UNIT CODE: BAF2105 UNIT NAME: BUSINESS LAW

CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract

Definition
This is a legally binding agreement made between two or more parties or persons. It has
also been defined as a promise or set of promises for the breach of which the law
provides a remedy and the performance of which the law recognizes as an obligation.
All contracts are agreements, but all agreements are not contracts. This is because a
contract imposes upon the parties legally binding obligations.

TYPES OF CONTRACTS
1.1 TYPES OF CONTRACT
The common law of England relating to contract classifies contracts into the following
categories:
(i) Specialty Contracts - which are executed in a special way (i.e. written, signed and
sealed). The Kenya Law of Contract Act, S. 2(1) provides that no contract in writing shall
be void or enforceable by reason only that is not under seal.
(ii) Contracts of record e.g. court orders.
(iii) Simple contracts - i.e. agreements that are enforceable by the courts.

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

A contract comes into existence when an offer by one party is unequivocally accepted by
another, both parties must have the requisite capacity and some consideration must pass
between them. The parties must have intended to create legal relations and the purpose
of the agreement must have been legal. Any requisite legal formalities must have been
complied with.
The above passage summarises the so-called elements of a contract. In order to
constitute a contact and agreement must be attended by the basic elements.

2. ELEMENTS OF A CONTRACT
1. OFFER

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

2.3 Rules Relating to an Offer

The case law relating to an offer has established the following rules:
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CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
(i) The offer may be oral, written or may be implicated from the conditions of the

offer.

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

A person cannot be said to have accepted an offer with such conditions: he would not
have understood what he was purporting to accept. However, in Stevens v. Mclean the
court explained that, an offeror must explain a vague offer if asked to do so.
(ii) An offer may be conditional or unconditional.
2.4 Termination of an Offer
An offer may come to an end by:
- Insanity
- Revocation
- Lapsing of time
- Counter-offer.
- Death
- Rejection
- Failure of a condition subject to which the offer was made.

(a) Revocation
An offer is "revoked" if the offeror changes his mind and withdraws it (expressly or
impliedly). To be valid, the revocation must have been:
(i) Made before acceptance :).
(ii) Communicated (i.e. made known)

Exceptions
(i) Consideration was given for keeping the offer open. Such an offer constitutes an
"Option". An example is a hire purchase agreement. The owner of goods cannot tell the
hirer that he will not, after all, sell the goods to him.
(ii) An application for shares in a company made in response to a prospectus cannot be
withdrawn until after the expiration of the third day after the time of opening of the
subscription lists. This is provided by the Companies Act, S. 52.
(b) Lapse of time
An offer "lapses" (i.e. comes to an end automatically by operation of law) if:
(i) It is not accepted within the stipulated time if any.
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CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
(ii) It is not accepted within what appears to the court to be the reasonable
time during which it should have been accepted,
(iv) It is an offer to sell property, and the property is sold to another party
before the offeree accepts the offer:)

(c) Counter - offer

A counter - offer is constituted by the offeree's qualified acceptance which, in itself,
becomes the fresh offer and cancels the original offer,

(d) Death
The death of either party before acceptance terminates a specific offer. However, the
offer only lapses when notice of death of the one is given to the other

(e) Insanity
Additionally, the unsoundness of mind of either party before acceptance terminates the
offer. However, the offer only lapses when notice of the insanity of the one is
communicated to the other.

(f) Rejection

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

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

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

2. ACCEPTANCE

This is the external manifestation of assent by the offeree. By acceptance an agreement

comes into existence between the parties. Acceptance takes place at a very subjective
moment when the minds of the parties meet, i.e. Consensus ad idem. This is the moment
at which an agreement comes into existence. However, this subjectivity must be
“externalised”. This is what is referred to as acceptance.
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CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
This offer and acceptance give rise to consensus, hence agreement. These two
elements constitute the foundation of every contractual relationship but cannot by
themselves constitute a contract.

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

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

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

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

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

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

(e) An offer made to a particular person can be accepted only by the particular person:
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CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
(f) The acceptance of an offer must be unconditional: An offer terminated by a counter -
offer cannot be revived by a subsequent tender of performance thereof.

(g) An acceptance of an offer communicated to the offeror verbally by the offeree

is effective from the moment the offeror hears the offeree's words

(h) If the offeror and offeree negotiate by telephone the acceptance is

complete the moment the offeror hears the offeree's words of acceptance

(i) If the offeror and offeree negotiate by telex the acceptance will be
effective from the moment that the telex message is received by the offeror:

(j) If the offeror expressly or impliedly authorised the offeree to transmit his
acceptance by post the acceptance will be effective at the moment the letter
of acceptance is posted:

3. CAPACITY
3.1 Capacity to Contract

`Capacity' may be described as the legally recognized right of a person to

enter into a legally binding agreement. The law of contract limits in varying
degrees the contractual capacity of the following persons:

(i) Infants or minors,

(ii) Drunken persons and persons of unsound mind,
(iii) Corporations.
(iv) undischarged bankrupts.

3.1.1 Ractral capacity of Infants or minors

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

3.1.2 Binding Contracts

Contracts which are binding on an infant are contracts for:

UNIT CODE: BAF2105 UNIT NAME: BUSINESS LAW
CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
(i) Necessaries,

(ii) Education, and

(iii) Beneficial service.

(a) Necessaries

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

To constitute necessaries, the goods:

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

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

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

Liability for Necessaries

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

(b) Education

An infant may legally enter into a contract for educational instruction. Some textbooks
regard education as part of 'necessaries'.
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elements that may affect the validity of a contract & remedies incase
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(c) Beneficial Service

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

for his benefit.

3.1.3 Voidable Contracts

The following contracts are valid and binding upon an infant unless he repudiates them
during infancy or within a reasonable time after attaining the age of eighteen:
- A lease,
- A partnership agreement,
- A contract to purchase a company's shares.

(a) Leases

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

time after attaining the age of eighteen.

(b) Partnership Agreement

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

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

(c) Purchase of Shares

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

3.1.4 Void Contracts

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

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

UNIT CODE: BAF2105 UNIT NAME: BUSINESS LAW
CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
- 'Contracts’ for goods supplied or to be supplied (other than contracts for
necessaries),
- All "accounts stated" with infants.

(i) Loans

All loans made to an infant are void and irrevocable.

(ii) Loans given for necessaries

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

(iii) Subrogation

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

Ratification

If an adult person makes a promise to pay a debt contracted during infancy or perform a
void contract made during infancy, the promise is void and unenforceable against the
promisor:

3.1.5 Contractual Capacity of Drunken Persons

If a person purported to enter into a contract at a time when he was too drunk to
understand what he was doing and the other party was aware of his mental condition, the
contract will be voidable at his option: Gore v. Gibson in which the court held that the
defendant was not liable on a bill of exchange which he had indorsed at a time when he
was, to the knowledge of the plaintiff, so drunk that he could not appreciate the meaning,
nature or effect of the endorsement.
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CHAPTER 4-LAW OF CONTRACT

Introduction, essentials of a valid contract, Contract formation,

elements that may affect the validity of a contract & remedies incase
of a breach of contract
The basis of the court's decision is not the defendant's intoxication but the plaintiff's
inequitable attempt to take advantage of a person in a weaker position. It would therefore
appear that if both parties were materially intoxicated at the time of contracting they
would be bound by the contract since none of them could take advantage of the other.
The following points should be noted:

(a) Ratification
A drunken man who enters into a voidable contract may affirm or ratify it when he is
sober:

(b) Necessaries

A drunken person is liable to pay for necessaries supplied to him pursuant to a contract
which he entered into when too drunk to know what he was doing

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

3.1.6 Contractual Capacity of Persons of Unsound Mind

A contract entered into by a person of unsound mind is voidable at his option if it is

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

(a) Ratification

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

(b) Necessaries

A person of unsound mind, like a drunken person, is liable to pay for necessaries
supplied to him. However, he is only liable to pay reasonable prices for the necessaries
under S. 4 of the Sale of Goods Act.
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elements that may affect the validity of a contract & remedies incase
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3.1.7 Contractual Capacity of Corporations
The courts have developed what is known as the doctrine of "ultra vires" in order to
determine the contractual capacity of legal persons or corporations.
The gist of the doctrine is that a body corporate's contractual capacity is limited to the
attainment of objects or purposes for which it was created. If the corporation purports to
enter into a contract to undertake a transaction which is neither expressly nor impliedly
within its objects. The contract is "ultra vires" (i.e. "beyond the powers of") the corporation
and is void, illegal and incapable of ratification.
This rule applies to statutory corporations, co-operative societies and registered
companies. This can be illustrated by the case of Ashbury Railway Carriage and Iron Co.
Ltd v. Riche in which the House of Lords held that a company whose object was, inter-
alia, to make railway carriages could not contract to build a railway line and Riche could
not sue the company for refusing to pay for the expenses incurred toward the
construction of the railway line.

3.1.8 Married Women

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

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

4. CONSIDERATION
For an agreement to constitute a contract the common law of England, as adopted in
Kenya, requires that it must be supported by consideration.
Exception

A "specialty contract" need not be supported by consideration. Such a contract is written,

signed by one party, sealed and then delivered to the other party.

4.2 TYPES OF/OR CLASSIFICATION OF CONSIDERATION

Consideration may be executory or executed or past in certain circumstances.
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elements that may affect the validity of a contract & remedies incase
of a breach of contract
(a) Executory Consideration
Executory consideration consists of a promise made by one party and a promise made
by the other party to the contract. The party exchange mutual promises. Performance of
the obligations remain in futura. It is good considerations to support a claim.

Examples

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

The lady's promise is the price, which she pays for the man's promise, and the man's
promise is the price he pays for the lady's promise.

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

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

(b) Executed Consideration

Executed consideration is constituted by something done by the plaintiff because of a
promise made by the defendant. It is good consideration to support a contractual claim.
Examples

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

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

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

4.3 Rules relating to consideration

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

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

5. FORMALITIES

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

6. ILLEGALITY
6.1 For an agreement to constitute a legally enforceable contract, it must have been
entered into for a lawful purpose. An agreement to do something which is prohibited by
statute or the common law is not a contract - although such agreements are generally
called "illegal contracts"
6.2 ILLEGAL CONTRACTS
There are numerous examples of "illegal contracts" of which the following may be
mentioned:
a. Contracts illegal by statute
Whether a particular contract is prohibited by a particular statute depends on the wording
of the statute. For example, employment act, contracts for the payment of wages or
salaries in kind are illegal.
b. Contracts illegal at the common law
A contract which is prohibited by the common law is usually described as being "contrary
to public policy" (i.e. the court is of the view that it is in the public interest that the contract
should not be enforced). Such a contract may be one which:
(i) Tends to promote corruption in the public service, as illustrated by Parkinson v.
College of Ambulance Ltd. (1925),
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elements that may affect the validity of a contract & remedies incase
of a breach of contract
(ii) Tends to promote sexual immorality, such as in Pearce v. Brooks (1866)
(iii) Tends to interfere with the sanctity of marriage, such as Wilson v. Carnley
(1908).However, in Fender v. St. John - Mildmay (1938) the House of Lords
held that a contract made between decree nisi and decree absolute, for
marriage after the dissolution of the existing marriage is valid (despite the fact
that it rendered reconciliation between parties to the divorce proceedings
almost impossible).
(iv) Tends to fetter the freedom of marriage.
(v) Tends to prejudice the administration of justice, such as –
(vi) Tends to prejudice the administration of justice. Effects or Consequences of
Illegality
Illegality renders a contract unenforceable. The contract creates no rights and
imposes no obligations on the parties. This is because the contract is beyond the pale
of law hence neither party has a legal remedy. As a general rule money or goods
changing lands under an illegal contract are irrecoverable. This is because gains and
losses remain where they have fallen. A court of law cannot assist parties to adjust
their rights if the contract is tainted with illegality. However money or goods changing
hands under an illegal contract may be recoverable where

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

VOID CONTRACTS
These are contracts which the law treats as non-existent. As a general rule illegal
contract is only void but not certain rights may be salvaged by the innocent party. A
contract may be rendered by statute or at common law i.e. courts of law.
Contracts void by the statute.
Wagering contract.
This is a contract whereby two persons or groups of persons with different views on
the outcome of an uncertain future event agree that some consideration is to pass
depending on the outcome.

Contracts void at common law

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elements that may affect the validity of a contract & remedies incase
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These are contracts declared void by courts of law for being contrary to public
policy namely

I. Contract of the courts

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

CONTRACTS IN RESTRAINT OF TRADE

This is a contract by which a person voluntarily or involuntarily restricts his future

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

a)The restraint was reasonably necessary to protect the restraining party’s

interest

b)The restraint was reasonable to affected party

c)The restraint was not injurious to the public.

7 INTENTION

For an agreement to constitute a contract, the parties thereto must have intended
it to have legal consequences.
8 TERMS OF A CONTRACT
The promises which the parties to a contract make to each other are known as the
"terms" of the contract. They are graded by the law into the following categories:
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elements that may affect the validity of a contract & remedies incase
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(a) Conditions

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

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

(b) Warranties

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

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

- the warranty of "quiet possession", and

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

9 VITIATING ELEMENTS IN A CONTRACT

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

9.1 MISTAKE

This is a misapprehension of a tact or fact situation.

The general rule is that mistake is legally irrelevant:

9.1.2
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Exceptions:
Mistake is legally relevant in cases of "operative mistake" (i.e. the mistake operates to
destroy the consensus that it is the basis of a contract and the parties are deemed not to
have agreed on anything).

A mistake may be -

i. Common Mistake: This may occur as follows:

(a) "Res extincta" - an agreement to sell goods which, unknown to
buyer and seller, have ceased to exist, e.g. Couturier v. Hastie -
Contract void.
(b) "Res sua" - an agreement to buy some property which, unknown to
both parties, already belong to buyer.
ii. Mutual Mistake:
This occurs if the parties misunderstood each other on a fundamental
fact so that there is actually no true agreement between them.
iii. Unilateral Mistake:
This is called "unilateral" because only one of the parties is mistaken.
The other party is aware of the mistake because he has fraudulently
induced it.
9.2 MISREPRESENTATION
A misrepresentation is a false statement of fact which was made by one party to a
contract to the other, at or before the time the contract was made, which induced the
other to enter into the contract. Where an agreement has been made on the basis of a
misrepresentation the law will sometimes grant relief. The relief obtainable depends on
whether the misrepresentation was innocent or fraudulent.

9.2.1 Elements of Definition

(a) A misrepresentation is a statement of fact. A statement of law, a statement of opinion,
such as an advertiser's 'puff' or a statement of intention, is therefore not covered.
(b) The statement must be false. Clearly if the statement is true the contracting party has
no claim for redress.
(c) The representation must be made by one party to the contract to the other. The essence
of the complaint is that one party misled the other, where the plaintiff has relied on false
information from another source, he cannot blame the contracting party.
(d) The representation must have induced the other party to enter the contract. If he did not
make the contract, or did not rely on the representation. the plaintiff has no cause for
complaint. Thus he cannot plead that he relied on the misrepresentation if he did not
know of it, or if he knew it to be untrue.
(e) As a general rule silence does not amount to misrepresentation.
Silence
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There are the following exceptions. Silence may amount to misrepresentation where:
1. There is a positive duty to disclose, e.g. in fiduciary relationships and
contracts of insurance;

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

3. Where disclosure is a statutory requirement

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

9.2.2 Remedies

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

a) INNOCENT MISREPRESENTATION
An innocent misrepresentation is an untrue statement made in the honest belief that it is
actually true: Derry v. Peek. It is irrelevant that the maker had no reasonable ground for
his belief.
There is no remedy at common law for an innocent misrepresentation. However, equity
developed the remedy of rescission which will be available to an aggrieved plaintiff unless
it is rendered unavailable by the circumstances listed below (under remedies for
fraudulent misrepresentation). Akerhielm v De mare. Indemnity for any direct financial
loss occasioned by the untrue statement. As was the case in Whittington v Seale-Hayne.

b) FRAUDULENT MISREPRESENTATION
A fraudulent misrepresentation is an untrue statement which is made:
(a) knowingly, or
(b) recklessly, careless whether it be true or false, or
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(c) without belief in its truth:

9.2.3 Remedies for fraudulent Misrepresentation

(a) The injured party may enforce the contract in spite of the fraud. It should be noted
that he himself is, of course, bound by the contract until he takes steps to set it aside.

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

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

(a) Delay

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

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

being connected with a company "Hallam & Co."
which did not exist. He bought goods from the plaintiffs and sold them to the defendant
company. It was held that the original contract between W and the plaintiffs was not
vitiated by fraudulent misrepresentation and the defendants had acquired a good title to
the goods.
(b) Affirmation If the injured party after discovering the fraud takes any benefit under the
contract or in any other way affirms it, or is deemed to have affirmed it.
(c) Restitution in integrum not possible If it is not possible for the court to order a
"restitutio in integrum", that is, to order the parties to be placed in the position that they
were in before the contract was made. For example, A fraudulently misrepresents a
cheap watch to be one made of gold. B. relying on the representation buys it, but on the
way home the watch drops accidentally and is destroyed. He is later told by a friend that
the watch is not made of gold. He is not able to rescind the contract since he is not in a
position to put things back to the original position. He may, of course, still claim for the
damages.
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(d) Third party rights It should be pointed out that naturally the guilty party may not plead
his own wrongful action as grounds for rescinding the contract.
(e) The injured party may bring a court action for the return of any property which the
fraudulent party obtained from him. If a person brings an action for the return of any
property, he must himself be ready to restore any property which he may himself have
obtained under the contract.
(f) He may refuse further performance and should he thereupon be sued by the other
party for not carrying out the contract, he may defend the action on the ground of the
other party's fraud
(g) In any case, whether the injured party elects to affirm or rescind the contract, he
nonetheless has a right to sue in damages for the tort of deceit. Any person who makes a
false statement dishonestly commits the civil wrong or tort of deceit and is liable if sued
to pay damages to the person he has deceived.

9.2.4 Silence as Misrepresentation

It is possible for a party who does not actually make a false statement nevertheless to
give a misrepresentation. The general rule is that he who keeps silent makes no
misrepresentation. As Lord Atkin said in Bell v. Lever Bros. Ltd. (1932):
"The failure to disclose a material fact which might influence the mind of a prudent
contractor does not give the right to avoid the contract".
There are three sets of circumstances, however, in which a person who is silent may
incur legal liability, because he has failed to disclose a material fact:
(a) Where his silence affects the accuracy of any previous representation.
(b) Where a confidential or fiduciary relationship exists between the parties, the person in
the position of trust is required to make full disclosure of all the facts in making any
contract with the other party who relies on his advice.
(c) Where the contract requires the utmost good faith or, as the lawyers say,
in "contracts uberrimae fidei" e.g. contracts of insurance.
If full disclosure of the facts is not made, the other party has the right to rescind the
contract, e.g. London Assurance Co. v. Mansel.

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

9.2.6 UNDUE INFLUENCE

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

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

10 DISCHARGE OF CONTRACT

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

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

Example:

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

10.1.2 PERFORMANCE as agreed under the contract.

A contract is discharged by performance if both parties have dutifully performed their
obligations. Originally , at common law, a party could only be discharged by performance
if every part of the contract was performed. Contractual obligations had to be observed to
the letter. This is the so called doctrine of “precise and exact” as exemplified by the
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decision in Cutter v Powell where Mrs Cutter was denied compensation since her
husband had not performed his obligations precisely and exactly.
However, the harshness of this common law principle led to the admission of a number
of exceptions where in parties are discharged without performing precisely and exactly,
namely
(a) Substantial performance Marshides Mehta and Co ltd v Barron Verhegen
(b) Partial performance If accepted by the other party. Sumper v Hedges
(c) Separable/divisible contracts Ritchie v Atkinson
(d) Prevented Performance Planche v Colburn
(e) Tender of performance

(f) Frustration of contract

EXPRESS AGREEMENT

Discharge of contract by agreement justified on the premise hat whatever is created by

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

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

(ii) Accord and satisfaction:

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

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

(iv) Novation:

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

(v)Frustration:

contract charged by frustration then performance f obligation is considered impossible,

illegal or commercially futile by reason of foreseen or extraneous circumstances for
which other party is to blame. Contract may be discharged by frustration in one of the
following ways:

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

(b) Non-occurrence of an event i.e. a new situation has arisen which renders it

impossible to perform the contract as originally anticipated.

(c) supervening illegality caused by a change in the law, or government

interference, so that it becomes illegal to perform the contract.
(a) Death or permanent incapacitation which renders it impossible for a party to a
contract to perform it because of unexpected or sudden illness.

(b) government intervention Where government acts or steps render performance

impossibleMetropolitan Water Board v Dick Kerr and Co.

(ADJUSTMENTOF THE RIGHTS OF THE PARTIES)

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10.1.5 EFFECT OF FRUSTRATION

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

The Act provides that when a contract is frustrated –

(a) The contract is terminated

(b) Money paid is recoverable.

(c) Money payable ceases to be payable.

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

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

The doctrine of frustration does not apply:

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

ii. Where the frustrating event is self-induced, as illustrated by Maritime

National Fish Ltd. v. Ocean Trawlers Ltd. (1935).
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iii. Where the contract is a lease or one for the sale of land - but there is some doubt
regarding this: Cricklewood Property and Investments Trust v. Leighton's Investments
Trust Ltd. (1945).

11 REMEDIES FOR BREACH OF CONTRACT

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

(a) Common law remedies, and, (b) Equitable remedies.

11.1 COMMON LAW REMEDIES

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

11.2 Types of damages

Damages are classified into the following categories:

(a) Nominal damages which are awarded to a plaintiff to vindicate his right to the
performance of the contract. This occurs if the plaintiff has not suffered any actual
financial loss as a result of the breach of the contract.
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(b) Actual or substantial damages which are awarded to the plaintiff as
compensation for actual loss occasioned by the breach. They are
calculated, generally speaking, in accordance with the rule in Hadley v.
Baxendale.

It should however be noted that:

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

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

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

RULES THAT GOVERN THE MEASURE OF DAMAGES FOR BREACH OF

CONTRACT

(a) The purpose of a monetary award in damages for breach of contract is to

compensate the innocent party for the loss suffered. The essence is to put that
party where it would otherwise have been if the contractual obligations had been
performed

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

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

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

(e) Where parties to a contract have already fixed the amount payable to the
innocent party in the event of breach, and a breach of contract occurs it is for the
court to determine whether the sum so fixed is payable as damages or is a
penalty in which case it is not enforceable. In Dunlop Pheumatic Tyre co v New
Garage and Motor co Lord Dunedin formulated the presumption, courts of law
rely on in determining whether the sum fixed is liquidated damages or a penalty.
(f) Whenever a breach of contract occurs it is the duty of the innocent party to
take such reasonable steps as are necessary in the circumstances to reduce the
loss it would otherwise have suffered from the breach. The law imposes a duty
on the innocent party to act reasonably. However, whether he has so acted is a
question of fact as illustrated by the decision in Musa Hassan v Hunt and Another.
In assessing damages the amount by which loss ought to have been reduced by
the acts of the innocent party is not reasonable from the defendant.

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

The loss of damage

11.3 Distinction between liquidated damages and

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

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

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

(ii) "The essence of a penalty is a payment of money stipulated as in

terrorem of the offending party; the essence of liquidated damages is a
genuine covenanted pre-estimate of damage.

(iii) The question whether a sum stipulated is penalty or liquidated damages

is a question of construction to be decided upon the terms and inherit
circumstances of each particular contract, judged at the time of making the
contract, not as at the time of the breach.

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

Such
are:
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(a) It will be held to be a penalty if the sum stipulated for is
extravagant and unconscionable in amount in comparison with the
greatest loss that could conceivably be proved to have followed from
the breach.

(b) It will be held to be a penalty if the breach consists only in not

paying a sum of money, and the sum stipulated is a sum greater than
the sum which ought to have been paid.

(c) There is a presumption (but no more) that it is a penalty when a

single lump sum is made payable by way of compensation, on the
occurrence of one or more or all of several events, some of which may
occasion serious and others but trifling damage.

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate

of damage, that the consequences of the breach are such as to make
precise pre-estimation almost an impossibility. On the contrary, that is
just the situation when it is probable that pre-estimated damage was
the true bargain between parties.

11.5 Equitable remedies

The equitable remedies for breach of contract are:

(a) Injunction

This is an order of the court which restrains (i.e. prevents) a party to a contract from
doing something which, if done, will occasion a breach of the contract. For example, if
Onyango has agreed to sell some unique goods to Kamau and promised to deliver them
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at end of the two weeks. On the third day after the contract was formed, Kamau learns
that Onyango has entered into another contract with Abdullah and intends to deliver the
goods to Abdullah within two days. Kamau may institute legal proceedings in the High
Court with a view to restraining Onyango from delivering the goods to Abdullah.

An injunction may also be issued in order to restrain a breach of a negative stipulation in

a contract. For example, if a tenancy agreement contains a clause prohibiting the tenant
from using charcoal for cooking in the rented premise, an injunction may be issued to
prevent him from doing so.

An injunction, being an equitable remedy, is not automatically available but is issued at

the discretion of the court. A common ground for the exercise of the court’s discretion is
the court's belief that it is "just and equitable " to do so.

(b) Specific performance

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

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

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

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

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

(c) Recession

(d) Trading

(e) account

(f) winding up