UNIVERSITY OF NAIROBI
SCHOOL OF LAW
CONTRACT LAW 1
1
Contents
LIST OF CASES ......................................................................................................................................... 3
CONTRACT FORMATION AND CONSTRUCTION: IMPLIED TERMS OF A CONTRACT ..... 4
INTRODUCTION....................................................................................................................................... 4
BACKGROUND ......................................................................................................................................... 4
IMPLIED FORMATION OF A CONTRACT ........................................................................................ 5
IMPLIED TERMS OF THE CONTRACT .............................................................................................. 6
TERMS IMPLIED IN FACT................................................................................................................. 6
TERMS IMPLIED IN LAW .................................................................................................................. 9
TERMS IMPLIED BY CUSTOM ....................................................................................................... 11
TERMS IMPLIED BY TRADE USAGE............................................................................................ 11
CONCLUSION ......................................................................................................................................... 12
BIBLIOGRAPHY ..................................................................................................................................... 13
2
LIST OF CASES
Alpha Trading Ltd. v. Dunnshaw-Patten Ltd. [1981] 1
Ashington Piggeries v Christopher Hill [1972] AC 441
Beale v Taylor [1967] 1 WLR 1193
British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd (1975)
Carlill v Carbolic Smoke Ball Company [1892] EWCA
Les Affreteurs Reunis S.A. v. Walford (1919)
Luxor (Eastbourne) Ltd v Cooper (1941) 1 AC 108
Niblett v Confectioners Materials Co [1921] 3 K.B. 387
O'Conaill v Gaelic Echo (1958)
O’Reilly v. The Irish Press Ltd. (1937)
Priest v Last (1903)2K.B.148
Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 K.B. 592
Rowland v Divall [1923] 2 KB 500
Rubicon Computer Systems Ltd v United Paints Ltd (2000) 2 TCLR 454
Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 per MacKinnon LJ.
Spring v NASDS [1956] 1 WLR 585
The Moorcock (1889) 14 PD 64
Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR
3
CONTRACT FORMATION AND CONSTRUCTION: IMPLIED
TERMS OF A CONTRACT
INTRODUCTION
Although it may be established that a contract exists and that it is enforceable, it may not always
be easy to determine the terms of such a contract. The terms of a contract may have many sources,
written and oral. When a court determines the scope and content of the normative relationship
between contracting parties, it draws on a range of sources: the communications between the
parties to the agreement, rules and principles of mandatory law (for example public policy,
illegality), default rules, procedural and substantive rules that govern the ‘construction’ of the
agreement.1 When there is a ‘gap’ in a contract, courts’ will effectively engage in restructuring the
contract between the parties. The court applies a variety of strategies through an interpretative
process (‘constructive interpretation’ in the widest sense),2 based on an assumed or hypothetical
intention of the contracting parties, or supplement the agreement through substantive rules and
standards outside of the agreement.3
BACKGROUND
With rise of the market ascent of the contractual ‘will theory’ in the 19th Century,4 contract
formation was conceptualized as the paradigmatic domain of private ordering, the very expression
of private autonomy and the legal mechanism through which, on the basis of a dichotomous
understanding of state and society, enterprising citizens structure their social relations mostly free
from state interference.5 Thus, the role of courts was said to be limited to the enforcement of the
contractual agreement as autonomously willed by the parties, i.e the lex contractus, therefore the
courts do not write contracts for the parties, but merely enforces them.
In constructing the contracts, the courts were guided by an intricate body of doctrine and social
interactions of the parties and in so doing the courts draw not only on the ‘autonomous’ expressions
of the parties’ intentions, but also on ‘heteronomous’ rules and principles of law, usage or accepted
1
PS Atiyah, The Rise and Fall of Freedom of Contract (1985) 67–85
McKendrick E, Contract Law: Text, Cases, and Materials (6th ed, Oxford University Press 2014)
3
Ibid
4
D Ibbetson, Historical Introduction to the Law of Obligations (1999) 220–61
5
J Habermas, The Structural Transformation of the Public Sphere: an Inquiry into a Category of Bourgeois Society
(Polity Press, Cambridge, 161. 1991) 73–9
2
4
standards such as ‘good faith’ or ‘equity’.6 These standards can either inform the interpretation of
the meaning of the communications themselves or operate as substantive standards that
supplement the agreement.7
IMPLIED FORMATION OF A CONTRACT
There are different modes of formation of a contract. The terms of a contract may be stated in
words (written or spoken). This is an express contract. Also the terms of a contract may be inferred
from the conduct of the parties or from the circumstances of the case. This is an implied
contract.For example;
If A enters into a bus for going to his destination and takes a seat, the law will imply a
contract from the very nature of the circumstances, and the commuter will be obliged to
pay for the journey.
Offer and acceptance analysis is a traditional approach in contract law used to determine whether
an agreement exists between two parties. An offer is an indication by one person to another of their
willingness to contract on certain terms without further negotiations. A contract is then formed if
there is express or implied agreement. A contract is said to come into existence when acceptance
of an offer has been communicated to the offeror by the offeree. When it comes to offer, it may be
express or implied. An offer implied from the conduct of the parties or from the circumstances of
the case is known as implied offer. For Example;
A owns a motor boat for taking people from Kisumu to Rusinga Island .The boat is in the
waters at the dock. This is an offer by conduct to take passengers from Kisumu to Rusinga
Island.. He need not speak or call the passengers. The very fact that his motor boat is in
the waters near dock signifies his willingness to do an act with a view to obtaining the
assent of the other. This is an example of an implied offer.
With reference to acceptance, the assent may be express or implied. It is express when the
acceptance has been signified either in writing, or by word of mouth, or by performance of some
required act. Acceptance is implied when it is to be gathered from the surrounding circumstances
or the conduct of the parties. For example;
6
7
Adams, J. N. and Brownsword, Roger, Understanding Contract Law (5th ed, Sweet & Maxwell 2007)
Ibid
5
1. A enters into a bus for going to his destination and takes a seat. From the very nature of the
circumstance, the law will imply acceptance on the part of A.
2. A’s scooter goes out of order and he was stranded on a lonely road. B, who was standing
nearby, starts correcting the fault. A allows B to do the same. From the nature of the
circumstances, A has given his acceptance to the offer by B.
3. In Carlill v. Carbolic Smoke Ball Co, Carbolic Smoke Ball Co. (D) manufactured and sold
The Carbolic Smoke Ball. The company placed ads in various newspapers offering a
reward of 100 pounds to any person who used the smoke ball three times per day as directed
and contracted influenza, colds, or any other disease. After seeing the ad Carlill (P)
purchased a ball and used it as directed. Carlill contracted influenza and made a claim for
the reward. Carbolic Smoke Ball refused to pay and Carlill sued for damages arising from
breach of contract. Judgment for 100 pounds was entered for Carlill and Carbolic Smoke
Ball appealed. The issue was whether who makes a unilateral offer for the sale of goods by
means of an advertisement impliedly waive notification of acceptance, if his purpose is to
sell as much product as possible? The court held one who makes a unilateral offer for the
sale of goods by means of an advertisement impliedly waives notification of acceptance if
his purpose is to sell as much product as possible . Thus acceptance by Mrs. Carlill took
the form of her conduct by purchasing and consuming the smoke balls.8
IMPLIED TERMS OF THE CONTRACT
As well as the express terms laid down by the parties, further terms may in some circumstances be
read into contracts by the courts.. Sometimes it is assumed that implied terms are simply terms that
the parties would have included had they thought of it. But judges very often imply terms into
contracts, sometimes where it is arguable that the parties might not have agreed such terms
themselves. These implied terms may be divided into four groups: terms implied in fact; terms
implied in law; terms implied by custom; and terms implied by trade usage.
TERMS IMPLIED IN FACT
Terms implied in fact are ones which are not expressly set out in the contract, but which the parties
must have intended to include. The courts have adopted two tests governing whether a term may
be implied. The first is the "officious bystander" test, where a term is so obvious that its inclusion
8
Carlill v Carbolic Smoke Ball Company [1892] EWCA
6
goes without saying, and had an officious bystander asked the parties at the time of contracting
whether the term ought to be included, the parties would have replied "Oh, of course". 9 In other
words, if it can be established that both parties regarded the term as obvious and would have
accepted it, had it been put to them at the time of contracting, that should suffice to support the
implication of the term in fact. This test was laid down by MacKinnon LJ in Shirlaw v Souther
Foundries (1926) when he stated that
“…that which in any contract is left to be implied and need not be expressed is something
so obvious that it goes without saying; so that, if while the parties were making their
bargain, an officious bystander were to suggest some express provision for it in the
agreement, they would testily suppress him with a common ‘Oh, of course!’”10
The alternative test for implication is that of "business efficacy", where the contract would be
unworkable without the term. The leading case in this field is The Moorcook (1989). In this case
the defendants owned a wharf and jetty on the river Thames which people could pay to use to load
and unload their boats. The defendants contracted with the plaintiffs for the unloading of the
plaintiffs’ boat, called The Moorcock, at their wharf. Both parties knew that the water level at the
wharf was low and that the boat would have to rest on the river bed when the tide was down. This
would be all right if the river bed was soft mud, but would damage the boat if it was hard ground.
In fact, the boat was damaged when it hit a ridge of hard ground at low tide. The contract did not
expressly state that the boat would be moored safely. The plaintiffs brought an action for
compensation for the damage to the boat on the basis that there had been a breach of contract. The
Court of Appeal implied a term into the contract that the boat would be moored safely at the jetty.
Such a term was necessary to give the contract business efficacy. Otherwise the boat owner ‘would
simply be buying an opportunity of danger’. The term had been breached and the action for
damages for breach of contract was therefore successful.11
The decision in The Moorcook was for a long time misunderstood. However, Scrutton LJ Reigate
v Union Manufacturing Co, clarified the position when he stated that:
9
Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 per MacKinnon LJ.
Ibid
11
The Moorcock (1889) 14 PD 64
10
7
“A term can only be implied if it is necessary in the business sense to give efficacy to the
contract, i.e. if it is such a term that it can confidently be said that if at the time the contract
was being negotiated someone had said to the parties: ‘What will happen in such a case?’
they would both have replied: ‘Of course so and so will happen, we did not trouble to say
that; it is too clear.’12
Further, Lord Pearson in Trollope and Colls Ltd v North West Regional Hospital Board stated
that:
“An unexpressed term can be implied if, and only if, the court finds that the parties must
have intended that term to form part of their contract: it is not enough for the court to find
that such a term would have been adopted by the parties as reasonable men if it had been
suggested to them: it must have been a term that went without saying, a term necessary to
give business efficacy to the contract, a term which although tacit, formed part of the
contract which the parties made for themselves”13
From the above decisions, it can be stated that a term will only be implied if it is found that the
contract will not work without it; it will not be implied just because it makes the contract more
sensible, fairer or better Perhaps the most elaborative decision on the business efficacy state is to
be found in the case of Alpha Trading Ltd v Dunnshaw Patten Ltd,14where one company was
acting as agent for another in sales promotion. The agent was to receive commission based on the
quantity sold. After contracting with the buyer, the principal pulled out of the contract. The cement
company (Principal) settled with the third party for breach of contract, however, the Court of
Appeal held that the business efficacy required that there was an implied term that the Principal
would not withdraw from the contract so as to avoid the sale and leave the agent without
commission, without such a term, it would have been pointless for the agent to be a party to the
contract. Thus the cement company had breached this term and so the agent was entitled to an
award of damages.
It is clear that both the by stander and the business efficacy tests are subjective in nature: they ask
what the parties in the case would have agreed, and not what a reasonable person in their position
12
Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 K.B. 592
Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR
14
Alpha Trading Ltd. v. Dunnshaw-Patten Ltd. [1981] 1
13
8
would have agreed.15 Accordingly, efforts to imply terms in fact commonly fail for one of two
reasons. First, a term will not be implied in fact where one of the contracting parties is unaware of
the subject matter of the suggested term to be implied, or the facts on which the implication of the
term is based.16 Second, a term will not be implied in fact if it is not clear that both parties would
have agreed to its inclusion in the contract.17
TERMS IMPLIED IN LAW
These are terms which the law dictates must be present in certain types of contract, regardless of
whether or not the parties want them. For example, in a Sale of Good contracts there is an implied
condition on the part of the seller that in the case of a sale he has a right to sell the goods, and that
in the case of an agreement to sell he will have a right to sell the goods at the time when the
property is to pass.18 Effect of the condition is that the seller transfers property/title in goods to the
buyer. The Contract can be rescinded and the buyer has the right to recover monies paid (purchase
price) as there is total failure of consideration.
In Rowland v Divall,19the Plaintiff buys a car and sells it to sub buyer. It eventually turns out that
the car had never belonged to the person that he had bought it from (the defendant). The Original
owner claims the car and the plaintiff refunds the sub buyer. He then seeks to recover the whole
purchase price from the defendant. The court held that the plaintiff is entitled to recover the whole
purchase price. Further in Niblett v Confectioners’ Materials Co,20the Defendants sold 3,000 tins
of preserved milk to the Plaintiffs. The goods arrived in England and were detained by customs
authorities as they infringed the trademark of Nestle which was found to have the right to restrain
the sale of the goods. The court held that the sellers had no right to sell the goods even though they
had the power to confer good title to the buyer and thus the buyers were entitled to succeed in an
action for damages.
Further, there is an implied warranty in a sale of good contract that the buyer shall have and enjoy
quiet possession of the goods.21 In Rubicon Computer Systems Ltd v United Paints Ltd,22 the
15
Catherine Elliott and Frances Quinn, Contract law (10th edn, Pearson Education 2015)
Spring v NASDS [1956] 1 WLR 585
17
Luxor (Eastbourne) Ltd v Cooper (1941) 1 AC 108
18
Sale of Goods Act Cap 31 Laws of Kenya, s 14.
19
Rowland v Divall [1923] 2 KB 500
20
Niblett v Confectioners Materials Co [1921] 3 K.B. 387
21
Sale of Goods Act Cap 31 Laws of Kenya, s 14 (b)
22
Rubicon Computer Systems Ltd v United Paints Ltd (2000) 2 TCLR 454
16
9
supplier was installing a computer system for a buyer and wrongfully included a time-lock to it
which denied the purchasers access to it. The court held that the claimants were in breach of
warranty of quiet possession. In addition, there is an implied warranty that the goods shall be free
from any charge or encumbrance in favour of any third party, not declared or known to the buyer
before or at the time when the contract is made.23 Where the disturbance of the buyer’s possession
is by a third party the buyer may be entitled to treat this disturbance as the responsibility of the
seller if, as a result of any acts or defaults of the seller, some third party with whom the seller is in
contractual relations with asserts an encumbrance or lien on the goods.
In a contract of sale of good, there are certain terms that are implied by law. These terms are
exceptions to the caveat emptor (Buyer beware) rule. First, there is an implied condition that the
goods sold correspond with their description.24 If the sale is by sample as well as by description,
it is not sufficient that the bulk of the goods correspond with the sample if the goods do not also
correspond with the description.25 In Beale v Taylor,26 a second hand car was delivered for sale in
a newspaper where Mr Taylor believed his car was a 1961 herald and advertised it for sale as such.
Beale bought it and later found it was half of a 1961 herald and half of an older one welded
together. Beale sues for a refund. The court held that the sale is by description and buyer was
entitled to refund less scrap value.
Moreover, there is an implied condition that where goods are bought by description from a seller
who deals in goods of that description, there is an implied condition that the goods shall be of
merchantable quality, provided that if the buyer has examined the goods, there shall be no implied
condition as regards defects which that examination ought to have revealed.27
Furthermore, where the buyer, expressly or by implication, makes known to the seller the particular
purpose for which the goods are required, so as to show that the buyer relies on the seller’s skill
or judgment, and the goods are of a description which it is in the course of the seller’s business to
supply (whether he be the manufacturer or not), there is an implied condition that the goods shall
be reasonably fit for that purpose.28 Where goods have only one purpose or if it is the obvious
23
Sale of Goods Act Cap 31 Laws of Kenya, s 14 (c)
Ibid, s 15
25
Ibid.
26
Beale v Taylor [1967] 1 WLR 1193
27
Sale of Goods Act Cap 31 Laws of Kenya, s 16(b)
28
Ibid, s 16(a)
24
10
purpose the courts will take it as a given that this was the particular purpose meant. E.g. food is
for eating and milk for drinking. If no purpose indicated goods would be taken to be ordered for
their normal purpose.29 Where goods are capable of use for a number of purposes particular
purpose is deemed to be any purpose that could have reasonably been foreseen.30
In addition, there is an implied condition that the goods correspond with the sample. In the case of
a contract for sale by samples there is an implied condition that, first the bulk shall correspond
with the sample in quality.31 Second, that the buyer shall have a reasonable opportunity of
comparing the bulk with the sample.32 Finally, that the goods shall be free from any defect
rendering them unmerchantable which would not be apparent on reasonable examination of
sample.33
TERMS IMPLIED BY CUSTOM
Evidence of custom is admissible to add to, but not to contradict, a written contract. Terms can be
implied into a contract if there is evidence that under local custom they would normally be there.
In Ó Conaill v. Gaelic Echo,34there was no express term in the contract that stated that Dublin
Journalist were entitled to pay holidays, however the court held that custom entitled Dublin
journalist were entitled to paid holidays. The onus of proving a custom lies on the person claiming
it.35 Custom must not contradict express terms: if it does, parties must be taken not to have intended
the customary practice.36
TERMS IMPLIED BY TRADE USAGE
Where a term would routinely be part of a contract made by parties involved in a particular trade
practice or business, such a term may be implied by the courts. In British Crane Hire v Corp Ltd
v Ipswich Plant Hire Ltd,37the owner of crane hired it to a contractor, who was engaged in the
same sort of business. The court held that the hirer was bound by the owner’s usual terms, even
though these was not stated expressly at the time of the contract. The reasoning of the court was
that the owner’s terms were based on a model supplied by a trade association and were common
29
Priest v Last (1903)2K.B.148
Ashington Piggeries v Christopher Hill [1972] AC 441
31
Sale of Goods Act Cap 31 Laws of Kenya, s 17 (2)(a)
32
Ibid, s 17 (2) (b)
33
Ibid, s 17 (2) (c)
34
O'Conaill v Gaelic Echo (1958)
35
O’Reilly v. The Irish Press Ltd. (1937)
36
Les Affreteurs Reunis S.A. v. Walford (1919)
37
British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd (1975)
30
11
in the trade and could therefore be implied into the contract in much the same ways as terms
implied by custom.
CONCLUSION
The general position in law is that courts do not rewrite contracts and as such its role is to enforce
the agreements between contracting parties. However, the court has discretion to establish implied
terms of the contract, either created by facts, or by law (especially under public policy) or by
customs or by trade usage.
12
BIBLIOGRAPHY
Adams, J. N. and Brownsword, Roger, Understanding Contract Law (5th ed, Sweet & Maxwell
2007)
Catherine Elliott and Frances Quinn, Contract law (10th edn, Pearson Education 2015)
D Ibbetson, Historical Introduction to the Law of Obligations (1999) 220–61
J Habermas, The Structural Transformation of the Public Sphere: an Inquiry into a Category of
Bourgeois Society (Polity Press, Cambridge, 161. 1991) 73–9
McKendrick E, Contract Law: Text, Cases, and Materials (6th ed, Oxford University Press 2014)
PS Atiyah, The Rise and Fall of Freedom of Contract (1985) 67–85
13