Formation of a contract

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A contract is formed by an offer by one person and the acceptance of this offer by another person. The intention of both parties must be to create a legal relationship and they must have the legal capacity to make such a contract. There must be also some consideration against the contract between the two parties. The formation of contract involves the following factors:-

a) The offer
b) The Acceptance
c) Consideration
d) Contractual capacity
e) Intention To Create A Legal Relationship

The Offer
An offer is defined as an expression of willingness to enter into a contract on definite terms, as soon as these terms are accepted. It is made by a person known as the offeror and addressed to the offeree. Thus, if A writes to B stating his desire to sell his property to B at a specified price,
A is said to have made an offer to B. A is the offeror and B the offeree. An offer may be express (where the offeror specifically makes his intentions known to the offeree, whether in writing or by word of month), or it may be implied from the conduct of the parties, particularly the offeror.
An offer is valid only if its terms are definite, but not where they are vague.

Offer and “Invitation to Treat”
An offer, as defined above, must be distinguished from an invitation to treat, The latter is merely an invitation to make an offer and no contract can result from it alone. The best example is afforded by the display of goods in a shop or supermarket. According to decided cases this amounts to an invitation to treat, not an offer; it is the customer or prospective buyer who makes an offer to the shopkeeper or attendant, or cashier, by picking up the goods and expressing the desire to buy them.

Pharmaceutical Society of Great Bruam V. Boots (1953)
The defendant had a self-service store in which certain listed drugs were displayed on the shelves. It was an offence to sell such drugs unless the sale was done under the supervision of a registered pharmacist. A customer selected some of the drugs from the shelves. The defendants had placed a registered pharmacist on duty at the cash desk near the exit, but not near the shelves. The defendants were charged with the offence of selling listed drugs without the supervision of a registered pharmacist. If the sale took place when the customer picked up the drugs from the shelves, the defendants would be liable; but if the sale took place at the cash desk where the registered pharmacist was stationed, then the defendants were not liable. The court therefore had to determine where the sale took place.
Held: The defendants were not liable because the display of goods on the shelves was merely an invitation to treat, not an offer; it was customer who made an offer by selecting the article and taking it to the cashier.

Fisher V. Bell (1960)
A shopkeeper displayed a flick-knife in his shop window with a price tag behind it. He was charged with the offence of offering a flick-knife for sale. The court had to determine whether the shopkeeper’s act amounted to offering the flick-knife for sale.
Held (Lord Parker, CJ): “It is clear that, according to the ordinally law of contract, the display of an article with a price on it a shop window is merely an invitation to treat. It is in no sense an offer for sale the acceptance of which constitutes a contract”. Since there was no offer for sale, the shopkeeper was not liable.
Another example of an act that amounts to an invitation to treat rather than an offer is to be found in advertisements inviting tenders. The advertiser merely invites tenders for a particular purpose. It is the tenderer who, by his tender, makes an offer to the advertiser and the latter is thereby converted into an offeree; and it is upon the offeree to accept or reject a particular tender. (A tender is an offer for the supply of goods or services).

The Acceptance
An acceptance is an assent to the terms of an offer. It must correspond with the terms of an offer, and it is for this reason that a counter offer, cross-offer or conditional assent is not an acceptance in the legal sense of the word. An acceptance may be made in anyway that is expedient, but sometimes the offer itself may dictate the mode of acceptance. For example, the offeree may be required to notify his acceptance in writing or to lodge it at a named place or to a named person, or to communicate it within a specified period of time, e.t.c. Generally, the prescribed mode of acceptance must be adhered to; it is only in exceptional circumstances that an equally reflective mode of acceptance may be upheld. An acceptance may be express (where the offeree directly assents to the terms of the offer), or it may be by conduct.

The offer and acceptance are not enough to bring about a valid and binding contract. In the case of simple contracts, these are required to be supported by consideration, otherwise the contract is void. Specialty contracts are an exception.

Why does the law insist on consideration before a valid contract can be made? The rationale behind this requirement is that the law of contract generally enforces only bargains and not bare promises for which no value is given. This follows from the fact that, the law of contract is generally intended to promote commercial relations. These are relations which necessarily impose an element of bargain, an element without which there would be no commerce at all.
Indeed, it is on this element that the whole doctrine of consideration is centered.

When we talk of bargain, what we have in mind is an exchange of relationship within the context of a money economy. This is clear from the fact that a party seeking to enforce a contract must prove that consideration has moved from him and that it consists of money or money’s worth.

Types of Consideration

a) Executory of Consideration
The word executory is used to denote that the promised act is yet to be done. Thus A promises to sell and deliver to B sacks to charcoal in return for a price to be paid by B. Before delivery of the charcoal, A’s promise to B is in the nature of executory consideration for B’s promise to pay the price. Similarly, before payment of the price, B’s promise to A is in the nature of executor consideration for A’s promise.

b) Executed Consideration
The word executed is used here to denote that the promised act has already been done. To take the example given above, after A has delivered the charcoal to B, A is said to have furnished executed consideration for B’s promise to pay the price. Similarly, after B has paid the price he is said to have furnished executed consideration for A’s promise to sell and deliver to him three sacks of charcoal.

Under a given contract, it is possible for the consideration furnished by one of the party to be
executory, while that furnished by the other party is executed. Thus, in the above example if it is agreed that A is to deliver the charcoal in a week’s time but that B is to pay the price immediately, at that stage consideration furnished by A is executor while that furnished by B is executed.

The distinction between executor and executed consideration is particularly important while considering performance of the contract by the parties and the remedies available to the innocent party in the event of a breach of the contract by the other party. Thus where B has furnished executed consideration by paying the price but A has failed to deliver the charcoal B is said to have performed his part of the contract and he is entitled to recover the price from A ad also to damages from A for breach of contract; whereas if B’s consideration was merely executory but he was willing to pay the price, E would be said t be willing top perform the contract ad he would in this case be entitled to damages alone.

c) Past Consideration.
Once negotiations are over and the parties have struck a bargain, any subsequent or fresh promise made by either party in relation to that bargain is known as past consideration. The law is that for d promise to constitute valid consideration is must have been made during the negotiations. As such, past consideration is not valid consideration for the bargain in respect of which it is given ; it is in fact no consideration at all and the promises(promised party ) cannot rely on it.

After selling a horse to the plaintiff, the defendant promised the plaintiff in the following terms
:” in consideration that the plaintiff at the request of the defendant, had bought of the defendant a certain horse, at and for a certain price, the defendant promised the plaintiff that the said horse was sound and free from vice. But the horse proved not to be “sound and free from vice” ands the plaintiff sued on the above Held: The defendant’s promise was given after the d sale and without any fresh consideration; it therefore amounted to past consideration, which the plaintiff could not rely on.
d) Sufficiency of Consideration
Consideration need not be adequate. Freedom of contract demands that the parties must be free to make their own bargain .No court of law will concern itself with the question whether the price agreed upon is worth the goods supplied. In short, the consideration furnished by one party need not be equal or proportionate to that furnished by the other party. Thus, a creditor’s forbearance to sue (i.e. a promise not to sue) may be sufficient consideration for a promise given by the debtor relation to a particular debt.

Alliance Bank, Ltd. v Broom (1864)
The defendant owed plaintiff bankers # 22,000 by way of overdraft. The plaintiffs pressed the defendant for payment, as result of which the defendant promised to give security for the overdraft. The defendant failed to provide the security and on being sued pleaded that the plaintiffs had furnished no consideration for his promise. Held: There was an implicit promise of forbearance for the defendant’s promise.

But since by definition consideration indicates value, it must bereal and not illusory. Thus, where a person is already legally bound (whether by contract or as a matter of public duty) to do a particular thing, a promise such as subsequently made by him to do that same thing is not consideration which, could support any agreement at all. Thus, a policeman discharging his ordinary duties furnishes no consideration for a promise made by X to pay him for protection.
Similarly, a person contractually bound to sail a ship home furnishes no consideration for extra pay if all that is done by him is to discharge his contractual obligation:

Intention to Create a Legal Relationship
A contract apparently supported by consideration will not result in a binding contract unless it was the intention of the parties to enter into, or create legal relationship. It, for example, X, promises to take out Y for lunch and Y accepts ad patiently waits for X, there is no legally binding agreement and Y cannot sue X failure to honour his promise.

It is not always easy to determine whether there was an intention to create legal relations. Where the circumstances expressly or impliedly to create such intention, obviously there will be no binding contract. Thus, where it is provided that a particular transaction is not to give rise to any legal relationship but that is to be “binding in honour only” there is no legally binding agreement an none of the parties to the transaction may bring an action on it: Jones V. Vernons Pools, Ltd. (1938). In Rose and Frank Co.V. J. R. Cromption Brothers, Ltd. (1924) a document signed be the plaintiffs and defendants provided (inter lia): “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall nor be subject to legal jurisdiction in the law court… but it is only a define expression and record of the purpose an intention of he three parties concerned, to which they each honourably pledge themselves with the fullest confidence- based on past business with each other- that it will be carried through by each of he three parties with mutual loyalty and friendly co-operation”. It was held that the parties intention was that the document should not be legally enforceable, and the plaintiff’s action could not therefore be maintained

Complications arise where there is nothing on the face of the transaction to negative an intention to create legal relations. Generally there is a presumption that there was such intention, in the case of commercial agreements. This presumption is rebutted by a provision to the case of social or domestic agreements. Here, there is no presumption of an intention to create legal relations; such intention must be specifically proved, otherwise the person seeking to enforce the agreement will fail in his action:

Balfour V. Balfour (1919)
The plaintiff and defendant were husband and wife. The husband, a civil servant in Ceylon, was on leave and he had gone with his wife to England.Towards the end of the leave the wife was in bad health and had to remain in England, while the husband returned to Ceylon. The husband promised her # 30 per month for maintenance during this time. Later, when the husband defaulted, the wife sued him on his promise. Held: The husband’s promise did not give rise to legal relations and so the wife’s action could not be maintained.

Merritt V. Merritt (1970)
The plaintiff and defendant were husband and wife. Their matrimonial home was in their joint names, and was subject to a mortgage. The husband left the matrimonial home and went to live with another woman. Later it was agreed that the husband would pay the wife # 40 per month out of which she was to pay the outstanding mortgage payments. The husband signed a document stating that “In consideration of the fact that you will pay charges in connection with (the matrimonial home), until such time as the mortgage repayment has been completed, when the mortgage has been completed I will agree to transfer the property to your sole ownership”. The wife paid off the entire amount outstanding on the mortgage, but the husband refused to transfer the house into her sole name. Held: The parties had intended to create legal relations; there was therefore a binding contract which the husband had breached.

Note: Domestic agreements are not restricted to those between spouses. They extend to agreements between parent and child (see, e.g. Jones V. Padavation, (1969) and also those between persons who may not in fact be relatives. “Domestic” is used here are to simply to distinguish those agreements from those which are of a commercial nature.

Contractual Capacity
An essential ingredient of a valid contract is that the contracting parties must be ‘competent to contract’. Every person is competent to contract who is of the age of majority and who is of sound mind, and is not qualified from contracting by any law. Only a person who has contractual capacity be a party to a contract. This includes artificial as well as natural persons.

The general rule is that any person may enter into any kind of contract. But special rules supply to the following persons:-

a) Minors
b) Persons of Unsound Mind and Drunken Persons
c) Married Women
d) Aliens or Non Citizens
e) Corporations
f) Co-operative Societies
g) Trade Unions

These special rules are explained below;

Minor’s contracts are governed by common law rules as modifiedby the Infants Relief Act 1874.
Under the Contract Act (Cap. 23), contracts in Kenya are governed by the common law of England relating to contracts as modified (interalia) by “the general statutes in force in England on 12 th August 1897. It may therefore, be said that the “Infant Relief Act 1874 applies in Kenya.

A contract made by minors may be binding, voidable of void.

These are discussed as under:-

a) Binding Contracts
There are two types of contracts which are binding on minors.

i) Contract for the Supply of Necessaries
Certain things are regarded as “necessaries”. These are things without which the minor could hardly live; are therefore things which are essential to his maintenance. Under the Sale of Goods
Acts “necessaries” are defined as “goods suitable to the condition in life of a particular infant or minor, and to his actual requirements at the time of the sale and delivery”. Included here are things like food, clothing, and medicine. But whether a particular commodity falls within the category of necessaries depends on the circumstances of a particular case; and in particular items of luxury are excluded. Thus, while a suit may be an item of necessaries in the case of a minor who hails from a well to do family it might be an item of luxury to a peasant’s son, particularly where there are cheaper alternatives within a peasant’s means. Once a particular item has been placed within the category of necessaries the next question is: To what extent can the other contracting party enforce the contract on sale against the minor? Under the above Act, a minor is liable to pay a “reasonable price” for goods which are necessaries. He is not therefore necessarily liable for the actual or contract price, and anyone dealing with a minor should bear this in mind as he is likely to lose in case the minor defaults to payment, particularly where the goods were supplied to minor on credit.

It is clear from the definition above that in reckoning whether or no t particular goods are “necessaries” account must be taken of minor’s actual requirements at the time of sale and delivery. It must therefore be proved that the minor was not sufficiently provided with goods in question at the time when they were sold and delivered to him; otherwise the goods are not necessaries and the contract cannot be enforced against the minor.

Nash v. Inman (1908)
A tailor supplied an infant with 11 fancy waistcoats, but the infant failed to pay. The infant was a university undergraduate. His father gave evidence that the infantwas adequately supplied with proper clothes according to his station in life.
Held: The clothes were not necessaries and the infant was not liable to pay from them. The fact that a minor has a sufficient allowance does no prevent him from contracting for necessaries on credit: Burghart v. Hall (1839). The lender is still entitled to a reasonable price for the necessaries supplied by him.

Where a minor gets a loan o buy necessaries, the lender may recover his loan under the doctrine of subrogation, i.e. he does not recover in his own right as lender but instead he stands in the place of the person who supplied the necessaries and it is only in this latter capacity that he may recover the money. However, he will only be able to recover the money to the extent that it has been used to buy necessaries and only to the extent of a reasonable price for the necessaries.
Besides goods, certain services and expenses are also considered to be necessaries. Examples includes lodging, legal advice, and funeral expenses for the infant.

ii) Beneficial Contracts of Service
Besides contracts for the supply of necessaries, minor is bound by a contract of service whose nature is such that, considered as a whole, it is intended for his benefit:

Clements v. London and N.W. Railway Co. (18940
X, a minor, was employed by a railway company as a porter. He joined the company’s insurance scheme and agreed to relinquish his statutory right of suing for personal injury under the Employers Liability Act 1880. Though the Scheme fixed a lower scale of compensation, its terms were generally more favourable than those embodied in the Act; the Scheme covered more accidents in respect of which compensation was payable.
Held: The agreement was generally for the benefit of X and it was therefore binding on him.

De Francesco V. Barnum (1890)
X, a minor of 14 years, joined the plaintiff as an apprentice in order that she might be taught stage dancing. The apprenticeship was to an agreed sum per night, that she would not marry and that she would not accept any other professional engagement without the plaintiff’s permission.
The plaintiff was not bound to engage X or to maintain her while unemployed; the amount payable for X’s services was a trifling sum and moreover, the plaintiff was at liberty to terminate the contract in the event of X being found unfit for stage dancing.
Held: The agreement as a whole was unreasonable and completely put X at the mercy of the plaintiff; it was not beneficial to X and was therefore not binding on her. Thus, whether a particular contract is beneficial to a minor and hence binding on him depends on the circumstances of the case. It is binding only when, considered as a whole, it appears to be advantageous or beneficial to the minor. But where the other party to the contract has more to gain from the minor, the contract and his own interests under the contract outweigh those of the minor, the contract will not be considered as being beneficial to the minor and consequently the minor will be bound by it. Certain contracts can never be enforced against a minor, however beneficial they may be to him.
This is particularly so in the case of trading contract. A minor is never by such contracts:

Cowern V. Nield (1912)
X, a minor, set himself up in business as a hay and straw dealer, Y paid for consignment of hay, which X failed to deliver. Y sued X for the price.
Held: Being a minor, X was not bound by the contract entered into with Y, since it was a trading; accordingly X was not liable to repay the price to Y

According to the above case, beneficial contact entered into with a minor is binding on him only if it is either a contract of service or of apprentices, or something close to this. Thus, in Doyle’s Case given above, the contract in question was held to be very closely connected with a contract since it was designed to develop the minor’s skill as a boxer.

b) Voidable Contracts
Voidable contracts, as far as minors are concerned, are those contracts which a minor is entitled to repudiate either during minority or within a reasonable time after attaining majority age. Apart from the minor’s option to repudiate, a voidable contract is similar to a binding one in that in either case the contract must be beneficial to the minor. But in the case of voidable contracts, the subject matter is generally of a permanent nature and the obligations created by the contract are of a continuous nature. The most outstanding examples are: leases agreements (by which the minor acquires an interest in land); contracts for the purchase of shares (by which the minor in a limited company); and contracts of partnership 9by which the minor becomes a partner in a firm).
Like any other voidable contract, a minor’s voidable contract remains binding on him until it is duly terminated by him. He must take timely action to avoid the contract, otherwise he will be bound by its terms:-

Davies V. Beynon- Harris (1931)
X, an infant, leased a flat from the plaintiff two weeks before attaining majority age. Three years later, his rent was in arrears and the plaintiff sued him. Held: X had failed to avoid the lease within a reasonable time after attaining majority age and it was now too late to do so; consequently, he was liable to pay the arrears of rent

c) Void Contracts
Under section 1 of the Infants Relief Act 1874, the following contracts entered into with minors are declared to be absolutely void:-

(i) Contracts for the repayment of money lent or to be lent (i.e. loan contracts).
(ii) Contracts for goods supplied or to be supplied other than necessaries;
(iii) All accounts stated (or “settled accounts”).

None of these three types of contract can be enforced against a minor.

Smith V. King (1892)
X, a minor was indebted to Y, who were stock brokers. After X had attained majority age, Y sued him for the debt. Y then accepted two bills of # 50 each in full settlement of the debt. Y later brought an action against X based on the bills. The acceptance by Y of the two bills amounted to a ratification of a debt contracted by him during minority; such ratification was void under the Infant Relief Act 1874 and X was no therefore liable on the bills.

Valentini V. Canali (1889)
X, a minor leased the defendant’s house and agreed to pay #102 for the furniture which was in the house by way of purchase. He effected a down- payment of #68 on the furniture. He then occupied the house and used the furniture for some months, after which he repudiated the lease.
He then sought to recover the # 68 from the defendant. Held: X was not liable to pay the balance on the #102; but since he had used the furniture for some months there was no total failure of consideration and accordingly he could not recover the #68.

R. Leslie, Ltd. V. Sheill (1914)
X, a minor, fraudulently told the plaintiff that he (X) was of majority age, thereby inducing the plaintiff to lead him @ 400. X for fraudulent misrepresentation or, alternatively, for money.
Held: The contract was absolutely void under the Infants Relief Act 1874; X was not liable to repay the money as the alternative claim against him was an indirect way of enforcing the void contract.
Note: Since a loan contract involving a minor is void, a guarantee of such contract is equally void: Coutts & Co. V. Browne- Lecky (1947).

Persons of Unsound Mind and Drunken Persons
A contract made with a person of unsound mind (PUM) is binding on him only if it was during a lucid interval, i.e. an interval during which he is sane. For this purpose, it is immaterial that the other party may have been aware of the PUM’s mental capacity. Apart form this, a contract that is entered into a PUM with a person who knows him to be mentally incapacitated, is voidable at the instance of PUM. However, where the PUM has obtained necessaries under the contract, he is, like a minor, liable to pay a reasonable price for the Sale of Goods Act.

As for a drunken person, his contractual capacity is generally the same as that of a PUM. If the drunkenness is, to the knowledge of the other party, such as to render him incapable of appreciating his acts, a contract entered into in these circumstances is voidable at the instance of the drunken person upon sobering up. But like a minor and PUM, he is liable to pay reasonable price for necessaries: Sale of Goods Act.

Married Women
At common law a married woman could not enter into a contract. But under the Law Reform
(Married Women and Tortfeasors) Act, 1935, the married women can sue and be sued in contract in the same way as single women.

Aliens or Non-Citizens
Alien, i.e. a person who is not citizen of Kenya, can sue and be sued. Any enemy alien, i.e. a person resident in a country which is at war with Kenya, cannot sue, but if sued can defend an action.

In the case of corporation, its contractual capacity is limited by the provisions of is Memorandum of Association. It can only enter into those contracts authorized by the Memorandum; any other contract is ultra vires and cannot be entered into by the corporation. In case of a statutory corporation, it can only do those things which are expressly or impliedly authorized by statute.
Any contracts entered into those which are not authorized by statute are “ultra vires” and therefore, void.

Co-operative Societies
A co-operative society registered under the Co-operative Societies Act (Cap 490) can enter into
Contracts, and be sued in accordance with the provisions of the Act.

Trade Unions
Section 25 (1) of the Trade Unions Act (Cap. 233) provides:
“Every trade union shall be liable on any contract entered into by it or by an agent acting on its behalf: provided that a trade union shall not be liable on any contract which is void or unenforceable at law”.
A registered trade union may sue and be sued and be prosecuted under its registered name.

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