MLAW 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. FORMATION OF A 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. ELEMENTS OF A CONTRACT 1. OFFER This is an unequivocal manifestation by one party of its intention to contract with another. It is a clear intimation of intention to contract. The party manifesting the intention is the offeror and the one to whom it is made is the offeree. 2.2 Nature of An Offer An offer may take many forms - written, verbal or merely implied from conduct. The cases which will be referred to in these notes will illustrate this point. But whatever be the manner of its manifestation, an offer is either a promise made or something done by a person from which the law will deduce his intention to enter into a contract with another person if that other person does or promises to do, something required. It must be distinguished from other acts which resemble it, such as: (i) Invitation to treat This is a mere invitation by a party to another or others to make offers. Again the offeror becomes offeree and invitee the offeror. A positive response to an invitation to treat is an offer. (a) A registered company issues a prospectus inviting the public to apply for its shares. This is an invitation to treat (i.e. an attempt to "attract" offers) and not an offer. It is not regarded as an offer because of practical reasons: If it was an offer, every application made pursuant thereto would constitute an acceptance and the company would be contractually bound to allot all the shares applied for. If the issue were oversubscribed, the company would be sued by some of the applicants for breach of contract. As this appears to be unjust, the courts have avoided the eventuality by regarding the issue of the prospectus merely as an invitation to treat. When applications are made, they will constitute the offers. The company then finds out how many shares have been applied for and, if the issue is oversubscribed, accepts applications which equal the shares available

and "rejects" the others. The company cannot be sued by those to whom shares have not been allotted since there is no contract between them and the company: they made an offer which was not accepted by the company - and the company could not accept the offer because it did not have shares to sell. (b) The display of goods in a shop or supermarket with price labels attached thereon. The reasons why the courts decided not to regard this as an offer was explained by Lord Goddard in Pharmaceutical Society v. Boots. Cash Chemists (Southern) Ltd. Fisher v Bells. A government ministry puts an advertisement in the newspapers asking for tenders for the supply of a specified quantity of goods during a specified period of time. The advert constitutes an invitation to treat and a trader's response thereto is the offer which the ministry may accept or reject. Advertisement of sale by auction Harris v Nickerson

(c)

(d) (ii)

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

2.3

Rules Relating to an Offer The case law relating to an offer has established the following rules: (i) The offer may be oral, written or may be implicated from the conditions of the offer. (ii) An offer must be specific or definite (so that the offeree may truly understand the intention of the offeror and consider his response thereto): Scammel and Nephew Ltd. v. Ouston in which an offer that referred to "hire purchase terms over a period of two years was declared "void" due to uncertainty over the meaning of "hire purchase terms" A person cannot be said to have accepted an offer with such conditions: he would not have understood what he was purporting to accept. However, in Stevens v. Mclean the court explained that, an offeror must explain a vague offer if asked to do so. (ii) (iv) An offer may be conditional or unconditional. An offer can be made to: (a) (b) The general public, as in Carlill v. Carbolic Smoke Ball Co. Ltd.; A class of persons, as in Wood v. Lektric Ltd - where an offer was made to "hair sufferers"a class of persons to whom the court held that the plaintiff, -Mr. Wood, a young man whose hair was prematurely turning grey and was, as a consequence, a "hair sufferer" within the offer, belonged. Mr Wood had properly accepted the offer although it was not addressed to him personally, or

(c) (v) 2.4

A particular person, as in Boulton v. Jones

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

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: Byrne v. Van Tien Hoven - in which it was held that a letter of revocation posted after a letter of acceptance had been posted was ineffective (although the offeror did not know that the offeree had posted the letter of acceptance). Communicated (i.e. made known) to the offeree - expressly or impliedly. An example of the implied revocation is the case of Dickinson v. Dodds (study the judgment of James, L.J.) Provided the aforesaid rules are complied with, an offer can also be revoked even though it was declared to be open for a given period. The offeror can change his mind at any time before the period expires: Dickinson v. Dodds

(ii)

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. 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.

(ii)

(b)

Lapse of time An offer "lapses" (i.e. comes to an end automatically by operation of law) if: (i) (ii) It is not accepted within the stipulated time if any. It is not accepted within what appears to the court to be the reasonable time during which it should have been accepted, e.g. Ramsgate Victoria Hotel Co. v.

Montefiove - an offer to buy shares in a company could not be accepted at the end of the fifth month after the offer was made. (June - November) (iii) (iv) Virji Khinji v Chutterback It is an offer to sell property, and the property is sold to another party before the offeree accepts the offer: Dickinson v. Dodds (in which Mellish L.J. regarded the sale as equivalent to the offeror's death because it renders performance of the offer impossible)

(c)

Counter - offer A counter - offer is constituted by the offeree's qualified acceptance which, in itself, becomes the fresh offer and cancels the original offer, e.g. Hyde v. Wrench - in which the "acceptance" to buy the house for 950 was held to have cancelled the offer to sell if at 1,000.

(d)

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

(e)

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

(f)

(g)

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

2.

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

(a)

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

(b)

(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. 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.

(d)

(e)

An offer made to a particular person can be accepted only by the particular person: Boulton v. Jones - in which it was held that an offer made by Jones to Brocklehurst could not be accepted by Boulton. The acceptance of an offer must be unconditional: Hyde v. Wrench -in which it was held that the "acceptance" to buy the house at 950 destroyed the offer to sell the house of 1,000. Neale v Merrett. An offer terminated by a counter - offer cannot be revived by a subsequent tender of performance thereof.

(f)

(g)

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

(h)

(i)

If the offeror and offeree negotiate by telex the acceptance will be effective from the moment that the telex message is received by the offeror: Entores Ltd. v. Miles Far East Corporation - in which it was held that the contract was formed in London when the offeror received the telex message from Amsterdam. If the offeror expressly or impliedly authorised the offeree to transmit his acceptance by post the acceptance will be effective at the moment the letter of acceptance is posted: Byrne v. Van Tien Hoven - in which it was held that the acceptance was effective when the plaintiffs posted their letter on October 11th in New York (although the defendants in Cardiff were not aware of the posting) Implied Authorization to accept by post occurs if: (i) (ii) The offeror posted his offer but did not tell the offeree not to use the post, as happened in Byrne's case above. The offer was not posted but the court, as a practical matter, regards the post office as the medium of communication that the parties themselves contemplated, as happened in Household Fire Insurance Co. v. Grant - in which the company's letter to Grant by post was held to have been valid acceptance of Grant's offer although Grant's letter of offer had not been posted but sent to the company by hand.

(j)

Express authorization to accept by post occurs if the offerer tells the offeree to reply by post, as happened in Adams v. Lindsell in which the offeree was told to "answer in course of post" (k) An acceptance by post which is neither expressly nor impliedly authorised by the offeror becomes effective only from the moment the offeror receives the letter of acceptance. In such cases the post office would be the offeree's agent to transmit his acceptance to the offeror, and the acceptance would be effective only if the agent actually delivers the message. This rule appears to be a logical deduction from the explanation given by the court in Byrne's case. If the offeror gives a letter containing an offer to a messenger and instructs the messenger to wait for, and receive, the acceptance thereof, the acceptance will be effective from the moment the offeree put his letter of acceptance into the messenger's hands: Household Fire Insurance Co. v. Grant (obiter dictum of Thesinger, L. J.) An acceptance, once posted, cannot be withdrawn: Household Fire Insurance Co. v. Grant (Statement of Thesinger, L. J.). This is definitely so when the acceptance was posted pursuant to an express or implied authorization by the offeror. The legal position regarding unauthorized acceptance by post is not clear because there is no decided case on the point. Examination questions sometimes test candidates' awareness of the uncertainty by asking, for example, whether an offeree who has posted a letter of acceptance can telephone the offeror and tell him to disregard the letter of acceptance - the examination question being so drafted as to raise doubts whether the offer was posted or made by other means. (n) Unless there are specific reasons to the contrary, the mode in which the acceptance was transmitted does not matter if the offeror actually received it: Yates Building Co. 6

(l)

(m)

Ltd. v. Pulleyn & Sons Ltd. - in which it was held that an acceptance by ordinary post was valid although the offeror had stated that it had to be by "registered post" The prescribed mode of acceptance was regarded by the court as "permissive" or optional. The court's decision might probably have been different if the offeror had told the offeree to reply by "registered post only", or if the offeror had prescribed any other mandatory mode of communication. 2.6 Provisional Contracts Occasionally, an agreement may be described by the parties thereto as being "a provisional agreement" until a legally binding agreement is prepared by their advocates and signed by them. In Branca v. Cobarro the court held that the agreement, though described as provisional, was legally binding already. The Companies Act, S. 111 uses the word 'provisional' in a very special way and it was held in Re: 'Otto' Electrical Manufacturing Co. (1905) Ltd. that a 'provisional contract' there under does not bind a company if the company had not received a trading certificate. 2.7 Agreement "Subject to Contract" An agreement described as being "subject to contract" is not legally binding and merely serves as a written record of what the parties are negotiating about. 3. CAPACITY 3.1 Capacity to Contract `Capacity' may be described as the legally recognized right of a person to enter into a legally binding agreement. The law of contract limits in varying degrees the contractual capacity of the following persons: (i) (ii) (iii) (iv) Infants or minors, Drunken persons and persons of unsound mind, Corporations. undischarged bankrupts.

3.1.1 Ractral capacity of Infants or minors An infant or a minor is any person who has not attained the age of eighteen years: Age of Majority Act 1974, S. 2. An agreement entered into by an infant may constitute a binding, voidable or void contract - depending on the object of the agreement. 3.1.2 Binding Contracts Contracts which are binding on an infant are contracts for: (i) (ii) (iii) (a) Necessaries, Education, and Beneficial service. Necessaries 7

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

Other necessaries include things like lodging, transport to the place of work, legal advice, etc. Liability for Necessaries S. 4(1) of the Sale of Goods Act provides that the infant is liable to pay "a reasonable price" for necessaries supplied to him. He is not liable for the agreed price. This provision raises the question whether the infant's liability is contractual or quasi-contractual. (b) Education An infant may legally enter into a contract for educational instruction. Some textbooks regard education as part of 'necessaries'. (c) Beneficial Service A contract of service or apprenticeship is binding on an infant - provided it is substantially for his benefit. In Doyle v. White City Stadium it was held that an infant boxer was bound by one of the rules and regulations of the British Boxing Board of Control, which was not beneficial to him because the rules and regulations, viewed as a whole, were beneficial to him. In Clemens v. London and North Western Rail Co. it was held that the infant plaintiff was bound by the defendant railway company's railway scheme which fixed a lower rate of compensation for injuries than the rate fixed by the Employer's Liability Act because the company's scheme covered a wider range of injuries than the Act. In De Francesco v. Barnum the court held that an infant dancer was not bound by a contract of service whose terms were so bad as to literally put the infant at the disposal of the employer. In Roberts v. Gray the infant defendant was held liable for breach of contract by his failure to accompany the plaintiff on a European tour to play billiards since the contract was substantially for his benefit. 3.1.3 Voidable Contracts

The following contracts are valid and binding upon an infant unless he repudiates them during infancy or within a reasonable time after attaining the age of eighteen: - A lease, - A partnership agreement, - A contract to purchase a company's shares. (a) Leases A lease granted to an infant is binding on him unless he repudiates it within a reasonable time after attaining the age of eighteen. In Davies v. Beynon Harris the court held that an infant tenant was liable for the rent of a flat which had accrued before he repudiated the lease. In Valentini v. Canali the plaintiff, an infant, had agreed to become the tenant of the defendant's house and to buy the furniture therein at 102. He paid 68 on account for the furniture, and after, occupying the house and using the furniture for some months he repudiated the tenancy agreement and sued to recover the 68. It was held that he could not recover the money because he could neither give back the benefit derived from the use of the furniture nor place the defendant in the position in which he was before the contract. (b) Partnership Agreement An infant is bound at common law by a partnership agreement but he is free to repudiate it at any time during infancy or within a reasonable time after attaining his majority. In Bennion v. Harrison the court held that Bennin, an infant who had been a partner and had held himself out as such to many persons, was liable for the price of goods which had been sold to the firm because when he became of age, he had not informed "the world" (i.e. the persons who knew him to be a partner or had dealt with him as such) that he was no longer a partner. He had in fact ceased to act as a partner during his infancy. S. 12 of the Partnership Act provides that a person who is under the age of majority may be admitted to the benefits of partnership but he cannot be made personally liable for any of the firms obligations. S.13 of the Act provides that an infant partner becomes liable, attaining the age of majority, for all obligations of the firm incurred since he was admitted - unless he gives public notice within a reasonable time of his repudiation of the partnership. (c) Purchase of Shares An infant who applies for, and is allotted, a company's shares becomes a member of the company under S.28 (2) of the Companies Act from the moment that his name is entered in the register of members. He then acquires membership rights and becomes subject to membership obligations like any other member. However, he has a legal right to rescind the contract if there has been a total failure of consideration for which he paid the money (i.e. the shares have become worthless). In Steinberg v. Scala (Leeds) Ltd. the plaintiff, an infant shareholder, instituted rectification proceedings with a view to:

(i) (ii)

Being relieved from liability on calls, and Recovery of money she had already paid.

The court held that she should not recover the money already paid because the shares had some value although she (the plaintiff) had not received any dividends from the company. She was however entitled to have her name removed from the members' register (as the company had agreed to do). 3.1.4 Void Contracts If the Infant's Relief Act 1874 of England applies to Kenya as a statute of general application which was in force in England on 12 August, 1897 then the following contracts which it renders "absolutely void" in England would also be void if entered into by an infant in Kenya: (i) 'Contracts for repayment of money lent or to be lent; 'Contracts for goods supplied or to be supplied (other than contracts for necessaries), All "accounts stated" with infants. Loans All loans made to an infant are void and irrevocable. In Leslie Ltd. v. Sheill the infant defendant had obtained two advances of two hundred pounds each from the plaintiffs after cheating them that he was an adult. The plaintiff sued him to recover 475 (the amount of the advances and accrued interest) for: (a) (b) Breach of contract, or alternatively, Fraudulent misrepresentation (i.e. deceit)

It was held that the infant was not liable because: (a) (b) There could not be any breach of a void contract, and The Infants' Relief Act renders loans to infants "absolutely void" without any exception (cheating by an infant notwithstanding). The court was also of the view that making the infant liable in tort (i.e. deceit) would have amounted to an indirect enforcement of a contract rendered void by statute.

(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 10

necessaries the lender could sue in equity and would be allowed to stand in the place of those who had sold the necessaries and would have had at common law a right to sue him if he had not been paid. This remedy is known as "subrogation" and the lender is said to subrogated to the rights of the seller and sues as if he were the seller and had not been paid. Ratification If an adult person makes a promise to pay a debt contracted during infancy or perform a void contract made during infancy, the promise is void and unenforceable against the promisor: Infants' Relief Act, S. 2. Although the Infants Relief Act has been repealed in England by the Minor's Contracts Act, 1987, it appears that it is still a prima facie source of Kenya Law since the repealing Act has not been made part of the Kenya Law. 3.1.5 Contractual Capacity of Drunken Persons If a person purported to enter into a contract at a time when he was too drunk to understand what he was doing and the other party was aware of his mental condition, the contract will be voidable at his option: Gore v. Gibson in which the court held that the defendant was not liable on a bill of exchange which he had indorsed at a time when he was, to the knowledge of the plaintiff, so drunk that he could not appreciate the meaning, nature or effect of the endorsement. The basis of the court's decision is not the defendant's intoxication but the plaintiff's inequitable attempt to take advantage of a person in a weaker position. It would therefore appear that if both parties were materially intoxicated at the time of contracting they would be bound by the contract since none of them could take advantage of the other. The following points should be noted: (a) Ratification A drunken man who enters into a voidable contract may affirm or ratify it when he is sober: Matthews v. Baxter in which the defendant was held liable for breach of contract to buy some houses from the plaintiff which he had made when he was drunk but had nevertheless confirmed after he became sober. (b) Necessaries A drunken person is liable to pay for necessaries supplied to him pursuant to a contract which he entered into when too drunk to know what he was doing: Gore v. Gibson in which Alderson, B. stated that the ground of liability is an implied contract to pay for the goods which arose from his conduct when sober. (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 11

proved that the other party was aware of his mental condition: Imperial Loan Co. Ltd. v. Stone, in which Lopes, L. J. stated that "a contract made by a person of unsound mind in not voidable at that person's option if the other party to the contract believed at the same time he made the contract that the person with whom he was dealing was of sound mind". The following points should also be noted: (a) Ratification A contract entered into by a person when he is insane can be ratified by him when he becomes of sound mind. (b) Necessaries A person of unsound mind, like a drunken person, is liable to pay for necessaries supplied to him. However, he is only liable to pay reasonable prices for the necessaries under S. 4 of the Sale of Goods Act. 3.1.7 Contractual Capacity of Corporations The courts have developed what is known as the doctrine of "ultra vires" in order to determine the contractual capacity of legal persons or corporations. The gist of the doctrine is that a body corporate's contractual capacity is limited to the attainment of objects or purposes for which it was created. If the corporation purports to enter into a contract to undertake a transaction which is neither expressly nor impliedly within its objects. The contract is "ultra vires" (i.e. "beyond the powers of") the corporation and is void, illegal and incapable of ratification. This rule applies to statutory corporations, co-operative societies and registered companies. This can be illustrated by the case of Ashbury Railway Carriage and Iron Co. Ltd v. Riche in which the House of Lords held that a company whose object was, inter-alia, to make railway carriages could not contract to build a railway line and Riche could not sue the company for refusing to pay for the expenses incurred toward the construction of the railway line. 3.1.8 Married Women At common law, married women have no contractual capacity because they are presumed to be non-existent (i.e. they are "part" of their husbandsthe 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".

12