Law of contract

CPA-Business-Law-Section-1 BLOCK RELEASE

DEFINITION OF CONTRACT

A contract is an agreement of promises which is legally binding or enforceable law.

According to Salmond a contract is an “agreement creating and defining obligations between the parties.”

According to Sir William Anson, “A contract is an agreement enforceable at law made between two or more persons, which rights are acquired one or more to acts or forbearances on the part of the other or others.

Sir William Anson further observes as follows: “As the law relating to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass; and that what has been promised to him shall be performed.”

Based on the above definition a contract exist when there is
1. an agreement
2. the agreement is enforceable the law

The law of contract imposes an obligation to the parties involved to see that they have performed their promise, failure to do so attracts legal implications. This usually involves compensating the aggrieved party once the party responsible has been found liable for the act or omission.

CLASSIFICATION OF CONTRACTS

Contracts may be of various types. These may be classified as under:-

1. Express and Implied Contract

An express contract is one in which the parties specifically agree about the nature and terms of their relationship. There is then said to be an express agreement. For example, if A agrees to sell his goods to B for KSH. 10,000/= and B agrees to buy the goods at that price, there is said to be an express contract for the sale of goods at an agreed price.

On the other hand, there is no specific agreement in an implied contract. The conduct of the parties, as well as all the surrounding circumstances, must be taken into account in order to ascertain whether or not a contract exists. Thus where A hires a taxi and boards it there is an implied contract that the taxi man shall convex A up to his destination and that A shall pay such fare is usually paid for that trip.

2. Unilateral and Bilateral contracts

A Unilateral Contract is one in which only one party is bound. It is a rare type of contract which arises, for instance, where there is an offer of a reward. Thus, if ‘A’ offers a reward to anyone who will recover his lost property, no one is bound to recover the lost property but ‘A’ himself is bound to give the promised reward to anyone who might recover the property.

Most contracts are bilateral. A bilateral contract is one in which both parties are bound. Thus, if
A agrees to sell his goods to B and B agrees to buy them at a stated price, both parties are bound.
A is bound to deliver the goods to B and B is bound to accept them to pay the price.

3. Valid, Void and Voidable Contracts.

A valid contract is an agreement enforceable law. An agreement becomes enforceable law when all the essentials of a valid contract discussed above are present. A void contract is an agreement which is not binding or enforceable law. This is because it has no legal effect at all and is, therefore, not binding on any of parties. A contract is rendered void in certain cases where both parties were mistaken, where it is prohibited law of where it is entered without consideration e.t.c.

A voidable contract is one which is enforceable law of the option of one of the parties.
Usually a contract becomes voidable when this consent of one of the parties to the contract is obtained undue influence, or misrepresentation. Such a contract is voidable at the option of the aggrieved party of the party whose consent was s caused.

Where there is a voidable contract, the party entitled to avoid it must do so within a reasonable time. This may be done A notifying the other party, B, that he (A) does not intend to be bound the contract. Where it is no feasible to give notice, e.g. where B is a rogue whose whereabouts are not known A can still effectively terminate the contract doing everything possible to show that ho does not intend to be bound the contract. It is sufficient, for instance, to make a report to the police.

Car and Universal Finance Co. V. Caldwell (1965)
X bought a car from the defendant and paid cheque. X took the car with him. The cheque bounced the next day, but X had disappeared. The defendant reported the matter to the police and the Automobile Association, requesting them to recover the car. Subsequently, X sold the car to Y, who knew X’s title to be defective. Y in turn resold the car to the plaintiffs, who bought in good faith.
Held: By setting the police and Auto mobile Association in motion, the defendant had clearly shown that he intended to resend the contract; this meant that the ownership of the car reverted to him and therefore Y had no title to pass to the plaintiffs. The defendant was therefore entitled to recover the car from the plaintiffs.

The right to avoid the contract is lost if the innocent party, upon discovering the true facts,
subsequently affirms it. It is also lost where an innocent third party had acquired an interest in
the subject matter of the contract, which is likely to be affected the avoidance of the contract.

Newtons of Wembley, Ltd. V. Williams (1965)
X bought a car from the plaintiff and paid cheque. He took the car with him. The cheque was dishonoured, but in the meantime X had disappeared. X subsequently resold the car to the defendant, who bought in good faith. The plaintiff sought to recover the car from the defendant.
Held: Title to the car had passed to the defendant; it could not therefore be recovered the plaintiff.

Notes: The facts in the above two cases are similar. In Caldwell’s Case the car was recovered because the innocent purchaser acquired it from a seller who had no title since the contract had already been rescinded; the seller had bought from X in bad faith. On the other hand, in Williams’s Case the car could not be recovered because the innocent purchaser has acquired it, in good faith, from a person who had right to sell it.

There are many other instances of voidable contracts, e.g. contracts entered, into under a unilateral mistake, duress or undue influence as well as minors’ contracts.

4. Specialty Contracts and simple Contracts.
A specialty contract is also known as a contract under seal. It is an instrument in writing signed and sealed the party to be bound it and delivered him to the person for whose benefit it was made. Thus, writing,, signature, sealing and delivery are the four essential characteristics of this type of contract, of which a Deed is the best example (e.g. a Deed of Conveyance under which property is transferred one person to another). “Delivery” is used here not in the sense of physical delivery; what is required is an intention to be bound; Vincent V. Premo Enterprises Ltd. (1969). If A executes a deed conveying his property to B, with an expressed intention that he is to be therebound, A will be bound even if the deed was never physical delivered to B. A central feature of this type of contract is that its validity is independent of consideration i.e. B need not have furnished anything of value as pre-condition for enforcing A’s promise.

A simple contract is an agreement, express or implied, which gives rise to legal obligations. A simple agreement may be in writing or agreed orally, or even be implied from the conduct of parties. A simple contract may be made also made partly orally and partly in writing.

In England, conveyances of land or leases of land for periods of more than three years, transfers of British ships and gratuitous promises must be under seal.

Section 2 (1) of the Law of Contract Act states that no contract in writing shall be void or unenforceable merely on the ground that it is not under deed. But such contracts, if not made under deed must be supported consideration.

The following contracts must be in writing:-

a) Bills of Exchange and Promissory Notes.
b) Representations regarding credit worthiness or character.
c) Acknowledgement of Statute Barred Debts.

The following contracts must be evidenced writing:

a) Contracts of Guarantee
b) Contracts for the Sale of Land
c) Contracts for the Sale of Goods over Two Hundred shillings
d) Employment Contracts over one month
e) Hire Purchase Contracts
f) Money Lending Contracts

6) Contracts Uberrimae Fidei
A contract uberrimae fidelis one in which only one of the parties has full knowledge of all materials facts, which he is under a duty to disclose. The best example is an insurance contract.
The insured is possessed of all facts which are material to the contract; but the insurer has no possession of these facts and the insured is under a duty to disclose them to him. Contracts
Uberrimae Fidei are said to be contracts of Utmost good faith, particularly on the part of the party under a duty to disclose material fact. Any failure to exhibit good faith, or any show of outright bad faith, amounts to a breach of the contract entitling the other party to be relieved from his own obligation under the contract. Other examples of contracts Uberrimae Fidei includes:-

(i) Family settlements (where full disclosure is required);
(ii) Contracts for the sale of land (where the seller must disclose defects relating to title);
(iii) Contracts of partnership (where every partner must exhibit utmost good faith in his dealings with the other partner (s).

7. Contracts of Record
A contract of record consists of the judgment of court. Such contracts are formed an entry on the court records. The rights and obligations of the parties are put on court record and the resultant relationships between them are said to constitute a contract of record. These contracts includes:

i. Judgment of a Court
The previous rights under a contract are merged in the judgment of a court. This judgment constitutes a contract of records between the parties of the contract. We assume ‘R’ owes ‘T’ Kshs. 2,000/= on a contract. ‘T’ sues ‘R’ and court issues a judgment that ‘T’ must be paid ‘R’ KSH. 1,500/= In this case, the previous rights become merged in the judgment of the court.

ii. Recognizances
In the criminal cases, the court may bind the accused to be of good behaviour and keep peace. The person so bound acknowledges that a specified sum will be paid him to the state if he fails to observe the terms of recognizance. In the contracts of record, the element of consent of both parties is absent. For this reason, these contracts are not true contracts.

8. Executed contract
A contract is said to be executed when both the parties to a contract have completely performed their share of obligation and nothing remains to be done either the party under the contract.
For example, when a bookseller sells a book on cash payment it is an executed contract because both the parties have done what they were to do under the contract.

9. Executory contract
It is one in which both the obligations are understanding, one on either party to the contract, either wholly or in part, at the time of the formation of the contract. In other words, a contract is said to be executory when either both the parties to a contract have still to perform their share of obligation or there remains something to be done under the contract on both sides.

For example, T agrees to coach R, a C.P.A student, from first day of the next month and R in consideration promises to pay to T Kshs. 1,000 per month, the contract is executory because it is yet to be carried out.
10. Quasi-Contracts
This type of contracts has little or no affinity with contract. Such a contract does not arise virtue of any agreement, express or implied between the parties circumstances. For example, obligation of finder of lost goods to return them to the true owner or liability of person to whom money is paid under mistake to replay it back cannot be said to arise out of a contract even in its remotest sense, as there is neither offer and acceptance nor consent, but these are very much covered under quasi contracts. These are known as quasi contracts because these have certain relations resembling those created contract. A quasi contract is based upon the equitable principle that person shall not be allowed to retain unjust benefit at the expense of another.

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