LAW OF Contract E- Learning Module PDF

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These are law of contract notes. They contain all the principles of contract law, elements of contracts, parties to a contract, how a contract can be vitiated, non performance of contractual obligations, and the remedies available to the innocent party....

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DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

PARKLANDS LAW CAMPUS SCHOOL OF LAW, DEPARTMENT OF PUBLIC LAW

LAW OF CONTRACT E-LEARNING MODULE BLW 1105 May-August, 2020 Prerequisite: None

COURSE INSTRUCTOR: DOMINIC NDOLO MUTUNGA CONTRACT: [email protected]

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

INTRODUCTION TO THE COURSE The word ‘Contract’ has a colloquial usage as well as a legal connotation. Colloquially it means an agreement. However in legal terms it has got more than one definition. The understanding of the various approaches to the word ‘contract’ forms the basis of the subject ‘Law of Contract’. There are various reasons which can be cited for studying the subject. The least of them would be the compulsion imposed by the institutional course structure. The foremost reason that makes it imperative to study the course is the wide application of the law of contract in every-day life. We make contracts when we buy a newspaper or travel on a bus. Obviously not all contracts are of those simple types. Contracts dealing with the construction of ships or buildings will be highly complex. Nevertheless, across that spectrum the underlying principles of contract law remain the same and it is those basic principles which are the subject matter of this course. Moreover formation of contract being mandatory for all commercial transactions accentuates the importance of the subject. Although we will habitually refer to the Law of Contract Act, Cap 23 Law of Kenya, our emphasis will be on case law analysis. The importance of case study in the context of the law of contract is undeniable. Many of the doctrines like promissory estoppel, doctrine of unconscionable bargains, economic duress et al have been evolved through the various judgments. Thus ideologies of the judges and the subsisting socio-economic circumstances will be analysed in order to evaluate the judgments. The relevance of the old doctrines in the present circumstances will also be analysed. An important area of discussion will be the growing trend of resorting to standard form of contract/adhesive contract. This type of contract challenges the classical notions of the law of contract viz. offer, acceptance and consensus-ad idem. Another area of debate will be the recognition of the right of third parties in a contract. The divergence between the traditional and the modern notions of the law of contract will thus be of prime concern. LEARNING OUTCOMES On successful completion of the Course, students should be able to: 1. Identify the general principles of the law of contract, undertake legal research with primary and secondary materials, and evaluate legal information.

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

2. Analyse complex problems relating to contractual dealings, identify relevant legal issues and correctly apply relevant legal principles to suggest an answer. 3. Structure and sustain concise and cohesive written arguments for a legal audience on matters relating to contracts. 4. Discuss and analyse complex problems relating to the Law of Contract. 5. Reflect on their abilities to effectively analyse problems and apply relevant legal principles pertinent to the area of contracts

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

Table of Contents INTRODUCTION TO THE COURSE...........................................................................................2 LEARNING OUTCOMES..............................................................................................................2 TOPIC 1 (WEEK 1): INTRODUCTORY REMARKS ON THE LAW OF CONTRACT.............7 Learning outcomes.......................................................................................................................7 Content.........................................................................................................................................7 Summary....................................................................................................................................17 Discussion Questions.................................................................................................................17 Additional reading materials......................................................................................................18 TOPIC 2 (WEEK 2 & 3): FORMATION OF THE CONTRACT 1: OFFER AND ACCEPTANCE.............................................................................................................................18 Learning outcomes.....................................................................................................................18 Content.......................................................................................................................................18 Summary....................................................................................................................................39 Class activity..............................................................................................................................40 Revision questions.....................................................................................................................40 TOPIC 3 (WEEK 4 & 5): FORMATION OF THE CONTRACT 2: INTENTION TO CREATE LEGAL RELATIONS AND CONSIDERATION.........................................................................40 Learning outcomes.....................................................................................................................40 Content.......................................................................................................................................40 Summary....................................................................................................................................66 Class activity..............................................................................................................................66 Discussion questions..................................................................................................................66 TOPIC 4 (WEEK 6): CONTENTS OF A CONTRACT................................................................66 Learning outcomes.....................................................................................................................66 Content.......................................................................................................................................67 Summary....................................................................................................................................82 Activity.......................................................................................................................................82 Discussion questions..................................................................................................................82 TOPIC 5 (WEEK 7): CONSTRUCTION/INTERPRETATION OF CONTRACTS....................83 Learning outcomes.....................................................................................................................83 Content.......................................................................................................................................83

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

Summary..................................................................................................................................102 Activities..................................................................................................................................102 Discussion questions................................................................................................................102 TOPIC 6: (WEEK 8) VITIATING ELEMENTS (FACTORS AFFECTING CONTRACTS): MISREPRESENTATION AND MISTAKE................................................................................102 Learning outcomes...................................................................................................................102 Content.....................................................................................................................................103 Summary..................................................................................................................................114 Activity.....................................................................................................................................115 Discussion questions................................................................................................................115 TOPIC 7 (WEEK 9): VITIATING ELEMENTS: DURESS AND UNDUE INFLUENCE........115 Learning outcomes...................................................................................................................115 Content.....................................................................................................................................116 Summary..................................................................................................................................137 Activity.....................................................................................................................................137 Discussion questions................................................................................................................137 TOPIC 8: (WEEK 10) VITIATING ELEMENTS: ILLEGALITY.............................................137 Learning outcomes...................................................................................................................137 Content.....................................................................................................................................137 Summary..................................................................................................................................144 Activity.....................................................................................................................................144 Discussion questions................................................................................................................145 TOPIC 9 (WEEK 11): VOID CONTRACTS..............................................................................146 Learning outcomes...................................................................................................................146 Content.....................................................................................................................................146 Summary..................................................................................................................................161 Activity.....................................................................................................................................161 Discussion questions................................................................................................................161 TOPIC 10 (WEEK 12): DISCHARGE OF A CONTRACT........................................................161 Learning outcomes...................................................................................................................161 Content.....................................................................................................................................161 Summary..................................................................................................................................191

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

Activities..................................................................................................................................191 Revision questions...................................................................................................................191 TOPIC 11 (WEEK 13 & 14): REMEDIES FOR BREACH OF CONTRACT...........................191 Learning outcomes...................................................................................................................191 Content.....................................................................................................................................192 Summary..................................................................................................................................192 Activity.....................................................................................................................................192 Discussion questions................................................................................................................192

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

TOPIC 1 (WEEK 1): INTRODUCTORY REMARKS ON THE LAW OF CONTRACT Learning outcomes By the end of this topic, learners should be able to: 1. Explain what the Law of Contract entails 2. Locate the Law of Contract among the other branches of Law and explain how the Law of Contract relates with those other laws 3. Explain the doctrine of freedom of contract 4. Discuss the types of contract 5. Analyse the sources of the Law of Contract Content Some preliminary remarks on the Law that you are about to study Law is a set of rules that have been put in place to keep order. The Law of Contract has been put in place to keep order in contracts! Sir John Salmond defines Law as follows: ‘…the body of principles recognised and applied by the courts in the administration of justice.’ ‘In other words the law consists of the rules recognised and acted on by the courts of justice’. For this reason, in studying law we are talking about a body of rules that can be placed into an organisational structure, and that can be applied and enforced in a system of courts. Kenya has a legal system, a body of rules. There is also an English legal system, an America legal system, etc. All legal systems must contain five common characteristics, according to Professor HLA Hart: a) Rules forbidding certain types of behaviour backed up by sanctions or punishments for those breaking them (Criminal Law) b) Rules that compel people to compensate others for wrongs they have committed (Civil Liability (The Law of Tort)) c) Rules that regulate the conduct of and enforce agreements, arrangements and relationships between individuals (Contracts, Wills, Trusts, Company Law) d) Operating mainly but not exclusively within the Civil Law

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

For any legal system to operate it must have a system in place for administering and enforcing the law. This is the role of courts. We have criminal courts, civil courts, and tribunals. The law has to be “made”. For this reason, Kenya has a Parliament that makes laws. Law can be classified as follows:

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

Section 3 of the Judicature Act, Cap 8 Laws of Kenya lists the sources of Law in Kenya as follows: (a) the Constitution;

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

(b) subject thereto, all other written laws, including the Acts of Parliament of the United Kingdom cited in Part I of the Schedule to this Act, modified in accordance with Part II of that Schedule; (c) subject thereto and so far as those written laws do not extend or apply, the substance of the common law, the doctrines of equity and the statutes of general application in force in England on the 12th August, 1897, and the procedure and practice observed in courts of justice in England at that date But also see article 2 (6) of the 2010 Constitution which states that all treaties that Kenya has ratified shall form part of the Law of Kenya. We will also be dealing with case law that established important precedent. This is what we refer to as “common law”. The law of contract The lifeblood of any business deal is the contract. It turns an ‘agreement’ into a ‘transaction’. It makes an agreement binding/ Business cannot operate without contracts. A contract is a legally binding agreement, between 2 or more parties. The agreement can be evidenced by writing, words or actions. A contract is determined on the principle of consent. The parties are fee to agree any terms they wish. The courts are reluctant to interfere with private agreements. The agreement of terms creates obligations on the parties. Judges therefore adopt a non-interventionist approach with regard to commercial contracts. The judges work on the assumption that there is equality of bargaining power between commercial men. This assumption underpins the two basic principles of commercial law: freedom of contract and sanctity of contract. The late Professor Schmitthoff wrote that “…the basis of commercial law is the contractual principle of autonomy of the parties’ will. Subject to the ultimate reservation of public policy, the parties are free to arrange their affairs as they like…” The will theory sees contracts as representations of the will of the people and therefore worth of recognition as such. The theory asserts the value of individual judgment, volition, and the liberal principle of individual self-determination. The most referenced legal opinion in the area of freedom of contract is Sir George Jesse’s decision in Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462 where he ruled that competent men and women of age shall have the liberty to contract and that courts of justice shall enforce contracts when such contracts are

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

entered into freely. In Photo Production Ltd v Securicor Ltd [1980] AC 827 at 848 Lord Diplock held that contracting parties are at liberty to decide the terms that they want to abide by and that this was basic principle of the common law of contract. Brennan J later established in Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 369 that a contract enables parties to create rights and obligations that will govern their contract. We all contract whether consciously or sub consciously. The bulk of the day to day contracts we make do not have all the formalities and are merely agreements. Contract law is therefore a very vital chapter as most persons and companies contract on a daily basis. A contract may therefore be defined as a legally binding agreement made by 2 or more parties. It has also been defined as a promise or set of promises a breach of which the law provides a remedy and the performance of which the law recognizes as an obligation. The most important characteristic of a contract is that it is enforceable. The genesis of a contract is an agreement between the parties hence a contract is an enforceable agreement. However, whereas all contracts are agreements, all agreements are not contracts. TYPES OF CONTRACTS Contracts may be classified as: 1. Written / specialty contracts 2. Contracts requiring written evidence 3. Simple contracts 4. Contracts under seal 1. WRITTEN CONTRACTS These are contracts which under the law must be written, that is embodied in a formal document e.g. hire purchase agreement, contract of marine insurance, contract of sale of land. Contracts under seal: this is a contract drawn by one party, sealed and sent to the party / parties for signature. Such a contract requires no consideration e.g. a lease agreement, mortgage, charge. 2. CONTACTS REQUIRING WRITTEN EVIDENCE These are contracts which must be evidenced by some notes or memorandum.

DOMINIC NDOLO MUTUNGA MKUSoL LEARNING MATERIALS. LAW OF CONTRACT

Contents of the note / memorandum: 1) A description of the parties sufficient to identify them. 2) A description of the subject matter of the contract 3) The consideration (value) 4) Signature of the parties Examples include; contracts of insurance other than marine, contract of guarantee. 3. SIMPLE CONTRACTS These are contracts whose formation is not subject to any legal formalities. The contract may be: 

Oral



Written



Partly oral and...