As such articles that to one person
might be mere convenience or matters of taste, may in the case of another be
considered necessaries. The agreements for supplied / offered goods / services which

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are necessaries will not be treated as void. On the other hand no contractual liability
will be imposed on the minor. The person supplying the goods or offering the services
becomes entitled to either a reasonable price or reimbursement from the property of the
minor if he has any.

NB: The general test of necessaries is that of utility and in this connection the minors
condition in life together with the supply of such goods which he already has, become
relevant.

Reference cases

Nash v. Inman (1908) 2 KB 1

The plaintiff was a tailor and the defendant was an infant undergraduate of Cambridge.
The plaintiff sent his agent to Cambridge because he had heard that the defendant was
spending money freely and might be sort of a person who would be interested in high
class clothing.
As a result, the plaintiff supplied the defendant with various articles of clothing to the
value of £145 during the period of October 1902 to June 1903. The clothes included
eleven fancy waist coats.

The plaintiff sued the infant for the price of the clothes. The evidence showed that the
plaintiff’s father was in good position and it could be said that the clothes supplied
were suitable to the defendant’s position in life. However his father proved that the
defendant was amply supplied with such clothes when the plaintiff delivered the
clothes in question.
Thus it was held that the plaintiff’s claim failed because he had not established that the
goods supplied were necessaries.

Elkington v. Amery (1936) 2 All ER 86

The defendant was an infant and the son of a former minister. He purchased from the
plaintiff an engagement ring and an eternity ring, the court treating the latter as a
wedding ring.

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He also purchased a lady’s gold vanity bag.
The court treated the two rings as being necessaries but did not accept that the vanity
bag was a necessary because there was no evidence to show that it was purchased in
respect of the engagement.

Robberts v. Gray (1913)

The defendant wished to become a professional billiards player and entered into an
agreement with the plaintiff, a leading professional to go on a joint tour. The plaintiff
went to some trouble in order to organize the tour, but a dispute arose between the
parties and the defendant refused to go. The plaintiff sued for damages of £6000.
The court held that the contract was for the infant benefit being in effect for his
instruction as a billiard player. Therefore the plaintiff could sustain an action for
damages for breach of contract, and damages of £1,500 were awarded.

Merchantile Union Guarantee v. Ball (1937) 2 KB 498

The purchase on hire purchase terms of a motor lorry by an infant carrying on business
as a haulage contractor was held not to be a contract for necessaries but a trading
contract by which the infant could not be bound.

De Franceso v. Barnum (1890) 45 Ch. D. 430

Two infants bound themselves in contract to the plaintiff for seven years to be taught
stage dancing. The infants agreed that they would not accept any engagements without
his consent. They later accepted an engagement with Barnum and the plaintiff Barnum
for interfering with the contractual relationship between himself and the infants, and
also to enforce the apprenticeship deed against the infants and to obtain damages for its
breach.
The contract was prima facie for the benefit of the infants and so would be binding on
the infants.
But the court considered the contract further in detail, and it found up some erroneous
terms: eg. The infants bound themselves not to marry during the apprenticeship; they
were paid very poorly; the plaintiff did not undertake to maintain them during
unemployment and did not undertake to find them engagements; the plaintiff could

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terminate the contract if he felt that the infants were not suitable for the carrier of
dancing.
Thus it appeared from the contract that the infants were at the absolute disposal of the
plaintiff.
The court therefore held that the contract was unreasonable one and was therefore
unenforceable against the infants. Thus Barnum couldn’t be liable.

NB: A contract is not binding on a minor merely because it is proved to be for the
minor's benefit; but a contract which would otherwise be binding as a contract for
necessaries is not so if it contains harsh and onerous terms: Fawcett v. Smethurst
(1914) 84 LJKB 473, (Atkin J).

(b) Voidable contracts by minor

Under the Common Law all agreements by which the minor acquires an interest of a
permanent nature in the subject matter of the agreement e.g. lease of premises, a
partnership contract, holding of shares in a company may be treated as voidable. They
are voidable at the option of the minor. So a minor is allowed by law to call to an end
such contracts during his minority or within reasonable time after attaining the age of
majority.

Reference case
Steinberg v. Scala (Leeds) Ltd. (1923) 2 Ch. 452
The plaintiff purchased shares in the defendant company and paid certain sums
of money on application, on allotment and on one call. Being unable to meet
future calls, she repudiated the contract whilst still an infant and claimed for the
removal of her name from the register to relieve her from liability to future calls
and also the recovery of money already paid.
It was held that she could succeed to remove the name from the register but the claim
for recovery failed because there had not been a total failure of consideration. That is;
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the shares had some value and gave some rights even though the plaintiff had not
received any dividends.

(c) Void Contracts by minor

Under the Common Law all other contracts with a minor which do not fall within (a)
or (b) are void.
In Tanzania, the L.C.A elaborates clearly that the general rule is that contracts with a
minor are void.(s. 11(2). Thus the contracts which do not fall under s. 68 of the L.C.A
or s. 4 of Cap. 214 are void.
For instance the following contracts entered into with a minor are declared to be
absolutely void.
- contracts for the repayment of money lent or to be lent (loan contracts)
- contracts for goods supplied or to be supplied other than necessaries

2. Soundness of mind
A) LUNATICS
Another factor which vitiate capacity is the soundness of mind. A person of unsound
mind is incompetent to contract. (s.11(1) A person of sound mind is defined as:

“a person who is capable of understanding the contract during the formation of

a contract and who is capable of forming a rational judgment as to its effect
upon his interests.” (s. 12)

SS.12 (2) & (3) provides on the ability to contract by a person who is of always sound
mind who sometimes becomes of unsound mind and a person who is always of
unsound mind and sometimes sound mind that such persons may only contract when
they are of sound mind. In Tanzania a contract with a person of unsound mind is void
unless it falls within the ambits of section 68 of the L.C.A or s. 4 of the Sale of Goods

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Act where the liability of such a person is reimbursement and reasonable price
respectively.

Under the Common Law, a person of unsound mind can make voidable contracts only
if the other party knew of his unsoundness of mind. The contract is voidable at his
option (the person of unsound mind).

Thus in Moulton v. Camroux, 2 Ex 487, it was held that:

"the rule concerning unsoundness of mind has in modern times been relaxed, and
unsoundness of mind would now be a good defence to an action upon a contract, if it
can be shown that the defendant was not of the capacity to contract 'and the plaintiff
knew it."

Read also: Imperial Loan Co. v. Stone [1892] 1 QB 599, CA.

B) INTOXICATED PERSONS

The authorities are scanty; but in Gore v. Gibson (1845) 13 M & W 621; 153 ER 260,
it was held that a contract made by a person so intoxicated as not to know the
consequences of his act is not binding on him if his condition is known to the other
party. It appears, however, that such a contract is not void but merely voidable, for it
was held in Matthews v. Baxter (1873) LR 8 Ex 132 that if the drunken party, upon
coming to his senses, ratifies the contract, he is bound by it.

3. Persons disqualified by law

Sometimes persons may be disqualified by law from contracting generally or from
entering into certain types of contracts.

For instance: a) Bankrupt Persons:

The bankrupt persons are disqualified by law from entering into any type of contracts
and whosoever enters into a contract with a bankrupt does so at his own peril.

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b) Unincorporated bodies and Corporations

Unincorporated bodies eg. Clubs, associations and societies are not capable to enter
into contracts. This is because they have no separate existence in law. However, these
bodies contract through agents and persons authorizing these agents (members of such
bodies) are personally liable on such contracts. If a member of a club for instance
enters into contract with outsiders for the club; the contract will bind the club members
personally if they authorized such a member to contract for them but if the member
was not authorized then the contract can not bind the members but it will bind such a
member personally.

As for Corporations/Companies these are legal persons: A company for instance is

capable of concluding contracts in its own name through its duly authorized agents ie.
Directors. Such contracts will bind the company but not members personally. But the
contractual capacity of a company is limited i.e It can only enter into those contracts
which the Memorandum of Association of the company allows. This capacity is found
in the objects clause. If the company contracts within the powers stipulated in the
objects clause it acts intra-vires and such contracts are valid contracts. But if a
company contracts outside this clause it acts ultra-vires/beyond its powers and so the
contract be comes null and void.

Reference Case
In Ashbury Railway Carriage and Iron Co. v. Riche (1875)
The company bought a concession for the construction of a railway system in Belgium
and entered into an agreement whereby Riche were to construct a railway line. After
the commencement of work, the company ran into difficulties and the shareholders
wished the directors to take over the contract in a personal capacity and indemnify the
shareholders. The directors thereupon repudiated the contract on behalf of the
company and Riche sued for breach of contract.
The objects clause of the company’s memorandum stated that it was established

“ To make or sell or lend on hire railway carriages, wagons and all kinds of railway
plant, fittings, machinery and rolling stock, to carry on the business of mechanical

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engineers and general contractors, to purchase and sell as merchants timber, coal,
metal and other materials and to buy and sell such materials on commission or as
agents”

The court held that the purchase of the concession to build a complete railway system
was ultra-vires and void because it was not within the objects of the company. The
contract with Riche was therefore void and the directors were entitled to repudiate it.

INTENTION TO CREATE LEGAL RELATIONS

This is also referred to as an intention to create treat..
Under Common Law it is a settled principle that there must be a common intention of
the parties to enter into legal relations for there to be a contract.

What is the importance of intention to create treat?

The importance of the intention to create treat lies on the fact that contracts should not
be spots of idle hour or mere matters of pleasantry never intended by the parties to
have any serious effect whatsoever.

Thus under the English law although there may be an evidence of offer and
acceptance, the courts may not recognize the agreement as a legally binding contract if
they feel that there was no intention on the part of the persons involved that a contract
should result from their dealings. The intention to create legal relations may be
categorized into two groups namely the domestic arrangements and the business or
commercial arrangements.

Intention in domestic arrangements

The presumption is that social or domestic arrangements do not give rise to legally
enforceable contracts even if they look like one. This is a general rule. Domestic or
social arrangements include arrangements between a husband and wife, family
members or friends.

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The agreements between a husband and wife are difficulty to decide whether the
intention was there or not especially when they are living in amity. It is easy to infer
the intention when the parties to an agreement are not living in amity.

Reference case: Balfour v. Balfour (1919) 2 K.B. 571

Balfour went to work in India leaving his wife in England for health reasons. He
promised to pay his wife £30 per month for her maintenance. The wife later divorced
her husband. Then his husband refused to pay as promised. The wife sued and it was
held that this was not a contract because the parties did not intend that they should be
attended by legal consequences.

In Merrit v. Merrit (1970) 2 All E. R. 760 it was held that the agreement which had
been made when the parties were not living together in amity was enforceable as there
was an intention to create legal relation.

NB: This does not mean that in family or social matters there cannot be a legally
biding contract. What the law requires is that the parties must intend legal
consequences to follow.

Intention in business/commercial arrangements

The general presumption here is that in such agreements are intended by the parties to
carry legal consequences or to be followed by legal consequences.

This presumption may be rebutted where parties intend to rely on each others good
faith and honor and not on legal consequences.

Reference case: Rose & Frank Co. v. J. R. Crompton & Brothers Ltd., (1925) AC 445

In this case an agreement was drawn between one American & two English firms for
their dealings in paper tissues. The agreement contained the following clause: This

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arrangement is not entered into as a formal legal agreement and shall not be subject to
a legal jurisdiction in the law courts either in US or in England.

The agreement was terminated by one of the parties contrary to its terms. The
American firm brought an action for breach. The Court held that the document did not
constitute a binding contract as there was no intention to effect legal relations.

Test for Contractual Intention

The intention of the parties must be ascertained from the arrangement & the
surrounding circumstance. It is the duty of the court to find out whether the parties
intended to enter into legal obligations.

The court employs an objective test: i.e what a reasonable person would say in
circumstance.

CONSIDERATION

The meaning of consideration revolves around exchange of values embedded in goods

or services. That is, a person who parts with value must be given some value in return.
This is according to the maxim “Quid pro quo” which means “something for
something and nothing for nothing.”

Consideration is a vital element in some contracts but not in all contracts. Thus
contracts under seal need no consideration. For an agreement to have legal force it
must either be under seal or must be supported by some consideration.

Under the Common law

Consideration is an important ingredient in all contracts which are not made under
seal.
Thus in Rann v. Hughes (1778) it was held that all simple contracts (ie. Contracts not
under seal whether written or not) must be supported by consideration. It was held

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further that the law of the country supplies no means, nor affords any remedy to
compel performance of an agreement made without sufficient consideration.

What is consideration?
There have been various definitions on the concept. But the most celebrated definition
was given in the case of Currie v. Misa (1875) LR 10 Ex.153. In this case consideration
was defined as:

“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”

From here we can see that consideration comprises of both positives or negatives to a
party. But payment of money is a common form of consideration.

In Dunlop v Selfridge Ltd [1915] AC 847, it was held that:

"An act or forebearance 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

Simply stated therefore, consideration is a detriment to the promisee or benefit to the

promisor bargained for, and given in exchange for a promise.

Under the L. C. O
Consideration is an essential element in all simple contracts concluded in Tanzania as
opposed to contracts under seal.
The L.C.A. defines consideration as:

“When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing or does nor abstains from doing or promises to
do or to abstain from doing something, such act or abstinence or promise is
called a consideration for the promise” (s. 2 (d).
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From this definition the following things can be deduced:
1. that consideration must be given when the promisor has expressed a desire and
not otherwise.
2. that consideration consists of both an act or omission and a promise to act or to
omit.

Contracts without consideration are generally void. However there are exceptions in
the L.C.A which includes the following:
a) an agreement expressed in writing and registered under the existing law
for the registration of documents which is made on account of natural
love and affection between parties standing in a near relation.
b) A promise to compensate a person who has already voluntarily done
something for the promisor or something which the promisor was
legally compellable to do.
c) A promise made in writing and signed by the person to be charged
therewith, or by his authorized agent to pay a debt which the creditor
might have enforced payment but for the law of limitation of suits (see
s.25)

Who can furnish consideration?

Under the Common Law consideration must be furnished by promisee and promisee
only.

In Tanzania consideration can be furnished by the promisee or any other person who is
not the promisee.(s.2(d)

Adequacy and sufficiency of consideration

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The price fixed by the parties out of their own free will or consent is what in law is
termed as sufficient consideration. However, the kind of consideration agreed upon by
the parties may not be based on the market value but only on the wishes of the parties.
The law only requires there to be a sufficient consideration hence the rule that
consideration needs only to be sufficient but not adequate. This is because parties
themselves agree as to what each of them has to do under the contract. The rationale
for this is that parties are presumed to be capable of appreciating their own interests
and of reaching their own equilibrium. The court will only interfere where it proves
duress, fraud, mistake under influence or misrepresentation.

Consideration must have economic value

In determining sufficiency of consideration one has to consider whether or not the
consideration has economic value. Sentimental motives such as natural love and
affection have no economic value and therefore they cannot qualify as good
consideration. (White v. Bluett (1853)

On the other hand nominal consideration and trivial acts of very small value may
constitute sufficient consideration in law.

Consideration must be Legal

The law requires that consideration must be lawful.
Illegal consideration renders the whole contract to be illegal and hence void.

Types of Consideration

(a) Executory consideration: This results from an exchange of promises to

perform acts in the future. E.g. “A promises to deliver goods to “B” and “B”
promises to pay for the goods. In Tanzania the definition of consideration
under S. 2 (1) (d) – The phrase “….. a person may promise to do or to abstain
from doing” – Reflects executory considerations.

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(b) Executed consideration: This happened where one party promises to do
something in return for the Act of another, rather than for the mere promise of
future performance of an act. Here performance of an act is required before
there is any liability on the promise. E.g. Where “A” offers a reward for return
of his lost dog, A is buying the Act of the finder and will not be liable until the
dog is found and returned.

(c) Past consideration: Comprises of an act (abstinence) which was done before
the promise was made and not in response to or induced by subsequent
promise.
Re McArdle [1951] 1 All ER 905.
Past consideration is no consideration at all under English law. In Tanzania the
phrase “…. Has done or abstained from doing something…. Are questionable as to
whether they suggest past consideration is good consideration in Tanzania.
However it is argued that the use of the word “has done” is not of past tense but of
present perfect tense and therefore the act of doing is not independent of the
promise. Therefore it is not past consideration.

On the other hand there are exceptions to the general rule that past consideration is
not consideration at all which include:

i. an agreement expressed in writing and registered under the

existing law for the registration of documents which is made on
account of natural love and affection between parties standing in
a near relation.
ii. A promise to compensate a person who has already voluntarily
done something for the promisor or something which the
promisor was legally compellable to do.
iii. A promise made in writing and signed by the person to be
charged therewith, or by his authorized agent to pay a debt
which the creditor might have enforced payment but for the law
of limitation of suits.
(see s.25)

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FREE CONSENT / REALITY OF CONSENT

Every party to a contract is required to conclude a contract out of his own free will or
volition. This is what is meant by the concept of free consent. The concept of free
consent is a reflection of the underlying assumptions of a contract namely the freedom
of contract and sanctity of contract.

By freedom of contract it means that every person is free to enter into any contract. A
person may enter into employment contract as an employer or employee and change as
he may wish. He has the freedom to bargain the terms of the contract. Principally
freedom of movement and freedom of will presuppose equality, that parties bargain the
terms of the contract on equal footing and so they enter into contract freely.

Meanwhile sanctity to contract means no one other than the parties to a contract who
can interfere with a contract validly concluded. This means that it is only the parties to
a contract who have the rights and duties under a contract.

However, the concept of the freedom to contract has been eroded by the coming of the
standard form contracts. This is because the formation of a standard form contract is
based not on free consent but rather on the relationships which develop independent of
men’s will.

Under the L.C.A the concept of free consent is reflected under s.10 as an essential
ingredient of a valid contract. On the other hand, although consent may be given by a
party to a contract, it may not be real but rather a vitiated or undermined consent.
Therefore consent may be undermined by the following factors as discussed hereunder.

Factors which undermine / vitiate consent

(a) Coercion / Duress

Coercion or duress means– committing, threatening to commit any act forbidden by

the penal code or unlawful detaining / threatening to detain any property, to the

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prejudice of any person whatever: With intention of causing any person to enter into
an agreement. (s.15)

It must be proved that the other party actually committed/threatened to commit the
forbidden act or he unlawfully detained/threatened to detain some property in order to
obtain such consent.

The effect of coercion is to make the contract voidable at the option of the party whose
consent was so improperly obtained.

(b) Undue influence

This involves improper use of power to affect somebody’s character, beliefs or actions
through fear, administration etc. In contract undue influence means improper use of
power to obtain consent.

The relations between the parties must be such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage over
the other.

S.16 (2) L.C.A. gives situations whereby there is a decreed position of one person to
dominate the will of the other. These include:-

i) Holding a real / apparent authority over the other or where there is a fiduciary
relationship.
Eg. Real authority – A magistrate holds a real authority over a person charged
with an offence before him; a director has a real authority over a secretary etc
Apparent authority/ implied authority: A dismissed police officer or a
dismissed agent has an apparent authority.
Fiduciary relationship: a husband and wife; A parent and child; A doctor and a
patient; etc

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ii) Making contract with persons with temporary or permanent incapacity by
reason of age, illness, mental or bodily distress.

The effect of undue influence is to render the contract voidable at the option of
the party whose consent was so caused by undue influence. (s.19)

(c) Misrepresentation /Representations

Representations are factual statements which are pre-contractual. The pre-contractual

statements are statements made to induce a party to enter into a contract. They may be
written or spoken or made by conduct. They do not become terms of the contract.
These may be true or untrue. They also may be untrue although the maker believes
them to be true. If they are untrue they are called Misrepresentations or
misstatements. A false statement as to the law cannot be a misrepresentation since
everyone is presumed to know the law.

The maker of such statements may have been negligent or not in making these
statements. If the maker was not negligent in making them they are called innocent
misrepresentations / innocent misstatements while if the maker was negligent in
making them they are called negligent misstatements or negligent misrepresentations.

The statements may be untrue to the knowledge of the maker but he proceeds to make
them. In this case they are called fraudulent misrepresentations. In Derry v. Peek
(1889) fraud was defined as a false statement made, knowingly, or without belief in its
truth or recklessly, i.e without caring whether it be true or false.

Under section 18 enumerates three types of misrepresentations namely:-

i. Unwarranted statements
ii. Breach of duty to speak
iii. Inducing mistake about the subject matter of the agreement.

Remedies under Common Law:

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Innocent misrepresentation: The party so misled can rescind the contract. The effect
of rescission is to restore the parties to their original positions. Status quo ante. So that
each party become entitled to be relieved of the obligations created by the contract and
to recover any benefit which he may have conferred upon the other.

Fraudulent misrepresentation: The injured party may either affirm the contract and
sue for damages or rescind the contract and sue for damages for any loss suffered.

Under L.C.A
Both Innocent & fraudulent misrepresentation: The contract become voidable.

d) Mistake
In the law of contract the word mistake applies to two situations:

i) Where the contracting party or parties believe that a present or past fact which
is material to their transaction exists when it not; or
ii) Where the contracting party or parties believe that a present fact which is
material to their transaction does not exist while it does.

Mistake of fact and mistake of law

The mistake which affect the contract must be a mistake of fact as opposed to a
mistake of law. The reason is that everyone is presumed to know the law. (s. 21)

Operative and non-operative mistake

The mistake which affects the validity of a contract is called operative mistake and it
must be a mistake of fact and not of law. Operative mistake can be classified into the
following categories:-

a) Mistake as to the nature of the contract itself

b) Unilateral mistake
c) Bilateral mistake

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A. Mistakes as to the Nature of the contract itself.

The General rule is that a person who signs a contractual document is bound by its
terms whether he has read it or not. But under certain circumstances if a person signs a
contract in the mistaken belief that he is signing a document of a different nature, there
will be a mistake which avoids the contract. Thus mistake as to the nature of the
contract itself renders the contract to be void.

B. Unilateral mistake
This happens when one of the parties to a contract is mistaken as to some fundamental
fact concerning the contract and the other party knows, or ought to know this. This is
mainly concerned with the mistake on the identity or attributes of the other party. E.g.
An offer made to A by C, is accepted B. who pretends to be A.
The effect here is that the contract becomes void.

C. Bilateral mistake
This happens when both parties to a contract are mistaken. They are of two types:-
1. Common or identical mistake: This occurs when both parties make an identical
mistake as to some fundamental fact concerning the contract. In absence of fraud or
misrepresentation where there is a common or identical mistake in a contract the
parties are bound except in cases of Res extinata and res-sua which renders the
contract void.

Res extincta: Mistake as to the existence of the thing contracted for e.g. parties agree
to sell a car which is destroyed by fire at the time of sale unknown to them both.

Res Sua: Occurs when a person makes a contract to buy something which already
belongs to him.

2. Mutual or non-identical mistake:

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This occurs when the parties are both mistaken as to a fundamental fact concerning the
contract but each party has made a different mistake: The contract does not
necessarily become void if the court can find a sense of promise in it under common
law under the law of Contract. Therefore there are circumstances where it may not
become void.
See s.20 – Mutual mistakes in which consent may not be defeated but nullified.

See also s. 13 – Mutual mistake in which consent may be defeated or rendered unreal
and negatived. Here each of the parties to an agreement is mistaken as to the intention
of the other and each does not know that he has been misunderstood. The parties make
different mistakes. Parties were not ad idem as such there was no consent.

The Plea of Non Est Factum (It is not my act)

Under Common Law
The apparent signed contract will be regarded as void if a party can successfully plead
the defence of non est factum. Under this plea a person disowns his signature and the
document, that he never consented to the terms appearing in the document.

However to succeed under this defence three things must be proved:

a) that the signature must have been induced by fraud
b) that the document must be fundamentally different from that thought to be
signed. But a mistake as to the contents is not sufficient to allow non est factum
to be raised.
c) That the writing fails to express the agreement of the parties.

Reference cases:
Lewis v. Clay (1897)
In this case a party who was induced to sign promissory notes by the fraudulent
misrepresentation that his signature was required as a witness successfully pleaded non
est factum. Here the rest of the document apart from the space for signature was
covered by blotting paper having being told that this was a document of a private
nature.

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It was held by the court that the defence of non est factum applied even though the
plaintiff could not say precisely what type of the document he thought he had signed.

In Tanzania
There is no provision in the L.C.A. which covers the plea of non-est factum but it is
traced from the Common Law precedents.
An authority for this position is found in the case below:-

Sluis Bros (EA) Ltd. v. Mathias & Tawari Kitomari (1967) H.C.D. 425
The appellant is a Tanzania registered Company affiliated to a Dutch Co. The
appellant had entered into a standard form contract with the respondent farmers for the
business of growing, buying and exporting seed beans. The company supplied stock
seeds to farmers and peasants and then the appellant would buy the harvested seed
beans and export them.

The standard contract contained “terms and conditions of agreement written in

English. The terms spelt out the rights of the appellant on the one hand and the
obligations of the peasants/farmers on the other.

The peasants did not understand English and they believed they were dealing in a joint
venture with the appellant in which they would contribute their farms, energy and time
while the appellant would contribute seeds, fertilizers, insecticides and cost of labour.

Meanwhile the contract provided that what was given to the peasants farmers was by
the way of loan deductible at the time of the sale of the produce.

The appellants sued the respondents claiming 48,007/25 as an outstanding on the

contract.

The Respondents raised a defence of non-est factum The respondents won the case.
On further appeal to the CAT the decision of the high court was upheld.

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PRIVITY OF CONTRACT
Privity of contract is the relation while exists between the parties to a contract which is
necessary to enable one person to sue another on it.

The Common Law doctrine of Privity

This is noted from the Common Law doctrine that no one can sue or be sued on a
contract to which he is not a party. Therefore it is only the parties to a contract who
acquires rights and incur liabilities under it. It is only a person who made promise or
consideration has rights and liabilities. A stranger can neither sue or be sued on the
contract.

Reference cases
Scruttons v. Midland Silicones (1962)
In this case a shipping company agreed to carry drums of chemicals belonging to P
from America to England, the contract limiting their liability to $ 500 per drum. The
shipping company hired a firm of stevedores to unload the ship and due to the
stevedores negligence the chemicals were damaged to the value of $ 1,800 per drum. P
were successful in their tort action against the stevedores, recovering their full loss.

The court held that the stevedores could not rely on the exemption clause in the
contract between P and the shipping company because they were not a party to this
contract, nor were they protected by a similar exemption clause in their contract with
the shipping company because P was not a party to this contract.

Beswick Beswick (1867)

Mr Beswick entered into an agreement with his nephew, whereby the nephew was to
take over Beswick’s business in return for a payment of £6.50p per week to Beswick
during his life and after his death £5 per week to his widow. When Beswick died the
nephew stopped the payments. Beswick’s widow sued the nephew both in her personal
capacity and in her capacity as an administratix of his estate. She failed in her personal
capacity but succeeded as administratix and was awarded a decree of specific
performance against the nephew.
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The Tanzanian Position

In Tanzania the Law of Contract Act is silent on the principle of privity of contract.

S.2 (1) (d) permits a 3rd person to furnish consideration but doesn’t allow him to sue on
the contract on the ground that although he furnished consideration he is not a party to
a contract.

In Ephraim Obongo v. Naftael Okeyo (1968) HCD 288 it was held that the principle of
privity of contract should not be applied in customary contract cases.

But the doctrine applies in non-customary contracts. In Tarlock Singh Nayar v.

Sterling General Insurance Co. Ltd. (1966) EA 144 the claimant who was not a party
to the insurance contract was held unable to sue in his own name because he was a
stranger to the contract.

Exceptions to the privity rule

1. Negotiable instruments: The Bills of Exchange Act cap.215 empowers a

holder of a bill to sue in his own name.
2. Agency: Contracts entered into through an agent may be enforced in the
same manner, and will have the same legal consequences as if the contracts
had been entered into and the acts done by the principal in person.
3. Arrangements creating trust: When a trust has been created and proved,
then the beneficiary third party, may sue on the contract in his own name.

THE CONTENTS OF CONTRACTS

A contract is made up of terms or clauses which shows what the parties have
undertaken do, and the manner of performing the agreement. Depending on the nature
of a particular contract; a contract may contain three types of clauses namely express
terms, implied terms and exemption clauses.

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1. Express terms: They can be deduced from the following:
i. Statements of the parties: In order to decide upon the
express terms of the contract it is necessary to find out what was
said or written by the parties. This is because contracts may be
oral or written, or partially oral and partially written.

ii. Representations and terms: Having ascertained what

the parties said or written it is necessary to decide whether the
statements are representations or terms.

Representations: These are statements which merely induce a

party to enter into contract.
Terms: These are party of the contract itself and make
up its contents.

How can you distinguish a term from a representation?

Certain tests are applied to decide whether a statement is a
representation or a term:

1. Intention of the parties: If the parties have indicated by

their words a particular provision to be a term the court will
follow the intention. Therefore it will be a term.
2. A statement is likely to be a term if it is made with
intention of preventing the other party from finding any defects
and succeeds in doing so. On the other hand a statement is not
likely to be a term if the person making it asks the other party to
check or verify it.
3. If the statement is such that the aggrieved party would
not have made the contract without it, then the statement will be
a term of the contract.
4. The statement made during preliminary negotiations tend
to be pre- contractual.

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iii. Collateral contracts/ collateral warranty: This is a
concept used by court to provide a remedy for what was in
effect on non-fraudulent misrepresentation such as a statement
by the defendant which could not be regarded as a term of the
main contract. This is construed as a separate and parallel
contractual obligation the breach of which damages can be
awarded.

iv. Conditions and warranties:

There are two basic types of express terms. They carry

different weights in as far as the obligations that they create. The
contractual terms which cover vital or fundamental obligations
are called conditions while the terms which cover the less vital
obligations are called warranties.

Condition: A vital term which goes to the root of the

contract. It is an obligation which goes directly to the substance
of the contract. Its non-performance, or its breach normally
entitles the innocent party to treat the contract as at an end. I.e. It
entitles the innocent party to repudiate the contract.

Warranty: A subsidiary to the main purpose of the

contract breach of which only entitles the innocent party to
damages. Here there is no right on the injured party to repudiate
the contract; there is only an action for damages. A failure to
perform it does not go to the substance of the contract.

Whether a stipulation is a condition or a warranty is a question

of the intention of the parties and this is deduced from the
circumstances of the case.

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- Where the parties state the effect of the breach, it
becomes clear whether a condition or warranty was intended.
- Where there is a breach of a condition the injured party
may elect either to repudiate the contract of claim damages.

v. Standard Form Contracts

Many agreements are not individually negotiated, indeed it
would be impossible for business to cope if every agreement had
to be negotiated by the parties. Standard form contracts are
normally used by large organizations in their contracts with
individuals. They are also used in commercial transactions. Here
only one party makes the terms while the other party has to
accept or to reject. This is mostly used in employment
contracts.

2. Exception, Exemption or Exclusion clauses

This forms part of express terms. An exemption clause is a term in a contract

which seeks to exempt one of the parties from liability or which seeks to limit
his liability to a specific sum if certain events occur, such as a breach of
warranty, negligence or theft of goods.

These terms are effective provided that they are communicated to the other
party.
Thus a party is bound by an exemption clause by signature or by notice.

Signed documents
A person who has signed a document is bound by an exemption clause there in
because in absence of fraud/misrepresentation, a person is not excused from
liability if he does not read a written contract.

Documents other than signed documents

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Where an unsigned document sets out the terms of the contract or says where
they may be found, then the acceptor may have constructive notice of the terms
and conditions, so long as the ticket or there document adequately draws the
attention of a reasonable person to the existence of such terms and conditions.
This often occurs where ticket or other document containing terms of contract
or an indication as to where they may be found, is delivered to the acceptor but
is not read by him.

Where the communication of the terms is by constructive notice the other party
has the right to assume that the conditions are reasonable and the court will
presumably strike out an unreasonable clause which had been communicated
solely by constructive notice. On the other hand any condition attaching to the
offer must be notified at the time when the offer is made, since a belated notice
is valueless.

The doctrine of fundamental breach:

Where a person has committed a fundamental breach of his contract he could
not rely exemption clauses introduced into the contract for his benefit.
However, there is no breach of contract more fundamental than the breach of a
condition.

Conditions for a valid exemption clause

i. The exemption clause should be brought to the attention of the other

party before or at the time of entering to a contract
ii. The exemption clause must be contained in the contractual document or
in the document forming part of the contract, of which reasonable
notice must have been given to the other party before the contract was
made. A document issued after the contract is made is a mere receipt or
acknowledgement of payment, it is not a contractual document and
therefore any exemption clause contained in it is devoid of any legal
effect.

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iii. Under contra preferentem rule exemption clauses are read strictly
against those wiling to rely on them.
iv. A court will either strike out or modify an exemption clause only to
protect a party when he is acting within the four corners of the contract,
deviation from the contract is regarded as a fundamental breach.

Some cases on Exemption clauses

Chapelton v. Barry UDC (1940)
The defendang provided deck chairs for members of the public who wished to hire
them for use on the beach. The plaintiff hired two chairs and the attendant gave him
two tickets after he had paid. He put the tickets in his pocket without reading them.
When he sat in one of the chairs the canvas gave way and he was injured. On the back
of the ticket issued to the plaintiff it was printed that: “The Council will not be liable
for any accident or damage arising from hire of chairs.” When the plaintiff sued, the
defendant purported to rely on the exemption clause.
It was held that Since the ticket was issued after the contract was made they were to be
regarded as a mere receipt and not contractual documents; and consequently the
plaintiff was not bound by the condition printed on the back of the receipt and was
entitled to recover damages for injuries.

Olley v. Marlborough Court, Ltd (1971)

A couple paid for a weeks accommodation in the defendant’s hotel. After paying they
went to the bedroom where they found on one of the walls a notice that “the
proprietors will not hold themselves responsible for articles lost or stolen unless
handled to the managers for safe custody.”
Certain items belonging to the wife were stolen from the bedroom. The defendants
purported to rely on the exemption clause. It was held That the contract was completed
before the couple went to their room and no subsequent notice could affect their rights.
The defendants were made liable to make good the loss suffered by the wife.

Thornton v. Shoe Lane Parking Ltd. (1971)

The plaintiff wished to park his car in the defendants’ automatic car park. At the
entrance was a notice which contained the charges and further stated: “All cars parked

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at owner’s risk”. The plaintiff inserted a coin in the automatic ticket but did not bother
to read the other words on it. These other words on the ticket referred to conditions
displayed on the premises one of which exempted the defendants from liability for
damages to the cars and injury to customers while on the park by whatever cause.
When he returned to collect his car there was an accident in which the plaintiff
sustained severe injuries. The defendants purported to rely on exemption clause.
It was held that the plaintiff could only be bound if he knew that the ticket was issued
subject to the exemption clause or if the defendant did what was reasonably sufficient
to give him notice of it; but since the plaintiff had no such knowledge and since the
contract was concluded by the time the ticket was issued, no reasonable notice had
been given to the plaintiff of the exemption clause and it could not therefore apply so
as to exempt the defendants from liability for personal injury.
NB: as to the notice on the entrance, the defendant could not recover damages in
respect to the damage to his car because it was reasonably brought to his attention
before the contract was made.

L’Estrange v. Graucob Ltd. (1934)

The plaintiff bought an automatic cigarette vending machine from the defendants
under a Sales Agreement. She signed the agreement without reading it and paid a
deposit. A clause in the agreement provided: This agreement contains all the terms and
conditions under which I agree to purchase the machine specified above, and any
express or implied condition, statement or warranty, statutory or otherwise, not stated
herein is hereby excluded.”
The machine turned out to be totally defective and the plaintiff sought to recover her
deposit. The defendants pleaded the exemption clause. It was held that the plaintiff had
voluntarily signed the agreement without being induced by any fraud or
misrepresentation; she was therefore by the terms of the agreement, notwithstanding
that she never read it.

Curtis v. Chemical Cleaning and Dyeing Co. Ltd. (1951)

The defendants agreed to clean the plaintiffs white satin wedding dress trimmed with
beads and sequins. The plaintiff was asked to sign a document, but she asked why she
had to do so. The defendant’s servant informed her that the document exempted the

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defendants from liability for damages to the beads and sequins on the dress. In fact the
document contained a clause to the effect that the dress “ Is accepted on condition that
the company is not liable for any damage howsoever arising”. The plaintiff signed the
document without reading the whole of it. The dress was returned with a stain on it and
the defendants, when sued pleaded the exemption clause.
It was held that the defendants were liable for the damage to the dress. They were not
protected by the exemption clause because they had (through their servant)
misrepresented the extent of its application.

3. Implied Terms
These are in addition to the Express terms. Such terms are derived from
customs or statute. A term may also be implied by court.

(i) Customary implied terms: A contract may be subject to customary

terms not specifically mentioned by the parties. But if the parties
expressly through express terms of a contrary intention, the customary
terms will not be implied.

(ii) Statutory implied terms: Certain laws such as the Sale of Goods Act
provide for implied terms which relate to title, description, fitness for
the purpose and quality and certain of them cannot be excluded.

(iii) Judicial implied terms: Court may imply a term into a contract
whenever it is
necessary to do so in order that the express terms decided upon by the
parties shall have the effect which was presumably intended by them.
The judge regards himself as doing what the parties would have done in
order to cover the situation.

DISCHARGE OF A CONTRACT

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A contract is discharged when the obligation created by it ceases to be binding on the
promisee who is then no longer under a duty to perform his part of the agreement.
Discharge may take place in various ways:

(a) Discharge by agreement: Parties can decide to discharge the contract by

mutual agreement. This can either be by way of a waiver, accord and
satisfaction or by a novation.
i. Waiver
This is applicable to executory contacts where a contract has been
performed partly as the case of executed contracts, a party with a right
to demand performance many agree to waive his rights. Thus the other
party is discharged by a waiver.
ii. Satisfaction and accord
Accord refers to agreement and satisfaction refers to consideration that
is to provided to a party who has performed partly at the time of the
agreement to discharge the contract. This therefore happens in
circumstances where one party will have performed some part of the
contract while the other will have not.
iii. Novation:
This happens where there is a contract in existence and a new contract
is substituted for it. This must take place with the free consent of all
parties concerned.

(b) Discharge by performance

This happens where all parties fulfill their obligations in the contract. The
contract then comes to an end.

(c) Discharge by breach

Breach doesn’t actually discharge a conduct, but it may in some

circumstances give the innocent party the right to treat it as discharged if he
so wishes. This can take several forms:-

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i. Express repudiation/renunciation before the time set for

performance.
ii. Failure to perform a contract. This is the most usual form
e.g. a seller failing to deliver goods on appointed time.
iii. Some action of one party may make performance
impossible e.g. A agrees to marry B but before he marries
C.

(d) Discharge by subsequent impossibility (or Frustration)

A contract my become impossible to perform because of certain

circumstances.

1. Intervention of law: A law may be passed which renders performance

of contract illegal
2. Destruction of subject matter.
3. Death, Insanity, incapacitating illness. This apply to contracts for
personal services.

REMEDIES FOR BREACH OF CONTRACT

Where a party breaches the contract, the other party may invoke one of the following
remedies depending on the nature of the breach.

(i) Damages: The party whose rights have been violated may claim
compensation in money form to cover the damage suffered due to the
breach. The object is to put the injured party as near as possible in the same
position, so far as money can do, as if he had not been injured. Damages
may be liquidated, unliquidated, special, nominal, special or compensatory.
The damages recoverable for breach of contract are governed by the rule in
Hedley v. Baxendale (1854) which states that:-

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“where two parties have made a contract which one of them has broken,
the damages which the other party ought to receive in respect of such
breach of contract should be, either such as may fairly and reasonably be
considered arising naturally, ie. According to the usual courser of things,
from such breach of contract itself or such as may reasonably be supposed
to have been in the contemplation of both parties at the time they made the
contract as the probable result of the breach of it.”

This is the general rule. The plaintiff can only recover for loss arising
naturally from the defendant’s breach or for such loss as was in the
contemplation of both parties at the time when the contract was made. In
this was it is sought to do justice to both parties.

In Hedley v. Baxendale (1854)

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

(ii) Restitution: This is a remedy available to an innocent party who has

performed part of the contract. Here the innocent party claims back his
performance or its reasonable value.

(iii) Specific Reliefs (Equitable Reliefs)

These include:

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- Specific performance: Here the innocent party ask the court to
order the breaching party to do according to the terms of the
contract. It is a discretionary remedy. This remedy will not be
granted if damages would be an adequate remedy. It is not available
in respect of contracts requiring personal services.

- Injunction: The court will be asked by the innocent party to order

the breaching party to undo a breach of contract. Eg. He may be
ordered to remove an advertisement erected in breach of a contract.
Injunction can be granted prevent the breach of a reasonable
restraint of trade clause.

In Warner Brothers v. Nelson (1936), an Actress agreed to act for

the Company and undertook that she would not act for anyone else
during the period of the agreement without the company’s written
consent. It was held that she could be restrained by an injunction
from breaking this undertaking. This did not force her to work for
the company nor did it prevent her from obtaining different types of
work.

- Rescission: The party may seek to rescind the contract. This will be
granted only if the party seeking to rescind was not at fault and
provided justice can be done to the other party by imposing
conditions.

- Rectification: This remedy will be granted where there has been a

mistake not in the actual agreement, but which come into existence
when the agreement is put into writing. Here equity will rectify the
written document so that it coincides with the true agreement of the
other parties. For this to apply three things must be satisfied: that the
terms were clearly agreed between the parties; that the agreement

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continued unchanged up to the time it was put into writing; and that
the writing fails to express the agreement of the parties.

(iv) Quantum Meruit (so much as is deserved)

This means payment of so much as the party doing the service deserves.
This is based on the implied condition that a party deriving benefit from a
service agrees to pay for it. Such cases are common in quasi-contracts. This is
can be claimed where either work has been dine or accepted under a void
contract or where one party abandons a contract. The injured party, instead of
claiming damages, may claim for what has been done under the contract. The
claim is not based on the original contract, but on an implied promise by the
other party arising from the acceptance of executed consideration.

SALE OF GOODS

The law relating to sale of Goods is found:

(i) In the sale of Goods Act, Cap. 214
(ii) In decided cases
(iii) The rules of the Common Law as modified by Equity are also applicable in
areas which are not dealt with by the Act.

Definition: A contract of sale of goods is a contract whereby the seller transfers or

agrees to transfer the property in goods to the buyer for a money consideration called
the price.
S.2 (1) - “Contract of sale” includes an agreement to sell as well as a
sale.
- “Sale” includes a bargain and sale as well as a sale and delivery.

Look for “buyer” & “seller”, “goods”, “property”, “delivery”.

The definition covers the following:-

(a) A contract of sale in which the property in goods is transferred from the saler to
a buyer.
(b) an agreement to sell in which the transfer of property takes places at future or
on fulfilment of certain conditions.

Formation of contract of sale:

S.3 (1) Definition.: A contact of sale of goods is a contract – consideration for

sale must consist wholly or in part of money.
S. 3 (2) - form of contract of sale
S. 3 (3) - a sale v. An agreement to sale.
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S. 3 (4)conclusion of Agreement to sale.

Formalities of the contract

S. 5 - How contract of sale is made

(i) In writing (either with or without seal)
(ii) Orally
(iii) Implied.

S. 6 (1) Contact of sale for two/more hundred shillings is required to be in

writing.

S. 6 (2)This apply to Executory contracts.

S. 6 (3)Acceptance.

NATURE OR PARTIES:

- Capacity of parties: Capacity to buy and sell is regulated by the general law
concerning capacity to contract, to transfer and to acquire property:
- Persons who are incompetent to contact can also enter into a
contract to sale. But these contracts must be for necessaries and
they will be liable to pay a reasonable price for them.

SUBJECT MATTER OF CONTRACT

The subject matter of sale of goods contract are goods. The definition of goods show
that it is only the movable property which qualifies as goods under these kind of
contracts. Therefore the subject matter of the contract of sale of goods does not include
the immovable property eg. Land and things which are permanently attached to land.

S.7 Existing or future goods

S. 8 Sale of perished goods = void
S. 9 Goods perished after agreement to sale = voidable.

VALUE OF GOODS

The Value of Goods is ascertained by Price.

How is price ascertained/determined?

- (i) It may be fixed by the contract

(ii) It may be left to be fixed in manner provided by the contract (e.g. by a
valuation/or an arbitration.
(iii) It may be determined by the course of dealing between the parties (e.g.
previous transactions between them or any relevant custom of the
trade/profession.

S. 10 (1)

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- It should be noted that where the price is not determined in
accordance with the above provisions, the buyer must pay a
reasonable price: Reasonable price is a question of fact dependent
on the circumstances of each particular case. S. 10 (2).

S. 11 - Also if the agreement to sell is dependent on the terms that the price
is to be fixed by the valuation of a third party, and such third party
cannot or does not make such valuation the agreement can be avoided
(is voidable).

- But (i) where the goods or part thereof have been delivered to the
buyer and he has appropriated them to his use, the buyer must pay a
reasonable price for them.

- Where such third party is prevented from making the valuation by

the fault of the seller/buyer, the party not in fault may sue for
damages against the party in default. S. 10 (3).

- It is difficult to see how the buyer would be able to prevent

valuation but presumably the Act is concerned to cover all
possibilities.

CONDITIONS & WARRANTIES

The distinctions between warranties and conditions are important because of the
difference in remedies that follow in case of breach.

Under the Law of contract, two types of statements are made in the course of
negotiating an agreement namely
(1) the pre-contractual i.e. representations

(2) contractual – i.e. the terms of contract which are either conditions or warranties.

Here the second category of statements are concerned; and the consequences of the
breach of each are emphasised.
Under the law of contract the following are the remedies for the breach:-

(a) Breach of condition – here the aggrieved party may elect either
(i) To repudiate the contract by rejecting the goods
With no liability to pay price or, if the price has been paid, it ma be recovered.

(ii) To treat the contract as subsisting but to claim

for damages.

(b) Breach of Warranty: The aggrieved party has no right to repudiate the contract,
but may sue for damages.

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NB: Unlike in the Law of contact where we were concerned with express statements
made by the parties; here we are concerned with the conditions and warranties
implied into contacts for the sale of goods by the sale of goods Act, Cap. 214,
and how they are defined by the Act.

The Act does not define a condition but a condition may be said to be a material term
or provision which, while going to the root of the contract, falls short of non-
performance.

A warranty is defined under S. 2 (1) of the Act as an agreement with reference to

goods which are the subject of a contract of sale; but collateral to the main purpose of
the contract, the breach of which gives rise to claim for damages, but not the right to
reject the goods and treat the contract as repudiated.

It should be understood that although the Act uses the word “collateral” which gives
the impression that a warranty is a term outside of the contract, a warranty in the
intention of the Act is a term vide the contract but of a minor description which does
not go to the root of the contract.

How to distinguish a warranty from a condition?

The Act does not say how we are to distinguish between conditions and warranties.

Under S. 13 (1) (b) whether a stipulation is condition or a warranty depends in each

case on the construction of the contract.

- We can looks at the surrounding circumstances and contract to establish whether a

provision is a condition or a warrant.

- It should be borne in mind that a stipulation may be a condition, though called a

warranty in the contract.

- Furthermore, where a contract of sale is subject to any condition to be fulfilled by

the seller, the buyer may waive the condition, or may elect to treat the breach of
such condition as a breach of warranty, and not as a ground for treating the contract
as repudiated. (S. 13 (1) (a).

- Where a contract of sale is not severable and the buyer has accepted the goods or
part thereof, the breach of any condition can be treated as breach of warranty and
not as a ground for rejecting the goods and treating the contract as repudiated
unless there be a term of contract express or implied to that effect.

- Where the conditions’ or warranties’ fulfilment are excused by law or reason of

impossibility or otherwise they cannot be affected by the Act S. 13 (2).

Implied conditions and warranties in a contract of sale includes the following:

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A: TITLE (1) Conditions as to title: Unless the circumstances show
different intention, there is an implied condition on the part of
the seller that in case of a sale he has the right to sell the goods,
and in case of an agreement to sell, he will have the right to sell
the goods at the time when the property is to pass. S. 14 (a), (see
also Rowland v. Divall, 1923) in which it was held that a person
who buys goods to which the seller has no title, is allowed to
recover the whole of the purchase price even though he has had
some use and enjoyment from the goods before the is
dispossessed by the true owner.

(2) Warrants as to title:

(i) Quiet Possession: Unless the circumstances of the

contract are such as to show a different intention, there
is an implied warranty that the buyer shall have and
enjoy quiet possession of the goods. S. 14 (b).

(ii) Encumbrances: Unless the circumstances of the

contract are such as to show a different intention, there
is a implied warranty that the goods shall be free from
any charge/encumbrance in favour of any third party,
not known or declared to the buyer before or at the
time when the contract is made 14 (c).

B: TIME: (a) Payment: The Act provides that, unless a different intention
appears from the contract by stipulations, the time of payment is not
deemed to be of essence in a contract of sale. Whether any other
stipulation as to time is of essence in the contract or not depends upon
the terms of the contract S. 12 (1). The effect of this seems to be that,
failure to pay on time is a breach of warranty rather than a breach of
condition.

However, the seller can provide expressly for right of re-sale in the absence of
prompt payment and this right is implied where the goods are perishable. In this
case prompt payment is a condition rather than a warranty

(b) Delivery

The Act is silent on the time of delivery of the goods. But English
cases show that where time for delivery is fixed by the contract, failure
to deliver or allow collection on time is a breach of condition and the
buyer can reject the goods seen though they are not damaged or in any
way affected by the delay. (Re: Bowes v. Sand, 1877).

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However, the time of delivery may be waived by the buyer and such a
waiver is binding even though the seller has given no consideration for
it. Re: Richards (Charles) Ltd. v. Oppenheim (1950).

C: QUALITY AND FITNESS:

Generally the contracts of sale are governed by a latin maxim Caveat Emptor
which means buyer beware. That whoever buys must be aware of all defects
obtainable in the goods.

There is no implied warranty or condition as to the quality or fitness for any

particular purpose of goods supplied under a contract of sale except as provided
by the statute – S. 16.

These exceptions include: -

(a) Where the buyer expressly or impliedly makes known to the seller the
particular purpose for which goods are required so as to show that the
buyer relies on the seller’s skill of judgment and the goods are of
description which it is the seller’s business to supply. Here there will
be an implied condition of fitness for such purpose 16 (a).

(b) Where goods are bought by description from a seller who deals in
goods of that description there is an implied condition that the goods
shall be of merchantable quality.

(c) An implied condition or warranty as to quality of fitness for a particular

purpose may be annexed by the usage of trade.

NB: An express warranty or condition does not negative a warranty or

condition implied by the Act.

D. SALE BY DESCRIPTION:

S. 15 provides that where there is a contract for the sale of goods by

description, there is an implied condition that the goods shall correspond with
the description.

E. SALE BY SAMPLE:

S. 17 (d) – Definition of sale by sample.

S. 17 (2) conditions of a contract of sale by sample:

(i) There is an implied condition that the bulk shall correspond with the
sample in quality.
(ii) There is an implied condition that the buyer shall have a reasonable
opportunity of comparing the bulk with the sample.

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(iii) There is an implied condition as to freedom from any defect, rendering
them unmerchantable which would not be apparent on reasonable
examination of the sample.

TRANSFER OF PROPERTY IN GOODS

The provisions of the Act regarding the transfer of property in the goods are
important because:
a) the parties to contract of sale do not usually express their intentions as to
the passing of the property.
b) the risk normally passes when the property passes and the seller can in
general terms only sue for the price as distinct from damages if the property
has passed. This is under the Maxim “res perit domino” (i.e. A thing
perishes to the Disadvantage of its owner).

The following are the principles which govern the passing of property in goods.

(1) Where the goods are specific/ascertained – S. 19

Generally, the property in this case is transferred to the buyer at such

time as the parties to the contract intend it to be transferred.

For the purpose of ascertaining the intention of the parties regard shall
be had to the terms of the contract, the conduct of the parties and
the circumstances of the case.

Therefore an obligation for example to insure is an indication that he

person who insurers, has the risk and, by inference the property.

Section 20 of the Act provides for the rules of ascertaining intention as

to time when property passes. There are five rules under this provision
to that effect.

Rule 1. Where there is an unconditional contract for the sale of

specific goods, in a deliverable state, the property in goods passes to the
buyer when the contract is made.

Rule 2. In the case of specific goods, in which the seller is bound to do

something to the goods for the purpose of putting them into a
deliverable state, the property doesn’t pass unless such a thing is done
and the buyer has notice thereof. Therefore in case of specific goods
not in a deliverable state, the property doesn’t pass until the seller
puts them into a deliverable state and the buyer is notified thereof.

Rule 3. In the case of conditional sale of specific goods: Where there

is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test or do some other act or thing
with reference to the goods for the purpose ascertaining the price, the

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property does not pass until such act or thing is done and the buyer
has notice thereof.

Rule 4. In the case of “sales on approval”, or in cases of “sale or

return”, or other similar terms; the property passes to the buyer by either
of the two ways:-
(a) When he signifies his approval or acceptance to the seller or
does any other act adopting the transaction e.g. pledging the
goods with a third party.

(b) If he does not signify his approval or acceptance to the seller but
retains the goods without giving notice of rejection, then the
property passes on the expiry of a reasonable time. This rule
only applies if it is the buyer who retains the goods. The seizure
and retainment by creditors of the buyer will not be counted as
passing the title.

NB: Rules 2, 3 & 4 are concerned with certain types of conditional

contracts of sale, whereas rule 1 deals with all unconditional
contracts of sale.
- Rule 3 applies only to acts which must be done by the seller.

Rule 5: Where there is a contract of sale of ascertained or future goods

by description and goods of that description and in a deliverable
state are unconditionally appropriated to the contract, either by
the seller with the assent of the buyer or by the buyer with the
assent of the seller the property in the goods passes to the buyer.

- Where in pursuance of the contract, the seller delivers the goods

to the buyer or to a carrier or other bailor or custodian (whether named by the
buyer or not) for the purpose of transmission to the buyer and does not reserve to
right of disposal, he is deemed to have unconditionally appropriated the goods to
the contract.

NB: Under S. 21 The seller may reserve the right of disposal by the terms of the
appropriation or contract until certain conditions are fulfilled. In such a case
even if goods are delivered to the buyer or to a carrier or other bailees for the
purpose of transmission to the buyer the property in the goods does not pass
unless the conditions imposed by the seller are fulfilled.

(2) Where the goods are unascertained:

S. 18 provides that where there is a contract for the sale of unascertained goods,
no property in the goods is transferred to the buyer unless and until the
goods are ascertained. This must be read with rule 5 (1) of section 20 which
emphasizes on the assent which may be express or implied and may be given
before or after the appropriation is made. The necessity for the buyer’s assent
to appropriation gives rise to difficulties where a consumer orders goods by
post.

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Where under a commercial contract the seller is required to ship the goods to
the buyer the shipping is regarded as an unconditional appropriation and the
assent of the buyer is assumed (Bames v. Common wealth (1939).

NOTE: Under S. 22 it is provided that unless otherwise agreed, the goods remain at
the seller’s risk until the property therein is transferred to the buyer, and when the
property therein is transferred to the buyer, the goods are at the buyer’s risk whether
delivery has been made out or not. But where delivery has been delayed through the
fault of either the buyer or seller the goods are at the risk of the party in fault as regards
any loss which might not have occurred but for such fault.

However the duties and liabilities of either the seller or buyer as a bailee or custodier
of the goods of the other party are not affected by this provision. Therefore the seller
must take proper care of the goods even though the buyer is late in taking delivery of
them.

Read also: SS. 23, 24, 25,26, 27, 28.

PERFORMANCE OF CONTRACT OF SALE

S. 29. Duties of Seller & Buyer

• The seller’s primary duty is to deliver the goods to the buyer or to allow
delivery of the goods to take place.
• The buyer’s primary duty is to accept the goods and pay for them in
accordance with the terms of the contract of sale.
The two duties by each party must be concurrent unless otherwise agreed (S. 30)

Rules as to delivery of the goods (S. 31)

Section 2 defines delivery as a voluntary transfer of possession from one person to

another. Delivery may take any of the following forms:-
(a) by physical transfer of the goods, as where the goods are handled to the buyer
with the intention of transferring possession.

(b) by delivery of the means of control, as where the key of a warehouse/store is

handled to the buyer.

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(c) by attornment, as where the goods are in the possession of a third party e.g. a
warehouse-man who acknowledges to the buyer that he holds the goods on his
behalf. Re: S. 31 (3).

(d) by delivery of documents of little, as where a bill of lading representing the

goods is delivered.

(e) by constructive delivery, as where the buyer already has possession of the
goods as a bailee e.g. in a hire purchase.

PLACE OF DELIVERY

- The seller’s duty to deliver does not mean he must necessarily take or send the
goods to the buyer.

- The place of delivery, in absence of express agreement to the contrary, is the

place of business of the seller or if he has no place of business, his residence (S.
31 (1).

But if the contract is for the sale of specific goods, which to the knowledge of the
parties when the contract is made, are in some other place, then that place is the
place of delivery. (S. 31 (1) proviso.

Therefore, in absence of a contrary intention, the buyer is under a duty to collect

the goods.

TIME OF DELIVERY

Where under the contract of sale the seller is bound to send the goods to the buyer, but
no time for sending them is fixed, the seller is bound to send them within a reasonable
time. (S. 31 (2) and at a reasonable hour (S. 31 (4)
What is a reasonable time/hour in both cases is a matter of fact.

QUANTITY OF GOOD DELIVERED

Where the seller delivers to the buyer a quantity of goods less than he contracted to
sell, the buyer may reject them, but if he accepts them, he must pay for them at the
contractual rate – S. 32 (1).

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Where the seller delivers to the buyer a quantity of goods larger than he contracted to
sell, the buyer may accept the goods included in the contract and reject the rest or he
may reject the whole S. 32 (2).

Where the goods delivered are mixed with goods of a different description not
included in the contract, the buyer may accept the goods which are in accordance with
the contract and reject the rest, or he may reject the whole S. 32 (3).

However, these provisions as to delivery are subject to any usage of trade, special
agreement or course of dealing between the parties. (S. 32 (4).

Also the buyer’s right to reject may not exist if the differences are microscopic because
the law does not concern itself with trifles (De minimus non curat lex).

Delivery to a Carrier:
Where the seller is authorised/required to send the goods to the buyer, delivery of the
goods to the carrier, whether named by the buyer or not, for the purpose of
transmission to the buyer, it is prima facie (on the face of it) deemed to be a delivery of
goods to the buyer.

See also - S 34 (2) - Seller’s duty to contract carrier

S. 34 (3) - Insurance on sea transit
S. 35 Risk when goods are delivered elsewhere than at place of
Sale.
S.36 Buyer’s right of examining the goods
S. 37 Acceptance
S. 39 Liability of buyer for neglecting or refusing delivery of goods.

BREACH OF CONTRACT OF SALE OF GOODS

The contract of sale may either be breached by the seller or the buyer. In either case,
the wronged party is entitled to certain remedies.

Remedies of the seller

These accrues when there is a breach by the buyer. The breach by the buyer must
affect the payment to the seller. These remedies may be divided into two main groups
namely real remedies against the goods and Personal remedies against the buyer.

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1. Real remedies against the goods: Under S. 41 (1) it is provided that even if the
property in the goods has passed to the buyer, the unpaid seller of goods has by
implication of law the following remedies:

(i) A lien on the goods or the right to retain them for the price while he is
still in possession of them. – see also SS. 42 – 44.

(ii) In the case of the insolvency of the buyer, a right of stopping the goods
in transit after he has parted with the possession of them. – SS. 45 – 47.

(iii) A right of re-sale as limited by the Act SS. 48 – 49.

S. 41 (2) – Where the property has not passed to the buyer, the unpaid
seller has, in addition to his other remedies, a right of withholding
delivery.

NB: The above rights can only be exercised by an unpaid seller: An

unpaid seller is defined under S. 40 (1) to mean a seller when the whole
of the price has not been paid or tendered or a seller when a bill of
exchange or other negotiable instrument has been received as a
conditional payment and the condition on which it was received has not
been fulfilled by reason of the dishonour of the instrument or otherwise.

2. Personal Remedies against the buyer: In addition to the real remedies, the
seller has personal actions against the buyer in either of the following
categories:-

(a) Action for the price: This will be maintainable where the property in
the goods has passed to the buyer and the buyer wrongly neglects or
refuses to pay for the goods according to the terms of the contract S. 50
(1), (2).

(b) Action for damages: This is maintainable where the buyer wrongfully
neglects or refuses to accept and pay for the goods, S. 51 (2) Estimation
of damages – S. 51 (2).

Remedies of the Buyer:

1. Rejection of the goods: The buyer may repudiate the contract and reject the
goods where the sellers is in breach of a condition.

- Where the buyer rejects the goods, the property reverts to seller, and the
buyer has no lien on the goods for the return of money paid by him
under the contract.

- The Buyer is not bound to return the rejected goods unless otherwise
agreed S. 38.
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- The right to reject the goods will be lost where the property in them has
passed to the buyer and they have been accepted by him. Thus a breach
of condition will have to be treated as a breach of a warranty and
rescission will not be possible in this case.

2. An Action for Damages: The buyer may be able to bring up an action for
damages for either:-

(i) Non-delivery of goods – S. 52 (1), (2), (3)

(ii) Breach of condition or warranty – S. 54
(iii) Detinue and conversion:- This is available only where the property has
passed to the buyer.

3. Specific performance: This is common where the goods are of peculiar value
or great rarity. But this remedy is rarely available because similar goods are
obtainable and an award of damages is adequate. See S. 53

Additional notes:
Cases: Bishopsgate Motor Finance Corporation v. Transport Brakes Ltd. (1949)
1 KB 332; Denning L.J.
“In the development of our law, two principles have striven for mastery. The
first is for the protection of property: no one can give a better tittle than he
himself possesses. The second is for the protection of commercial transactions:
the person who takes in good faith and for value without notice should get a
good title. The first principle has held sway for a long time, but it has been
modified by the common law itself and by statute so as to meet the needs of our
times.”

Cundy v.Lindsay (1897) AC 456

The plaintiffs received orders in writing from one Blenkarn. The order papers
were headed “Blenkiron & Co., 37 Wood Street. In the same street there was a
respectable firm called Blenkiron & Co. The plaintiffs believed that the orders
came from Blenkiron & Co. and not from any other person. They sent a large
consignment of goods. Blenkarn received the goods and sold them to the
Defendant who acted in good faith. The plaintiffs sued the Defendant for the
return of the goods arguing that there was no contract between them and
Blenkarn because by accepting the offer they believed on reasonable grounds
that they were accepting an offer from Blenkiron and Co. and not from any
other person. They further argued that they made mistake as to the identity of
the person who they were contracting, which mistake rendered the contract
void ab initio. Deciding in favour of the plaintiffs, the House of Lords reasoned
as follows:
a. that the plaintiffs never knew of Blenkarn
b. that the plaintiffs never intended to deal with him

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c. That when his offer was accepted by Blenkarn the plaintiffs thought that
they were entering into a contract with Blenkiron & Co., and
d. That between the plaintiffs and Blenkarn there was no consensus ad idem
which could lead to an agreement.
Thus the plaintiffs were able to get back their goods because they still had title
in goods. Blenkarn could not pass any to the defendant on grounds that no one
can give that which he does not have.(nemo dat rule).

LAW OF AGENCY

The Nature of Agency

Agency does not allow a brief description or a short and significant sentence. But it is
not impossible to make an attempt to summarise shortly what is involved in the
concept of agency. Such a summary provides the guide to a scholar in search of
features which distinguish agency from other legal relationships.

What is agency?
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“Agency is the relationship that exist between two persons when one, called the agent,
is considered in law to represent the other, called the principal, in such a way as to be
able to affect the principal’s legal position in respect of strangers to the relationship by
the making of contracts or the disposition of property.”

It should be noted that the concept of agency here is defined in terms of its
consequences. That a person is an agent only in so far as his acts can result in some
alteration of the legal situation of the one for whom he acts or purports to act. The
Agent must have the authority and capacity to create legal relations with a third party
for another person (principal).

The existence of such a relationship does not depend on the terminology but it depends
on the true nature of the arrangements or the exact circumstances of the relationship.

Important terms in the definition

(a) The acts of the agent must only affect the principal’s legal position: i.e. rights
against and liabilities towards other people. – The law of agency has no
relevance to social or other non-legal obligations.

Examples

⇒ A man who sends his wife to a wedding to represent him and to congratulate
the bride and groom on his behalf. Here the law of agency doest apply because
this representation is aimed to serve a social purpose.

But:
⇒ A mother who tells her son to buy milk from the milkman is making an agent
of him just as a company makes agents of directors who enter into contractual
obligations on behalf of the company. This is because the son here enters into a
transaction with the milkman which creates rights and liabilities to the mother.

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(b) It is the effect in law of the way the parties have conducted themselves and not
the conduct of parties considered apart from the law or the language used by
the parties, that must be investigated, in order to determine whether the agency
relationship has come into existence.

What are the important ingredients of agency relationship?

Agency relationship is not an easy thing to prove. Therefore two factors have always
been considered in the light of their necessity for the understanding of the legal nature
and function of the agency relationship. These are consent and authority.

(i) Consent: - The leading writers have brought up the idea that principal and
agent have agreed, either in the form of a contract or otherwise that the
agent should represent the principal.
Thus in Garnac Grain Co. Ltd. Inc. v. HMF Faure and Fair Clough Ltd
(1967) 2 All E.R. 353 it was held that:
“The relationship of principal agent can only be established by the consent
of the principal and the agent. … If they have agreed to what in law
amounts to such a relationship, even if they do not recognize it themselves
and even if they have professed to disclaim it.”

The above view has been criticized on two grounds. Firstly, it suggests that
consent is a basis of agency whereas it is a settled principle that it is for the
law to determine what is/is not agency. It is the question of legal
construction rather than of mechanical determination.

Secondly, it excludes situations in which the parties have not truly

consented to any such relationship, yet such a relationship arises.

In Boardman v. Phipps (1967) 2 A.C. 46 it was held that parties to whose

acting as agents no consent had ever been given could be treated as “self
appointed agents.”

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Therefore, it is not satisfactory to base agency upon consent, even though,
in many instances, consent is a relevant and possibly a determining factor in
the existence as well as the scope of an agency relationship.

(ii) Authority:- This is the cornerstone of the agency relationship. It is at the

core agency relation. Under the law of agency authority is divided into two
major categories namely actual authority and implied authority.
 Actual authority: This arises out of the act of the parties: Here
there is an agreement with the agent that the principal will be
bound by the acts of the agent. It is also called express authority
because the parties creates their relationship through an express
agreement. This may be a written or oral agreement.
 Apparent / implied authority: This arises out of the conduct of
the parties basing on the relation which exist between the two
parties. Here customs and usages of a particular place, trade, or
market come into play. It is also referred to as agency by
estoppel.

Therefore, authority forms the essence of agency because it through the

agent’s power to affect the principal’s legal relations with the outside
world that the law of agency is centered.

FORMATION OF AGENCY / CREATION OF AGENCY

Prerequisites

Capacity
In Tanzania, agency, like a contract requires full contractual
capacity.(s.11 Law of Contact Act) Therefore both the agent and the
principal needs to be competent to contract for there to be a valid
agency relationship. (see s. 135 & 136 L.C.A.) The rationale here is that
an agent is a person who affects the principals legal relation with the
outside world. This is in most cases done through contracts. That the
agent enters into contracts with the third parties for and on behalf of the

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principal. Therefore it will be useless if the agent lacks the contractual
capacity and in the same way it will be if the principal has no
contractual capacity.

However in some countries, capacity to contract is not necessary to

enable person to represent another as agent. This is justified by the fact
that an agent becomes just a go between and he is not a party to a
contract entered into for and on behalf of the principal.

But there is a consensus agreement on the point that no one can enter
into a contract through an agent, which is outside the principal’s
contractual capacity.

Consideration
In the law of agency, for there to be a valid agency consideration is not
an essential requirement like in contracts. Therefore parties may create
an agency relation whether there is or there is no consideration. (s. 137
L.C.A.)

How can an agency relationship be created?

Agency may be created in any one of the following ways: -
1. By an actual authority to contract given by the principal to the
agent. (s. 138 & 139 L.C.A.)
2. By the principal’s ratification of a contract entered into by the agent
on his behalf but without his authority. (s.148 L.C.A.)
3. By an ostensible / apparent authority conferred by the principal on
the agent even though no actual authority has been given. (s. 138 &
139 L.C.A.)
4. By a legal presumption in the case of a married woman cohabiting
with her husband.
5. By implication of law in cases of necessity.

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Explanation

Actual authority
Here the agent and principal will enter into an express agreement creating the agency.
Here the parties agree as to the nature, the purpose and the limits of the authority given
to the agent by the principal. So here both parties consent as to the creation of such a
relationship.

Ratification
Here the principal subsequently ratify, i.e. adopts the benefits and liabilities of a
contract made on his behalf. Ratification places the parties in the position which they
would have occupied if the agent had the authority at the time he made the contract.
Therefore where the acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies
them the same effect will follow as if they had been performed by his authority. (s. 148
L.C.A.)

In Wilson v Tumman (1843) it was held that:

“An act done for another by a person not assuming to act for himself, but for such
other person, though without any precedent authority whatever, becomes the act of the
principal, if a subsequently ratified by him, is the known and well established rule of
law. In this case the principal is bound by the act, whether it be for his detriment or his
advantage, and whether it be founded on a tort or a contract.”

The situation in which an agent acts without authority may occur in either of the two
ways: -

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(a) Where the agent enters into contract without the authority of his principal
in the sense that there was no such a relationship and he was not the agent
in fact.
(b) Where the agent enters into a contract which exceeds the authority
conferred to him by his principal.

Form of ratification
Ratification may be express or may be implied in the conduct of the person on whose
behalf the acts are done. (s. 149 L.C.A.) Therefore if for example the agent makes an
authorized contract to buy goods, and the principal receives the goods and fails to
return them or uses them, he has ratified by implication of law. No formal ratification
is required.

Conditions for ratification to be valid

1. The agent must purport to act as agent for a principal who is in contemplation.
Thus, the agent must contract expressly as an agent for a principal, who must be
named or described as to make it possible for the third party to identify him.
2. The principal must be inexistence when the agent makes the contract. Thus, a
prospective agent cannot enter into contract on behalf of a company before
incorporation, and the company cannot ratify such a contract after its
incorporation.
3. The principal must have to capacity to contract at the time of contract and
ratification.
4. A void contract cannot be ratified but a voidable contract can be ratified. If a
contract is voidable due to misrepresentation or fraud, then the principal becomes
liable for the fraud or misrepresentation of the agent.
5. A forgery cannot be ratified. Thus, if a document contains a forged signature of
the principal, he cannot ratify the same so that the document becomes good.
6. Ratification must be of the whole contract. Thus, partial ratification is not valid.
(s. 151 L.C.A.)
7. Ratification can only be retrospective in its operation.
8. Ratification should not injure the third party (s.152 L.C.A.)

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9. The principal must have the knowledge of the facts of the contract to be ratified.
(s.150 L.C.A)

Apparent / Ostensible Authority

The principal may by words or conduct, create an inference that an authority has been
conferred upon an agent even though no authority was ever given in fact.

This arises where the principal holds out a person as his agent for the purpose of
making a contract with a third party and the third party relies on that fact. Thus, such
apparent authority often arises from the course of dealing between the parties.

This doctrine of ostensible authority or apparent authority as it is usually called, is

really an application of the principle of estoppel. Estoppel means that a person is not
permitted to resist an inference, which a reasonable man would draw from his words or
conduct.

The doctrine of ostensible authority is hardly applicable where a person had never at
any time had authority to contract and is more likely to apply where an authorized
agent goes beyond the limits of his actual authority.

In Freeman & Lockyer v. Buckhurst Park Properties (Mangal), Ltd. (1964) 2QB 480
the articles of a company contained power to appoint a managing director. With the
knowledge and approval of the board of directors, K. acted as managing director,
although he was never appointed to this post. K instructed the plaintiffs, a firm of
architects, to do certain work for the company. The company disclaimed liability for
payment for this work on the ground that K had no authority to contract on the
company’s behalf. The plaintiffs sued the company unsuccessfully.

On appeal, the court of Appeal of England held that, although K had no actual
authority to employ the plaintiffs, the company had created an ostensible authority by
its conduct in permitting him to act as managing director to the knowledge of the

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board. Any Act done within the usual ambit of that ostensible authority was therefore
binding on the company.

Conditions for Apparent / Ostensible authority to be Valid

(1) The representation must be made by or with the authority of the principal.
Ostensible authority cannot be created simply by a representation of the agent
himself.

(2) The third party must rely on a representation of the agent’s authority to act as
agent. The doctrine cannot apply where the third party does not know or believe
him to be an agent.

Agency in the Case of Cohabitation

Where a married woman in cohabiting with her husband, there’s a presumption

that she has implied authority to pledge his credit for necessaries “in all domestic
matters ordinarily entrusted to a wife;
as the reasonable supply of goods and services for the use of the husband, the wife
and the children, and household, such goods and services being suitable in kind
and sufficient in quantity and necessary in fact according to the condition in which
they live.

The presumption arises from cohabitation so that once cohabitation ceases, the
trades man must prove that the husband held his wife out to have his authority to
contract.

Exceptions:-
This presumption may be rebutted by the husband in any of three ways: -
a) By showing that he had expressly warned the tradesman not to supply goods
on credit.
b) By showing that he had expressly forbidden his wife to pledge his credit.
c) By showing that his wife was supplied with a sufficient allowance for the
purpose of buying the articles without pledging his credit.

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Agency of Necessity

In certain circumstances the law confers an authority on one person to act as an agent
for another without any regard to the consent of the principal.

Such an agency is called an agency of necessity. Agency of necessity is often applied

to cases where, after the parties have created a contractual relationship, the law, in
view of some emergency confers upon one party authority to act for another or allows
an agent to exceed the authority, which has been concerned upon him.

Conditions for agency of necessity to be valid

(a) It must be shown that the course taken was only practicable one in the
circumstances.
For example: A master of a ship who finds that the cargo is perishing rapidly is
entitled to put into the nearest port and to sell the goods for the best price there
obtainable.

(b) It must be shown that he had no opportunity in the time available for
communicating with his principal.
(c) It must be shown that he acted honestly in the interests of his principal.

KINDS OF AGENTS

1. Auctioneers: These are agents whose ordinary course of business is to sell by

public auction. i.e. open sale of goods or other property.
An auctioneer is both the agent of the buyer and of the seller. He is primarily the
agent of the seller, but, upon the property being knocked down, he becomes also
the agent of the buyer.

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- The auctioneer has authority to sell, but not to give warranties as to the
property being sold unless expressly authorized by the seller.

- The auctioneer may sue or be sued on goods sold and delivered by himself as
an auctioneer even if his commission has been paid. Therefore if the seller had no
good title to the sold goods the seller together with the auctioneer and the
purchaser will be liable for conversion to the true owner despite the innocence of
the auctioneer and the purchaser.

- The seller is bound by the auctioneer’s acts, which are within his ostensible
authority even though he disobeys instructions privately given.

2. Brokers: This is an agent primarily employed to negotiate a contract between two

parties.
- Brokers are not given possession of goods or documents of title. (Fowler v.
Hollis (1872)
- They cannot sue in their own names on contracts
- They cannot sell in their own names
- Brokers unlike factors, negotiate other contracts not involving the handling of
goods by the brocker himself.
− Stock brokers – sale stocks/shares
− Insurance brokers – arrange policies of Insurance
− Credit brokers etc.

3. Factors (Mercantile Agents): A factor is an agent to whom goods are consigned for
the purpose of sale.
He gets the possession of goods, authority to sell them in his own name, and a
general discretion as to their sale. Persons who in good faith take the goods under
such a disposition, and who have no notice at the time of sale that the agent has no
authority to dispose of them, acquire a good title to them.

4. Estate Agents: These are agents who are employed to find a purchaser for property.

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- They have authority to make representations or to give warranties relating to
the property.
- But they have no authority to effect an actual contract for the sale of the
property unless expressly authorised to do. Therefore they do not have the normal
capacity an agent as the one found in the definition.
- They can be held liable to third parties as well as to their principals in case of
breach of fiduciary duty and negligent misrepresentation with respect to the
property being dealt with.
− On the event of misappropriation by an estate agent the principal cannot be
held liable.
In Sorrel v. Finch (1977) AC 728 it was held by the House of Lords after a
difference of opinion that “an estate agent possesses neither an implied nor an
apparent authority to receive and accept deposits given by third parties.”
Therefore the principal (the owner of the property) was not liable to the
prospective purchaser who had lost his deposit by reason of the impropriety of
the estate agent.

5. Solicitors and Counsel: These are agents who are necessary in the conduct of legal
business particularly, but not exclusively, litigation.
- When undertaking litigation on behalf of a client, a solicitor has implied
authority to accept process and appear for a client, but he is not entitled to
commence an action without express authority.
- As against third parties he has an ostensible authority to compromise an action or
to do any act, which is usual in his profession.
- A solicitor is liable in negligence if he acts without due care and skill in the
conduct of his business as a solicitor. But in Rondel v. Worsley (1969) 1 AC 191 it
was held that a barrister could not be sued for negligence in respect of his conduct
in court, as an advocate. They are immune.

However, in Saif Ali Sydney Mitchell & Co. (1980) AC 198 the house of lords held
that barristers were not immune from suit for negligence where the alleged neglect
related to neither advocacy no pretrial work which was so intimately connected

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with the conduct of a case that it could be said to involve preliminary decisions
affecting the way the action was conducted when it came to a hearing.

7. Others
(a) Del credere Agents: These are agents who in return for an extra commission,
called a del credere commission, promise that they will indemnify the principal
if the third party with whom they contract in respect of goods fails to pay what
is due under the contract e.g. travel agents.

In Morn’s v. Cleasby (1816) it was held that these agents were only secondarily
liable as a sureity for the person with whom they dealt (i.e. it is after the third
parties had failed to pay what is due under the contract that they would be
liable.
(b) Commercial Agents: A commercial agent may be defined as a self employed
intermediary who has continuing authority to negotiate the sale or purchase of
goods on behalf of and in the name of another person (the principal) or to
negotiate and conclude the sale or purchase of goods on behalf of and in the
name of that principal.

RESPONSIBILITY OF PRINCIPAL AND AGENT:

The rights and duties of the principal and agent depend upon the terms of the
contract, whether express or implied which exist between them. But the mere
existence of the relationship gives rise to rights and duties on both sides and it
is these that we are concerned with.

The Principal’s Duties and Responsibilities

(A) Remuneration
The most important duty of the principle is to remunerate the agent for
the services rendered. Such remuneration may be in terms of
commission or salary or both commission and salary depending on the

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circumstances of the case. The obligation to pay such remuneration to
the agent exists only where it has been created by an express or implied
contract between principal and agent.

(B) Reimbursement and indemnity

The principal must also reimburse the agent for all expenses and indemnify him
against all liabilities and claims, which the agent has reasonably incurred in the
exertion of his duties. (ss. 174 & 175 L.C.A.) This may be expressly stated in the
contract but it is usually implied.

The duty to indemnify and reimburse extend to cases where the agent has
occasioned liability by an honest mistake but not where they have raised from his
breach of duty of default.

The principal will be liable to indemnify the agent if the agent acted
within his express, implied or usual authority. In Burron v. Fitzgerald
(1840) the agent was employed to effect insurance on the principal’s
lives. He was given authority to do so in the names of the principal or
his own name (the agent’s). He did so in his own name and another
person and then claimed indemnity. It was held that the principal were
not liable since the agent had exceeded his authority.

But where a person is employed to do an act which is criminal, the employer is not
liable either upon an express or an implied promise, to indemnify him against the
consequences of that act. (s. 76 L.C.A.)

The Agent’s Duties and Responsibilities

A: Duties arising from agreement:
(i) Duty to account:
The agent is bound to account for such property of his principal as it comes into
his hands in the course of employment. He must keep accurate accounts of the

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transactions into which he enters on his principal’s behalf and produce them on
demand to his principal. (ss. 163 & 165 L.C.A.)

(ii) Duty to use Care and Skill:

The agent must perform the undertaking with due care and skill. A distinction
may exist between the standard of care to be observed by a gratuitous agent
(lower standard) and that to be observed by one who acts under contract for
reward (higher standard) but generally both are responsible to the principal for
the negligent performance of their duties. A gratuitous agency arises where the
agent renders the principal some friendly service for which there is no payment.
(s. 164 L.C.A.)

(iii) Duty to Perform

The agent must perform what he has undertaken to perform. In Turpin v. Bilton
(1843) the agent was appointed under a contract to insure the principal’s ship.
He failed to do so, the ship was lost, and the principal was therefore uninsured
at the time. It was held that the agent was liable for a breach of contract.

NB: But the agent is not obliged to perform the undertaking if it is illegal.
(Cohen v. Kittell (1889) 22 QBD 680.

(iv) Duty not to delegate

The agent may not as a general rule, depute to another person that which he has
undertaken to do. The obligation of the agent is therefore to act personally
because the relationship of principal and agent is a confidential one the
principal imposes trust in the agent.

This is because his authority is a delegated one from the principal. If he

purports to delegate the same to another person this will be a sub-delegation
and a sub-delegation is always unlawful unless authorized by law. (delegatus
non potest delegare).

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The Law of Contract Act provides that an agent cannot lawfully employ
another to perform acts which he has expressly or impliedly undertaken to
perform personally unless by the ordinary custom of trade a sub-agent may or
from the nature of the agency, a sub-agent must, be employed. (s. 142 L.C.A.)
A sub agent acts under the control of the original agent in the business of the
agency.

(v) Duty to be obedient

The agent must act in accordance with the authority, which has been given to
him. He must obey the instructions contained in his express authority (as long
as they are lawful). He must act in accordance with the trade, other customs
and usages.

(vi) Duty to respect principal’s title

The agent cannot deny the title of the principal to goods, money or land
possessed by the agent on behalf of the principal.

B: Duties arising from the fiduciary nature of the agency relationship

These duties are equitable in character and may be lumped together under a
general principle namely, “the agent must not let his own personal interests
conflict with the obligations he owes to his principal.”

This principle is manifested in the following duties:-

(i) Duty to Observe Fidelity

The agent must not put himself in a position where his duty and
interests conflict unless he has made full disclosure of his interest to his
principal specifying its exact nature and obtaining his assent.

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An agent may not depart from his exact character agent and become a
principal. Thus if a man is employed to buy or sell on behalf of another,
he may not himself sell to his principal or buy from him.

(ii) Duty not to make Secret Profits

The agent must not, except with the knowledge and assent of his
principal, make any profit out of the transactions into which he may
enter on behalf of his principal in the course of his employment beyond
the commission or remuneration agreed upon between them. Any such
profit made must be paid over the principal and the principal is entitled
to claim from the agent such benefits or profits. (s. 168 & 170 L.C.A.)

In Hippisley v Knee Brothers (1905) 1KB 1 the plaintiff employed the

defendant auctioneers, to sell certain property for him, and undertook to
pay them a commission on the sale and their out of pocket expenses,
including those of printing and advertising. The defendants received
discounts from printers and advertisers, but charged with the full
amount in the honest belief that they were entitled to keep the discounts
for themselves. It was held that the defendants were bound to account
to the plaintiff for such discount money.

Relations Between the Principal and Third Parties

The general rule is that when a principal endows an agent with actual
authority to contract on his behalf, he is bound, as regards third parties, by
all acts of the agent which are done within the limits of that authority. (Qui
facit per alium, facit per se).

There are two cases in which a principal becomes liable for the acts of his
agent:-

i. Where the agent acts within the limits of his authority.

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ii. Where he exceeds the actual limits but acts within the apparent
limits of his authority, where those apparent limits have been
sanctioned by the principal.

A principal also acquire rights against a third party under a contract

entered into by his agent on his behalf where the agent is acting within
the Limits of his actual authority.

Where the contract entered into by his agent was not authorized, the
principal must ratify that contract before he can acquire rights (as
opposed to liabilities) against the third party.

If the third party has actual notice of the lack of authority by an agent,
the principal will not be bound.

The result of agent’s making a contract between his principal and a

third party is that the agent ceases to play any role in the relationship
thus created and the rights and liabilities of the principal and the third
party are determined irrespective of any rights and liabilities on the part
of the agent.

The Relations Between the Agent and Third Parties

General rule is that the agent acquires no rights and incurs no liabilities
in respect of those contracts into which he enters in the capacity of
agent. This doesn’t apply to contracts, which the agent enters
personally. This is because the agent is not a party to the contract that
he enters into on behalf of his principal. Therefore he acquires no rights
nor liabilities under it.

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Exceptions:

(1) An agent who makes himself a party to a deed is bound

thereby even though he is described as an agent.

(II) An agent who signs his name as party to a negotiable

Instrument, such as a bill of exchange either as a drawer, endorser or acceptor will

be personally liable unless he indicates clearly that he is signing only on his
principal’s behalf.

(III) If the principles are not existence the agent incurs

Personal liability.

Where the agent acts for an undisclosed principal

An undisclosed principal is one of whose existence the third party is

unaware, so that the third party does not know that the person with
whom he is dealing is any body’s agent.

This happens when an agent contracts with a third party on behalf of his
principal but does not inform the third party that he is an agent and
appears to be himself a principal. If this happens, the doctrine of the
undisclosed principal applies. Under this doctrine the rights and
liabilities of the parties are as follows.

a) The third party can elect to sue either the principal or the
agent. This election must be within reasonable time
otherwise only the agent can be sued. Having made such
election, the third party cannot return to the other party and
sue him.
b) The undisclosed principal can sue the third party on the
contract subject to the following qualifications:

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- That the contract was duly made on his behalf, as long
as the agent acted within the scope of his authority in so
contracting.

- The undisclosed principal must be identified so as to

enable him to sue or be sued. Humble v. Hunter (1948)
12 Q.B. 310

- When a person claims as an undisclosed principal the

question sometimes arises whether the contract was
made with the agent for reasons personal to the agent
which incurred the other party to contract with the agent
to the exclusion of his principal or any one else. Greer
V. Downs Supply Co. (1927) 2 K.B.28

c) The agent can sue since he is the contracting party. But if the
undisclosed principal intervenes and brings an action against
the third party then the agent cannot sue or must discontinue
any action he has begun.
d) The doctrine does not apply where the agent has expressly
described himself as a principal.

TERMINATION OF AGENCY (s. 153)

The agreement between the agent and principal may be terminated in many ways:-

(i) By performance of the agreement for which the agency was created. For
example the completion of the business for which the agency was
created brings to an end a particular agency.
(ii) By expiration of time: This happens where the agency was created for a
definite the period.
(iii) By death or insanity of either party: This automatically determines the
agency.

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(iv) By mutual agreement: This happens where the agency was created by
the act of the parties. Therefore the parties enters into an agreement to
dissolve the agency
(v) By withdrawal of authority: This happens where the principal
withdraws his authority by dismissing the agent. Here the principal may
be sued for wrongful dismissal where he has no sufficient ground to do
so
(vi) By operation of law: This happens when a party become bankrupt. It
also happen when there is frustration. Eg. If the agency is created to
deal with a certain matter it will be frustrated by destruction of the
subject matter or where a law declares the business for which it was
created to be illegal.

Irrevocable Authority

The authority given to an agent may become irrevocable in three main instance: -

1. When it is coupled with an interest of the agent (s. 154 L.C.A)

2. When revocation would cause the agent personal loss as to where the authority
has been partly exercised. (s. 156 L.C.A)

3. When it is contained in a power of attorney or deed

REMEDIES AVAILABLE FOR THE BREACH OF AGENCY

Remedies available to Principal

(a) Dismissal: Upon discovering the agent’s misconduct the principal may dismiss
him without notice or compensation. In an action for wrongful dismissal by an
agent, the principal can rely upon the defense of agent’s misconduct for fraud.
In these circumstances the principal has a complete defence to a claim for
damages, compensation or indemnity.

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(b) Actions: The principal may also bring a number of different actions against
the agent, depending on what the agent has done or omitted to do. In these
actions the principle will be seeking for damages due to the breach of agency.
These actions may base in tort of negligence or in contract.

(c) Prosecutions: This will be available where agent’s misconduct results into an
offence. e.g. acceptance of bribe, conversion etc.

Remedies available to agent

(b) Actions: The agent may sue for breach of contract where there is a failure or
refusal to pay the agreed remuneration. The same applies where the principal
refuses to indemnify him against the expenses incurred for the purpose of the
business of the principal.

(c) Set off: If the principal brings an action against the agent, for breach of duty,
etc the agent may reply to the principal’s claim by setting-off against such a
claim the amounts alleged to be due to the agent by way of remuneration or
indemnity. This will happen when the principal sues for damages for the
breach of duty while there are claims due to the agent from the principal in
terms of remuneration which have not been settled. The agent therefore will be
admitting that he is liable to pay the damages but the amount is to be reduced
to the tune of what is due to him from the principal. Therefore he will be
praying for a set-off of the amount payable to him from the principal. But
such a claim cannot be set-off in an action for an account. He must bring a
cross suit.

(d) Lien. If the principal has not discharged his obligation of paying
remuneration/indemnity and the agent is in possession of goods belonging to
the principal, the agent is entitled to exercise a lien on such goods and retain

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possession of them until such time as the principal has satisfied the due claim
of the agents.

This is subject to the following conditions: -

→ For an agent to be able to exercise a lien, he must have lawful

possession of the goods, which are subject of lien. Therefore possession
of the goods must have been obtained by the agent in his capacity of
agent and not otherwise. In Madden v. Kempster (1807) it was held that
an agent who gained possession of a bill by misrepresentation did not
thereby acquire a lien over it.

→ An agent will lose his lien if he agrees to act, or does act in a way that is
inconsistent with the existence of a lien that would otherwise arise. This
amounts to waiver of his right to lien.

Law of Torts

In the common law, a tort is a civil wrong, other than a breach of contract, for which
the law provides a remedy. The term itself comes from French and means, literally, "a
wrong". In the French language, the phrase avoir tort translates to "to be wrong". The
analogous body of law in civil law legal systems is delict.

Tort law is distinguished from the law of contract, equity and the criminal law.
Contract law protects expectations arising from promises, equity seeks to ensure that
people act properly in certain circumstances and criminal law punishes wrongs that are

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so severe that the state has a direct interest in preventing them. Note that many wrongs
can result in liability to both the state as crimes, and to the victim as torts.

Tort law serves to protect a person's interest in his or her bodily security, tangible
property, financial resources, or reputation. Interference with one of these interests is
redressable by an action for compensation, usually in the form of unliquidated
damages. The law of torts therefore aims to restore the injured person to the position
he or she was in before the tort was committed (the expectation or rightful position
principle).

In most countries, torts are typically divided into three broad categories — intentional
torts, negligence and nuisance. Additional categories or subcategories are recognized
in some countries. Some torts are strict liability torts, in that the plaintiff may recover
by showing only that the wrong took place, and that the defendant committed the
wrong — there is no need to show the defendant's state of mind or that the defendant
breached a duty of due care.

Definition of a tort
The term "tort" is a legal term derived from the Latin word "tortus", meaning a
"wrong". In his famous treatise, Handbook of the Law of Torts, William Prosser
defined "tort" as "a term applied to a miscellaneous and more or less
unconnected group of civil wrongs other than breach of contract for which a
court of law will afford a remedy in the form of an action for damages."

The type of damages awardable in the law of tort is unliquidated damages as opposed
to liquidated damages which are mainly awardable for breach of contract. Besides
damages, in a limited range of cases, tort law will tolerate self-help, for example, using
reasonable force to expel a trespasser. Further, in the case of a continuing tort, or even
where harm is merely threatened, the courts will sometimes grant an injunction to
restrain the continuance or threat of harm.

Purposes of torts

The law of torts determines whether a loss that befalls one person should or should not
be shifted to another person. Some of the consequences of injury or death, such as
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medical expenses incurred, can be made good by payment of damages. Damages may
also be paid, for want of a better means of compensation, for non-pecuniary
consequences, such as pain.

In "The Aims of the Law of Tort" (1951) Glanville Williams saw four possible bases
on which different torts rested: appeasement, justice, deterrence and compensation.
The law tends to emphasize different aims in relation to intentional torts from those in
relation to negligence or strict liability. After Williams' article, there grew a school of
economic analysts of law who emphasized incentives and deterrence.

Categories of torts

Torts are generally categorized by two factors:

1. The level of intent that must be assessed against the tortfeasor, and
2. The interest affected by the tort.

Intentional torts

Intentional torts are any intentional acts that are reasonably foreseeable to cause harm
to an individual, and that do so. Intentional torts have several subcategories, including
torts against the person, property torts, dignitary torts, and economic torts.

Torts against the person

Torts against the person harm or restrict the person of the plaintiff. Torts
against the person include assault, battery, false imprisonment, and intentional
infliction of emotional distress.

Property torts

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Property torts involve any intentional interference with the property rights of
the plaintiff. Those commonly recognized include trespass to land, trespass to
chattels, and conversion.

Dignitary torts
Dignitary torts are torts that cause no tangible injury to a person or his property,
but rather cause intangible harm to his reputation. These may include
defamation, slander and libel, misappropriation of publicity, invasion of
privacy, and disclosure. In the United States, the First Amendment places
special limitations on the defamation of public figures with respect to issues of
public importance. Abuse of process and malicious prosecution are often
classified as dignitary torts as well.
Economic torts
Economic torts include common law fraud and tortious interference with
contractual or business relationships.

Negligence

The tort of negligence is the broadest of the torts and is the basis of most personal
injury cases. There are a number of elements common to all jurisdictions, namely:
there is a minimum standard of care that all adults must achieve in their everyday
activities; the defendant owes a duty of care to the plaintiff/claimant and breaches that
duty by doing or failing to do something; this breach must be the cause of
plaintiff/claimant's loss or damage; and, in all the circumstances, it must be fair and
reasonable to order the defendant to pay compensation to the plaintiff/claimant. These
elements are often summarized as the formula of "standard of care, duty, breach,
causation, and damages." Refer Donoghue (M’Alister) v. Stevenson (1932) AC 562
(found in the other hand out)

Nuisance

The tort of nuisance allows a claimant (formerly plaintiff) to sue for most acts that
interfere with their use and enjoyment of their land. For example, noise pollution from
airports is usually remedied through nuisance claims.
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Strict liability

Strict liability is applied in some countries to ultrahazardous activities, which present

such grave dangers that parties engaged in those activities are held liable for injuries
resulting therefrom even if they were not negligent. This theory is applied to injuries
resulting from things such as the keeping of wild animals, use of explosives, or storage
or use of radioactive materials. In English law, food safety is also subject to strict
liability, so a restaurant that causes food poisoning is liable however careful it is with
hygiene.

In some countries, strict liability is the rule in certain product liability cases, on the
theory that only strict liability can force manufacturers to always pursue the safest
possible design. It is also believed necessary to force all parties in the "chain of
commerce" to exercise the highest level of due care to ensure that products are in good
condition and are not dangerously defective. Additionally, product liability cases are
often categorized as the specific form of tort law, known as toxic tort law.

Also, in some jurisdictions, copyright infringement has been made a strict liability tort
by statute.

Torts and criminal law

In common law, many torts originated in the criminal law. As noted above, there is
still some overlap between crime and tort. For example, in English law an assault is
both a crime and a tort (a form of trespass to the person). In Tanzania there is little
distinction between assault which is a tort and a common assault which is a crime.

The difference between the two is that tort allows a person, usually the victim, (the
'plaintiff' or 'claimant' in English law) to obtain a remedy that serves their own
purposes (for example by the payment of damages to a person injured in a car accident,
or the obtaining of injunctive relief to stop a person interfering with their business).
Criminal actions on the other hand are pursued not to obtain remedies to assist a person
(although often Criminal courts do have power to grant such remedies), but to punish a
person for their actions. That explains why, for example, incarceration is usually
available as a penalty for serious crimes, but not usually for torts.
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Regardless, many jurisdictions retain a punitive element as a part of the law of tort via
concepts such as exemplary damages and 'aggravated damages'. Also there are
situations where, particularly if the defendant ignores the orders of the court, a plaintiff
can obtain a punitive remedy against the defendant, including imprisonment. Some
torts may have a public element — for example, public nuisance, — and sometimes
actions in tort will be brought by a public body. Also, while criminal law is primarily
punitive, many jurisdictions have developed forms of monetary compensation or
restitution which criminal courts can directly order the defendant to pay to the victim.

Product liability

Product liability encompasses a number of legal claims that allow an injured party to
recover financial compensation from the manufacturer or seller of a product. The
majority of product liability laws are determined at the state level and vary widely
from state to state. In Tanzania, the claims most commonly associated with product
liability are negligence, strict liability, breach of warranty, and consumer protection
claims. Each type of product liability claim requires different elements to be proven to
present a successful claim.

Products liability is the area of law in which manufacturers, distributors, suppliers,

retailers, and others who make products available to the public are held responsible for
the injuries those products cause to the consumers.

Products Liability and Negligence

A products liability claim usually falls into one of three possible types:

• those claiming a design defect,

• those claiming a manufacturing defect, or
• those claiming a failure to warn.

Dangerous or defective product claims may succeed even when products were used
incorrectly by the consumer, as long as the incorrect use was foreseeable by the

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manufacturer (or other party in the "supply chain"). Refer Donoghue (M’Alister) v.
Stevenson (supra)

Products liability claims are, in general, not based on negligence, but rather on a
liability theory called "strict liability." The difficulties of an injured customer to prove
what a manufacturer did or did not do during the design or manufacture of product has
therefore led to strict liability. However, some scholars consider claims of "failure to
warn" to be negligence-based claims.

A basic negligence claim consists of proof of

1. a duty owed,
2. a breach of that duty,
3. that the breach caused the plaintiff's injury, and
4. an injury.

Over time, negligence concepts have arisen to deal with certain specific situations,
including negligence per se (using a manufacturer's violation of a law or regulation in
place of proof of a duty and a breach) and res ipsa loquitur ie. the facts speaks for
themselves (an inference of negligence under certain conditions).

Products Liability and Strict Liability

Products liability claims are, in general, not based on negligence, but rather on a
liability theory called "strict liability."

Rather than focus on the behavior of the manufacturer (as in negligence), strict liability
claims focus on the product itself. Under strict liability, the manufacturer is liable if the
product is defective, even if the manufacturer was not negligent in making that product
defective. Because strict liability is a harsh regime for a manufacturer, who is forced to
pay for all injuries caused by his products, even if he is not at fault, strict liability is
applied only to manufacturing defects (when a product varies from its intended design)
and almost never applied to design and warning defects. The first case to apply strict
liability to manufacturing defects involved an exploding Coca-Cola bottle.

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There is some confusion in judicial opinions as to whether strict liability is being
applied in cases of design and warning defects. The courts may even state that they are
applying strict liability. However, when the court proclaims to apply strict liability
while determining product's defectiveness through the use of a (consumer expectations
test) or (risk-utility test), it is applying the negligence principles and not strict liability.
Although the tests are not based on the conduct of the manufacturer, rather focusing on
the product itself, they attempt to determine if the product's design or warning is
reasonable. It is widely known that reasonableness is the staple of negligence, not strict
liability.

Proponents of strict liability for defective products argue that strict liability is
necessary because between two parties who are not negligent (manufacturer and
consumer), one will still have to suffer the economic cost of the injury. The proponents
argue that it is preferable to place the economic costs on the manufacturer because he
can better absorb them and pass them on to other consumers by the way of higher
prices. As such, the manufacturer becomes the insurer of consumers that are injured by
its defective products, with premiums paid by other consumers.

A related argument arises from the fact that the distribution of information about any
given product is highly asymmetrical; the manufacturer of any given product is in a
better position than the consumer to know of its particular dangers. Therefore, in order
to fulfill the public policy of minimizing injury, it is more reasonable to impose the
burden of finding and correcting such dangers upon the manufacturer as opposed to
imposing the burden of finding and avoiding unsafe products upon the consumer.
These arguments is often mentioned in cases of design and warning defects and less so
in the case of manufacturing defects, since the latter are thought to be less preventable
by the manufacturer because he is already acting with due care.

Critics charge that strict liability incentivizes product misuse (particularly in

jurisdictions where this may not be a defense) and creates a moral hazard problem on
the part of potential buyers. Reasoning that consumers will recover regardless of the
amount of care they take in the product, critics assert that consumers will underinvest
in care even when they are the least-cost avoiders, thus leading to a lower aggregate
level of care than under a negligence standard.
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While proponents baldly assert that the producer can build the cost into the price as
insurance, critics argue that this assertion is ignorant of economics and only holds true
in inelastic regions of the demand curve. As a result of strict liability for their products,
manufacturers may not produce the socially optimal level of goods. Particularly with
elastic regions of the demand curve, where consumers are very price-sensitive, the
manufacturer by defintion cannot pass on the economic costs to the consumers as a
form of insurance without pricing many of those consumers out of the market for that
good.

Critics also argue that applying strict liability to products results in substantially higher
transaction costs. One example of these transaction costs is the creation of maintenance
of legal disclaimers on products that would be unnecessary to the reasonable person --
such as the improperly algorithmic "lather, rinse, repeat" instructions on shampoos and
the ubiquitous "not for human consumption" labelling on an inordinate number of non-
food items. This results in a waste of time and resources for the producers who have to
create these warnings, decreasing the producer surplus from trade. This also lowers the
consumer surplus from these transactions, as all reasonably diligent consumers will
read the unnecessary instructions, whereas the consumers likely to misuse the product
are unlikely to be sufficiently diligent to read the instructions.

Product liability and breach of warranty

Warranties are statements by a manufacturer or seller concerning a product during a

commercial transaction. Unlike negligence claims, which focus on the manufacturer's
conduct, or strict liability claims, which focus on the condition of the product,
warranty claims focus on how these issues relate to a commercial transaction.
Warranty claims commonly require privity between the injured party and the
manufacturer or seller. Breach of warranty based product liability claims usually focus
on one of three types: (1) breach of an express warranty, (2) breach of an implied
warranty of merchantability, and (3) breach of an implied warranty of fitness for a
particular purpose. Additionally, claims involving real estate may also take the form of
an implied warranty of habitability. Express warranty claims focus on express
statements by the manufacturer or the seller concerning the product (e.g., "This
chainsaw is useful to cut turkeys"). The various implied warranties cover those
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expectations common to all products (e.g., that a tool is not unreasonably dangerous
when used for its proper purpose), unless specifically disclaimed by the manufacturer
or the seller.

Trespass to chattels

Trespass to chattels is a tort whereby the infringing party has intentionally (or in
Australia negligently) interfered with another person's lawful possession of a chattel.
The interference can be any physical contact with the chattel in a quantifiable way, or
any dispossession of the chattel (whether by taking it, destroying it, or barring the
owner's access to it). As with all intentional torts, it is "actionable per se" so no proof
of damage is required.

The origin of the concept comes from the original writ of trespass de bonis asportatis.
As in most other forms of trespass, remedy can only be obtained once it is proven that
there was direct interference regardless of damage being done, and the infringing party
has failed to disprove either negligence or intent.

In some common law countries like the United States and Canada, a remedy for
trespass to chattels can only be obtained if the direct interference was sufficiently
substantial to amount to dispossession, or alternatively where there had been an injury
proximately related to the chattel.

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BANKER V. CUSTOMER RELATIONS

The relationship arises between a banker and a customer with the opening of an
account by the customer with a banker. The application for opening an account is
considered as a letter of agreement for establishing the banker-customer relationship.
The general view is that the banker-customer relationship is mainly that of a debtor
and a creditor with certain special features.(Re. Folley v. Hill (1848)

However, today the range of banking services is more extensive, and indeed is
expanding all the time, so it must be expected that other relationships will arise besides
that of debtor and creditor. For instance, the relationship of principal and agent is
present when the customer instructs his bank to buy or sell stocks on his behalf, and
when items are held in safe-custody the relationship is that of bailer and bailee. Where
the bank’s executorships service takes on the administration of a deceased’s estate the
relationship is that of trustee and beneficiary. Duties akin to a trusteeship might also
happen when a branch comes into possession of funds or property that belongs to a
third party, as when the bank has sold property in mortgage, and has a surplus to pass
to the subsequent mortgagee. Obviously the relationship with the customer in that
situation is that of a mortgagor with a mortgagee. However, if the security had been
given by a third party then another state of affairs would exist between the lender and
his surety. There, duties and obligations would arise irrespective of the banker-
customer relationship with the borrowing customer.

The nature of the relationship depends upon the type of services rendered by the
banker, which has two aspects: one is legal and another is behavioral.

It is worth mentioning that the behavioral relationship is important from the view point
of humanity, particularly for the customers who do not maintain account with the
banker but buys, miscellaneous services like Demand Drafts, Mail Transfer of money
or payment of electric bill, gas bill, opening and renewal of licenses of Television, and
Radio. For example, a bankers’ good manners, courtesy, kindness, sympathy, and
cooperation in helping to solve a customer’s problem, undoubtedly makes a good
impression on the customer. The roads to progress and prosperity can easily be made
through friendly behavior with the customers. If the bankers wish to develop their

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organizational image, they have to offer better services and cooperation, coupled with
courteous service to gain a competitive edge.

The history of conventional banking reveals that these relationships have arisen on the
basis of interest.

BANKERS AND CUSTOMERS

A banker may be defined as a person transacting the business of accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise and withdrawable by check, draft, order or otherwise.

The customer may be defined as the constituents of the Bank who maintain some type
of account(s) with him duly introduced for the purpose of having a certain amount of
deposits therein withdrawable by checks or by any other means, are customers. More
recently, however, where a bank gave investment advice to a person who was not in an
account at the time, the court held that nevertheless the bank had incurred
responsibilities to him, as to a customer (Woods vs. Martins Bank Ltd. 1959). It may
be said, therefore, that a person becomes a customer as soon as a business relationship
is established. It is not necessary for the account to have been open for a long period of
time, or for the business to be conducted over a regular period. In fact, two conditions
seem to be important for becoming a customer of a bank. These are as follows:

(i) There has to have been some habit of dealing between him and the banker with
or without opening an account; and

(ii) The transactions so made ought to be in the nature of regular banking business.

A bank can even be a customer itself, where it has an account with another bank.

Obligations of Bankers to Customers

Both parties in this relationship, both banker and customer have certain obligations to
one another. The Banker’s responsibilities to his customers are as follows:

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(a) The banker must pay the customer’s check which has been drawn duly on his
account subject to the availability of money in the Account;

(b) Maintenance of secrecy of a customer’s Account is the legal and moral

responsibility of a banker, both while the account is open and even after it has been
closed. However, secrecy may be disclosed under the following circumstances as
discussed in Tournier v. National Provincial and Union Bank of England (1924):-

- where there is an order of the court- ie an order of attachment or garnishee

- where there is a public interest,

- where it is in the interest of the bank

- where there is consent from the banks customer

(c) Collection of check, and depositing the proceeds to the Customer’s Account is
the

general banking duty of a banker. If these negotiable instruments are returned back
without clearance, the bank should quickly inform the customer.

(d) The bank is entitled to a charge and or commission, except where special
arrangements have been made. It is entitled to debit the customer account with charges,
without specific advice to the customer. A charge for an item such as the stop payment
of a check or rejection of a check would usually be allowed.

(e) A bank must always follow its usual course of business when acting for its
customers who can expect transactions to be dealt within a consistent manner.

(f) A bank acquires a general lien over its customer’s negotiable instruments,
which come into its possession, unless an express contract has been made which would
be inconsistent with a lien (Brandao v. Barnett, 1846).

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(g) The bank must give reasonable notice to its customer before closing an account
that is maintained on credit. However, overdrafts are repayable on demand, unless
there is an implied or actual agreement to the contrary.

(h) Supply of Pass Book or Statement of Account is the duty of a banker.

(i) If any fraudulent check comes to the hand of a banker, he should inform the
customer immediately.

(j) The bank must repay the whole or part of the balance, if and when there is
demand by the customer during banking hours, provided the demand is made at the
branch where the amount is kept, or at a branch where prior alternative arrangements
have been made, such as under credit-opened encashment facilities.

(k) A bank has no obligations to third parties, arising out of the duty to pay its
customer’s checks, and the payee of checks issued by a customer cannot sue the paying
banker.

Responsibilities of Customers to Bankers

On the other hand, there are certain responsibilities of the customers. Those are
given below:

• To ensure safety and security of the checkbook;

• To issue a check duly neither being careful to ensure that neither words nor
figures can be altered;
• If a check or checkbook is lost, the customer should inform the banker
immediately

Termination of Banker-Customer Relationship

As the banker-customer relationship can be established, so it can also be terminated. It

arises between a banker and a customer with the opening of an account by the
customer with a banker. So, the relationship terminates if the account is closed for any
reason.

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Banker-customer relationship may be terminated due to the following reasons:

i) If a banker does not pay the check of a customer, which has been drawn duly
on his account, not withstanding the availability of deposited money in the account;

ii) If the secrecy of the customer’s account is not maintained legally and morally
by the banker;

iii) If the banker does not provide banking services to the customer properly. For
example, if checks, bills etc. are not collected without informing the customer;

iv) If the banker does not supply Pass Book or Statement of Account to the
customer;

v) If any fraudulent check comes to the hand of a banker and if he makes payment
without informing the customer.
vi) If the banker makes any charge on transactions which is not permissible. For
example, if a bribe is alleged;

vii) If the banker fraudulently embezzles the customer’s money;

x) If the customer defaults on a loan; and

xi) If any agreement is otherwise violated either by the banker or by the customer.

NEGOTIABLE INSTRUMENTS LAW

What is a negotiable instrument?

A negotiable instrument is a chose in action the full and legal title to which is
transferable by mere delivery of the instrument (possibly with the transferor’s
endorsement) with result that complete ownership of the instrument and all the
property it represents, passes free from equities to the transferee, provided that the
latter takes the instrument in good faith and for value.
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The following are the distinguishing Characteristics:

i. rights represented by the instruments are transferable merely by delivering
it to another (although instruments made payable to order require
indorsement)
ii. The transferee of a negotiable instrument doesn’t take it subject to equities
and he is not affected by defects in the title of his predecessors provided he
is a holder in due course
iii. The acceptor of a bill of exchange or the banker in case of a cheque, is
under a duty to pay the holder for the time being of the instrument
iv. The holder of a bill of exchange can sue upon it in his own name

Importance
a. they provide a creditor with a better remedy – once accepted, it settles the
amount of the debt owing and makes a legal remedy easier to obtain than
would be the case under an ordinary contract. The instrument is legally
binding.
b. The document can be transferred from one person to another, each time
conferring on the holder a right to have promise enforced for his own

Main types
Bills of Exchange, promissory notes, cheques, treasury bills, share warrants, dividend
warrants, bonds, debentures etc.

The law governing:

Bills of Exchange Act, Cap. 215
Cheques Act, 1969

Bills of Exchange

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s. 3 BEA, A bill of exchange is defined as an unconditional order in writing,
addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable
future time a certain sum in money to or to the order of a specified person or to
bearer.

Parties to a bill
Drawer – A party issuing a bill
Drawee – A party to whom a bill is issued
Payee – A party who is a beneficiary of a bill

Unconditional order
The instruction to pay must be an order and not a request. The order must be
unconditional in order to facilitate circulation. If the order is conditional it is not a bill.
Thus where the order provides like

“pay ……………. If he gives quality goods, or pay……….. provided he

gives goods, or provided he gives a signed receipt etc” are conditional
and therefore cannot be part of the bill.

However, while an order to pay out of a particular fund is conditional, an order to pay
coupled with indication of a particular fund out of which the drawee is to reimburse
himself or a particular account to be debited with the amount … is unconditional.

In writing, signed
A bill must be written and it must be signed by a person giving it. However a forged
signature makes the bill void while Unauthorized signature may be ratified.

To pay a sum certain

The amount to be paid must be certain in money.
In Plateau Hotel Ltd v. Mitchell (1924) 10 KLR 76, a bill was drawn and it read as:

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“ pay four thousand, four hundred and forty nine, cents 50 plus bank charges and
stamp..”
The court held that This was not a valid negotiable instrument because the sum was not
certain.
Rationale behind sum certain is that the possessors of the instrument should be able to
form a clear idea of its value.

Certainty as to the time of payment:

Negotiable instrument may either be payable on demand or at a future determinable
time (this may be fixed or not)
- a bill is payable either on demand/ at sight/ on presentation
- where no time of payment is expressed or where it is accepted or
indorsed when overdue it becomes payable on demand as regards the
acceptor.
- A bill is payable at determinable future time if it is drawn either a.
payable at affixed period after date (ie. Date of drawing the bill
appearing on the bill itself or b. payable at fixed period after sight
- A bill is also payable at a determinable future time if it is drawn on or at
affixed period after the occurrence of a specified event which is certain
to happen though the time of happening may be uncertain. However a
contingent bill is not a bill at all.

Uncertainty as to the time of payment renders an instrument not valid and not
negotiable. The option to pay on earlier date than the one specified in the bill creates
uncertainty and renders the instrument not negotiable. (see William v. Rider (1963) 1
QB 89 in which the court was to decide whether a note promising to pay pounds 100
“on or before 31st December 1956” was payable at a fixed or determinable future time.
The court held that it was uncertain.

What if the bill is not dated? The undated bill is not invalid but any holder may insert
therein the true date of issue and where a wrong date is inserted he is protected. In the
same way a bill is not invalid because it is ante dated or post dated.

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To the order of a specified person or bearer
A bill may be payable to a specific person or to a bearer (any person who comes into
its possession). A bill payable to a specific person is known as an order bill and it is
only that person named therein who should be paid. A bill payable to bearer is known
as a bearer bill and any person who presents it for payment may be paid.

Inchoate Bill/ skeleton bills/incomplete instruments

This refers to the bills which is in some respects incomplete. The most incomplete
stage of the bill is a blank stamped or signed paper. If this is delivered the transferee
has prima facie implied authority to complete it and to fill in any amount which the
stamp will cover. This or any other filling in must be within the authority granted by
the immediately preceding party but once the bill gets into the hands of a bona fide
holder for value, or holder in due course, the bill is binding has filed in and the person
whose authority has been exceeded cannot plead that he granted only limited authority.

Life Cycle of a Bill

A bill of exchange passes through the following stages:-
• drawing
• presentation for acceptance
• negotiation
• Presentation for payment

Drawing
This is the first stage in the life cycle of a bill. We have seen that the bill will be drawn
by the drawer to the drawee in favour of the payee. The drawee can be a bank or any
individual. There must be an underlying relationship between the drawer and the
drawee in the nature of a debtor-creditor. This relation may also exist between the
drawer and the payee but under certain circumstances, one may not need the existence
of such a relationship as in case of a gift or a present made to the payee.

Presentation for acceptance

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After the bill has been drawn, it must be presented to the drawee for acceptance. This
process may be done by the drawer or by the payee or even by an endorsee. If it is
presented to the drawee by the drawer the payee will not need to present it for
acceptance again but where it has not been presented for acceptance it may be
presented for acceptance by the payee or if the payee has not done this, it may be
presented by the endorsee to the drawee for acceptance.
When the bill is presented to the drawee for acceptance, the drawee is supposed to
write the words “accepted” and the date of the acceptance across the bill together with
his signature. This bill can then be negotiated to various holders until it matures, so
that it shall be presented for payment.

However, the bill may not have been presented for acceptance until it matures so that it
is presented once for both acceptance and payment. This is not a common practice as a
bill which has not been presented for acceptance may not be that strong in the eyes of
the holders and therefore negotiation may not be that effective as a bill which has been
presented for acceptance.

Dishonour by Non-acceptance
Where the bill has not been presented for acceptance until the date of maturity so that
it is presented for both acceptance and payment and it is dishonoured, this is known as
a dishonour by non- acceptance.

Negotiation
Negotiation refers to the process of transferring the bill from one person to the other in
such a way that the transferee constitutes the owner of the bill free from the defects of
title of previous owners. As we will have seen, the bill once drawn it can exchange
hands from one person to another in same way that money does. It can be used to
purchase things and also it can be given to some other person as a gift/present. The bill
therefore is capable of exchanging hands in this manner because it is negotiable.

Thus:

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A may draw a bill to B payable to C in respect of goods supplied to him by C. C may
endorse the bill to D in respect of the radio sold to him by D. D may further endorse
the bill to E as his birthday present. E may still use the bill to purchase clothes from F.
F may therefore present the bill to B for payment if it matures in his hands in the same
way any of the previous holders will have done. The process could therefore go on
indefinitely provided that the bill should not have matured or restrictively endorsed.

Graphically:

A (Drawer) B (Drawee)

C (Payee - Indorser 1)

D (Indorsee1 - Indorser II)

E (Indorsee 2 – Indorser III)

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F ( Indorsee 3)

Negotiation of a bearer bill

A bearer bill is negotiated by mere delivery. Once the bill is handled to the other party
therefore so as to constitute delivery, it is taken to have been negotiated.

Negotiation of a special bill

A special bill is negotiated by endorsement and delivery. Endorsement is a term which
is derived from the latin phrase “In Dorsum” which means at the back. Thus an
endorsement is done at the back of the bill. The contents of endorsement shapes the
endorsement either to be an indorsement in blank or a special indorsement. An
indorsement in blank is comprises of a mere signature of the endorser. Meanwhile a
special endorsement comprises of the order and the signature of the endorser. The
order in this case specifies the person to be paid. Eg. Pay Juma or order, followed by
the signature of the endorser. Juma here is an endorsee. Juma can endorse further the
bill to another person in the same way it was endorsed to him.

Presentation for payment

On maturity of a bill, the person holding it is the one who is supposed to present it for
payment. On presentation the drawee is supposed to pay the holder the sum which is
indicated on the bill. If the bill is paid on this point, it is said to have been honoured
and if it is not paid, then it is said to have been dishonoured. On dishonour, the
holder(endorsee) who presents it for payment has rights against all the previous
holders (endorsers) and the drawer of the bill. Thus he can sue them jointly or he can
only the immediate indorser who indorsed it to him. The previous endorsers as well as
the drawer are sued because they are parties to the bill which will have been
dishonoured. In case he sues the endorser who indorsed it to him, the said previous
endorse can sue the next previous endorser who will have indorsed the bill to him. The
process can therefore go on until it finds the drawer of the bill.

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Holders of a bill
Any person who is a beneficiary of a bill at any particular time is referred to as a
holder. Thus at a particular time the payee and each endorsee constitute a holder of a
bill. The payee constitutes a holder since the bill is drawn in his favour. But if he
endorses the bill to another person he ceases to be the holder and the endorsee to
whom it is drawn becomes the holder. He will continue to be the holder until he
endorses it further to another endorsee who also becomes the holder.

Holder for value

A bill may be transferred or negotiated from one person to another freely as in case of
a present or in exchange of a valuable item as in case of purchase of items from a
seller. The valuable item in this case constitutes consideration. Thus where a bill is
negotiated or transferred in exchange with valuable item/ consideration, the transferee
becomes a holder for value. It should be noted that to constitute a holder for value it is
not necessary for the current holder to be the one who will have provided the
consideration but for one to constitute holder for value he must become a holder of that
bill after consideration is given. So consideration must have been provided by some
other previous holder before he became the holder for him to be the holder for value.
A holder for value obtains rights in a bill and he can enforce the bill as against the
previous holders and the drawer on the basis of the value which had been given.

Holder in due course

This is a holder who takes the bill under the following conditions:-
a. that he is a holder for value
b. that the bill was complete and regular on its face,
c. that the bill had no error on the face of it,
d. that he took the bill in good faith without any notice of any defect in title and
e. the bill has never been previously dishonoured.

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The holder in due course takes the bill free from all defects in title provided that he
took the bill in good faith without notice of previous flaws in title. Thus, this forms an
exception to the general rule that no one can give what he does not have. This is
because even if the bill was previously stolen, the holder in due course gets a good
title, which is better than that of the previous holders.

Types of Payees
As we have seen earlier, the payee is a person in favour of whom a bill of exchange is
drawn. However, under normal circumstances the payee must be a person who can be
identified with certainty. Under certain circumstances it may not easy to identify who
the payee is. This brings us to the concepts of fictitious and non-existence payees.

Fictitious payee
A fictitious payee is a person whose name is used by the drawer of a bill fictitiously
without the intention of benefiting him. Generally there is no person with such a name
and the drawer does not know of such person or does not intend to benefit him.

Non-existence payee
Sometimes the drawer of a bill draws a bill by naming a person as a payee, who is not
known to him or he has never intended him to benefit from the bill although there is a
person with such a name existing somewhere. The phrase non existence payee refers to
the fact that he does not exist in his mind as a proper beneficiary at the time of drawing
the instrument. If this person comes forward to claim as a beneficiary of the bill he will
not succeed because he has never been intended by the drawer to benefit from the
same.

CHEQUES
Definition
A cheque is a bill of exchange drawn on a banker and which is payable on demand.
Unlike a bill of exchange it therefore does not need to be presented for acceptance but
it is presented once for payment.

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Bearer and Order Cheque
A bearer cheque is a cheque which is payable to a bearer while an order cheque is a
cheque which is payable to the order of a specific person. The bearer cheque can be
encashed by any person who presents it to the banker but an order cheque can only be
payable to the named person or to his order only.

Crossing of Cheques
Crossing of cheques involves a practice which is intended to offer more security to the
drawer of the cheque. This is a common practice in modern economies. A crossed
cheque involves more procedures before it becomes payable. This cheque is not
payable at the counter but it has to be collected by another bank.

Rules of Crossing
There are two types of crossings namely general crossing and the special crossing. The
general crossing involves the drawing of two parallel lines across the cheque without
any other words. While the special crossing involves the drawing of two parallel lines
across the cheque with the name of the bank in between the parallel lines.

a) Generally
crossed
cheque

b) Special crossed cheque

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The implications are that a generally crossed cheque may be crossed by any bank but a
specially crossed cheque must be collected by the named bank only. That is to say the
bank which is named in the crossings.

It should be noted also that a generally crossed cheque may be crossed specially by
adding the named banker.

The crossed cheque may be opened by having the signatures of the signatories of the
account across the crossings. Once it is opened it becomes payable at the counter like
any open cheque.

The rules of crossing apply to cheques only and not to any other instruments.

Crossing with words “Account Payee Only”

Sometimes cheques are crossed and in between the crossings the phrase “Account
Payee Only” is inserted. However this should be regarded as general crossing and not a
special crossing in which any banker can act as a bank of collection. The phrase is a
direction that the proceeds of the cheque should be paid in the bank account only.

THE LAW OF PARTNERSHIP

• Law applicable – Law of Contract Act – Part X - - ss.190 to 226.

• Partnership deft – s.190(1)
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Relation which subsists between persons carrying on business in common
with a view of profit;
• Partners, firm and Firm name – defn-s.190(2) Persons
who have entered into partnership with one another individually called
Partners and collectively a firm. The name under which their business is
carried is called a Firm name.
• A firm
- is not a separate legal entity distinct form its members
- it is merely a collective name of individuals composing it.
- Hence unlike a Co. which is a separate legal entity from its members a
firm cannot possess property or employ servants, borrow, sue or be
sued.
- Property of the partners, servants of the partners, a suit by
the partners, borrowing by the partners etc.

Note however that for the purpose of the Income Tax Act a partnership
firm is treated as an entity quite distinct form the partners composing it
and is assessable separately.
• Essential elements of the definition of partnership
(1) there must be a contract
(2) between 2 or more persons
(3) who agree to carry on a business
(4) with the object of sharing profits
(5) the business must be carried on by all or any of them
acting for all, i.e., there must be mutual agency.
Ad(1)-Contract
• S.191(1) – partnership arises from contract and not from status
Partnership is of under on the agreement between the parties. Father,
partner, does. His son can claim a share in the partnership property but
cannot become a partner unless he enters into a contract with the other
persons concerned
• A family business cannot be called a partnership – relation arises not from
contract but from status.

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• The contract upon which a partnership is founded may be express or
implied, oral or in writing.

Ad(2) Association of two or more persons

• A contract – 2 or more persons minimum no of partners is 2
Maximum no.20 persons (Companies Act, 2002) except for professional
partnerships which have no fixed maximum number.
• Only those who are competent to contract may enter into the partnership
association.
- age of majority
- sane mind
- no legal bar
ad(3) Carrying on a business
- parties must have agreed to carry on a business
- business includes every trade, occupation or profession
- charitable work – not partnership
- sharing of income of a certain property – not partnership

ad(4) Sharing of profits

• Sharing of profits
- object of the business – make money – share profits. Each partner
entitled to a share – how much - subject of an agreement.
• Partners also have to share liabilities/losses of the firm.
Ad(5) Mutual agency
Either all or some or once may carry on the business. Where some or one
carry/carries on the business – must be acting for all. The some or one should
act s agent of all – hence mutual agency.

• Formation of a Partnership
When you want to form a partnership the following basic facts must be borne
in mind:
(1) mutual confidence & utmost good faith are the foundation of a
successful partnership.

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Necessary that partners of a firm be selected with extreme care and
caution
A saying “Do not be in too great a hurry while selecting a partner.
Choosing a partner is like choosing a wife, marry in haste and repent at
leisure.”
(2) all essential ingredients of a valid contract must be present
- free consent
- capacity to contract
- lawful object
(3) Mutual rights & obligations of parties must be discussed in detail and
incorporated in a partnership deed
(4) A partnership should be registered under the Business Names
(Registration) ordinance.
• Contents of a partnership deed
(1) Name of firm & names & addresses of partners who compose it;
(2) Nature of business town & place where it will be carried on:
(3) Date of commencement of partnership
(4) Duration of the partnership;
(5) The amount of capital to be contributed by each partner & the methods
of raising finance in future if required.
(6) the ratio of sharing
(7) Interest on partner’s capital, partners’ loan and interest if any to be
charged on drawings
(8) Salaries, commission etc; if any, payable to partners
(9) The method of preparing a/c and arrangement for audit and safe custody
of cash, etc.
(10) Division of tasks & responsibilities – duties, powers & obligations of all
the partners
(11) Rules in case of retirement, death, admission of a partner;
(12) Expulsion of partners rules
(13) Not to carry on competing business rules
(14) Dissolution of partnership rules
(15) Arbitration clause.
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• Distinction between Partnership and a company

Partnership Company
1. Governing law Law of Contract Act Cap Companies Act, 2002
345
2. No. of members Min. 2, Max.20 Private: Min.2, max. 50;
Public: Min. 2, max.
infinite
3. Entity No separate legal entity A separate legal entity
distinct from members distinct from its members
composing it
4. Liability Unlimited. Each member Limited to the extent of
is personally liable for the either unpaid shares of
debts of the firm amount guaranteed
5. Authority of members Each member has implied Shareholders have no
authority to bind co- authority to bind the
partners by acts done in company or co-
the ordinary course of shareholder
business
6. Management All partners are involved Vested in Board of
Directors
7.transfer of interest Must be with consent of Private Company: with
all partners prior permission of
Board of Directors.
Public Company:
Shareholder may transfer
his interest without
restriction and transferee
succeeds to all rights of
membership
8. Audit A legal necessity only if A legal necessity

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the turnover is big
9. Registration Optional Compulsory
10. Winding up No legal formalities Legal formalities
involved.

• Partners responsibility to one another (s.192)

- Utmost good faith & fairness from one partner to another
- Carry on business for the greatest common advantage
- To render true accounts and full information of all things
affecting the Partnership.
• Conduct of business & mutual rights & liabilities (s.194)
- Right to take part in the management of the partnership
business
- Decide any differences by a majority of all partners
- No change of partnership business unless all partners have agreed
- Access to & to inspect and copy any of the books of the firm
- Not entitled to remuneration for taking part in the conduct or
the business
- Entitled to share equally in the capital & profits of the business
- Contribute equally towards the losses sustained by the Firm
- Partner be indemnified by the Firm in respect of payments
made and personal liabilities incurred by him.
: In the ordinary & proper course of the business of the
firm
: In or about anything necessarily done for the
preservation of the business or property of the Firm.
- Firm is entitled to be indemnified by Partner for any loss caused to it
due to the fraud or willful neglect in the conduct of the business of the
firm.
• Relations of Partners to persons dealing with them s.201, 202, 203, 204, 205,
206, 207, 208, 209, 210 LCA.
• Every partner is an agent of the other partners when carrying on the business of
the firm.
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• The acts of partner bind the other partners except where the partner has no
authority to act.
• A partner is not an agent of the firm or his other partners in the absence of an
express authority, any usage or custom of trade to-
(a) Submit a dispute relating o business of the firm to
arbitration;
(b) Open a banking a/c on behalf of the firm in his own name;
(c) Compromise or relinquish any claim or portion of a claim y the firm;
(d) Withdraw a suit or proceeding filed on behalf of the firm
(e) Admit any liability in a suit/proceeding against the firm
(f) Acquire immovable property on behalf of the firm
(g) Transfer property belonging to the firm; or
(h) Enter into partnership on behalf of the firm.
• Duration of Partneship
- May depend on
: Where partnership has no fix term of duration =
partnership “at will”. Any partner may dissolve the
partnership by giving notice to all the other partners to
that effect
: when a partnership is formed for a particular period or for
a specific purpose = particular partnership. Partnership
automatically dissolves on the completion of the venture or
on expiry of the term.

• Dissolution of Partnership
- There are two types of dissolving a partnership.
a. Statutory dissolution
This occurs on the occurrence of certain specific events stipulated under the
law. For instance: - expiry of time, completion of an adventure or notice (s.
212); occurrence of bankruptcy or death (s. 215) and happening of an event
which makes the business of partnership unlawful.

b. Judicial dissolution
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- On application by a partner, the court may order a dissolution of partnership
in either of the following cases:
o where a partner is suffering from insanity
o where the business of the partnership can only be carried on at a loss
o where the circumstances have arisen in which in the opinion of the
court render it just and equitable that the partnership be dissolved
o where a partner is guilty of misconduct in his business or private life
likely to harm the business of the partnership.

COMPANY LAW

Definitional issues and types of business corporations

“Company” has no strict technical meaning. It refers to a group of persons
associated together for a common purpose.” Farrar (1987) p.3 or “A species of
business corporations.”

Body corporate incorporated under the Companies Act, 2002

- Governed by memorandum (Charter) and Articles of
Association
- Administered by Registrar of Companies.
- Minimum of two members and no maximum of 50 for (private
co.); minimum of 2 and no maximum for public co.
- Members have equal voting power
- Can own real property in its own name separate from its
members. Anyone who has a dispute with the Company must
sue the company not its members.
- When a member leaves his/her membership lapses and his/her
replacement may be admitted into membership.
- Companies pay tax on income. Members pay tax through
PAYE scheme.
- Regulation of a floating charge gives better protection to lender.

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MECHANICS OF COMPAY FORMATION
The Companies Act, 2002 (Mainland) and Companies Decree 1953, Cap.153
(Zanzibar) provide for incorporation by registration of Memorandum and Articles of
Association.

CHOOSING THE APPROPRIATE FORM

Basic choices are (i) between an unlimited or a limited company, and (ii) between a
public and private company.
• Unlimited company confers separate legal personality but members remain
personally liable for debts in full. This form is rare in practice. Usually
adopted by professionals who seek administrative convenience rules which do
not allow them to limit liability. Limited Companies – by shares or guarantee

- By shares – members are liable to pay up the full amount on their

shares in winding up.
- By guarantee – members liable to pay up to the amount specified in
their guarantee in the Memorandum of Association.
• PRIVATE COMPANIES – statutory minimum of members is two. Maximum
is 50 excluding employees and ex-employees.
- Restrictions on right to transfer shares
- Prohibited from inviting public to subscribe for shares or
debentures.
• PUBLIC COMPANY – Memo states - that it is a Public Company
- Must have at least two directors (see s. 186 Companies Act)
- Must have a minimum prescribed capital
- Its shares are freely transferable
- Allowed to invite public investment in shares.
Minimum of seven members, no maximum.
- There must be an offer document: Under the Companies Act, the term
offer document is defined as any document, prospectus, notice, circular,
advertisement, or other invitation, offering to the public for subscription
or purchase any shares or debentures of a company or any interest
therein, or any right to acquire any shares or debentures or any interest
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therein. The offer document must be approved by the Capital Markets
and Securities Authority before being registered with the Registrar of
companies and subsequently being issued to the public. (s.49
Companies Act).

FORMATION FORMALITIES (MAINLAND)

The First Step is to choose and clear the Company’s name with the Registrar of
Companies. The Registrar may refuse registration of a company if in his
opinion the name is undesirable or if the Company is registered by a name
identical with that which a company in existence is registered.
The Second Step is to prepare the Memorandum and the Articles of Association. Any
two persons and not more than 50 or any seven or more persons may form a
Private or public company respectively.
The Memorandum of Association and the Articles of Association of a
Company must be printed in English language (s.4(1) Companies Act). The
Memorandum of association must state:-
(a) the name of the company with limited as the last word of the name in
case of private companies; or with Public Limited Company as the last
word in case of a public company where the company is limited by
shares or by guarantee.(s.3(3) Companies Act)
(b) Where the registered office of the Company will be situated
(c) the objects of the company.
(d) That the liability of the members is limited, if the Company
is limited by shares or by guarantee.
(e) There must be shown in the Memorandum against the name of each
subscriber, the number of shares he takes.
(f) In the case of a Limited Company having a share capital, the amount of
share capital with which the Company proposes to be registered and the
division thereof into shares of a fixed amount.
(g) In case of a company Limited by guarantee they must also state that
each member undertakes to contributes to the asset or the Company in

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the event of its being wound up while he is a member or within one year
after he ceases to be a member.
(h) The Memorandum must be signed by Subscriber, in presence of a
witness who must attest. The Articles of Association may adopt all or
any of the regulation in table ‘A’ the Articles must be printed, divided
into paragraphs numbered consecutively an he signed by each
Subscriber o the Memorandum of Association in the presence of at least
one witness who must attest signature.
(i) The Memorandum shall be dated and shall be signed by each subscriber
in the presence of at least one attesting witness.

The Articles of Association: these are the rules, regulations by laws for the internal
management of the affairs of a company. They are framed with the aim of carrying out
the aims and object as set out in the Memorandum of Association. As to the form they
must be printed in English language and signed by each subscriber to the
Memorandum of Association (S.9 (2) of the Companies Act, 2002).
As to the content, although the promoters are free to write anything in their articles, a
well drafted articles shall contain the regulations on the following subjects:
(i) Share capital, rights of shareholders; variation of their rights,
payment of commissions, share certificates
(ii) Calls on shares
(iii) Transfer of shares
(iv) Transmission of shares
(v) Conversion of shares into stock
(vi) Share warrants
(vii) Alternation of capital
(viii) General meetings and proceedings threat
(ix) Voting rights of members, voting and poll; proxies
(x) Directors, their appointment, remuneration, qualification, powers
and proceedings of the Board of Directors
(xi) Manager, secretary/dividends/Accounts/borrowing
powers/winding up etc.

However, there are samples of Memorandum of Association and Articles of

Association in the Schedule to the Companies Act, arranged under the subheading
Tables A, B, C, D and E which can be adopted mutatis mutandis to apply in a
company.

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6.3.3 After preparation of the Memorandum and the Articles of Association should
be submitted to the Registrar of Companies to be registered accompanied by
forms number 1, 14 and 15
Form number 1 - declaration of Compliance
Form Number 14 - List and particulars of directors and managers of the
Company
Form Number 15 - Notice of the situation of the registered office.

The registrar may register the Company and issue a certificate of registration, which
shall be conclusive evidence that all the requirement of this Act in respect of
registration and matters precedent thereto have been complied with.(section 16,
Companies Act, 2002)

It is worthy noting that registration fees will also have to be paid before registration.
However, the fee is a subject of rules issued by the Minister for Trade under the
provisions of s.479 of the Companies Act, 2002.

Consequences/legal effects of incorporation of a company

A. Legal personality separate from its members

By incorporation a separate legal entity – a body corporate – is created.
The idea that upon incorporation a company becomes a legal person was first laid
down in the case of Salomon v. Salomon & Co. Ltd. (1897) AC 22.
In this case Salomon who at one time had run a prosperous business as a sole
proprietor, ran into difficulties and his business became insolvent. He decided to
convert his sole proprietorship into a limited liability company which he called
Salomon & Co. Ltd. The company was registered under the English companies Act,
1862 which had a provision similar to S15(2) of Companies Act, 2002.
The shareholders in this company were himself who took 201 shares and; his wife and
h is 5 adult sons who held 1 (one) share each.

After formation of this company, Salomon sold his shoe business to the company for
consideration of £ 10,000 and took debenture worth £ 20,000 because the company
was not in a position to pay him the consideration of £ 10,000 at once.
But the company was not successful in managing the shoe business hence he loaned
his own money and secured for himself on all assets of the company.
Still the company did not prospect and it went into receivership and then liquidation.

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In the course of liquidation, the liquidator resisted the claim under the debentures on
the ground of fraud. He argued that the company was the nominee of Salomon. That
it was his tool of managing his business.
On reply, Salomon argued, that upon incorporation a company becomes a legal
separate and distinct from its members and as such it is fully responsible for all its
obligations including its debts. Salomon sued:
− In the first instance, it was held that the company was merely acting as Salomon’s
nominee and agent and therefore Salomon as principal had to indemnify the
company’s creditors himself.
− Salomon Appealed to the Court of Appeal. The Court of Appeal turned down his
appeal but on a different ground; That Salomon was a Trustee for the company
which was him mere shadow (a mere sham/dummy).
− Salomon Appealed to the House of Lords. The House of Lords reversed the
decisions of the courts below. It held that Salomon & Co. Ltd. was different from
Salomon as an individual Lord Macnaghten gave the following opinion;

“The company is at law a different person altogether from the

subscribers to the Memorandum and although it may be that after
incorporation the business is precisely the same as it was before, and the
same persons are Managers, and the same hands, receive the profits, the
company is not in law the agent of the subscribers or trustee for them.
Nor are subscribers as members liable, in any shape or form except to
the extent and in the manner provided by the Act”.

The decision in Salomon’s Case has become the cornerstone of company law and all
subsequent cases merely clarify other things the company is capable of doing in its
own name as a legal entity.

Lee v. Lee Air Farming Co. Ltd. (1960) 3 W.L.R 758

Lee formed a company known as “Lee Air Farming Company Limited” which he
incorporated under the relevant New Zealand Companies Act of 1922. The objects of
the company included the provision of air farming services to farmers in New Zealand.
Lee entered into contract with the company under which Lee was appointed the Chief
pilot of the company.
One day in course of piloting one of the air-craft of the company in his usual
employment he crashed and died. His widow Catherine Lee brought an action agent
the company seeking for the workmen’s compensation for the death of her husband.
The company opposed the application arguing that Lee & Company were one and the
same thing, in fact Lee owned the company and could not therefore, be regarded as a
worker to quality for compensation under workmen’s compensation law of New
Zealand.
It was held that upon incorporation a company becomes a legal person separate and
distinct from its members and as such it is capable of doing a member of things which
natural persons can do such as to employ and to dismiss workers. As an employer, the
company is subject to among other laws, the workmen’s compensation law of the land
and must compensate an injured or deceased worker accordingly. However, the
petition failed on technical grounds; that Catherine Lee had petitioned in her own name
instead of the estate of the deceased.

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The position that a company is capable of owning property in its own name was
discussed in Macaura v. Northern Assurance Co. Ltd. (1925) AC 619.
In this case Macaura was the owner of a timber estate which he sold to the company
that he had incorporated. Macaura was the pre-dominant shareholder in the company.
After selling timber to the company, he advanced substantial sums of money to the
company to enable it to manage the timber estate.

In addition, he effected insurance policy on the timber in his own name with several
companies.
A substantial portion of the timber was destroyed by fire and Macaura claimed the
indemnity money.
The insurance companies declines to give him the money arguing that indemnity was
due to the company and not to any other person because it was the company which had
the insurable interest in a particular assets w which it owned. Macaura action failed.

Booth v. Helliwell [1914] 3 K B 252

Co. – business as a retailer of food. The business was managed a director of the Co.
who was also virtually the sole shareholder. A shop attendant sold food which was
not of the quality demanded. The director-manager was charged & convicted under
the good & drugs legislation.

On appeal the conviction was held to be wrong because even though the business was
carried on under the exclusive and unrestricted control of the director-manager, the
shop attendant was the servant of the Co. and not of the director-manager. Only the
Co. could be held liable for the acts of the assistant.

B. Limited liability
A shareholders liability is limited to any amount which is unpaid on his shares. A
member who acquires fully aid up shares will have no further liability to the Co.
Where Co – is limited by guarantee the liability is limited to the amount each member
undertook to contribute to the assets of the Co. in the event of its being would up. This
liability attaches so long as he is a member or within one year after he ceases to be a
member.

C. The memo + articles when registered have the effect of creating contractual
relations
(i) between shareholders & the Co.
(ii) between shareholders inter se.

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ad(i) The contract between shareholders inter se is to the effect that

(a) each will observe the provisions of the memo + articles
(b) the articles may be altered from time to time.
Ad(ii) The contract between shareholders inter se is to the effect that:
• The co. is constituted by an association of its members;
• The Art of Ass. constitute a multilateral contract between the Members;
• The Art of Association constitute a contract between the shareholders in respect
of their rights as shareholders.

It was said in Wood v. Odessa Waterworks Co (1889) and automatic Self Cleansing
filter Syndicate Co. Ltd. v. Cuninghame that “the articles of association constitute a
contract not merely between shareholders + the co, but also between each individual
shareholder and every other.”

Please note 2 things:

1. The purpose of the MEMARTS is to define the position of the shareholder as
shareholder not to bind him in his capacity as an individual
2. Strictly speaking the articles do not themselves form a contract but from them
the terms of a contract may be based.

E.g. If a person is appointed a director of a co. in which remuneration payable to

directors is specified in the articles and he is a member of the co. even if the articles
require a director to be a member, the remuneration is not payable to him qua member.
There numeration is payable to him by virtue of a separate contract between him & the
co. which is made on his acceptance of his appointment, the terms of that contract
being the relevant provisions from the articles.

MANAGEMENT OF COMPANIES

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There are two power bases in a company which are responsible for management of the
company namely:-
- The Members (Shareholder’s ) General Meetings, and
- The Board of Directors (BoD)

The General Meetings

This is the highest power base in the company in which all the members or
shareholders are entitled to attend. The most important decisions are made in the
General Meeting. Under the Companies Act, there are two types of general meetings
namely the Annual General Meeting (AGM) and the Extraordinary General Meeting
(EGM). Decisions in general meetings are made by voting and such decisions are
called resolutions. The resolutions may be either special (requiring ¾ votes of the
members present) or ordinary resolution (requiring from 51% and above votes of the
members present).

Directors – Business Managers

(a) Why company directors
- A company s a separate legal entity from its members
- As a separate legal entity a co. cannot manage itself
- So a co needs people to manage it - directors
- The term director is applied to anyone entrusted with the management
of a
co. who attends board meetings and takes part in their
decision-making activities.
- A private co. must have at least 2 director (formerly 1 director)
- A public co. must have at least 2 directors.
There re three distinct components in any co.
- the company itself
- its managers (directors)
- its owners (shareholders)
Basic relationship - Agency

(b) Business management of a company is vested in directors

- a director need not be a shareholder in the co. he is managing
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- appointment of directors.
: by being named as directors in a form submitted to the
Registrar of Companies
: by being named in the articles;
: under the provisions for appointment laid down in the
articles
Qualifications for appointment
: Age; 21 years and above but not more than 70 years (s.194 Companies Act,
2002) – Duty to disclose (s.195 Companies Act, 2002)
: Soundness of mind; must be of sound mind
: no legal bar e.g. bankruptcy, disqualification orders (ss. 196 and 197
Companies Act, 2002)
: Share qualification; - only where the Articles of Association so requires
(s.191 Companies Act, 2002)

- Disqualifications: grounds
: Conviction of an indictable offence - fraud- R v. Corbin
(1984)
: Persistent breaches of company law e.g. failure to file
returns with Registrar of Companies
: Fraud, fraudulent trading or breach of duty revealed in a
winding up.
- Remuneration
: No automatic right to payment for a director
: where a director works under a contract of service normal
principles of employment law will apply
- Powers of directors
: BoD has wide management powers which may be controlled by the
members/ shareholders of the company.
Such control by members may be achieved in two ways:
• Shareholders have a right in certain circumstances to take action on behalf of
the co. to prevent wrong doing carried out or committed against it.
• Members can control BoD by
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- Passing an ordinary resolution to remove a director before his/her terms
of office expires
- Not vote for re-election of a director
- Passing a special resolution to alter the articles to cut down the powers
of directors
- Passing a special resolution which given the directors directions on how
they should act in relation to a particular matter, i.e., giving directors
orders in advance.

(c). Duties of directors

• The nature of a director’s position
- controls/manages the Co. but the co. is not his
- he owes duties to the co.
- By co. here is meant the corporate body, the members,
employees and creditors of the co.
- Directors have responsibility to take a/c of the overall interests
of the co. not only particular sections of its.
- Duties
: of managing the general affairs of the co. (s. 181 Companies
Act, 2002)
: to act as best to promote the interest of the co.
: to act in good faith (fiduciary duty)
: not to enter into engagements in which he has, or can have, a
personal interest conflicting, or which possibly may conflict,
with interests of those he is bound to protect.

Specific Duties of Directors

• Fiduciary duties arising as a result of the equitable view of directors as quasi
trustees
• Duties of care, skill and diligence arising by operation of the tort of negligence
and s.185 of the Companies Act, 2002.
• Statutory duties

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Statutory duties
- to notify the co of his/her interest in its shares of debentures or those of
an associated co
- to disclose for approval at a general meeting any substantial non-cash
transaction with the co.
- to have regard to the interests of the employees
- to disclose interest in contracts of the co. (s.209 Companies Act, 2002)

Fiduciary duties
- obligation to exercise powers bonafide and for the benefit of
the co. (s.182 Companies Act)
- obligation to avoid any conflict between personal interest and
those of the co. i.e., duty not to make a secret profit.

Duties of care and skill

- standard of care and skill owed by a director
(i) that expected of a person with his knowledge and experience
(ii) attend meetings whenever he is reasonably able to do so
(iii) may delegate provided delegate is trustworthy

Effect of breach of duty

- if leads to loss director to make good that loss
- account for any secret profit made
- lead to avoidance of contract with the director

Duty to employees of the Co.

- duty to take a/c of the interests of company employees in general, as
well as the interest of the co. in the performance of their duties (s. 183
Companies Act, 2002)
- duty to adopt a strategy to avoid redundancy provided such strategy
saves the interests of the co.

Duty to creditors of the Co.

- If the Co. is solvent no duty to creditors

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- If cp. Becomes insolvent interests of creditors arise whereby
directors become duty bound to protect interest of creditors.

Some Prohibited Conducts by Directors

a) Conflict of interest
– not to make an unapproved (a secret) profit
- A director, as agent, should avoid placing himself in a position where
there is a conflict of interests e.g. by taking a bribe
- If he pursues for his own benefit a business opportunity in his co’s line
of business (the corporate opportunity doctrine)
b) Ultra vires exercise of powers
• Two power bases in a co.
- members in a general meeting
- Board of directors
Directors have power to manage the co. enter into contracts with 3rd parties on behalf
of the co.
• Directors are only allowed/empowered to act in accordance with or within the
provisions of the Memorandum of association – in particular the objects clause.
• Anything done outside the limits is ultra vires the powers of the directors – not
bind the co.
c) Prohibition of Loans to directors (s.200 Companies Act, 2002)
• As a general rule it shall not be lawful for a company to make loans to or enter
into similar transactions with or for the benefit of a director of the co or of its
holding company.
• A co. shall not guarantee or provide any security in relation to a loan made by
an outsider to one of its directors.
• A co. shall not extend a quasi loan or credit transaction involving its director.
A quasi loan arise where a director incurs personal expenditure but the bill is
met by the co and the director repays later. A credit transaction arises where
the co, acts as the creditor under an arrangement with a director or connected
person involving a hire purchase or conditional sale agreement, or a leasing or
hiring arrangement involving periodical payments or a deferred payment

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arrangement – E.g A co transfers a car it has bought to a director – payment by
installments.
• Quasi-loans of small amounts are usually allowed.

• The same prohibition applies to the connected persons

Persons connected with a director are
- the director’s spouse
- the director’s children – legitimate, illegitimate & step
- any co. if the director or persons connected with him are
interested in more than 20% o its equity share capital (or
control more than 20% of its voting rights;
- any partner of the director of spouse, children or co.
A co shall not extend loans or quasi loans to persons who are connected with directors

d) Fraudulent Trading (s. 383 Companies Act)

• May be committed when the co is in the process of liquidation
• Takes place here a director is knowingly (mens rea) a party to fraudulent
trading
i.e. if he is carrying on the business and continuing to incur debts on the
company’s behalf at a time when he knew thee was little or no prospect of
those debts being paid on time or within a reasonable time.
• Persons affected are creditors
• The director may be required to contribute to the assets of the co in order to
meet its liabilities on account of wrongful trading (s.384 Companies Act)

e) Insider dealing
- dealing in securities
- counseling procuring another person to deal in securities
- enabling other persons to deal in securities using unpublished price
sensitive info. Obtained in confidence.
Unpublished price sensitive information
• Concerns a co’s securities and is information which

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- relates to specific maters relating to or o concern to that co – not of a geneal
nature
- is not generally known to those persons who are accustomed or would be
likely to deal in those securities but which would if it wee generally known
to
them be likely materially to affect the price of those securities
- all companies which trade their shares in a Stock Exchange are required to
ensure that all price sensitive information is published as rapidly as
possible. This is a duty imposed on the listed cos. If this duty is observed
insider dealing may be prevented.
Connected Persons
- the law prohibits any individual who has obtained unpubl. Price sensitive
info. by virtue of being “connected” with the co. from using such
information
- A “connected” person in this respect is:
• Director
• Officer or employee of the co. with access to unpublished Price
sensitive information
• A person with professional/business relationship with the co. which
gives him access to unpublished Price sensitive information
• A person connected with a subsidiary of the co. or a holding co. or with
another subsidiary of a holding co.
- Using such information acquired in confidence = misusing it
• Dealing in securities of that co.
• Counseling or procuring any or the person to deal in the securities
• Passing the unpubl. Price sensitive info. On to any other person who
will make use of such information to deal in securities of that co.
Passing the info. To any other person who will counsel or procure others to
use it to deal in securities of that co.
• If one is no longer connected with the co. for the past 6 months – no
insider dealing.

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The Company Secretary
• Every Co. must have a secretary. (s.187 Companies Act) The secretary has
power to bind the Co. in any contract of an administrative nature e.g. hiring of
cars – see Panorama Development (Guild Ford) Ltd v. Fidelis Furnishing
Fabrics Ltd (1971)
• Qualification
- requisite knowledge & experience
- posses qualifications (accountant or lawyer)

ETHICAL DIMENSIONS OF BUSINESS LAW: CRIMINAL ASPECTS

A crime or offence

Businesses may commit crimes. A crime is a public wrong as well as a

moral wrong. As a public wrong a crime is an act or an omission which has
a particularly harmful effect on the public and does more than interfere with
merely private rights. It is a crime because it consists in wrong doing which
directly and in serious degree threatens the security or well being of society
and because it is mot safe to leave it redressable only by compensation of
the party injured.

In order to keep peace, security and tranquility in society certain acts and
omissions are made crimes either by legislation (Parliament) or by judicial
decisions. A crime yesterday may not be a crime today; and a crime today
may not be a crime tomorrow (e.g. homosexuality).

It can be said that crimes are wrongs which either the judges or Parliament
have from time to time laid down as being sufficiently injurious to the
public as to warrant the application of criminal procedure.

A crime may also be looked at as a moral wrong. As a general rule every

crime is a moral wrong. However, not every moral wrong is a crime. For
example, adultery is a moral wrong, yet it is not a crime in Tanzania
Mainland.

The law prohibits commission of crimes at pain of penal consequences.

Acts and/or omissions that are crimes are provided for in some law (e.g. the
Penal code, Cap. 16, the Drugs and Prevention of Illicit Traffic in Drugs
Act, 1995) and punishment is provided for each type of crime.

Elements of crime
o Actus reus – an act or omission forbidden by law

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o Mens rea - guilty state of mind when committing the act or
when omitting to act.
o Each of the above elements must be proved beyond reasonable
doubt by the prosecution.

General rules as to criminal responsibility
o Ignorance of law is no defence – ignorantia juris neminem
excusat
o An honest claim of right and without intention to defraud is a
defence – bonafide claim of right
o A person is not criminally responsible for an act or omission
which occurs independently of the exercise of his will or for an
event which occurs by accident
o Mistake of fact is a defence – an honest and reasonable, but
mistaken belief in the existence of any state of things
o An insane person is not criminally responsible for his acts or
omissions. However the law presumes every person to be of
sound mind unless the contrary is proved.
o Intoxication is not a defence unless the person was in such a
situation as not to understand what he was doing or that what he
was doing was bad and that he was made intoxicated by another
person.
o A person below the age of 7 years is a doli incapax – not
capable of committing an offence. A child below the age of 12
years is presumed not to be capable of committing a criminal
offence. A male person below the age of 12 years is presumed
not to be capable of committing the offence of rape
o A person may use reasonable force in the protection of himself
another person or property.
o When effecting an arrest use of reasonable force in the
circumstances is permitted.

Strict liability offences (crimes)

These are offences which require the prosecution to prove actus reus
only. There is no need to prove mens rea.
o Sale of food which not fit for human consumption
o Traffic offences
A company will be held vicariously liable for offences committed by its
employees.

Crimes committed by businesses – corporations/companies

o A company is an abstract person – a legal person. It acts through
agents – business managers/directors. These are natural persons
with mind, eyes, ears, hands, legs etc. –These can think and act.
o Acts and minds of agents are those of the principal/company –
He who does through another does it himself – Qui facit per
alium facit per se.
o The actus reus and mens rea of the agents are imputed to the
company. The company commits crimes through the acts and
state of mind of its agents.

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o Not every person in a company is an agent of the company.
Only crimes committed by top officers of the company with
guilty mind are committed by the company.
o However, a company may also be held liable for the crimes
committed by its employees, other than top officers.
o A company will be held liable for offences committed by its
employees other than top officers where –
- The offence is a strict liability offence (no guilty
mind needs to be proved)
- The employee committed the offence while in the
course of employment (See St. Hellens MBC v. Hill
[1991]

Types of crime which a company may commit

 Fraud
Means the obtaining of a material advantage by unfair or wrongful
means; it involves moral turpitude (state or quality of being
wicked). Fraud id proved when it is shown that a false
representation (statement) has been made
- Knowingly; or
- Without belief in its truth, or
- Recklessly (i.e. without caring whether it be true or not)
Fraud may be committed both civilly and criminally.

Our Penal Code criminalizes fraud (makes fraud a crime) in its

chapter XXXII.
Section 315 prohibits directors and officers of corporations or
companies from –
o Fraudulently appropriating property
o Keeping fraudulent accounts
o Falsifying books or accounts
If found guilty and convicted – penalty – maximum 14 years
imprisonment.

 Money laundering
 Launder (v) – wash and iron clothes. It also means transfer
(money obtained from crime) to foreign banks, legitimate
businesses etc. so as to disguise its source.
 Laundry (n) – A place where laundering is done.
 Laundering is a term used to describe investment or other
transfer of money flowing from racketeering, drug transactions
and other illegal sources into legitimate channels so that its
original source cannot be traced. [Racket means dishonest or
illegal way of getting money].
 Money laundering means channeling dirty money (i.e. money
obtained illegally) through legitimate institutions or businesses
so that such money is cleaned. When it comes out of such

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institutions/businesses no one can trace the illegality of such
money as no source is traceable. So here the bank/business has
acted like a laundry to clean the dirty money.
 Section 71(3) of the Proceeds of Crime Act, 1991, No. 25 of
1991 gives the definition of money laundering as follows:
 An offence of money laundering is committed when
a person:
Engages, directly or indirectly, in a
transaction in or outside Tanzania, which
involves the removal into or from Tanzania,
of money or property which is the proceeds
of crime; or
Receives, possesses, conceals, disposes of,
brings into or removes from Tanzania, any
money or other property which is the
proceeds of crime
To prove the offence of money laundering both actus reus and
mens rea must be established.

 Dealing in drugs and illicit traffic in drugs

 Dealing in drugs and illicit traffic in drugs is a criminal offence.
It has been criminalized by the Drugs and Prevention of Illicit
Traffic in Drugs Act, 1995, No. 9 of 1995.
 Drugs are defined as the narcotic drugs or psychotropic
substances specified in the Schedule to the Act. The Schedule
specifies 121 drugs and more than 100 species of psychotropic
substances.
 Illicit traffic has been defined in section 2 to mean
- Cultivating any coca plant or gathering any portion
of coca plant
- Cultivating the opium poppy or any cannabis plant
- Engaging in the production, manufacture, processing,
sale purchase, transportation, warehousing,
concealment, use or consumption, import into United
Republ9ic, export from United Republic or
transshipment of narcotic drugs or psychotropic
substances
- Dealing in any activities in narcotic drugs or
psychotropic substances
- Handling or letting out any premises for the carrying
on of any of the activities, other than those permitted
under this Act, or any rule or order made, or any
condition of any licence, term or authorization
issued, hereunder, and include –
(i) Financing, directly or indirectly, any of the
aforementioned activities;
(ii) Abetting or conspiring in the furtherance of
or in support of doing any of the
aforementioned activities; and

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(iii) Harbouring persons engaged in any of the
aforementioned activities.

 Section 16 creates the offence of drugs and illicit traffic in

drugs. If convicted the punishment is a fine of 10million
shillings or to an imprisonment for life or to both such fine and
imprisonment. The court has been given discretion, for reasons
which must be recorded, to imposed a fine exceeding 10million
shillings.
 Section 19 creates an offence of possessing, using etc. small
quantity of narcotic drugs and psychotropic substances.
Punishment for such an offence is a fine of 200,000/=shillings or
seven years imprisonment or to both such fine and
imprisonment.
 Financing of illegal activities is an offence under section 20 and
the penalty is a fine of 10 million shillings or life imprisonment
or to both such fine and imprisonment.
 Section 27 deals with a situation where the offence is committed
by a company –
o Where an offence under this Act has been committed b y
a company, every person who, at the time the offence
was committed, was in charge of, and was responsible to
the company for the conduct of the business of the
company, shall be deemed to have committed the
offence and shall be liable to be proceeded against and
punished accordingly.
o No person shall be liable to punishment if he proves that
the offence was committed without his knowledge or
that he had exercised all due diligence to prevent the
commission of the offence.
o Where any offence under this Part has been committed
by a company and it is proved that the offence has been
committed with the consent or connivance of, or is
attributed to any neglect on the part of any director,
manager, secretary or other officer of the company, such
director, manager, secretary o9r other officer of the
company shall be deemed to be proceeded against and
punished accordingly.

 Note that offences under sections 16, 17, 20 and 21 are not bailable.

Faulu are not responsible for the content of this notes because it is not the author.
Make sure you use the right notes for the right subject with the right level. Follow your
syllabus for exact topics.

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