Law of Contracts

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STRATHMORE UNIVERSITY

FACULTY OF INFORMATION TECHNOLOGY


BCM 4201 : IT & BUSINESS LAW

CHAPTER 4: LAW OF CONTRACTS

4.1. Definition

A contract may be defined as a legally binding agreement made by two or more parties. It may be
written, oral, partly written and partly oral. The most important characteristic of a contract is that it is
enforceable.

4.2. Formation of a Contract

A contract comes into existence when an offer by one party is unequivocally accepted by another and
both parties must have had requisite capacity and intended their dealings to be a legally binding
agreement. Some consideration must have passed between them and the purpose for which the
agreement was entered into must have been legal. Any necessary formalities must have been complied
with.

4.2.1. The offer

An offer has been defined as the unequivocal manifestation by one party of its intention to contract with
another. It is a clear intimation or proposal by a party who wants to contract with another. The party
manifesting the intention is the offeror and the party to whom it is manifested is the offeree.

Rules / Characteristics of an Offer:

1. An offer may be oral, written or implied from the conduct of the offeror. E.g. in public transport the
offer is implied from the conduct of the offeror.

2. The offer must be clear and definite i.e. free from uncertainty and ambiguity. If the words used by the
offeror are uncertain an offer has not been manifested.

3. The offer must be communicated to the intended offeree or offerees. It will only come into existence
when the manifestation is received or perceived by the offeree. For example, an oral offer comes into
existence when the words are heard by the offeree while an offer by post becomes effective when the
letter is received.

4. The offeror may insert conditions to be fulfilled by the offeree in which case no agreement arises until
the conditions are fulfilled. E.g. the method of communication of acceptance of the offer.

5. The offeror may prescribe the duration the offer is to remain open for acceptance. However, the
offeror is not bound to keep the offer open for the duration unless the parties have so agreed. Hence,
the offeror is free to revoke or withdraw his offer at any time before the offer is accepted. However, if

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the offer is neither revoked nor accepted before the prescribed duration then it lapses on expiration of
the duration. In Dickinson v. Dodds, the defendant offered to sell a house to the plaintiff on Wednesday
10/06/1874 and the offer was to remain open up to Friday 12th at 9.00 am. However on the 11th of
June, the defendant sold the house to a 3rd party. The plaintiff purported to accept the offer on Friday
morning before 9.00 am. The issue was whether there was a contract between the parties. It was held
that there was no agreement between the parties as the defendant had revoked his offer by selling the
house to a 3rd party on June 11th.

6. An offer may be general or specific i.e. it may be directed to a particular person, a class of persons or
the public at large. An offer can only be accepted by the person or persons to whom it is made. A
general offer may be accepted by any person who fulfils the requirements. In Carlill v. Carbolic Smoke
Ball Co, the defendant company manufactured and owned a drug name the “Carbolic Smoke Ball” a
drug for the treatment of influenza, cold and other diseases associated with taking cold water. On
November 13th 1891 the company put an advertisement in a newspaper to the effect that a £100 reward
would be given to any person who contracted influenza or related diseases after taking the smoke ball
as prescribed i.e. 2 tablets, 3 times a day for 2 weeks. The advertisement further stated that the
company had deposited £1000 with the Alliance Bank on Reagent Street as a sign of their sincerity in the
matter. Mrs. Carlill who had read the advertisement bought and took the Smoke balls as prescribed but
contracted influenza. The company rejected her claim and she sued. The Court of Appeal held that the
advertisement amounted to an offer to the whole world and the person who fulfilled its conditions,
contracted with the company hence Mrs. Carlill was entitled to the £100 reward.

Types of offers

a) Cross offers

This is a situation where a party submits an offer to another who has already sent a similar offer and the
two offers cross in the course of communication. No agreement arises from cross offers for lack of
consensus ad idem (meeting of the minds) between the parties.

b) Counter offer

This is a change, variation or modification of the terms of the offer by the offeree. It is a conditional
acceptance and therefore not an acceptance. A counter offer is an offer in its own right and if accepted
an agreement arises between the parties.

Effect of the counter offer

Its legal effect is to terminate the original offer as in Hyde v. Wrench (1840), where the defendant made
an offer on June 6th to sell a farm to the plaintiff for £1,000. On 8th June, the plaintiff wrote to the
defendant accepting to pay £950 for the farm. On 27th June, the defendant wrote rejecting the £950.
On 29th June the plaintiff wrote to the defendant accepting to pay £1,000 for the farm. The defendant
declined and the plaintiff sued for specific performance of the contract. It was held that the defendant

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was not liable as the plaintiff’s counter offer of £950 terminated the original offer which was therefore
not available for acceptance by the plaintiff on 29th June as the defendant had not revived it.

c) Standing offer

A standing offer arises when a person’s tender to supply goods and service to another is accepted. Such
acceptance is not an acceptance in the legal sense. It merely converts the tender to a standing offer for
the duration specified if any. The offeror is promising to supply the goods or services on request and is
bound to do so where a requisition is made.

The offeror is bound to supply the goods or services ordered by the offeree during the subsistence of the
standing offer failing which it is liable in damages for breach of contract as was the case in Great
Northern Railway Co Ltd v. Witham. The plaintiff company invited tenders for the supply of stores and
Witham’s tender to supply the same on request within 12 months was accepted. The company made a
requisition but Witham did not supply the goods and was sued. It was held that he was liable in damages
for breach of contract.

An offer must be distinguished from an Invitation to treat.

Invitation to Treat

This is a mere invitation by a party to another or others to make an offer or bargain. The invitor becomes
the offeree while the invitee becomes the offeror. A positive response to an invitation to treat is an
offer. However, the invitee is not bound to make the offer.

Examples of invitation to treat include the following:

1. Advertisement of sale by public auction:

At common law, an advertisement to sell goods or other property by public auction is an invitation to
treat. The prospective buyer makes the offer by bidding at the auction and the auctioneer may accept or
reject the offer.

It was so held in Harris v. Nickerson where the plaintiff sued the auctioneer for withdrawing from the
auction certain furniture he had advertised for sale by auction. It was held that there was no contractual
relationship between the parties as the advertisement was merely an invitation to treat and as such, the
auctioneer was not liable.

2. Sale by display:

At common law, the display of goods with cash price tags is an invitation to treat. The prospective buyer
makes the offer to buy the items at the stated or other price which the shop owner may accept or reject.
In Fisher v. Bell, the issue was whether the defendant had violated the provisions of the Offensive
Weapons Act 1959 which made it unlawful for a person to “offer for sale” a flick knife. The defendant
had displayed the knife in his shop with a cash price tag. It was held that he had not violated the Act as
the display of the knife was an invitation to prospective buyers to make offers.

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3. Sale by self-service:

At common law, a sale by self-service is an invitation to treat. Prospective buyers make offers by
conduct by picking the goods from the shelves and the offer may be accepted or rejected at the
cashier’s desk. The offeror is free to revoke his offer to buy the goods at any time before reaching the
cashiers desk. In Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd (1952),
the defendant owned and operated a self-service store which stocked among other things, drugs which
under the provisions of the Pharmacy and Poisons Act (1933) could only be sold with the supervision of
a registered pharmacist. The defendant’s pharmacist was stationed next to the cashier’s desk. The
plaintiff society argued that the defendant had violated the Act as the pharmacist was not stationed
next to the shelves where the drugs were displayed. Question was at what point a sale took place. It was
held that the defendant had not violated the provisions of the Act as its pharmacist was stationed next
to the cashier’s desk where the actual sale took place.

4.2.2. Acceptance

This is the external manifestation of assent by the offeree. It gives rise to an agreement between parties.
In legal theory, an agreement comes into existence at the subjective moment when the minds of the
parties meet. This moment is referred to as Consensus ad idem (meeting of minds).

However, this subjectivity must be externally manifested by the offeree for the agreement to arise.
Acceptance may be oral, written or implied from the conduct of the offeree.

Rules of Acceptance

1. Acceptance may be oral, written or implied from the conduct of the offeree. For example, in public
transport acceptance is by conduct and occurs when the person boards the bus. It was so held in Wilkie
v London Passenger transport board. In Carlill v. Carbolic Smoke Ball Co, acceptance by Mrs. Carlill took
the form of her conduct by purchasing and consuming the smoke balls.

2. The offeree must have been aware of and intended to accept the offer: A person cannot accept an
offer whose existence he is unaware of. In Crown v. Clarke, the Australian government offered £1,000 to
any person who volunteered information leading to the arrest and conviction of the killers of 2 police
officers. Any accomplice who gave information would be pardoned. Clarke, who was aware of the
murder gave the information and the killers were arrested and convicted. However, he made it clear
that he had given the information to clear his name. It was held that he was not entitled to the reward
as he had given the information for a different purpose and therefore had not accepted the offer.

3. Acceptance must be unconditional and unqualified: The offeree must accept the offer in its terms, any
variation or modification of the offer amounts to a conditional acceptance which is not an acceptance as
was the case in Hyde v. Wrench where the plaintiff’s counter offer terminated the defendant’s offer.

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4. An offer must be accepted within the stipulated time if any or within a reasonable time failing which it
lapses. This was the case in Ramsgate Victoria Hotel v. Montefiore, where the defendant’s offer made
in June was not accepted until November by which time it had elapsed.

5. In standing offers a requisition or order by the offeree constitutes an acceptance of the offer and the
offeror is bound to supply failing which it is liable in damages for breach of contract as was the case in
Great Northern Railway co. v. Witham.

6. An offer to a particular person can only be accepted by that person for an agreement to arise
between them.

7. An offer to a class of persons can only be accepted by a member of the class for an agreement to
arise.

8. A general offer may be accepted by any person by fulfilling its conditions as was the case in Carllil v.
Carbolic Smoke ball co. Ltd.

9. Acceptance must be communicated to the offeror in the prescribed method if any or an equally
expeditions method. Where no method of communication is prescribed, the method to apply depends
on the type of offer and the circumstances in which the offer is made.”

11. As a general rule silence does not amount to acceptance. It was so held in Felthouse v Bindley where
the plaintiff intended to buy a horse owned by his nephew John. In his offer he stated, “If I hear no more
about the horse I will consider him mine at £30 and 15 pence”. John did not respond but six weeks later
he gave the horses to the defendant auctioneer to sell by auction but instructed him not to sell the
particular horse. It was sold by mistake and the plaintiff sued the auctioneer in damages for the tort of
conversion. Question was whether there was a contract between the plaintiff and John. It was held that
there was none since John had not accepted the plaintiff’s offer and hence the defendant was not liable.

12. Where parties negotiate by word of mouth in each other’s presence, acceptance is deemed
complete when the offeror hears the offeree’s words of acceptance. Where parties negotiate by
telephone, acceptance is deemed complete when the offeror hears the offeree’s words of acceptance.
Where parties negotiate by telex acceptance is deemed complete when the offeree’s words of
acceptance are received by the offeror.

Once an offer is accepted, an agreement arises between the parties as there is consensus between
them. Offer and acceptance constitutes the foundation of a contractual relationship but not the contract
itself. For the agreement to become a contract it must be characterized by the other elements that
follow.

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4.2.3. Intention to create legal relations

In addition to offer and acceptance, an agreement must be characterized by intention. The parties must
have intended to create legal relations. Intention is one of the basic elements of a contract at common
law. An agreement is unenforceable unless the parties thereto intended such a consequence.

Ascertainment/Determination of intention:

To determine whether parties intended to create legal relations, courts consider;

a) Nature or type of agreement i.e. whether commercial or business and domestic or social.
b) The circumstances in which the agreement was entered into.

These two factors demonstrate whether the parties intended to contract.

a) Business or commercial agreements

Where the agreement between the parties is commercial or business in character there is a rebuttable
presumption that the parties intended to contract. For example:

i. Advertisements

These are intended to promote sales and are therefore commercial in character. In Carlill v. Carbolic
Smoke Ball Co. Ltd, the company had manifested an intention to create legal relations by stating that it
had deposited £1,000 with Alliance Bank Regent Street. Hence Mrs Carlill was entitled to the £100 as she
had contracted with the company.

ii. Employment agreements

These are commercial agreements intended to impose legal obligations on the parties thereto. In
Edwards v. Skyways Ltd, the plaintiff was a former employee of the defendant company as a pilot and
was declared redundant but promised on ex-gratia sum. By reason of many other redundancies, the
company was unable to make good the promise to Edwards who sued. It was held that he was entitled
to the sum as this was a business agreement intended to create legal relations. The court was emphatic
that this was not a domestic agreement.

b) Domestic or social agreements

Courts proceed on the presumption that the parties did not intend to create legal relations.

i. Agreement between husband and wife

Such agreements are generally not intended to impose upon the parties any rigid obligations.

In Balfour v Balfour, the defendant was a civil servant in Sri Lanka. At the material time, he and his wife
were in Britain on holiday. His wife fell ill and it became clear that she was not in a position to

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accompany him back to Sri Lanka. He promised to send her 30 pounds per month for the duration they
would remain apart. He did not and the wife sued. It was held that her action was not sustainable as the
parties had not intended to create a legal relationship. A similar holding was made in Gould v Gould as
well as Spellman v Spellman.

ii. Agreements between Parent and Child

Such an agreement is ordinarily not intended to be a contract but a working relationship, and is
therefore legally unenforceable.

In Jones v. Pandervatton, the plaintiff mother persuaded her daughter to leave a well-paying job to
study Law in Britain, she was promised a maintenance allowance as she studied. The defendant
daughter reluctantly agreed. In the meantime, the plaintiff bought a house where the defendant lived as
part of the maintenance. Before the daughter completed her studies, the 2 quarrelled and the mother
sought to evict her from the house. The daughter argued that there was a contract between them.
However it was held that the parties had not intended to create legal relations and the mother was
entitled to evict her.

However the circumstances in which a domestic or social agreement is entered into may show that the
parties intended to create legal relations. Such intentions may be garnered from the words used by the
parties, their conduct and the circumstances of the agreement;

i. Agreement between husband and wife

Such an agreement may be enforced if the parties have manifested an intention to contract. E.g. in
McGregor v McGregor, a husband and wife sued each other for assault but later resolved to withdraw
the cases but live apart. The husband promised to pay a weekly sum as maintenance while the wife
promised to maintain the children. The husband was in arrears for 6 weeks and the wife sued. It was
held that her action was sustainable as the parties had manifested an intention to contract.

4.2.4. Capacity to contract

In addition to consensus and intention, a contract must be characterized by capacity. This is the legal
ability or competence of a party to enter into a contractual relationship. As a general rule, every person
has a capacity to enter into any contractual relationship. However, in practice, the law of contract
restricts or limits the contractual capacity of certain classes of persons namely;

i. Infants or minors
ii. Drunken persons
iii. Persons of unsound mind
iv. Corporations

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v. Undischarged bankrupts

a) Contractual Capacity Of Infants Or Minors

Under article 260 of the constitution a child means an individual who has not attained the age of 18
years. Contracts entered into by an infant are binding, voidable or void depending on their nature and
the purpose for which they were entered into.

Binding contracts

These are contracts enforceable by or against the infant. Examples include:

i. Contracts for the Supply of “Necessaries”

Under section 4 (2) of the Sale of Goods Act necessaries mean goods suitable for the conditions in life of
such an infant or minor and to his actual requirement at the time of sale and delivery. The goods must
have been necessaries when delivered to the infant.

In Nash v. Inman, the defendant was an infant college student. Before proceeding to college, his father
bought him all the necessary clothing material. However, while in college, he bought eleven expensive
waist coats from the plaintiff but did not pay and was sued. His father gave evidence that he had bought
him all the necessary clothing material. It was held that he was not liable as the plaintiff had failed to
prove that the goods supplied were not necessaries.

Under section 4 (2) when an infant is supplied with necessaries he/she is liable to pay a reasonable
price.

ii. Educational Contracts

An infant is bound by a contract whose purpose is to promote his education or instruction e.g.
apprenticeship

Voidable Contracts

Certain contracts entered into by an infant are voidable i.e. the infant is entitled to repudiate the
contract during infancy or within a reasonable time after attaining the age of majority.

By avoiding the contract, the infant escapes liability on it. Examples include: Partnership agreements,
lease or tenancy agreement and contract for the purchase of shares.

Under Section 12 of the Partnership Act, an infant partner is not liable for debts and other liabilities of
the partnership during infancy since the contract is voidable at his option.

However under Section 13 of the Act, if the infant does not avoid the contract during infancy, or within a
reasonable time after attaining the age of majority, he is liable for debts and other obligations of the
firm from the debt he became partner.

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Void Contracts

Under the provisions of the Infants Relief Act (1874) which applies in Kenya as a statute of general
application, certain contracts entered into by infants are void. These are contracts which the law treats
as non-existent. They confer no rights and impose no obligations on the parties, and are therefore
unenforceable by or against the infant.

These contracts include the following:

i. All accounts stated with infants: These are debts admitted by an infant. The infant cannot be
sued on such admission
ii. Contracts for the supply of goods other than necessaries: e.g. if an infant is a trader a
contract to supply or be supplied with goods is void, it was so held in Mercantile Union
Guarantee Corp Ltd V Ball.
iii. Money lending contracts: An infant is not bound to repay any monies borrowed from a 3rd
party as the contract is void. However if the infant repays, the amount is irrecoverable.

In Leslie Ltd. V. Sheil, the defendant, an infant borrowed £400 from the plaintiff, a money lending firm
in 2 lots of £200 each and was liable to pay £475 inclusive of the interest but failed to do so and was
sued. The plaintiff argued that it was entitled to damages for misrepresentation as the defendant had
fraudulently misrepresented his age. It further argued that the defendant had received the money on its
behalf. It was held that the amount was irrecoverable as the contract was void by reason of the Infants
Relief Act 1874.

b) Contractual Capacity Of Drunken Persons

A contract entered into by a drunken person is voidable at his option by establishing that:

i. He was too drunk to understand his acts


ii. The other party was aware of his condition.

By avoiding the contract, the person escapes liability on it. In Gore v. Gibson, the defendant was sued on
a bill of exchange he had signed and endorsed. He pleaded that when he did so he was too drunk to
understand what he was doing and that the plaintiff was aware of his condition. It was held that he was
not liable as the contract was voidable at his option by reason of the drunkenness.

Under Section 4 (2) of the Sale of Goods Act, if a drunken person is supplied with necessaries he is liable
to pay a reasonable price.

c) Contractual Capacity Of Persons Of Unsound Mind

A contract entered into by a person of unsound mind is voidable at his option by establishing that:

i. He was too insane to understand his acts


ii. The other party was aware of his mental condition.

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By proving the above facts the person demonstrates that he had no capacity to contract and therefore
the purported contract is void. In Imperial Loan Co. Ltd v Stone, the defendant was sued on a
promissory note he had signed. He argued that at the time, he was insane and therefore incapable of
comprehending the nature or effects of his acts and that he was not liable on the promissory note as the
contract was voidable by reason of insanity. In the words of Lopes L.J. “In order to avoid a fair contract
on the ground of insanity, the mental incapacity of the one contracting must be known to the other
contracting party. A defendant who seeks to avoid a contract on the ground of insanity must plead and
prove not merely his insanity but the plaintiff’s knowledge of that fact and unless he proves these 2
things he cannot succeed.”

Under Section 4 (2) of the Sale of Goods Act, if a person of unsound mind is supplied with necessaries,
he is liable to pay a reasonable amount.

d) Contractual Capacity Of Undischarged Bankrupts

These are persons who have been declared bankrupt by a court of competent jurisdiction. Their capacity
to contract is restricted by the provisions of the Bankruptcy Act. For example, under section 139 if a
bankrupt person borrows more than ksh 100 without disclosing their state they are guilty of a criminal
offence and the same applies when such persons enter into trading contracts worth more than ksh 100.

e) Contractual Capacity Of Corporations

These are artificial persons created by law, either by the process of registration or by statute. The
capacity of the corporations to contract is defined by law and is subject to two limitations:

i. Natural limits: since a corporation is an abstraction of law it has no capacity to enter into
contracts of a personal character. In addition, it can only contract through human agents.
ii. Legal limits: corporations can only enter into contracts prescribed by law. Other transactions
are ultra vires and therefore null and void. For example, the contractual capacity of a
registered company is defined by the object clause of the memorandum. At common law a
registered company has capacity to enter into transactions set forth in the objects and those
that are reasonably incidental to the attainment or pursuit of such objects. It was so held in
Ashbury Railway Carriage and Iron Co. v. Riche. Other transactions are ultra vires (beyond
the powers of) the company and void. Transactions within the powers of a company are said
to be intra vires a company.

4.2.5. Consideration

In addition to consensus, capacity and intention, an agreement must be characterized by consideration


to be enforceable as a contract. At Common Law, a simple contract is unenforceable unless supported
by some consideration. Consideration is the bargain element of a contract.

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It has been defined as “an act or promise offered by the one party and accepted by the other party as
price for that others promise.”

Rules of Consideration

1. Mutual love and affection is not sufficient consideration:

It was so held in Thomas v. Thomas. Mr. Thomas had expressly stated that if he died before his wife, she
was free to use his house as long as she remains unmarried. His brothers who later became executors of
his estate knew of this wish. After his death, Mrs. Thomas remained in his house and paid a
consideration of £per year. After the death of one of the executors, the other sought to evict Mrs.
Thomas from the house. She sued the late husband’s estate. It was held that the husbands promise was
enforceable as she had provided consideration by way of the £1 she paid for every year she lived in the
house. The love she had for the late husband was not sufficient consideration but the £1 she paid every
year was.

2. Consideration must be legal:

The act or promise offered by the promisee must be lawful as illegal consideration invalidates the
contract.

3. Consideration must not be past

As a general rule, past consideration is not good to support a contractual claim as exemplified by the
decisions in Re McArdles case where the promise to pay the £488 was made after the amount had been
spent. A similar holding was made in Roscorla v. Thomas.

4. Consideration must be real but need not be adequate.

This rule means that as long as something of value passes consideration is sufficient. The law does not
concern itself with the economics of a transaction. Courts of law do not exist to correct bad bargains and
consideration will be sufficient even though it is not adequate. In Thomas v. Thomas, the £1 Mrs.
Thomas paid per year was sufficient consideration.

5. Consideration must be something in excess of a public duty owed by the plaintiff

Performance by the plaintiff of a public imposed by law is not sufficient consideration for a promise to
pay.

In Collins v. Godefroy, the defendant was involved in a civil case and the plaintiff had given evidence in
the matter but was reluctant to do so in future. The defendant promised him 6 pounds if he continued
giving evidence which he did. The defendant did not honour his promise and was sued. Question was
whether the plaintiff had provided consideration for the defendants promise to pay. It was held that the
promise was unenforceable as the plaintiff had not provided consideration but had merely performed a
public duty.

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6. Consideration must be something in excess of an existing contractual obligation

Performance by the plaintiff of an existing contractual obligation is not sufficient consideration for a
promise. In Stilk v. Myrik, the defendant who was a ship captain entered into a contract with his crew
members to assist him on a journey from Britain to the Baltic Sea and back. In the course of the journey,
2 sailors deserted. The captain promised to share their wages between the remaining crew members a
promise he did not honour and was sued. It was held that the crew members were not entitled to the
extra pay as they had not provided consideration. They had merely performed an existing contractual
obligation.

However, doing something in excess of a contractual obligation constitutes consideration. In Hartley v.


Ponsonby where in the course of a journey, a substantial number of crew members deserted and a
promise for extra pay was made, it was held that they were entitled to the pay as they had done more
than their contractual obligation. The willingness to expose themselves to danger for longer hours
constituted consideration for the promise.

4.2.6. Illegality

The term illegality does not necessarily mean that a criminal offence is involved.

It means that the contract in question is unenforceable as it is injurious to the public or is inconsistent
with the public good. An illegal contract is un-enforceable. This is because for an agreement to be
enforceable, it must have been entered into for a lawful purpose.

A contract may be declared illegal by statutes or a court of law.

Contracts declared illegal by Statutes.

These are contracts declared illegal by Acts of Parliament. Such contracts are unenforceable ab initio.
For example, under the betting, lottery and gaming act unlicensed betting is illegal. Also, under the
companies Act the allotment of company shares of a parastatal without the written consent of the
treasury is illegal.

Contracts declared illegal by courts of law (contracts illegal at common law)

These are contracts declared illegal by courts of law for being contrary to public policy. For example,

1. A contract to commit a crime, tort or fraud.

Such a contract is illegal and unenforceable as it is a contrary to public policy to commit crimes, torts or
fraud. In Bigos v. Boustead where the object of the contract was to violate the English Exchange control
regulations; it was held that the contract was illegal and unenforceable.

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2. Contracts prejudicial to public safety

These are contracts which promote harmful activities in a country or its neighbors. E.g. a contract to
finance rebels in a country or coup plotters, assisting alien enemies etc.

3. Contracts prejudicial to the administration of justice

These are contracts which interfere with the judicial process e.g.

a) A contract to stifle prosecution of an alleged crime


b) Champerty agreements: This is a contract whereby a party provides financial assistance to
another involved in a civil case so as to share the amount awarded by the court. Such a contract
is illegal and unenforceable
c) Maintenance: this is a contract whereby a party provides financial assistance to another to
enable him sue a 3rd party for no reasonable course. Such a contract facilitates the harassment
of a party by another through the courts. It is illegal and unenforceable.

4. Contracts to defraud the state of revenue

A contract whose object is to deny the state whether central government or local government revenue
by way of evading tax is illegal and unenforceable.

In Miller v. Karlnski the plaintiff who was an employee of the defendant earned ₤10 per week. Under
their contract of employment the amount deducted as tax was payable to the plaintiff as an allowance.
The defendant was in arrears for weeks and the plaintiff sued. It was held that the allowance was
irrecoverable since the object of the contract was to defraud the state of revenue.

5. Contracts liable to promote corruption in public

Such a contract is unenforceable as corruption is contrary to public policy. In Parkinson v. College of


Ambulance and Another, the secretary of a charitable organization informed the plaintiff that it could
be honored with a knight hood if he donated to the organization. The plaintiff gave ₤ 3,000 but was not
knighted as only the King could bestow the title. In an action to recover the sum, it was held that it was
irrecoverable as the contract was illegal.

6. Contracts liable to promote sexual immorality

These are contracts contra bonos mores (contrary to good morals). Such a contract is unenforceable on
account of illegality. In Pearce v. Brooks the plaintiff owned a beautiful horse drawn carriage which he
hired to the defendant, a prostitute for 12months at stated charges. The plaintiff knew that the
defendant was a prostitute and intended to use the carriage to solicit influential customers. In an action
to enforce payment of the hiring charges, it was held that that contract was unenforceable as it was
illegal as performed as its purpose was to promote sexual immorality.

7. A contract based on an illegal contract is also an illegality of the other contract.

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Effects Of Illegality

An illegal contract is said to be ‘beyond the pale of law’. Such a contract is unenforceable as it creates no
rights and imposes no obligations on the parties. Neither party is bound to perform. Money or assets
changing hands under an illegal contract is irrecoverable as gains and losses remain where they have
fallen.

However such money or assets may be recovered in certain circumstances:

i. Where either party repents/ regrets the illegality before the contract is substantially performed
ii. Where the parties are not in pari delicto (not equally to blame for the illegality), the less
blameworthy party may recover
iii. If the owner of the money or asset establishes title thereto without relying upon the illegal
contract. As was the case in Amar Singh v. Kulubya, where a piece of land had changed hands
under an illegal contract but the plaintiff established his title thereto without relying on the
illegality.

4.2.7. Formalities

In addition to the basic elements of a contract certain contracts are subject to certain formalities which
must be complied with for the agreement to be legally enforceable. The formalities are statutory in
nature and include:

1. Requirement Of Writing

Some contracts must be embodied in a formal document e.g. Hire Purchase Agreement, contract of
Marine Insurance

2. Requirement For Written Evidence

Some contracts must be evidenced by some note or memorandum which must contain:-

a) Description of the parties


b) The Consideration
c) Signature of the parties

Examples include Contracts of Guarantee and Contracts of Insurance other than Marine.

3. Requirement Of Consent

Under sec. 6 of the Land Control Act, a contract for the sale of agricultural land must be consented to by
the Land Control Board of the district in which the land is located failing which the contract is
unenforceable. The consent must be applied for within 6 months of the agreement failing which the

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contract is void. However, the president is empowered to exempt a transaction from the requirement
of consent on application by the parties.

4. Requirement Of Signature

A contract entered into with the government must be signed by the Revenue Officer of the ministry or
some other duty authorized person failing which the contract is enforceable.

The formalities of writing and requirement of written evidence are intended to prevent fraud; however,
it is possible for a party to perpetrate fraud by insisting that the requisite formalities have not been
complied with.

To prevent such injustice, equity developed the doctrine of Part Performance.

The Doctrine Of Part Performance

The doctrine is to the effect that where parties have entered into an oral agreement and before the
formalities are complied with one of the parties does something in furtherance of the agreement , the
other party cannot be heard to say that there was no agreement between them. The part
performance binds the parties.

This doctrine was developed by equity and is now contained in the proviso to sec. 3 of the Law of
Contract Act. Under the proviso, Part performance may consist of:

a) Entry onto another’s land pursuant to an agreement


b) Remaining in possession of another’s land pursuant to an agreement.

In Credit Finance Corporation v. Ali Mwakasanga, the defendant opted to take a truck on Hire Purchase
terms; he completed the application form, paid a deposit and took delivery of the truck. Subsequently,
the plaintiff alleged that there was no contract between them as it had not signed its part of the
contract. However, it was held that the defendant’s conduct amounted to part performance and hence
there was a contract between them.

4.3. Terms of a contract

Contractual terms may be conditions, warranties or implied.

4.3.1. Conditions

This is a term of major stipulation in a contract. It runs to the root of the contract. It is part of the central
theme of the contract. If a condition is breached, it entitles the innocent party to treat the contract as
repudiated and to sue in damages as was the case in Poussard v. Spiers and Pond. A singer was engaged
to play the leading role in a French Opera from the beginning of the season but owing to illness she was
unable to take up her role during the first 1 week forcing the organizers to engage a substitute and
consequently rejected the singer’s services who sued.

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It was held that the organizers were entitled to treat the contract as repudiated as the singer had
broken a major term of the contract. A condition may be express or implied in a contract.

4.3.2. Warranties

This is a minor term of a contract or a term of minor stipulation. It is a peripheral or collateral term that
does not run into the root of the contract. If breached, it entitles the innocent party to sue in damages
only as the contract remains enforceable and both parties are bound to honour their part of the bargain.

In Bettini v. Gye, an actress was engaged to perform in concerts and theatres from the beginning of
performances. However she additionally agreed to appear for 6 days in advance for rehearsal but
appeared for only 3 days. The organizers purported to treat the contract as repudiated. It was held that
the contract was subsisting as the agreement to appear for rehearsals was a collateral term.

4.3.3. Implied Terms

These are terms which though not agreed to by the parties, are an integral part of the contract. These
terms may be implied by statutes or by a court of law.

4.3.4. Exemption Or Exclusion Clauses

An exemption clause is a clause inserted in a contract by the stronger party exempting, itself from
liability or limiting the extent of any liability arising under the contract.

These clauses are common in standard form contracts e.g. conveyance of goods, hire purchase
agreements contracts of insurance etc. and are justified on the theory of freedom of contract.

Courts of law enforce exemption clauses if satisfied that they were an integral part of the contract.

In L’estrange V. Graucob (1934) the plaintiff bought an automatic cigarette vending machine from the
defendant. The terms of the agreement were written in a document entitled sale agreement. Some of
the clauses were in a very small print and the plaintiff signed the document without reading. One clause
exempted the defendant from liability if the machine turned out to be defective. It worked for only a
few days. The plaintiff sued and the defendant relied on the exemption clause in the agreement. It was
held that the defendant was not liable as the document contained the terms of the contract and the
plaintiff had signed the same and was therefore bound.

Incorporation by Signature

If a document signed by the parties to a contract contains an exemption clause, the court must be
satisfied that: -

a. The document contained the terms of the contract between the parties

b. It was signed by the party affected voluntarily

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Signature prima facie means acceptance. A party cannot after signing a document argue that it did not
read, understand or that the print was too small. It was so held in L’Estrange V. Graucob.

However if there is evidence that the signature was procured by fraud or misrepresentation of the
contents of the document the signature is voidable at the option of the innocent party.

This was the case in Curtis v. Chemical Cleaning & Dyeing Co. the plaintiff took a wedding dress to the
defendant shop for cleaning and was given a document to sign. She requested the shop assistant to
explain to her the contents and was informed that the document exempted the company from liability
for any damage caused to the decorations of the dress. She signed the document without reading. Her
dress was damaged and stained. She sued the company which relied on the exemption clause which
excluded it from liability for any damage. The plaintiff pleaded that the contents of the document had
been misrepresented to her and hence the signature, it was held that the signature was voidable at her
option and the company was liable.

Incorporation by Notice

Where there is no document to be signed the court must be satisfied that the exemption clause was
brought of the attention of the party either before or when the contract was being concluded as was the
case in Parker v. South Eastern Railway Co. The plaintiff had left in luggage at a railway station luggage
office and was given a ticket containing the words “see back”. At the back was a clause exempting the
company from liability for lost luggage. The plaintiff’s luggage was lost and he sued. The company relied
on the exemption clause. It was held that the company was not liable as it had brought the exemption
clause to the plaintiff’s notice who was therefore bound.

However, an exemption clause brought to the attention of the party after the contract has been
concluded has no effect on the contract. In Olley v. Malborough Court the plaintiff had booked in a
hotel and paid for a week’s board, she was given a key to her room where there was a notice exempting
the hotel from liability for lost items. The notice was behind the door. Guests were requested to deposit
valuable with the manageress of the hotel. During her absence a stranger opened the room and stole
her expensive clothing. She sued. The hotel relied on the exemption clause in the room. It was held that
the hotel was liable as the exemption clause was brought to the plaintiffs notice after the contract had
been concluded.

A similar holding was made in Lougher v. Kenya Safari Lodges and Hotels Ltd. Where the plaintiff who
was a guest in a hotel was injured near the swimming pool next to which was a notice exempting the
hotel from liability for injuries sustained by persons near the swimming pool. It was held that the hotel
was liable as the exemption clause was not part of the contract.

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4.4. Vitiating elements of a contract

These are circumstances which interfere with the enforceability of a contract since they have a negative
effect on the contract. They may render a contract void or voidable.

1. Misrepresentation

It is a false statement made by a party to induce another to enter into a contractual relationship. It
renders the contract voidable at the option of the innocent party.

However for the innocent party to avoid the contract, it must be proved that: -

i. The statement in question was false in a material particular


ii. The statement was more than a mere puff or sales talk. Whether a statement is a puff or a
misrepresentation depends on what a reasonable person could deem it to be
iii. The statement was one of fact not opinion. As a general rule opinion does not amount to
misrepresentation. However an opinion may amount to misrepresentation if:
a) The maker does not honestly hold that opinion
b) The opinion purports to be based on certain facts within the maker’s knowledge but
whose truthfulness he does not verify.

iv. The false statement was in fact made by the other party to the contract. As a general rule,
omission, silence or non-disclosure does not amount to misrepresentation.

Innocent Misrepresentation

A statement is deemed to be innocently misrepresented if the maker honestly believed in its truth
though it was false and had no means of ascertaining that it was false as was the case in Derry v. Peek
where it was held that the defendants were not liable as they honestly believed that the statements in
the prospectus were true.

Fraudulent Misrepresentation

A statement is deemed to be fraudulently misrepresented if the maker:

a) Has knowledge that it is false


b) Makes it carelessly and recklessly
c) Does not believe in its truth

The innocent party may either apply for recession of the contract or sue in damages for the tort of
deceit as was the case in Andrew v. Mockford where the defendants had issued a prospectus containing
untrue statements and the plaintiff applied for 50 shares and was allowed the same but subsequently
sued the defendants in damages for fraudulent misrepresentation. It was held that the defendants were
liable as they were aware of the falsity of the statements.

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Negligent Misrepresentation

A statement is deemed to be negligently misrepresented if the maker has both means of capacity of
ascertaining its falsity but fails to do so. The maker is deemed negligent as a reasonable person in such
circumstances would have so ascertained.

However, for negligent misrepresentation to be relied upon, it must be proved that:

i. There was a special relationship between the maker and recipient of the statements hence
the maker owed the recipient a legal duty of care.
ii. The loss suffered was financial in nature

It was so held in Hedley Byrne and Co. ltd. V. Heller and Partners Ltd. A customer of the defendant
approached the plaintiff bank for some guarantees. The plaintiff bank wrote to the defendant seeking to
learn the credit worthiness of the defendant’s customer. The defendant bank in 2 letters written on a
‘without responsibility basis’ confirmed that their customer was credit worthy. The plaintiff extended
the guarantee but due to the customer’s uncreditworthiness, the plaintiff suffered loss of £19,000. The
plaintiff sued. It was held that though the defendant bank was negligent it was not liable as the
information had been given on a ‘without prejudice / responsibility basis”.

2. Mistake

A mistake is said to be misapprehension of a fact or factual situation. It is an erroneous assumption.

Common/ shared mistake

Both parties make the same mistake. Each party understands the others intention but both are
mistaken about some underlying fundamental fact. E.g. the subject matter does not exist. Common
mistake renders the contract void in two circumstances:

i. Cases of Res Extincta: These are circumstances in which parties are unaware that the
subject matter does not exist. Under sec 8 of the sale of goods Act where there is a contract
for the sale of specific goods which without the seller’s knowledge have perished the
agreement is void. In Couturier V. Hastie the parties entered into a contract for the sale of a
large quantity of corn which at the time was supposed to be on transit to Britain from
Greece but unknown to the parties the ship captain had sold the corn in Tunisia due to
overheating and fermentation. It was held that the buyer was not liable to pay the price as
the contract was void for common mistake as the subject matter did not exist.
ii. Cases of Res Sua: These are circumstances in which parties are mistaken about the
ownership of the subject matter. The party purporting to buy is the legal owner but both
are unaware of the fact. The purported seller has no title to pass hence the purported

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contract is void. It was so held in Bingham V. Bingham where the party purported to take a
lease of his property from another party, unbeknown to both, the property belonged to the
purported tenant.

Mutual Mistake

It arises when parties misunderstand each other or at cross purposes. No agreement arises between
them for lack of consensus ad idem.

In Raffles V. Wichelhause the parties entered into a contract for the sale of cotton to be shipped to the
U.K. on board “the peerless” from the port of Bombay. Unknown to the parties there were two ships by
the name “peerless” at the port of Bombay. One sailed in October and the other in December. While
the buyer meant the October ship the seller referred to the December one. The cotton was shipped by
the December vessel and the buyer refused to take delivery. It was held that he was not bound as the
contract was void for mutual mistake.

Unilateral Mistake

This is a mistake as to the identity of one of the parties to the contract. Only one party is mistaken and
the mistake is induced by the other party.

Unilateral mistake arises where a fraudulent person misrepresents his identity to another so as to obtain
goods on credit or other favourable terms which he then sells to a bona fide 3rd party who takes
without notice of the fraud.

The dispute is usually between the original owner of the goods and the bonafide purchaser.

The original owner is entitled to the goods or their value by establishing that the contract between him
and the fraudulent person was void for unilateral mistake. The party must prove that:

i. It dealt with a person other than the one it intended to deal with
ii. The person it dealt with was aware of that fact
iii. The identity of the person, the party intended to deal with was fundamental to the contract
iv. The seller made reasonable attempts to verify the identity of the other person it dealt with

In Cundy v. Lindsay and Co. Ltd. A fraudulent person known as Blenkarn ordered goods from Lindsay
and Co. Ltd. He ensured that his signature resembled that of a company named Blenkiron and Co and he
even quoted an address on the same street as the company. Lindsay and Co. had heard of Blenkinron
and Co but had not dealt with them. Thinking that they were dealing with Blenkiron and Co. Lindsay and
Co. dispatched the goods to the address. Blenkarn took delivery and sold them to cundy. Lindsay and Co.
sued Cundy in damages of conversion. It was held that they were entitled to damages as Cundy had no
title to the goods since the contract between Lindsay and Blenkarn was void by ubilateral mistake.

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A similar holding was made in Ingram and others v. Little where three sisters advertised the sale of a
vehicle. A fraudulent person introducing himself as Mr. Hutchinson for offered to take it for £717 but
paid by cheque which the sisters initially refused. He re-introduced himself as P.G.M Hutchinson and
gave an address which one of the sisters confirmed with a local post office. They accepted the cheque
which was subsequently dishonoured by which time the car had been sold to the defendant. The
plaintiffs sued the defendant for the car. It was held that they were entitled to it as the contract
between them and the fraudulent person was void for unilateral mistake.

3. Duress

At common law duress means actual violence or threats thereof.

It exists where a contractual relationship is procured by actual violence on the person or threats thereof.

The party is compelled or coerced to contract. Duress was developed by the common law with a very
narrow scope. It renders a contract voidable at the option of the innocent party.

For the contract to be avoided, the innocent party must prove that:

i. The threat was intended to cause fear, injury or loss of life


ii. The threat was directed to his person or body as opposed to his property. It was so held in
Altee v. Backhouse. The threat may also be directed to the body of a member of the
person’s household.
iii. The threat was illegal e.g. a threat to sue, prosecute or cause imprisonment for no
reasonable cause. A threat to enforce once legal rights does not amount to duress. It was so
held in Hassan Ali Issa v. Jeraj Produce Shop where the defendant had alleged that the
cheque had been written under duress in that the plaintiff had threatened to sue if repair
and storage charges were not paid. It was held that the threat did not amount to duress.

In Friedberg Seelay v. Klass where the plaintiff had sold her jewelry to persons who had gained access to
her house and threatened not to leave until she sold them, it was held that she could avoid the contract
for duress.

4. Undue Influence

It is said to exist where a party dominates the others will thereby inhibiting its exercise of an
independent judgment on the contract.

One party thus exercises overwhelming influence over the other. Undue influence was developed by
equity with a fairly wide scope. It renders a contract voidable at the option of the innocent party.

Undue influence is presumed Where parties have a special relationship E.g. parent-child, advocate-
client, doctor-patient, trustee-beneficiary, religious leader-disciple; undue influence is presumed in

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favour of the weaker party. It is the duty of the stronger party to show that the weaker party made an
independent decision on the contract. E.g. he had an advocate of his own.

In Ottoman Bank Co. Ltd. v. Mawani, the defendant worked at his father’s business and had no other
source of income. He had guaranteed a loan to the father’s business. The fathers business was unable to
pay the loan and the bank sued so as to enforce the guarantee. Evidence tendered showed that the
defendant was still under the control of the father. He worked in the fathers firm and had no
independent source of income. It was held that he wasn’t liable on the guarantee as it was voidable at
his option for the father’s undue influence.

The party alleging that it was unduly influenced must seek judicial redress at the earliest possible
instance because delay defeats equity as was the case in Allcard v Skinner. In 1868 the plaintiff was
introduced to the leader of an organization called the sisters of the poor and three years later she
became a member by taking a vow of poverty, chastity and obedience. She was a member for 8 years.
She left in 1879. During her membership she had given assets and money worth £7000 and by the time
she left £1671 had not been utilized by the organization. She did not sue for the sum until 1885. It was
held that the amount was irrecoverable as she had slept on her rights for too long.

4.5. Discharge of a contract

A contract is said to be discharged, when the obligation created by it ceases to bind the parties who are
now freed from performance.

1. Discharge by agreement:

A contract may be discharged by agreement if the parties thereto expressly agree to discharge the
contract.

2. Discharge By Performance

A contract is discharged by performance if both parties perform their mutual obligations as agreed.
Each party must have performed its part.

3. Discharge By Impossibility Or Doctrine Of Frustration

A contract is said to be frustrated if performance of the obligation is rendered impossible, illegal or


commercially useless by unforeseen or extraneous circumstances for which neither party is to blame.
When a contract is frustrated, it terminates and the parties are discharged

4.3.1 Circumstances in Which A Contract May Be Frustrated

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i. Destruction of Subject Matter

If the subject matter of the contract is destroyed before performance and neither of the parties is to
blame, the contract is frustrated. It must be evident that the subject matter was the foundation of the
contract.

In Taylor v. Caldwell, the defendant had hired the plaintiff’s hall to conduct a musical concert at
specified charges, before the day of the first concert, the hall was destroyed by fire and neither of the
parties was to blame. In an action by the plaintiff to recover hiring charges, it was held that they were
irrecoverable as the destruction of the hall frustrated the contract and thereby discharged the parties.

ii. Non-occurrence of an event

If a contract is based on a particular event or state of affairs existing at a particular time, its non-
occurrence frustrating the contract and discharges the parties.

However, for the contract to be frustrated, it must be evident that the event or state of affairs was the
only foundation of the contract.

In Krell v. Henry (1903), the defendant had hired a room in the plaintiff house to enable him view Royal
Procession of the coronation of King Edward VII. However, the king was taken ill before the coronation
and the ceremony was cancelled. It was held that the hiring charges were irrecoverable as the
cancellation of the ceremony frustrated the contract and discharged the parties.

iii. Illegality

If performance of contractual obligations becomes illegal by reason of change of law or otherwise the
parties are discharged as there is no obligation to perform that which has become illegal.

iv. Death or Permanent Incapacitation

In contracts of personal service or performance e.g. employment, the death or permanent


incapacitation of a party frustrates the contract and discharges the parties as the obligations are not
generally transferable.

v. Government Intervention

If a policy, act or regulation makes it impossible for a party to complete its contractual undertaking the
contract is frustrated and the parties discharged e.g. refusal to grant a license as was the case in Karachi
Gas Company v. Isaaq where the government refused to grant an export license in respect of certain
pipes to be exported to Karachi. When sued, the defendant relied on the government refusal to grant
the license.

4. Discharge By Breach Of Contract

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Breach of a contract does not discharge it; it gives the innocent party an opportunity to treat the
contract as repudiated or as existing. If it treats the contract as existing, it is bound to honor its part.
However, if it treats it as repudiated it is not bound to do so and may sue for damages.

4.6. Remedies for Breach of Contract

1. Damages

This is the basic Common Law remedy; it is a monetary award by the court to compensate the plaintiff
for the loss occasioned by the breach. Its objective is to place the plaintiff to the position he would have
been had the contract been performed.

2. Injunction

This is a court order which either restrains a party from doing or continuing to do a particular thing or
compels it to undo what it has wrongfully done. It is an equitable remedy whose award is discretional
and may be granted in circumstance in which:

1. Monetary compensation is inadequate


2. It is necessary to maintain the status quo

Types Of Injunction

They may be classified as:

i. Prohibitory injunction

This is a court order which restrains a party from doing or continuing to do a particular thing. Its purpose
is to discontinue the act if performance has commenced or prevent commencement. It is the most
common type of injunction.

ii. Mandatory injunction

It is a court order which compels a party to put right what it has wrongly done. It is restorative in
character.

3. Quantum Meruit

This literally means “as much as is earned or deserved”This is compensation for work done. The plaintiff
is paid for the proportion of the task completed.

The remedy has its origins in equity and its award is discretional. It may be granted where:

1. The contract does not specify the amount payable

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2. The contract is divisible
3. The contract is substantially performed
4. Partial performance is accepted
5. A party is prevented from completing it undertaking.

4. Specific performance

In a breach of contract action, the doctrine of specific performance requires the breaching party to
perform a specific act, usually what he has agreed to perform under the terms of the contract. The court
may grant specific performance when money damages would provide inadequate compensation for the
breach.

5. Rescission

This is a remedy that restores the parties to the positions they would have occupied if no contract had
ever been formed. It is the unmaking of a contract between parties

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