Essential elements for the
valid formation of a
contract
Consideration
 “Some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given suffered or
undertaken by the other” (Currie v Misa 1875)
 A bargain consisting of mutual promises, both to be performed or
exchanged around the same time – executory consideration;
 Consideration for the promise is an act already performed – executed
consideration;
 If the act put forward as consideration was performed before any
promise of reward was made it is not valid consideration – past
consideration (but there are exceptions, e.g. in cases where there is an
implied understanding that there would be some payment.
Consideration
a)Consideration must be of some value
Some value is sufficient, it need not be proportionate bargaining
The following will not suffice as consideration:
i. Agreement to accept a lesser sum on contract of larger sum of money
General rule: not binding unless fresh consideration given
Exceptions:
 Smaller amount paid at creditor’s request on different terms;
 Composition agreement/ debt rearrangement scheme;
 Part payment made by third party on condition that debtor released;
 Equity: promissory estoppel
Consideration
ii. Promise to do what one can already legally demand
e.g. workers’ obligation to do extra work during emergencies;
iii. Promise to discharge duty imposed by law
e.g. promise to compensate individual subpoenaed by a court of law.
b) Consideration must move from the promise (privity of contract)
 Fundamental principle of English law;
 A person cannot be bound by or take advantage of a contract to which he was not
a party;
 Exceptions:
 Assignment of rights;
 Trust
Intention
 Objective test to determine intention to create legal relations;
 Intention may be negative by clause that it is a “goodwill agreement”;
 Commercial agreement: presumption of intention, unless:
Mere puffs or exaggerations in advertisements;
Agreement binding in “honour only”;
Comfort letters by third parties, instead of formal guarantee.
 Social/ domestic agreements: presumption of no intention
e.g. agreement that husband will pay wife housekeeping allowance
 However, a separation agreement would be binding: see Merritt v Merritt
Capacity
 Generally, all persons have the power to enter into contracts. Exceptions:
a) Minors – persons below the age of 18:
 The minor must be protected against his own inexperience;
 The law should not cause unnecessary hardship to those who deal with
minors.
i. Necessaries
E.g. food, clothing, lodging, education or training in a trade and
services;
It should not contain onerous terms;
The seller must prove:
 Items capable of being necessaries, and not luxury ones;
 Goods are necessary for the particular minor in question.
essential
Capacity
S4 of the Sale of Goods Act
Capacity to buy and sell
(1) Capacity to buy and sell is regulated by the general law
concerning capacity to contract, and to transfer and acquire
property:
Provided that, where necessaries are sold and delivered to a
minor, or to a person who by reason of mental incapacity or
drunkenness is incompetent to contract, he must pay a
reasonable price therefor.
(2) Necessaries in this section means goods suitable to the
condition in life of such minor or other person, and to his
actual requirements at the time of the sale and delivery.
Minors
ii.
Beneficial contracts of service
The law allows the minor to get into such a contract,
provided that, taken as a whole, it is manifestly for his
benefit;
A minor will therefore not be bound if the contract is on
the whole harsh or oppressive;
Take note, though, of sections 21 and 22 of the
Employment Act – prohibition against child labour (any
child below the age of 14) and hazardous work
Minors
 Iii. Acquisition of property with obligations
E.g. a leasehold, or shares in a company - he is bound by the obligations
as long as he retains the subject. He must pay the rent or calls on the
shares: London & North Western Railway v M'Michael (1850) 5 Ex 114.
The contract is voidable by the minor-he may repudiate it any time during
his minority or within a reasonable time thereafter
When a minor avoids a contract he escapes liability such as rent which
are not yet due, but he can be sued for rent which is due. The minor
cannot recover money which he has already paid unless there has been
a total failure of consideration;
e..g if he has attended meetings or received dividends (profits) on his
shares, he cannot recover the amount already paid to the company
Minors
iv. Loans and Guarantee of a minor's contract
Loans to minors are not binding unless ratified by the
minor after reaching the age of 18. No new
consideration is required for ratification.
A guarantee by an adult of a minor's contract will be
enforceable against the guarantor despite the fact
that the main transaction cannot be enforced
against the minor
Minors
The Effect of Equity on Minors’ Contracts
Subrogation: if a minor borrows money to buy necessaries
and he actually spends money for this purpose, the lender
may “step into the shoes” of the seller and recover from the
minor the reasonable price which the seller could have
recovered. The lender is said to be subrogated to the rights of
the seller
Specific performance: this will not be granted to the minor,
since equity will not grant it against a minor. The equitable
maxim “equality is equity” applies
Mental Disorder and Drunkenness
If a person is temporarily incapable of understanding what he
is doing because of mental illness, drunkenness or drugs the
contract will be valid unless he can prove:
That he did not understand the nature of the contract and,
The other party knew or ought to have known of this
disability
Such a contract will be binding if it is later ratified at a time
when the person is able to understand what he is doing.
Where necessaries are sold and delivered to a person who by
reason of mental incapacity or drunkenness is incompetent to
contract, he is bound to pay a reasonable price.
FORM OF A CONTRACT
Generally, contracts can be in any form, except:
Contracts which must be in the form of a deed: certain
transactions involving land require the execution of a deed,
i.e. conveyances, legal mortgages and leases for more than
3 years;
 Contracts which must be in writing: a contract for the sale or
other disposition of land can only be made in writing;
Contracts which must be evidenced in writing: a contract of
guarantee must be evidenced in writing to be legally
enforceable.
GENUINENESS OF CONSENT
1. Mistake
 Common law
The general rule of common law is that a mistake does not affect the validity of a contract –
caveat emptor;
The following mistakes, however, at common law, render a contract void:
 Mistake as to the existence of the subject matter: in Galloway v Galloway (1914);
 Mistake as to the possibility of performing the contract – e.g. failure of land to produce 50
tonnes of maize;
 Mistake as to the identity of the subject matter;
 Mistake as to the identity of the other party, but must prove the following:
 That at the time of the agreement he regarded the identity of the other party as of importance
 That he did not intend to contract with Y, but with a different existing person – Z, and
 That this fact was known to Y.
Mistake
 Equity
Equity will in limited situations relieve a party from the effects of his mistake
where the common law would hold him to the contract. There are two
equitable remedies:
a) Rescission
Provided the party is not at fault, and justice will be done to the other party
by imposing conditions, see Grist v Bailey (1966);
b) Rectification
A mistake in the written document may be rectified, subject to conditions:
i.
The terms were clearly agreed between the parties;
ii. The agreement continued unchanged up to the time it was put into
writing, and
iii. The writing fails to express the agreement of the parties.
c) Specific performance
The court may refuse to order this if it will be unfair to enforce it against the
person who made a mistake
Mistake
3. Non est factum
 The general rule concerning signed documents is that a person is bound even if he
does not read or understand the document. However, an apparent signed
contract will be regarded as void if a party can successfully plead the defence of
non est factum (it is not my act). Three conditions must be satisfied:
i.
The signature must have been induced by fraud ;
ii. The document must be fundamentally different from that thought to be signed. A
mistake as to the contents is not sufficient to allow non est factum to be raised;
iii. The party seeking to avoid liability must prove that he acted with reasonable
care.
See Lewis v Clay (1897)
Misrepresentation
 A misrepresentation is an untrue statement of fact which is one of the
causes which induces the contract;
 It must be a statement of fact; not opinion, intention or law ;
 Silence is not usually misrepresentation except:
i.
When a statement made in the course of negotiations subsequently
becomes false and is not corrected, or;
ii. When silence distorts a literally true statement - R v Kylsant (1931); or
iii. Where the contract is of utmost good faith (uberrimae fidei), it imposes a
duty of disclosure of all material facts because one party is in a strong
position to know the truth, e.g. insurance contracts – Lambert v CoOperative Insurance Society [1975].
 The misrepresentation must induce the contract. The plaintiff therefore
cannot avoid the contract if:
i.
He knew the statement was false, or;
ii. He would have made the contract despite the misrepresentation, or;
iii. He did not know that there had been a misrepresentation.
Fraudulent misrepresentation
A statement which is known to be false, or made without
belief in its truth, or recklessly, not caring whether it is true or
false - Derry v Peek (1889) 14 App Cas 337.
If the innocent party has suffered loss he may claim
damages, based on the tort of deceit. In addition, he may:
Refuse to perform the contract and
Claim rescission of the contract.
Since fraud makes a contract voidable, the innocent party
may choose to affirm the contract.
Negligent misrepresentation
A negligent misrepresentation is a false statement made by
a person who had no reasonable grounds for believing it to
be true.
The innocent party has a right to damages for
misrepresentation if he has suffered loss. However, if the
maker of the statement proves that he had reasonable
grounds for believing, and in fact did believe, up to the time
the contract was made that the facts represented were
true, then he has a defence.
The measure of damages is to put the plaintiff in the position
which he would have been in if the representation had not
been made
Innocent misrepresentation
 An innocent misrepresentation is a statement which the maker honestly
and reasonably believes to be true;
 The law attempts to strike a balance between two innocent parties, the
maker of the statement and the person who has been induced to make
a contract in reliance on that statement;
 The innocent party has no right to damages, but may ask the court to
grant the equitable remedy of rescission, i.e. restoration, to the precontract state of affairs:
 The court has a discretion to award damages in lieu of rescission if it thinks it
equitable to do so, for example, if the misrepresentation is trivial it may be
too drastic to rescind the contract;
 As with fraudulent misrepresentation the innocent party may choose to
affirm the contract.
Misrepresentation
Bars to rescission
The remedy of rescission will not be available in the following
situations:
i. If the innocent party, with knowledge of his rights, affirms the
contract;
ii. Lapse of time:
 Where the misrepresentation is fraudulent, lapse of time
does not itself bar rescission because time only begins to run
from discovery of the truth;
 Where the misrepresentation is innocent, lapse of time may
bar rescission (court may then award damages)
Duress
It is limited in scope to illegal violence or
threats of violence to the person of the
contracting party e.g. unlawful imprisonment;
Cuming v Ince (1847): an old lady was
threatened with unlawful confinement in a
mental home if she did not transfer certain
property rights to one of her relatives.
Undue influence
 Consent may be affected by other influences other than physical ones;
 There will be a presumption of undue influence where there is a special
relationship between the parties; the relationship is such that one of
them is by reason of the confidence placed in him able to take unfair
advantage of the other;
 Examples of such relationships are trustee/beneficiary, solicitor/client,
and parent/child;
 The transaction must be to the manifest disadvantage of the person
subjected to undue influence;
 However, the presumption will not arise if the person in whom
confidence is placed keeps within the boundaries of a normal business
relationship.
Terms of a contract
Express terms
Distinguish between a term and a representation inducing
the contract. It is likely a term if:
made in latter stages of negotiations,;
reduced to writing after it was made (regarded as
important);
the maker of the statement possessed special skill or
knowledge than the other party (Oscar Chess v Williams
[1957] 1 All ER 325 – buyer had special knowledge being car
dealers, whereas the seller did not)
If the maker suggests to the other to check the statement,
then it is likely a representation.
Conditions and Warranties
 Condition:
 Vital term going to the root of the contract;
 Normally entitles innocent party to cancel contract and claim damages.
 Warranty:
 Subsidiary to the main purpose of the contract;
 Breach only entitles the innocent party to damages.
 Classification as a condition or a warranty depends on the intention of
the parties – see Schuler v Wickman Machine Tools [1974] AC 235;
 Inter-mediate or innominate terms do not express intention of the parties,
and will be classified as either conditions or warranties depending on the
seriousness of the breach
 If it goes to the root of the contract then it will be deemed to be a
condition – see Hong Kong Fir Shipping [1962] 1 All ER 474.
Incomplete contracts
 A legally binding agreement must be complete in its terms;
 An agreement for the balance of the price to be paid over two years on “hire purchase
terms” is not an agreement - uncertain what terms were intended - Scammell v Ouston
(1941);
 However, the parties may leave an essential term to be settled by specified means outside
the contract, e.g.:
 open market price on date of delivery;
 arbitrator to determine a fair price;
 course of dealings between parties.
 Missing terms can be deduced from conduct of parties - Hillas v Arcos (1932) reference
made to official price list where no price was mentioned for timber sale;
 Non- essential or inappropriate words can de disregarded - Nicolene v Simmonds (1953) a
contract provided that the “usual conditions of acceptance apply”, but these
disregarded as they did not exist, therefore meaningless.
Standard form contracts
Usually used by large organisations in their contracts with
consumers;
Also used in commercial transactions;
Two major problems may arise in such contract:
When words inserted in blank spaces are inconsistent with the
printed words – usually the former will prevail – basic rule of
construction: “particular overrides the general”;
When both parties agree on their own standard terms - Butler
Machine Tool Company v Ex-Cell-O Corporation (1979) held in
favour of the buyer, as his terms of acceptance concluded the
contract, therefore deemed to override terms of the offer.
Implied terms
Custom
Presumption that parties conclude contract on prevailing customs in
trade or locality, unless proved otherwise - British Crane Hire v
Ipswich Plant Hire (1974)
Courts
Terms implied in fact: obvious and necessary to give contract
business efficacy (“officious bystander” test)
Terms implied in law: terms implied to maintain a standard of
behaviour, e.g. in employment
Implied terms: Statute
Exemption clauses
A term which seeks to limit or exempt party from liability on occurrence of
particular event;
Such a clause becomes a term of a contract by signing document or by notice:
 A person is bound by signed document even if s/he does not read it;
 A person will not be bound by a signed document if the other party
misrepresented its terms;
 Reasonable steps must be taken to bring clause to party’s notice before the
contract is concluded;
 The more outlandish the clause the more effort needed to bring it to the
party’s attention;
 Reasonable notice of the liability conditions proposed by the clause must be
given, otherwise the courts will not enforce it.
 Clause may apply where parties have had long and consistent dealings
incorporating the same
Limitations on exemption clauses
Courts seek to balance between:
Parties’ freedom to contract on any terms they wish; and
Need to protect public from unfair exemption clauses in standard
form contracts of large businesses
As much as corporations should not use them to abuse bargaining
power, they are important in allocating risk beforehand;
They also make it possible to determine different rates depending
on the risk borne by a party;
Greater need to protect public against such clauses with big
corporations, as opposed to contracts between corporation with
equal bargaining power
Discharge of a contract
Performance
Proper performance
 Each of the parties must carry out the obligations exactly as they agreed - Cutter v Powell
[1795] 10 ER 573
Partial performance
 Promissor partly performs obligations;
 Inference made that fresh agreement between the parties – dependent on acceptance by
other party;
 Based on quantum meruit principle
Prevention of performance
 Other party is at fault, so quantum meruit principle applies
Substantial performance
 Performed most of the obligations, but there are minor defects or omissions
 Contract price – cost of defects/omissions
Breach of contract
Breach of a condition entitles party to treat contract as coming to
an end;
The breach substantially deprives him of benefit of the contract;
Repudiation by performance also entitles innocent party to treat
contract as coming to an end:
Party indicates by words or conduct that he will not perform;
He does not honour obligations when due;
Called anticipatory breach;
Innocent party acquires immediate right to sue;
Or else can wait until performance due and there is non-performance.
Frustration
Unforeseen contingencies may occur once contract
concluded;
Parties sometimes insert “force majeure”/hardship clauses
to deal with such contingencies; otherwise the courts may
imply the same – Taylor v Caldwell (1863) 3 B & S 826 – hall
accidentally destroyed by fire;
The court will not hold contract as discharged if frustration
is due to action of one of the parties;
Occurrence of frustrating event will automatically bring
contract to an end.
REMEDIES FOR BREACH OF CONTRACT
Damages
 Monetary compensation in respect of loss suffered as a result of breach of contract;
 The object of damages is to put the injured party in the same position he had been before
the contract or in the position he would have been if the contract was not breached;
 Court has the task to decide if the injury suffered by the party is such that the injured party is
entitled to damages – not too remote:
 “…is only entitled to recover such part of the loss actually resulting as was at the time of the
contract reasonably foreseeable as liable to result from the breach” – Asquith J - Victoria
Laundry Ltd v Newman Industries [1949] 2 K.B. 528 ;
 “…fairly and reasonably be considered either arising naturally, i.e., according to the usual
course of things, from such breach of contract itself, or such as may be reasonably have
been contemplated by both parties at the time they made the contract, as the probable
result of the breach of it.” – Alderson, B - The Haron II (1969) 1 A.C. 356;
 The courts also take into consideration the principle of mitigation of loss/damage in awarding
damages.
Specific performance
 A court decree which constrains a contracting party to do that which he has promised to do;
 A plaintiff can choose to either pray for damages alone or specific performance alone or
both;
 Equitable/discretionary remedy, which will not be given if there is another adequate remedy
at law;
 Purpose of specific performance is to ensure that justice is done;
 Usually awarded in contracts of the sale of land - damages viewed as inadequate i.e. a
purchaser of the land is usually disappointed because of the vendor’s failure to convey the
land;
 It will not be awarded in the following cases:
 Agreements strictly personal in their nature, e.g. hiring and serving, master and servant;
 Performance of the contract requires constant supervision by the courts;
 Contracts with infants/minors (see notes on capacity);
 Where there has been an unreasonable delay in bringing an action
Injunction
The effect is to order a party to refrain from doing
something in breach of duty/order to complete;
It is thus either prohibitory or mandatory;
A mandatory injunction can be restorative, not
merely preventive – can undo what is already
done;
Injunctions are usually interim remedies, awaiting
hearing of the substantive case.
EXTINCTION OF REMEDIES
The right to bring an action/claim can be lost under the
Limitation Act (Chapter 6:02) s.4(1);
An action founded on contract must be brought within 6
years ;
 limitation period can be extended if :
The injured party could not commence action due to
disability; or
Failure to commence an action was due to fraud on
the part of the defendant