Law of Contracts

1. Capacity of MinorsA minor is someone who has not reached the age of majority (18 years in Kenya.) As a general rule, a minor is not bound by any contract made during his minority. There are 3 exceptions to this: • Contracts for necessaries

• Contacts of educational or employment or training nature • Certain contracts which are avoidable.

a)Necessaries

The term necessaries is not restricted to things which are required to maintain a base existence such as bread and clothes but includes articles which are reasonably necessary to the minor having regard to his station in life. A watch for example, a radio or a motor cycle may be considered necessaries & not articles of mere luxury.

An engagement ring may be a necessary but not a diamond necklace bought for the minors by her fiancée. Goods are not the only necessaries, the hire of a car may be a contract for necessaries. If the necessaries are goods, the minor is liable only when the goods are suitable for his condition in life, necessary to his requirements at the time of sale and necessary for his requirements at the time of delivery. A minor must pay a reasonable price for necessaries supplied to him.

Although the goods supplied may be within the class of necessaries, they may not be necessary to the particular minor.

Nash v. Inman (1908)Inman, a minor, who was an undergraduate at Cambridge bought 11 fancy waist coats from M on credit. He was at the time adequately provided with clothes. It was held the waist coats were not necessaries and was not liable to pay for any of them.

b)Education and Employment contracts for the minor’s benefits

Not every contract for the benefit of a minor is binding on him. But contracts for his education service and apprenticeship or for enabling him to earn a living are binding unless they are detrimental to the interests of the minor. E.g. apprenticeship on how to be a thief!

A contract relating to the minor’s education, which is not detrimental to his interest, can be enforced although it is to be performed in the future. E.g. a contract by a minor who is a guitar player to tour and play the guitar matches with a well-known singer. In these cases if contract as a whole is for the benefit of the minor it will be binding on him.

A contract of apprenticeship is a contract of special character. If it is broken, the apprentice can claim damages not only for his loss of earning for the remainder of his training period but also for the reduction of his future prospects.

When a minor is engaged in trade, contracts entered into by him in the way of his trade however much to his benefit, are not binding on him. He is therefore not liable to pay for goods bought for trading purposes.

c)Voidable contractsWhen a minor acquires an interest in a subject of permanent nature which imposes a continuous liability on him. The contract cannot be enforced against him during his minority but after he attains full age, it will be binding on him unless he avoids it within a reasonable time. Contracts in this class include leases, partnership, and holding of shares in a company.

Goode v. Harrison (1821)

A minor who has a partner in a partnership took no steps to avoid the partnership upon attaining his majority. He was held to liable for the debts of the partnership incurred after he came of age.

• Recovery by minor

Money paid by a minor under a contract which is not binding on him can be recovered by him only if there has been a complete failure of consideration.

Similarly if a minor has benefited in a void contract for the sale of goods other than necessaries, he cannot return the goods to recover the money he has paid for them. Again if a minor delivers goods under a contract, which is not binding on him, he cannot recover them, unless there is a total failure of consideration.

• Recovery against the minorIn cases where the minor is not bound by the contract the court, has the power to consider if it thinks it just and equitable to do so, to order the minor to return any property acquired by him under the contract or any property representing it. Obviously the court will not make such an order where the minor has paid for the property.

• Recovery against a guarantor

As a general rule somebody who guarantees someone else’s debt is not liable on his guarantee unless the person whose debt is guaranteed is himself liable. Thus e.g. a bank which lent money to a minor and took from an adult a guarantee of that loan would be unable to enforce either the loan or guarantee.

2. Capacity of Corporations

A corporation is an artificial person created by law. It is distinct from the individual persons who are members of the corporation and it has a legal existence separate and apart from them.

The contractual capacity of a corporation is limited firstly by actual limits i.e. by the fact that it is an artificial person and not a natural person.

A corporation can only contract through its directors; therefore it cannot enter into any contract of a strictly personal nature. It cannot act as an advocate, doctor or accountant.

Secondly by legal limits i.e. by the restrictions imposed on the powers of a corporation of its formation. It can only engage in activities found in its Memorandum of Association – these activities are referred to as its objects

The ultra vires doctrine

According to general principles of law, the contractual capacity of corporations is limited by the statutes governing them. Therefore, where the corporation is created by an Act of parliament, the objectives the corporation may legitimately pursue must be ascertained from the Act itself. If the contractual capacity is exceeded, the contract is ultra vires this means beyond power or excess of power or abuse of power. Any ultra vires activities are void and cannot be made valid or ratified even if all the members of the corporation agree to the making of the contract.

In brief an ultra vires action is one that goes beyond the authorized objects of the company stated in the Memorandum of Association or in an Act of Parliament where the corporation is formed by the said Act.

Attorney-General v. Fulham Corporation (1929)A municipal council was authorized by certain acts to establish baths, washhouses and bathing places. It established a municipal laundry. A ratepayer objected and applied for an injunction. In this case it was held that the injunction had to be granted as the council had acted ultra vires.

3. Capacity of Unincorporated Bodies

These are associations of persons, which are not incorporated such as clubs or societies. Such associations contract as agents.

The committee or other persons authorizing the agent to contract are liablebut the members are not liable unless the rules provide that the agent is authorized by them.

3.9.4 Capacity of Mentally Disordered and Drunken Persons.

A contract entered into by a mentally disordered person who is subject to the control of the court is voidable at the instance of such a party.

Where a mentally disordered party enters into a contract without the assistance of the court and the other party knew that he was contracting with a person who was of unsound mind and could not understand the nature of the contracts the contract is voidable at the option of the patient.

A person may suffer from delusions and yet be capable of understanding the nature of the transaction into which he is entering. In such a case the contract is valid although the other party may have not known of the delusions. A contract made during mental disability can be ratified in a lucid interval. If a person is incapable by reason of mental disability to manage his property and affairs he may execute an enduring power of attorney or the court may assume jurisdiction to manage them.

Contracts made by persons who are drunk at the time as not to understand what they were doing are voidable at the option of the person who was drunk provided that the other party knew of his condition. The burden of proof in this, as in the case of mental patients, is on the party suffering from incapacity to prove the knowledge of the other party. A contract made by a drunken man can be ratified when he is sober.

Both mentally disordered and drunken persons are liable for necessaries supplied to them. In such cases they are bound to pay a reasonable price for the necessaries.

3.10Reality of Contract

An arrangement between two parties which on first impression appears tosatisfy all requirements of a valid contract may on closer examination be found to lack reality because it is affected by a defect which renders the contract unenforceable, void, voidable or illegal. These are called vitiating factors.

3.10.1 Unenforceable Contracts

An unenforceable contract is one, which is invalid because it cannot be enforced due to some technical defect. Such as in the case of insurance contract the absence of a signed agreement.

3.10.2 Voidable Contracts

A voidable contract is one which one of the parties can put to an end at his option.

The option can be exercised without reference to the other party so that the contract is binding, if he elects to treat it as binding and not binding if he elects to set it aside. E.g., a contract might be voidable if one of the contracting parties has been induced by misrepresentation or by duress or undue influence to enter into the contract.

A by innocent misrepresentation induces B to make a contract with A. The contract is binding on A unless B chooses to set it aside, B may set aside the contract or not at his option but A has no option to set it aside.

3.10.3 Void Contracts

A void contract is one without legal effect. It’s a complete nullity in law and confers no rights on either party. Examples of these are contracts with minors for goods that are not necessaries.

3.10.4Illegal Contracts

An illegal contract is affected by the most serious defect of all. Not onlyis the contract itself void but collateral contracts tainted or stained by the illegality may likewise be void.

A contract, which is illegal, is normally unenforceable. The illegality may be present:

• In the formation of the contract e.g. if its contrary to public policy Parkinson V College of Ambulance ltd

• In the performance of the contract e.g. a contract to commit crime

• In the consideration for the contract e.g. where A promises to give B his car and B promises to kidnap someone for A in consideration of A’s promise.

• In the purpose for which the contract is made. Sometimes the contract itself is not illegal but the purpose for which it is formed is illegal. E.g. If a motor boat is hired for the purpose of smuggling drugs into the country.

Cowan v MilbournThe defendant agreed to let a room to the claimant. When he subsequently discovered that it was to be used for a blasphemous lecture he withdrew his consent, the claimant’s action against him was unsuccessful.

Contracts are illegal because they are forbidden by statutes or contrary to common law concepts or the principals of equity. Contracts, which are contrary to public policy, meaning public interest, should not be enforced.

3.10.5 Examples of Contracts with no legal effect

1. Contracts tending to injure the public service.

These include agreements for the sale of public office or for the assignment of salaries of public officials or pensions granted for public service. Acontract to procure a title of honor for reward is also void. Parkinson v. College of Ambulance (1925)

The Secretary of the College of Ambulance promised Col. Parkinson that if he made a large contribution to the college, which was a charitable institution, he would receive a knighthood. The Col. made a large donation and upon not receiving the knighthood sued for the return of his money. It was held that the action failed because the contract was against public policy and was illegal.

A contract by a person to use his position and influence with the government to get a benefit for another person, is void as being against public policy, as also is a contract to restrain a person from serving in the naval or military forces of the country.

2. Contracts tending to interfere with the administration of Justice An agreement to interfere with a prosecution of a criminal offence is void because the public has an interest in the proper administration of justice. On the other hand, an agreement to compromise and settle out of court a civil claim is valid.

For example a witness contract not to give evidence – This is a contract by which a witness binds himself not to give evidence before the court on a matter on which the judge says he should give evidence. This is an interference with the administration of justice and contrary to public policy . It is cannot be enforced by the law.

3. Contracts for Maintenance and Champerty

Champerty means division of spoils of litigation. Champerty is an agreement whereby a person obtains a promise of a share in the proceeds of an action in return for providing evidence or financial assistance to the person who conducts the litigation.

Maintenance has been defined as the improper starting of litigation andstrife by giving aid to one party to bring or defend a claim without just cause or excuse

Contracts having maintenance and champerty as their objects tend to pervert (interfere) with the cause of justice and are illegal. It is not maintenance however when the person giving assistance acts from motives of charity or has a common interest with the person assisted. Common interest includes a genuine business interest in the results of an action.

4. Contracts of Trading with the EnemyAt common law all contracts made with a person residing in enemy territory in times of war are illegal unless made with the permission of the government. They are illegal on grounds of public policy based on two reasons;

• The further performance of the contract would involve relating with the enemy. • The continued existence of the contract would confer upon the enemy a benefit. However, the rights of an enemy are preserved and are kept in suspense until the war is over

Daimler Co. Ltd v. Continental Tyre and Rubber Co. (Great Britain) Ltd. The continental tyre company was formed in Britain to sell German made tyres. The bulk of the company’s shares were held by the German company which manufactured the tyres. All directors of the company were Germans resident in Germany.

After the outbreak of the First World War, the Continental Tyre Company instituted proceedings against the appellant (Daimler) to enforce a trade debt. The defendant denied liability and argued that the debt was unenforceable as enforcing it amounted to trade with an alien enemy. The House of Lords agreed with this defense and disallowed the action as the respondent was an enemy by reason of the nationality of the members and managers of the company.

5. Contracts to commit a criminal offense or a civil wrong

• An agreement to defraud the tax revenue authority by the evasion of taxes is illegal and cannot be relied upon in a court of law.Alexander v. Rayson (1936)Alexander let a flat to Rayson at a rate of £1200 per year. With the object of getting a low ratable value for the flat, two written agreements were entered into. One agreement purported to let the flat for £450 pea and the other the other was an agreement by Rayson to pay £750 p.a. for services in connection with the flat. Alexander sued Rayson for an installment of £750 and it was held that the agreement having been made to defraud the rating authority was void and Alexander failed.

• An agreement to take shares in a company, in order to fraudulently induce the public to believe that there is a market for the shares is a conspiracy to defraud and is illegal.

• An insurance policy indemnifying the assured against legal liability for deliberate and unlawful acts caused by him cannot be enforced.

Gray v. Barr (1971)Gray had an affair with Barr’s wife. Barr armed with a loaded shotgun went to Gray’s farm to search for his wife. In a struggle with Gray, Barr fell down the stairs and the gun was accidentally discharged and the shot killed Gray. Barr was acquitted of murder and manslaughter. The administrators of the Gray’s estate sued Barr for damages under the fatal accidents act and Barr claimed to be indemnified by Prudential Assurance under an accident liability policy. It was held that Barr was liable for having caused Gray’s death by his negligence.

The killing was not an accident within the meaning of the insurance policy and that even if the killing was an accident, it was caused by the deliberate and unlawful act of the assured and it was therefore against public policy to admit a claim for indemnity against the insurance company.

• Also, the suicide of the assured if sane at the time renders the sum assured irrecoverable in a life policy.

6. Immoral Contracts

Contracts relating to sexual immorality such as agreements for future illicit cohabitation are illegal and void. Moreover, collateral contracts which are good in themselves will become void if they are knowingly made to further an immoral purpose. E.g. a contract to lease a flat which is used as a brothel.

Peace v. BrokersA let a Cab on hire to B a prostitute knowing that it was to be used for immoral purposes. It was held that A could not recover the cost for the hire.

Agreements between husband and wife for future separation and between a married man and a woman who knows him to be married for marriage after his wife’s death have been held to be void.

7. Contracts Affecting the Freedom of Marriage

Contracts in general restraint of marriage are void as also are contracts unreasonably affecting freedom of choice in marriage. Marriage brokerage contracts, that is, contracts to introduce men and women to each other with a view to their subsequent marriage are void.

However, a contract between a dating agency and its clients is valid since it does not depend on a marriage occurring.

8. Contracts Contrary to Public Policy

• A contract by a newspaper owner not to comment on the conduct of a particular person is void.

Neville v. Dominion of Canada News Co. Ltd (1915) In this case it was held “for a newspaper to stipulate for a consideration that it will refrain from exercising its rights to commenting upon fraudulent schemes when it is the ordinary business of the company to comment upon fraudulent schemes is in itself a stipulation which is quite contrary to public policy and which cannot be enforced in a court of law.’

• A contract interfering with the liberty of an individual is void. Where therefore a man agreed with a moneylender ‘not to change his residence or his employment or to consent to a reduction of his salary or to part with any of his property, or to incur any obligations on credit or any obligations legal or moral without the consent of the moneylender’ the court held that the contract was void. However in Denny’s Trustee v. Denny (1919

A father whose son had bad habits agreed to pay his son’s debt and the son in consideration thereof agreed not to go within 80 miles of London, it was held that the contract was binding because the object of the restriction was to reform the Son.

9. Contracts in Restraint Trade

A contract in restraint of trade is one, which restrains a person fully or partially in the carrying out of his trade or business. All such contracts are prima facie void and will only be enforced if there are good reasons. A contract in restraint of trade may be enforceable if it is intended to protect a legitimate interest. Examples are:

• The purchaser of the goodwill of a business has a legitimate interest in protecting that goodwill by getting the seller to agree not to set up immediately next door in the same line of business.

• An employer also has a legitimate interest to prevent an employee from revealing trade secrets.

Therefore, a contract provision which is in restraint of trade and which is intended to protect a legitimate interest will be enforced if it is no wider than necessary to protect the legitimate interest of the party in whose favour it is made and is reasonable in the public interest.

A provision which is wider than is necessary to protect a legitimate interestis unenforceable. Thus in Morris v. Saxelby (1914) It was held that “such a restraint has never been upheld if directed only to the prevention of competition or against the use of personal skills and knowledge acquired by the employer in his employer’s business.”

If the restraint although against competition is necessary to protect the employer against any improper use by the employee of the knowledge he has acquired in the service of his employer, e.g. trade connections, trade secrets or confidential information it will be enforced provided it’s no wider than is reasonably necessary to effect that purpose.

Attwood v. Lamont (1920)

A, a tailor, employed L as his assistant under a contract by which L agreed that on the termination of his employment he would not carry out business as a tailor within 10 miles of A. It was held that the agreement was merely to prevent L from using skills that he possessed in competition with A and was therefore void.

An employer may not after his servant has left his employment, prevent that servant from using his own skill and knowledge in his trade or profession even if he acquired it when he was in the employer’s service.

Fitch Vs Dewes (1912)Fitch was a Solicitor and Dewes was his Clerk. In his contract of service, Dewes agreed that on leaving Fitch’s employment, he would not practice as a Solicitor within 7 miles of Fitch. It was held that the agreement was valid because Dewes during his service with Fitch had come to know details of F’s business and clients and therefore he could be restrained from using that knowledge to the detriment of Fitch.

Solus AgreementA solus agreement is an agreement whereby a trader agrees to restrict his business or one aspect of it to a sole supplier or a sole outlet . It is subject to the scrutiny of the courts to see if the restraint on the traderis reasonable.

A solus agreement whereby a garage owner binds himself to buy all his petrol from an oil company though it is in restraint of trade, it is not necessarily unenforceable. In view of the existing arrangements for the distribution of petrol, the widespread incidence of solus agreements and the necessity for oil companies to protect their trade outlets, such an agreement might be reasonable.

3.10.6Effects of Illegality.

1. Contracts that are tainted by illegality are normally unenforceable. The law gives no assistance of any kind to the guilty party in such a case and consequently, he cannot recover any money paid or goods supplied under such a contract, nor can he sue for damages or the price of the goods if in order to be successful he has to rely on his own illegality.

2. Courts will not entertain an action founded on or brought in connection with an illegal contract. This rule however has some exemptions.

Firstly, where the parties are not partners in the crime, the innocent party may recover anything he has paid under the contract. E.g. when a person was induced by fraud to take over some insurance policies in which he has no insurable interest, he was entitled to recover the premiums he had paid under the illegal contract.

Secondly, where the illegal purpose has not been carried out, one party to the contract may repent his illegal purpose and if he does so before performance takes place, the law will assist him. If however, non-performance is due not to his repentance but to other forces, the law will not assist him.

3. Illegal acts are committed in the course of the performance of a legal contract. It can sometimes happen that in the course of performance of a perfectly legal contract an illegal act is performed. If only part of thecontract is illegal, the whole contract will not be void, if the illegal part can be severed from the rest of the contract.

Napier v. National Business Agency Ltd (1951)Napier was employed as Secretary and Accountant at a salary of £13 a week with £6 a week for expenses. Both parties knew his expenses were less than £1 a week. It was held the contract was to evade tax and was illegal. It was impossible to severe the part dealing with salary from the part dealing with expenses so that the whole contract was unenforceable

Clay v Yates 1856P agreed to print a book for D which had a libellous dedication. P discovered afterwards the dedication was libellous and printed the book without it. He then claimed the cost of printing the book. D argued it was an entire contract and that P could not recover anything as he had only given part performance. The court held that there was an implied undertaking to pay for so much of the book as was lawful. Since the illegal part could be severed from the legal part, P could sue for the legal part he had printed.

3.11Discharge of ContractA contract may be discharged or brought to an end in the following ways: – a) Performanceb) Paymentc) Agreementd) Termination by noticee) Frustration

3.11.1 Performance

If both parties have performed what they agreed to do under the contract, the contract is discharged. Performance must be strictly in accordance with the terms of the contract in order for the contract to be discharged by performance. In other words performance must be complete and exact

Section 26 of the Sales if Goods Act provides that a contract of sale of goods is performed if the seller delivers goods as agreed and the buyer accepts the goods and pays as agreed. Section 31 of the Act gives the buyer a right to reject the goods if the seller deviates from the terms of the contract

Re: Moore & Company and Landauer & CompanyA supplier of tinned fruits agreed to supply 3,000 tins of canned fruit from Australia to be packed in cases containing 30 tins each. When the goods were tendered, it was found that a substantial part of the consignment was packed in cases containing 24 tins. The buyers rejected the whole consignment and the sellers sued for the breach of contract. It was held that the buyers were not labile since they had acted within their legal rights.

Where a party to a contract is prevented by the fault of the other party from further performance of his part of the contract, he may sue for damages for breach of contract or claim reasonable remuneration on a quantum meruit (as much as he has earned)

De Bernardy v. HardingThe plaintiff agreed to act as the defendant’s agent for the purpose of preparing and issuing certain advertisements and notices designed to promote the sale of tickets to see the funeral procession if the Duke of Wellington. He was to be paid a commission of 10 per cent upon the proceeds of the tickets actually sold. After he had prepared advertisements and paid printers, but before he begun to sell the tickets the defendants withdrew his authority to sell them. He sued in quantum meruit for the work already done and his action succeeded.

The court indicated that ‘Where one party has absolutely refused to perform, or has rendered himself incapable of performing his partoif the contract, he puts it in the power of the other party either to sue for breach of it or rescind the contract and sue on a quantum meruit for the work actually done’

Time performance may be fixed in the contract, in that case, the contract must be performed within that time and especially when time is of the essence of the contract. Time is of the essence of the contract when the parties have expressly said so; or when the circumstances of the contract imply it to be so. E.g. the building of a swimming pool for Olympic games. The requirement that time is of the essence may be waived by an agreement of the parties.

3.11.2PaymentPayment of amount due under a contract is a discharge. Payment of a smaller amount is not a discharge unless it is accepted by the creditor as being full satisfaction. Payment to an agent is a good discharge if the agent is authorized or held out as having authority to receive payment. Payment to one of several joint creditors discharges the debt.

WaiverIt’s a common experience in commercial practice that a party does not insist on its strict contractual rights but when requested by other party’s shows some indulgence. Thus a contract for sale may provide for delivery February 1st but the buyer may ask the seller to defer delivery until March 1st