LECTURE ONE
INTRODUCTION TO LAW:
THE NATURE, PURPOSE, AND KINDS OF LAW
1.1 Lecture Overview
Welcome to our first lecture in business law. Learning law is fairly easy because we deal with
legal issues every day. You are therefore encouraged to approach this lecture with confidence
and a positive mental attitude. Law is all about facts and fun to learn. It is full of stories and I
want to believe that we all like stories. The legal profession is very rich in jokes and shall be
sharing some of them as we proceed. I call them the “the light moments”. I do not start any
topic without such light moments. These light moments are not only meant to lighten you but
also to encourage you to critically consider the issues therein as you develop your creative
skills. Herein below is our first light moment.
On a light touch
A surgeon, an architect and a lawyer are having a heated discussion concerning which of their professions is actually the
oldest profession.
The surgeon says: "Surgery is the oldest profession. God took a rib from Adam to create Eve and you cannot go back further
than that”.
The architect says: "Hold on! In fact, God was the first architect when he created the world out of chaos in 6 days, and you
cannot go back any further than that!!”
The lawyer teasingly looks at them and says: "Gentlemen, Gentlemen, Gentlemen...who do you think created the chaos?!!”
Points to ponder:
i)
Is law actually a major cause of chaos in the world today? If yes, how?
ii)
Does law provide any solution to major chaos in the world? If yes, how?
Lecture Objectives
At the end of the topic, you should be able to;
i)
Define the term law
ii)
Appreciate the difference between law and morality
iii)
Explain the purpose of law
iv)
Explain the role of law in guiding conduct
v)
Explain the importance of legal knowledge in the business environment
vi)
Explain the various classifications of law
vii)
Differentiate between crime and civil wrongs
viii) Explain the advantages and disadvantages of law
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Law is with us all the time. Law is involved in all aspects of business, whether the entrepreneur is
aware of it or not. It affects business decisions such as; formation of business entity, hiring and
firing, workplace safety, financing, property acquisitions, etc. Understanding the role of law when
making such decisions allows an entrepreneur to maximize the protection that law extends while
avoiding its pitfalls. An emphasis is placed on the idea that knowledge of the law is an essential
business asset that can assist owners and managers in reaching their goals and objectives.
Lack of legal knowledge may result in failure to maximize opportunities or in losing out on
them altogether. In addition, the business may be subjected to regulatory and judicial sanctions,
including being fined, forced to pay penalties, or closed down altogether. Informed owners and
managers can protect their businesses by ensuring compliance with legal requirements. They can
capitalize on the planning function of law to ensure the future of their business by entering into
contracts. They also can seek enforcement of legal rules against those who do business or have
other interactions with the enterprise. In this way, the property, contractual expectations, and
profitability of the business are made more secure.
Among other functions, law protects persons and their property, facilitates commercial
interactions, particularly through the law of contract and provides mechanisms for dispute
resolution. Law protects businesses by setting penalties and ensuring accountability with losses
being paid for by the parties responsible for creating them. Law therefore protects people in
two primary ways. First, it sets rules with penalties in order to encourage compliance. Second,
it seeks to make those who break the law accountable for their misconduct. The more
significant role of law is facilitative in that legal rules provide definition and context for doing
business. Law facilitates commercial relations by providing rules governing the marketplace.
Law functions to prevent disputes and to facilitate relationships.
For a legal system to function properly both the process for determining liability and the rules or
laws should be fair, objective, and free from bias. Since no justice system can be said to be perfect,
it is imperative that a business adopt a proactive approach in managing the legal aspects of its
environment through a legal risk management plan.
Therefore, to make good business decisions, a basic knowledge of the laws and regulations
governing business activities is essential. Moreover simply being aware of what conduct can
lead to legal liability is not enough. Businesspersons are also under increasing pressure to make
ethical decisions and to consider the consequences of their decisions for stockholders and
employees.
1.2 What is Law?
“Any law that uplifts human personality is just. Any law that degrades human personality is unjust”
(Martin Luther King, Jr.)
Lex iniusta non est lex (An unjust law is not a true law)
This is a general question which interest philosophers. It touches on the general jurisprudence
of law. There is no agreed definition of law due to the existence of various schools of thought.
We shall therefore not duel much on the debate on “what is law” since this philosophical
debate is yet to be concluded. Lawyers are more interested in specific issues that would answer
the question; what is the law and not what is Law. We shall take the same approach adopted by
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lawyers since a business student is also interested in knowing the law applicable in a given
situation.
However there is a common thread in the various definitions of law offered by the various
scholars. Some of the common definitions of law include the following;
i)
Law is a normative social practice in that it purports to guide human behavior.
ii)
Law is a body of enforceable rules governing relationship among individuals
and between individuals and their society.
iii)
It can be defined as a set of enforceable rules, regulations, principles and
guidelines that are applied and recognized by a state or a community in the
administration of justice.
iv)
It can also be defined as a rule of human conduct imposed upon and enforced
through a set of institutions among members of a given state or community.
v)
Law is a system of rules a society sets to maintain order and protect harm to
persons and property.
vi)
Law is a body of rules of conduct of binding legal force and effect, prescribed,
recognized, and enforced by controlling authority.
!!!
From the above definitions, we are able to conclude that law is a set of legally enforceable
rules and principles made by a recognized legal entity that are intended to guide conduct in
a given society, primarily by protecting persons and their property, facilitating personal and
commercial interactions, and providing mechanisms for dispute resolution.
1.3 Features of law
Generally the common features of law are those that establish rights, duties, and privileges that
are consistent with the values and beliefs of a society or its ruling group. The above definitions
reveal that law has the following features and characteristics:
i)
Law is a set or body of rules - These rules may originate from customs, Act of
parliament, constitution etc.
ii)
Acts as guidance/regulator for human conduct - Human beings follow these
rules for their own safeguard and betterment.
iii)
Law is created and maintained by the state - Law is not self-evolving it is
created for some specific purpose. The creator of the law is the state through its
legislative authority (usually the Parliament). It is the expression of the will of
the people and is generally written down to give it definiteness.
iv)
Law is jurisdictional - It is applicable to a community. These rules apply to a
specific community. A community may refer to a state, a country, a business
community, a tribe etc. It is related to the concept of 'sovereignty' which is the
most important element of state.
v)
Law must change - Law changes over a period of time i.e law should not be
static. It is “alive and dynamic” but with a certain amount of stability, fixity and
uniformity.
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vi)
vii)
viii)
Law must be enforced – Law is enforced by the creating authority to avoid
chaos. The law enforcing “agencies/machinery includes police force, the court
of law, and the prisons. It is therefore backed by coercive authority and its
violation leads to punishment.
Law has hierarchical order - This means some laws are superior to others. For
example, the constitution is the supreme law and all other laws are subordinate
to it. Similarly, delegated legislations are subordinate to Acts of
Parliament/Statutes.
Law applies to all – (“Law is an ass”), it is both “stupid” and “stubborn”. It is
usually gender insensitive but not “sterile”. It is a double edged sword that cuts
its producer (maker) and consumer equally. None is above the law.
1.4 Morality
“Morality does not need to be grounded in God’s will. Nor does it need to be grounded in empirically verifiable facts about
universal needs or wants. Morality is grounded in what human being think is moral. As societies change, people’s moral norms
and values also change. Human beings construct their own theories of how they ought to live, of what their privileges and rights
are, and of what their obligations ought to be to family, society, and state”.
(Rhoda E. Howard, Human Rights & the Search for Community)
The concept of law and morality touches at the heart of jurisprudence, that is, the theory and
philosophy of law. Morality touches on what is right and wrong in terms of manners,
character, behaviour, norms, values culture, traditions, customs, mores ethics, codes,
principles, rules, etc. You cannot talk of morality without touching on ethics since ethics is
“the study of morality.” Ethics is the discipline that examines one’s moral standards or the
moral standards of a society to evaluate their reasonableness and their implications for one’s
life.
We can define morality as the standards that an individual or a group has about what is right
and wrong, or good and evil. Issues of morality are inherent and internal within human beings.
They are subject to change and ranges from those issues that are universally recognized to
those that relate to specific region, religion, profession or other groups of people. It is
therefore a very subjective concept since what is morally wrong to one person may be the
opposite to another.
Matters of ethics and morality are also found in business transactions. Business ethics concern
moral principles and values that seek to determine right and wrong in the business world.
Business ethics require entrepreneurs to confirm to principles of commercial morality, fairness
and honesty. Due to a breach of ethics and morality a variety of consequences can result
including lost revenue, bad publicity, public demonstrations, and condemnation for
contributing to social injustice.
1.4.1 Moral standards
Culture forms the foundation for moral and ethical behavior and determines what is ethical and
unethical. Primary cultural values are transmitted to members of a given society by parenting
and socialization, education, and religion. Secondary factors that affect ethical behavior
include differences in the systems of laws across nations, accepted human resource
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management systems, organizational culture, and professional cultures and codes of conduct.
Cultural values therefore, determine moral and ethical standards.
Moral standards include the norms we have about the kinds of actions we believe are morally
right and wrong, as well as the values we place on what we believe is morally good or morally
bad. Moral norms can usually be expressed as general rules about our actions, such as “Always
tell the truth,” “It’s wrong to kill innocent people,” or “Actions are right to the extent that they
produce happiness.” Moral values can usually be expressed with statements about objects or
features of objects that have worth, such as “Honesty is good,” and “Injustice is bad.”
Generally moral standards are first learned as a child from family, friends, and various societal
influences such as church, school, media, music, internet, and associations. Later, as we
mature, our experience, learning, and intellectual development will lead us to think about,
evaluate, and revise these standards according to whether we judge them to be reasonable or
unreasonable. You may discard some standards that you decide are unreasonable, and may
adopt new standards because you come to believe they are more reasonable than the ones you
previously accepted. Through this maturing process, you develop standards that are more
rational and so more suited for dealing with the moral issues of adult life.
!!!
Morality is all about what is considered to be right or wrong by an individual or a given
society. It is inborn and subjective. It is not enforceable by courts of law. A moral value can
graduate into law when law is enacted to enforce the moral value. You must be aware of the
homosexual law which was enacted recently in Uganda. This law has lifted homosexual
from moral realm to legal realm.
1.5 Ethics
“In business the handshake is an expression of trust, and ethical behaviour is the foundation of trust”
Anonymous
Ethics are rules of conduct. They can be written or unwritten. Every profession has rules of
ethics associated with it. Lawyers are expected to act in the best interest of their clients.
Likewise, doctors have the responsibility of taking care of their patients. Business people too
need their customers and they are socially responsible to them. Being ethical, according to
most scholars, is one of the obligations companies owe to society. In this respect, business
ethics is a part of corporate social responsibility since social responsibility of business
encompasses the economic, legal, ethical, and discretionary expectations that society has of
organizations.
Business ethics is a specialized study of moral right and wrong that focuses on business
institutions, organizations, and activities. It is a study of moral standards and how these apply
to the social systems and organizations through which modern societies produce and distribute
goods and services, and to the activities of the people who work within these organizations. It
is a form of applied ethics. Business ethics investigates three kinds of issues; systemic,
corporate, and individual issues.
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Systemic issues in business ethics are ethical questions raised about the economic, political,
legal, and other institutions within which businesses operate. These include questions about the
morality of the laws, regulations, industrial structures, and social practices within which
businesses operate. Corporate issues in business ethics are ethical questions raised about a
particular organization. These include questions about the morality of the activities, policies,
practices, or its organizational structure. Individual issues in business ethics are ethical
questions raised about a particular individual or particular individuals within a company and
their behaviors and decisions. These include questions about the morality of the decisions,
actions, or character of an individual.
1.6 Law and morality
“Law bridges morality across borders”
Anonymous
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
Law, unlike morality, is made by someone. So it may, unlike morality, have
aims, which are the aims of its makers (either individually or collectively).
Morality has gaps and sometimes needs law to help fill in the gaps. But the
same is also true in reverse. Often law also has gaps and needs morality’s help
to make it less so.
Legal norms, like moral norms, often conflict among themselves, and often such
conflicts cannot be resolved using legal norms alone. Law and morality
therefore complement each other and come to the aid of one another when there
is internal conflict.
Morality is associated with the natural law theory which holds that there are
laws that naturally occur, that is, inherent to human beings having been put
there by a Supreme Being (God). The theory values justice and as such it is
guided by the maxim “An unjust law is not a true law” (Lex iniusta non est
lex).
The Natural law theory is opposed by the positive law theory which holds that
there is no necessary connection between law and morality. Positive law is that
law which has been promulgated or enacted in appropriate ways. Positivists
hold that what the law is can be established without considering what the law
morally ought to be. Positivists therefore hold law is what it is even if it is
wicked in the eyes of moralists.
To them the Nazi Law, South African Apartheid law, Slavery laws in the United
States, or the Common Law that did not allow women to own property or vote
and allowed their husbands to beat them, and presumed victims of sexual assault
had consented was law in a recognized legal system.
The Question what is law therefore will have different answers to different legal
theorists. While positivists and naturalists agree that law is a distinctive type of
social ordering they totally disagree on what makes it distinctive. Positivists
suppose that law can be identified solely by its sources. While their critics
suppose it must be identified by its particular moral content.
The rules of law may be enforced by an action in court but morality does not
attract the sanction of the court for its enforcement. The requirement that the
person should respect his elders is a rule of morality, not a law and nobody can
be sued for failing to respect his elders.
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!!!
Sometimes a person may break the law and morals at the same time e.g theft is
against morality as well as law. This shows that a moral norm may graduate into a
legal norm. The African culture of giving gifts has been abused and is now
associated with bribery. This cultural practice is today addressed by Section 11 of
The Public Office Ethics Act Cap 183 Laws of Kenya which prohibits selfenrichment by public officers through gifts received in the course of their duty. Law
therefore, bridges (enforces) morality across borders.
1.7 Purpose of Law
“Hominum causa omne jus constitutum est (All law is created for the benefit of human beings)
Laws should be like cloths. They should be made to fit the people they are meant to serve”
Clarence Darrow (American lawyer) – 1875-1938
Law is a product of social processes which determine society’s common freedoms, rights and
interests. These freedoms, rights and interests need to be recognised and protected for the good
of the society. Law therefore, serves the following purposes among others:
i)
To maintain peace, security and order – this is achieved through promotion of
peaceful co-existence of all people in a given society or community f societies.
Those who break the law are punished so as to deter others from committing
similar offences.
ii)
To Provide justice to the members of the society – those whose rights,
freedoms, and interests are abused are compensated through the justice system
of the law. This ensures that damage and losses are borne by those who
occasioned them.
iii)
To maintain political and economic stability – the rule of law establishes a
stable and predictable political and economic environment for sustainable
development.
iv)
To establish the procedures and regulations regarding any dealings – law
provides procedures for doing any business in an orderly manner. Law defines
general rules of commerce
v)
To protect property including business ideas – law provides protection of life
and property of the people from destruction or arbitrary acquisitions without any
compensation.
vi)
To provide mechanisms for dispute resolutions – people are able to have their
disputes addressed through various avenues such as the court (judicial) system,
arbitration, mediation, and adjudication.
!!!
The basic purpose of law is to provide for and protect freedoms, rights, and interests of the
people in a given society. It is all about justice and fair play in the society. The big question
is whether law has succeeded in this key objective.
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1.8 Classification of Law
Law can be classified in three main categories as outlined below:i)
Public and private law
ii)
Procedural and substantive law
iii)
National law and International law.
Public law is that law that governs the relationship between the state and its citizen as well as
relationship among the various organs of the state. It is further classified into:
i)
Constitutional law- Contains the rules which regulate the relationship among
the three organs of the State namely executive, legislature and judiciary. It also
includes all rules which directly or indirectly affect the distribution and exercise
of the sovereign powers of the state. This law also provides for the fundamental
freedoms and rights of the citizens.
ii)
Administrative law- This law relates to the public administration. It determines
the organization powers and duties of the administrative authorities. It addresses
the administrative actions of the state, various state organs, public officers, and
institutions.
iii)
Criminal law- This is the law of offences against the State and individuals
which are called crimes. It is also popularly referred to as the penal law. This
law defines each offence and provides the prescribed punishment for each and
every offence. A crime is an act or omission committed or omitted contrary to
the requirements of a public law. The Penal Code Cap 63 Laws of Kenya is the
foundation of criminal law in Kenya. Examples of criminal offences include;
treason, murder, robbery with violence, rape, manslaughter, and theft.
Private law is that part of the law that is primarily concerned with the relationships,
rights, duties of an individual to another i.e. citizen amongst themselves. It is also
commonly referred to as civil law. It deals with the violation of private rights belonging
to an individual e.g. refusal to pay a loan, defamation, assault, trespass, etc. Examples
of civil law include; the law of contract, the law of torts, the law of agency, the law of
property, and the family/personal law. Violation of civil law leads to a commission of
civil wrong. Examples of civil wrongs include; trespass to private property and to
person, defamation, breach of contract, negligence, and nuisance.
Substantive and Procedural Law
Substantive law – this is the law that provides various rights, duties, obligations, as
well as providing appropriate penalties for breach of any prohibited conduct. It
therefore defines criminal and civil laws and provides penalties and remedies for each
type of offence or wrong. Examples of substantive law in Kenya include the
Constitution of Kenya 2010, and The Penal Code. Basically almost all Acts of
Parliament of Kenya contain the substantive law in respect of their intent while
providing the procedure for its implementation. For example, the Limited Liability
Partnership, Act No.42 of 2011 provides the substantive law relating to limited liability
partnerships such as its definition, as well as, the procedure for their formation. Same
case applies to the Law of Succession Act Cap 160 Laws of Kenya and its procedural
rules therein.
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Procedural law – this is a set of rules and regulations that provide the procedure that
need to be followed in the administration of substantive law of the land. For example in
court proceedings, it determines the manner in which the proceedings are required to be
conducted in criminal and civil law. The procedural law for criminal cases in Kenya is
the Criminal Procedure Code Cap 75 Laws of Kenya, whereas that for the civil cases is
the Civil Procedure Act Cap 21 Laws of Kenya.
National law and International law
National law – National law is that law that is applicable within the
jurisdiction/boundaries of a country. National law is also referred to as the Municipal
law. All the laws enacted by Parliament of Kenya together with all the
subsidiary/delegated legislations, customary law, and Islamic law form the national law
of Kenya. The national law can therefore be in the form of public or private law,
substantive or procedural law.
International Law consists of the rules and regulations agreed upon by different states
or international organizations such as the UN, AU, EU, and EAC to govern their
relationships. Just like the National law, International law is also composed of Public
International law, Private International Law, Substantive International law and
Procedural International law. International law is derived from international treaties
(agreements), customs and general principles. The International Criminal Law is
captured in the Rome Statute which created the International Criminal Court (ICC).
!!!
Most law fall under two categories - criminal law and civil law. Criminal law is of major
interest to the state because it is the key law used by the state for maintenance of peace
and security. Civil law on the other hand is of major interest to private persons since they
use it to enforce their freedoms, rights, and interest not only against fellow private
persons but also against the state.
Differences between criminal wrongs and civil wrongs
No.
1.
2.
CRIMINAL OFFENCE (WRONG)
CIVIL WRONG
It is a public wrong against the state
even where the complainant is a
private person e.g. in the offence of
rape, assault or theft.
Parties involved in a case are the
prosecution (prosecutor) and the
accused. Prosecution is done through
the office of Director of Public
Prosecution (DPP).
It is a private wrong against an
individual
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The parties are the Plaintiff (the one
who is claiming/suing) and Defendant
(the one who is sued)
3.
4.
Once the suspect is arrested and
arraigned in court he becomes the
accused person.
Death of the accused person
automatically terminates the case. This
is because in criminal cases liability is
personal and it is not transferable.
5.
A person cannot be prosecuted on
behalf of another.
6.
Parties cannot compromise in a case
without involving the court. Indeed
some criminal cases cannot be
compromised at all.
The prosecution must prove its case
against the accused beyond any
reasonable doubt (100%). The
standard of proof is therefore very
high and the accused is presumed
innocent until prosecution proves the
contrary. The burden of proof is on the
prosecution i.e. the accused needs not
prove his innocence.
Punishment
is
usually
by
imprisonment, fine or death.
7.
8.
9.
10.
11.
The remedy in a criminal case is
usually punitive in nature and it is set
by the law
The wrong is a crime (offence) that is
usually well defined by law and
committed intentionally
The case is usually initiated by the
state through the police who upon
receiving a complaint investigates the
same, arrests the suspect and
prosecutes him by lodging a charge in
court in the name of Republic versus
XYZ.
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The parties do not change.
Death of either party does not
terminate the case. This is because the
surviving party can apply for the
inclusion of the deceased’s legal
representative in the case or the legal
representative of the deceased party
can apply to be enjoined in the case.
However if this is not done within
one year the case abates.
A person can sue or be sued on behalf
of another. E.g. a parent can sue on
behalf of a minor child or a person of
unsound mind as a guardian ad litem.
Parties can compromise in a case.
They can easily record some consent
orders marking the case as settled out
of court.
Plaintiff needs only to prove his case
on a balance of probability and not
beyond reasonable doubt (51%). The
standard of proof is not as high. The
burden of proof keeps shifting from
the Plaintiff to Defendant. Once the
Plaintiff has tendered his evidence the
Defendant must disapprove the same
to avoid liability.
The Defendant is usually ordered to
pay damages (compensation) to the
Plaintiff, or specific performance, or
injunction orders.
The remedy is assessed and decided
by the court or the parties
The wrong is usually grounded on
negligence and contract
The case is initiated by the plaintiff
who files a case in court in his name
against the wrong doer i.e. XYZ
(Plaintiff) versus PQR (Defendant)
12.
13.
14.
15.
16.
17.
18.
The wrong results to criminal liability
with serious consequences to the
accused person once convicted (found
guilty).
Where the complainant is an
individual that individual is only
treated as a state witness and not a
party in the case
The
complainant
receives
no
compensation through a criminal case
since the fine is paid to the state.
No court filing fees is paid to the court
when a criminal case is lodged in
court. The accused person also pays
nothing to the court.
The wrong results to civil liability
which has lesser injury to the public
image of the Defendant.
The plaintiff is a party in the case.
The Plaintiff gets compensated for
the loss suffered.
Court filing fees must be paid before
the case can be filed and summons
are issued. The amount payable is
determined by the nature of the claim
and the amount claimed in the case.
The Defendant must also pay court
filing fees for his defence and all
other documents filed.
The parties hire their own lawyers if
they need them. The case can proceed
even in the absence of a lawyer who
has failed to attend court on behalf of
his client.
The state provides a lawyer to the
accused person in murder cases free of
charge. This means a murder trial
proceed
without
legal
cannot
representation being given to the
accused person.
A criminal case cannot be revived Civil cases can be revived if it is
once it is heard and determined by the dismissed for non-attendance of the
court.
Plaintiff or determined exparte (in the
absence of the Defendant)
The law of limitation of actions does The law of limitation of action
not apply in criminal cases. This provides contractual claims must be
means criminal cases are not time filed in court within six years, torts of
barred. They can be instituted any negligence within three years,
time.
defamation within one year and
recovery of land within twelve years.
Failure to adhere to the set time
frames renders the claim time barred.
!!!
Please note that there are many differences between criminal wrongs and civil wrongs. The
fundamental difference is that one is a crime punishable by a fine, imprisonment, or even
death upon conviction. The other is a private issue between the parties involved and upon
proof of liability award of damages (compensation), injunction, or specific performance is
made in favour of the successful party. We shall look at these remedies later in the law of
contract.
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Divisions of Civil Law
Civil law can be classified in to various categories as classified below:i)
Law of contract- A contract is an agreement between two or more persons
which is legally binding and enforced by the law.
ii)
Law of Torts- A tort is a civil wrong which gives rise to a claim of unliquidated damages.
iii)
Law of Property- This is the part of the law which deals with the nature and
extent of rights and interests which a person may have over it i.e. use of his land
or his property.
iv)
Law of Succession- This is the law that determines how property passes on the
death of a person to his heirs.
v)
Law of Trusts- This occurs when a person called settler transfers properly such
as money or shares or land to another person called the trustee, for the benefit of
another person called beneficiary.
vi)
Family law – This is the law relating to marriage, separation, maintenance,
divorce, custody of children, and sharing of matrimonial property.
Advantages of Law
i)
Law provides uniformity and certainty in the administration of justice. The
same law has to be applied in all case and there cannot be any distinction
between one case and another if the facts are the same. Law is no respecter of
personality and the legal system in a country is usually put in black and white so
that it is possible for all the people to know the law of the land.
ii)
The existence of fixed principles of law avoids the danger of arbitrary biased
and dishonest decisions. Since law is certain and known, any departure from
the rules of law by a judge will be visible to all.
iii)
The principles of law protect administration of justice from individual
judgment. Judges are not expected to substitute their own opinion for the law of
the country. Salmond observes that: in the long run, law is wiser than those
who administer it.
iv)
Law is more reliable than individual judgment. Human mind is fallible and
judges are no exception. The wisdom of legislature which represents the
wisdom of the people is safer and more reliable as a means of protection from
individual opinion of a judge.
Disadvantages of law
i)
Law is rigid- In an ideal system the legal system keeps changing according to
the changing needs of the people.
ii)
Law is conservative in nature- Both lawyers and judges favour status quo of the
existing law.
iii)
Law is formalism- Law lays a lot of emphasis on the form of law than its
substance, a lot of time is wasted in raising technical objection of law which has
nothing to do with the merits of the case or dispute. While investing on the
formalities of the law, injustice in many cases is done since the innocent person
may suffer and the clever and the crooked profit thereby.
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iv)
Law has undue and needless complexity- Law is never simple due to the
complex nature of the modern society, Lawyers also insist on drawing find
distinction on the various points of law and this doesn’t bring justice.
Summary of the lecture
Congratulations for your successful completion of your first discussion in Business Law One. In this topic
we have successfully covered the introduction to law. You now know what law is and why you cannot avoid
it in your business transactions. Certainly you cannot forget the definition of law, the relationship between
law and morality, and the purposes of law. You are also familiar with the classifications of law and the
distinctions between public law and private law, substantive law and procedural law, as well as national law
and international law.
You see law is not difficult at all. To prove this fact, I have provided you with some simple study questions
for your self-assessment. Where else do you think the final exam questions in this topic will come from?
The exam is not different at all!! Please answer all of them and you will be home and dry in this topic.
In our next lecture we shall seek to unearth the various sources of law in Kenya.
Self-assessment study questions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
Why study business law?
What is law?
What is the importance of law in business transactions?
What is the connection between law and morality in relation to business transactions?
Does law enforce morality?
What is the role of business ethics?
Can Kenya do without law? Give your reasons noting to capture the functions of law.
How is law classified?
Discuss the meaning of procedural and substantive law in relation to the Constitution, Acts of
Parliament and Delegated legislation.
What is international law and how has international criminal law shaped the Kenyan politics?
Explain the difference between criminal wrong and civil wrong.
What is the standard of proof in criminal wrongs and civil wrongs and why is it different?
Who bears the burden of proof in both cases?
What is criminal liability and civil liability and what are the consequences of the proof of each?
Who are the parties in criminal and civil cases and what is their role?
List and explain the various categories of civil law.
Law has several advantages and disadvantages. Do you agree? Give your reasons.
25
1.
2.
Kindly read the following:
Chapter 3 of Business Law 8th Edition by Keith Abbott & others.
Any other relevant material that introduces you to law.
26
LECTURE TWO
SOURCES OF LAW & JUDICIAL SYSTEM IN KENYA
2.1 Lecture Overview
Welcome to our second introductory topic in Business Law. Having successfully gone through
our first discussion I know you are now anxious to know where the origin of our law and how
our courts work. This will be covered in this lecture.
Objectives
At the end of the topic, you should be able to:
i)
Define the term “source of law”.
ii)
Discuss the hierarchy of the sources of law and prepare the legal pyramid
iii)
Differentiate between written and unwritten sources of law
iv)
Discuss the various sources of law in Kenya
v)
Appreciation our judicial system and how it works.
The light moment
As you are already aware I do not like starting a topic without our usual light moments. Herein
below is yet another such moment for you to ponder.
On a light touch
Some professionals were being interviewed to be sent to Mars to permanently settle there. Only one
could go and could not return to Earth. The first applicant, an engineer, was asked how much he
wanted to be paid for going. “A million dollars,” he answered, “because I want to donate it to the
school of engineering”. The next applicant, a doctor, was asked the same question. He asked for two
million dollars. “I want to give a million to my family,” he explained, “and leave the other million for
the advancement of medical research.” The last applicant was a lawyer. When asked how much money
he wanted, he whispered in the interviewer’s ear, “Three million dollars.” “Why so much more than
the others?” asked the interviewer. The lawyer replied, “If you give me three million dollars, I will give
you one million, I will keep one million, and we will send the cheap engineer to Mars.”
Points to ponder
1. How deep are your bargaining powers?
2. Do you take advantage of every opportunity that comes your way?
3. Do you corrupt your way up?
4. Do you believe lawyers are that corrupt?
B: The importance of knowing the source of Kenyan law
In this topic we need to know the source or origin of our law. The big question that we need to
address our minds to is “why should we know the source of our law”? The simple answer is
“why not”? We all want to know our source. Our earthly parents are our source here on earth.
However we know we have a higher source than our earthly source. Don’t you love your
source? Don’t you appreciate your source? Don’t you own your source? Don’t you defend your
27
source? Don’t you obey your source? Don’t you worship and serve your source? My answer to
all the questions is big yes!!
Simply put we need to know the source of our law so that we may legitimize it. We need to
validate the law in order to own it, obey it, and defend it. If the law is strange to us, we simply
ignore and disobey it. We shall simply say “This is not our law”. Do you know this is exactly
the reason why Kenyan kept clamoring for a new constitution until we got one in 2010? You
see, the 1963 constitution was framed at the Lancaster House in UK by our Colonial masters
with some minimal contribution from our few representatives. Since we needed independence
we took what we were given but soon thereafter we started agitating for a new constitution.
The 1963 constitution was subsequently heavily amended to the extent that its original form
was lost.
Law is a creature of the society. It comes from the people that it purports to govern. The
ultimate source of law is therefore the people it seeks to govern. The moment it is realized that
law comes from us we then proceed to own it, use it, and defend it. It ceases to be illegitimate
since it is validated as our own. Since it is our creature it is expected to serve us and if it fails to
do so, we amended it or repeal it all together. Even after many amendments, the 1963
Constitution failed to serve aspirations of Kenyans resulting to it being repealed. Indeed “Laws
should be like cloths. They should be made to fit the people they are meant to serve”.
!!!
The term source of law can be defined as that from which a rule of law derives its force and validity. The
material source is unit from which is derived the actual matter of the law. Source of law is therefore the
origin of law which helps in determining its validity and acceptance in a given community .
C: Sources of law in Kenya: The legal pyramid
Now that we have known the importance of knowing the source of law let us move forward
and identify the sources of our law. The question is – where does our law come from? The
Judicature Act Cap 8 Laws of Kenya makes provisions for the exercise of jurisdiction and the
law to be applied in Kenya. Section 3 of that Act identifies various sources of Kenyan law as
follows:
i)
The Constitution of Kenya
ii)
Acts of Parliament including the applicable Acts of the UK Parliament
iii)
The Common
iv)
The Doctrine of equity
v)
The African Customary law
However these are not the only sources of our law. Others sources are:
i)
International law
ii)
Applicable Acts of Parliament of India
iii)
Case law (judicial precedents/authorities)
iv)
Subsidiary/delegated/subordinate legislation
v)
Islamic law
vi)
Hindu law
28
It is very important for us to note that the various sources of law that we have listed above are
not of the same importance. Some sources of law are superior to others. We shall shortly see
the reason why some sources are superior to others. The figure below shows the various
sources of Kenyan law in hierarchical order.
THE SUPREME LAW
Constitution of Kenya 2010 is the supreme law of the
land and the supreme source of other laws. All other
laws derive their legitimacy from it and must agree
with it otherwise they are null and void. It was made
by Kenyans directly and as such represents their will.
|||
|||
LEGISLATED LAW
All Acts
Applicable
Applicable
International
Delegated
of
British Acts Indian Acts
Law
Legislation (made
Parliament
of
of
(applicable
with the authority
of Kenya. Parliament
Parliament
of Parliament)
treaties and
statutes)
|||
|||
CASE LAW
Case Law or Judge made Law
Common Law i.e.
Doctrines of Equity i.e.
under the doctrine of Judicial
unwritten English
English Principles of
Precedent (Stare Decisis).
way of life (rigid
fairness and justice (came
established customs
up to supplement common
Courts interpret law and in the
process make law (binding
& rules practiced in law for the sake of fairness,
decisions/authorities)
courts of law)
justice and equity).
|||
|||
OTHER SOURCES (LIMITED TO PERSONAL LAW ONLY)
African Customary Law (limited Islamic Law. Only applied Hindu Law. Limited only to
to only non-repugnant personal
in Personal law matters
civil personal law (marriage,
between Muslims in kadhi divorce & inheritance)
law & to specific community)
courts.
D: The Constitution of Kenya 2010
A constitution is a public law document which regulates the relations between the state and its
citizens as well as the relations among the three arms of the government, that is, Judiciary,
Legislative and Executive. It can be defined as rules that regulate the system of government
within a State. It provides for powers, functions and duties among the arms of government. It
contains fundamental principles that regulate governance. It binds people together and provides
for harmonious co-existence between arms of government, the individuals and the State as well
29
as between the individuals themselves. It is therefore a set of laws on how a country is
governed.
It is the supreme law as well as the supreme source of law of the country. It is the supreme law
because it is made directly by the citizens and it expresses their will on how they want to be
governed. It is the supreme source of all other law since all other law must derive their validity
from it. Any law that does not agree with it is null and void.
Constitutions can be in written or unwritten form. Britain is an example of a country that has a
unwritten Constitution. Kenyan Constitution is in written form. It replaced the 1963
constitution following a length constitutional making process that culminated with the
successful 2010 constitutional referendum and subsequent promulgation on 27th August 2010.
The Constitution of Kenya 2010 is the foundation of all the laws in Kenya. It is a binding
agreement between the people of Kenya, their leaders and the governing institutions. This
agreement is well captured in its preamble as can be seen below.
!!!
PREAMBLE OF THE CONSTITUTION OF KENYA 2010
We, the people of Kenya
ACKNOWLEDGING the supremacy of the Almighty God of all creation:
HONOURING those who heroically struggled to bring freedom and justice to our land:
PROUD of our ethnic, cultural and religious diversity, and determined to live in peace and unity as one
indivisible sovereign nation:
RESPECTFUL of the environment, which is our heritage, and determined to sustain it for the benefit of
future generations:
COMMITTED to nurturing and protecting the well-being of the individual, the family, communities and the
nation:
RECOGNISING the aspirations of all Kenyans for a government based on the essential values of human
rights, equality, freedom, democracy, social justice and the rule of law:
EXERCISING our sovereign and inalienable right to determine the form of governance of our country and
having participated fully in the making of this Constitution:
ADOPT, ENACT and give this Constitution to ourselves and to our future generations.
GOD BLESS KENYA
The Constitution determines the form of government towards its citizens and of the citizens
towards the government. The key changes in the 2010 Kenya constitution touch on:
i)
Separation of powers between the three arms of the government. This clear
separation of power is meant to promote democracy in Kenya where;
a) The legislature makes the law – The Legislature composed of two
houses, the National Assembly and Senate. The counties will also have
their county assemblies and Executives. Article 118 provides for public
participation in the law making process while 119 grants the public an
opportunity to petition the Parliament on matters relating to enactment
of any law.
b) The executive enforces the law - Executive authority under an Executive
President who is head of state and head of government. It also captures
30
ii)
iii)
devolution of power to two levels of government, that is, the National
and the counties.
c) The judiciary interprets the law – The Judiciary now has the Supreme
Court composed of the Chief Justice, Deputy Chief Justice and five
other Judges.
The constitution has 18 chapters which includes chapter 16 which deals with
amendments. It provides two methods of amendments, that is, either by the
parliament or by popular initiative.
Chapter exhaustively deals with the Bill of Rights. The rights are well defined
and procedure for their enforcement provided.
!!!
The supremacy of the Constitution
The Constitution of Kenya is both the supreme law as well as the supreme source of law in Kenya. This
supremacy cannot be underrated. Article 2 of the Constitution provide as follows:
1. This Constitution is the supreme law of the Republic and binds all persons and all State organs at
both levels of government.
2. No person may claim or exercise State authority except as authorized under this Constitution.
3. The validity or legality of this Constitution is not subject to challenge by or before any court or other
State organ.
4. Any law, including customary law that is inconsistent with this Constitution is void to the extent of
the inconsistency, and any act or omission in contravention of this Constitution is invalid.
5. The general rules of international law shall form part of the law of Kenya.
6. Any treaty or convention ratified by Kenya shall form part of the law of Kenya under this
Constitution.
Case law supports this supremacy as can be seen in the old case of Okunda v Republic [1970] EA 453 where
the Court of Appeal for Eastern Africa said;
“The Constitution of the Republic of Kenya is paramount and any law, whether it be of Kenya, of the
Community or of any other country, which has been applied in Kenya, which is in conflict with the
Constitution is void to the extent of the conflict. The provisions of a treaty entered into by the
Government of Kenya do not become part of the municipal law of Kenya save in so far as they are
made such by the law of Kenya. If the provisions of any treaty, having been made part of the
municipal law of Kenya, are in conflict with the Constitution, then to the extent of such conflict such
provisions are void”.
E: Legislated Law
Legislation is the process of making law in Parliament. Parliament made law are called Acts of
Parliament. An Act of Parliament can also be referred to as a statute, enacted law or legislation.
This law is second to the Constitution in importance. Parliament is therefore, the second most
important source of Kenya Law. The legislative authority is derived from the people and it is
vested in and exercised by the Parliament that is, the National Assembly and the Senate.
Parliament therefore represents the will of the people. Article 94(5) of the Constitution
provides that;
“No person or body, other than Parliament, has the power to make provision having the force
of law in Kenya except under authority conferred by this Constitution or by legislation”
Simply put the Parliament is the supreme law making authority in Kenya. It makes law in two
ways;
31
i)
ii)
Direct legislation – the process of making laws Parliament
Indirect legislation – the process of making laws under the authority of
Parliament.
F: Direct Legislation
The process starts with the drafting of a Bill. A Bill is a draft of proposed Act of Parliament.
It is classified in the four:i)
Government Bill – this Bill is presented to the Parliament by the government
through its ministers.
ii)
Public Bill- Deals with matters of public policy and affect the general public in
the entire country. They are either initiated as a Government Bill or a Private
Member Bill.
iii)
Private Bill- Deals with matters that affect a particular person or association or
a corporate body e.g accountants.
iv)
Private Member’s Bill - Are introduced to the Parliament by an individual
Member Parliament who is responsible for drafting it. The Bill may be dealing
with matters of public policy or matters appertaining to the Members of
Parliament.
To enable you appreciate the law making process by the legislature please read Part 4 of
Chapter 8 of the 2010 Constitution of Kenya
G: Advantages of an Act of Parliament
i)
ii)
iii)
iv)
v)
It is democratic- An Act of Parliament represents the wishes of the people in the
sense that it is made by MPs who are the representatives of the people.
It enables Parliament find legal solutions to any problems that the country may
face by passing new Acts or amending the existing ones.
It is usually a statement of general principles and rules and can therefore be
applied to different situations in a flexible manner as determined by the court in
a particular situation.
It is dynamic since it can be changed as needs of the Kenya society change.
It gives Kenyan an opportunity to debate the proposed law from the moment
they become aware of it after its publication in the Kenya Gazette.
H: Disadvantages of Acts of parliament
i)
ii)
iii)
iv)
Some Acts are imposed by the people and reflect the views of the executive, or
pundits in the ruling political party.
Acts of Parliament do not reflect the wishes of the people (voters) but the
wishes of the individuals who constitute Parliament at any given time.
The process of legislation is rather very slow.
Technical Bills may be passed into law without sufficient debate.
32
I: Indirect Legislation
This is also known as delegated/secondary/subordinate/subsidiary legislation. This law is made
by persons or institutions other than Parliament but with the authority of the Parliament.
Parliament delegates its law making power to certain persons, bodies, or institutions through
specific statutes. Such persons/bodies include:i)
Government Ministers
ii)
Chief Justice
iii)
Government Officers
iv)
Professional bodies
v)
Public Corporation
vi)
Local Authorities
J: Reasons for Delegated legislation
i)
ii)
iii)
iv)
v)
Lack of time – parliament does not have all the time to discuss and analyze all
national matters.
Urgency of some matters- Some matters are so urgent that they require
immediate attention and cannot be debated in parliament because parliament is
not always in session.
Subject technicality- Some issues can be handled more effectively by experts,
e.g drug regulation will be better dealt with by the Kenya Medical Association
because of the technicality involved.
Flexibility- There is flexibility in delegated legislation because if a by-law or
statutory order proves to be impracticable it can be revoked quickly. It takes a
long time to revoke an Act of parliament.
Future difficulties- Future difficulties are with by delegated legislation than
parliament/e.g fixing of service charges etc.
K: Criticisms or Disadvantages of Delegated Legislation
i)
Lack of publicity
ii)
Inadequate judicial control
iii)
Difficult to determine which matters must be delegated and which ones to be
dealt with by the parliament
iv)
Delegated powers are so wide that it creates uncertainty about the prevailing
laws
v)
In some cases powers given to the ministers, e.g imposing taxes should remain
in the hands of the parliament.
!!!
There is danger of subordinate/delegates abusing the powers of legislation given by the statutes (Act).
Delegated legislation is controlled by the court or parliament. A more effective way of controlling delegated
legislation is by application of the doctrine of “ultra vires” (Beyond your powers). Anything declared ultra
vires has no legal effect and should be ignored. A by-law can be declared ultra vires if the delegate exceeds
the powers contained in the statute enabling him to make such a law or if the by-law offends or is against
certain presumptions of the law.
33
L: International Law, Treaties & Conventions
From the outset it is important to note that Article 2 (5) & (6) of the 2010 Constitution allows
the following to be part of the law of Kenya;
i)
The general rules of international law
ii)
Treaties that have been ratified by Kenya
International law is that body of rules which regulates relationships between countries or other
international legal persons. There is neither an 'international parliament' empowered to create
international law; nor an 'international police force' to enforce it.
The principal sources of international law are treaties and conventions which are created when
several countries reach agreement on a certain matter and bind themselves to it by authorizing
their representatives to sign a document embodying that agreement. Essentially, when a State
ratifies a treaty, they have entered into a contract that obliges them to do something or to
refrain from doing something. Failure to comply is the equivalent of breach of contract.
Once a country has signed the protocol, the method of enforcement depends on the terms of the
treaty or convention. A common way of bringing a defaulting country to heel is by imposing
sanctions against it. Sanctions may take many different forms and can be applied with varying
degrees of severity. Obviously, the more parties there are to the protocol, the easier it is to
enforce by virtue of the weight of opinion and the efficacy of any measures that can be taken
against an offender.
Other sources of international law are custom (i.e. international practice that is accepted as
law) and the general principles of law recognised by civilized nations or natural law (the basis
of human co-existence).
International Court of Justice (ICJ) and International Criminal Court (ICC) situated at The
Hague in The Netherlands, determine international civil disputes and criminal cases
respectively. You are all familiar with the Kenyan criminal cases in the ICC at The Hague.
Kenya ratified the Rome Statute on 15th March 2005 and the Statute became effective in Kenya
on 1st June 2005.
Rome Statute requires member States to enact National laws in line with and to cooperate with
ICC. In compliance with this requirement Kenya enacted International Crimes Act, 2008 which
became effective on 1st January 2009. This an Act of Parliament that makes provision for the
punishment of certain international crimes, namely genocide, crimes against humanity and war
crimes, and enables Kenya to co-operate with the International Criminal Court established by
the Rome Statute in the performance of its functions. This clearly demonstrates the fact that
international law is good source of law in Kenya.
34
Please read the case below for more understanding on the application of international law
in Kenya.
The Walter Barasa ICC Warrant of Arrest Case
Walter Osapiri Barasa -vs- Cabinet Secretary Ministry Of Interior And National Co-Ordination & 6 Others
[2014] eKLR
(High Court’s Jurisdiction to Enforce Warrant of Arrest Issued by the International Criminal Court
January 31, 2014)
Brief Facts
The petitioner was a former intermediary for the International Criminal Court prosecutor in the context of
investigations relating to the 2007 post elections violence. It was alleged that he was criminally responsible for
interfering with prosecution witnesses by attempting to corruptly influence the witnesses, in contravention of
article 70(1)(c) of the Rome Statute. He was therefore being sought by the ICC to answer to those charges. The
ICC Registrar issued a request for arrest and surrender of the Petitioner which was received by the Cabinet
Secretary of Interior and National Co-ordination and forwarded to the High Court of Kenya for execution in
accordance with section 29 of the International Crimes Act No. 16, of 2008 (the “ICA”).
The issuance of the warrant is what triggered the petitioner to file the petition.
International law – treaties and conventions – nature and extent of application of treaties – supremacy of the
Constitution and sovereignty of the people vis-à-vis the Rome Statute and conventions ratified by Kenya
Constitutional law – fundamental rights and freedoms – request for arrest and surrender of a suspect by the
International Criminal Court – where the ICC had issued a warrant of arrest to be effected by the High Court
of Kenya – whether the High Court had jurisdiction to order arrest and surrender of the petitioner to ICC Whether in the absence of regulations made by the Minister prescribing procedures for dealing with requests
by ICC, invalidates the proceedings against the petitioner – whether the petitioner was entitled to security –
International Crimes Act No. 16, of 2008 section 29 – Rome Statute articles 25(3)(a) 70(1)(c),89 – Criminal
Procedure Code ( Cap 75) section 89
Issues
I.
Supremacy of the Constitution and sovereignty of the people vis-à-vis the Rome Statute and
conventions ratified by Kenya.
II.
Whether Part IV of International Crimes Act 2008 on arrest and surrender contravenes the arrest
procedure under sections 28, 89, & 29 of the Criminal Procedure Code which provides for an
arresting officer to exercise power of arrest only if he has reasonable and probable cause.
III.
Whether the petitioner’s fundamental rights and freedoms were violated by the action of the Minister
in commencing proceedings under Part IV of the International Crimes Act before notifying and
furnishing him with the information and evidence upon which the International Criminal Court (ICC)
seeks his arrest and surrender.
IV.
Whether in the absence of regulations made by the Minister pursuant to sections 172 & 173 of the
ICA, prescribing procedures for dealing with requests by ICC, invalidates the proceedings by the 1 st
Respondent.
V.
Whether the High court had jurisdiction to order arrest and surrender of the petitioner to ICC.
VI.
Whether the petitioner was entitled to security.
Held
1. It was trite that under the Rome Statute the ICC did not exercise police powers, nor did its personnel
have a direct right of arrest. The request therefore together with accompanying documentation and
identifying information under article 91 of the Rome Statute was transmitted for execution to the
Cabinet Secretary, Ministry of Interior and Co-operation of Kenya, by way of a request for cooperation pursuant to article 89 of the Rome Statute.
2. To acquire the force of law under the Kenyan Constitution, treaties and conventions had to undergo
domestication. It was recognized that treaties were laws, consented to by all parties in the comity of
nations who sign them, obligating States that have ratified or acceded to them comply with them
particularly when dealing with other States parties as well as relevant international organizations.
The 1969 Vienna Convention on the Law of Treaties (the 1969 Vienna Convention) and the 1986
35
Vienna Convention on the Law of Treaties between States and International Organizations or between
International Organizations (the 1986 Vienna Convention) provided the yardstick on how to deal with
treaties and conventions.
3. Once a treaty becomes part of a state’s law, a state party is obligated to perform the treaty regardless
of conflicts with its internal law. Suffice to say, internal law includes a States Constitution. That is
provided for in Article 27 of the 1986 Vienna Convention which Kenya has ratified.
4. The obligation of a State Party to comply with a treaty, especially where the State had not expressed
any reservations thereto could not be willy-nilly denied or abrogated. A State could only invoke the
provisions of its internal law where the same had been expressed as reservations before the
ratification of such treaty. Some countries had however, expressly stated that their internal laws and
most especially the constitution was supreme to treaties. The United States of America was one such
example.
5. The Rome Statute established the International Criminal Court. It was one of the treaties signed by
Kenya. It was ratified on 15th March 2005, and Kenya did not express any reservations to any of the
provisions of the Statute. Article 120 of the Rome Statute expressly prohibited State Parties from
entering any reservations.
6. Under Section 4 of the ICA, the Kenya Parliament was very clear that certain provisions of the Rome
Statute shall have the force of law in Kenya. In the case before the court, the subject matter of the
proceedings instituted by the ICC was the issuance of a warrant of arrest. It was duly transmitted to
the Kenyan authorities by way of a request for assistance relating to international co-operation, in
terms of the provisions of the Rome Statute. Clearly therefore, Section 4 of the ICA and Part 9 of the
Rome Statute were invoked. Those were amongst the provisions which the Parliament of Kenya had
enacted as having the force of law in Kenya.
7. Kenya, through a process of domestication, and the people of Kenya in exercise of their sovereign will
through their constitutionally mandated representatives in Parliament, had in exercise of such
sovereignty, ratified, adopted, incorporated and received the Rome Statute, excluding the provisions
not domesticated, as part of the law of Kenya under the supremacy of the Constitution. That being so,
the effect was that the Rome Statute formed part of the laws of Kenya. Being a statute through a
process of ratification and domestication the Rome Statute was in terms of article 2(6) of the
Constitution subordinate to the Constitution
8. When an Act of parliament is appropriately challenged in the courts as not conforming to the
constitutional mandate, the judicial branch of the government has only one duty; to lay the article of
the Constitution which is invoked beside the statute which is challenged and to decide whether the
latter squares with the former. All the court does, or can do, is to announce its considered judgment
upon the question. The only power it has, if such it may be called, is the power of judgment. The High
Court neither approves nor condemns any legislative policy. Its delicate and difficult office is to
ascertain and declare whether the legislation is in accordance with, or in contravention of, the
provisions of the Constitution; and, having done that, its duty ends.
9. In impugning a provision of law as unconstitutional, the complainant must juxtapose the article of the
Constitution which is invoked against the provision challenged and show how they do not square with
each other. The petitioner did not demonstration as to how Part IV of the ICA on arrest and surrender
when juxtaposed with Art 27,28 and 29 of the Constitution, were flawed. Under the ICA, once the
Cabinet Secretary had received the transmitted warrant and supporting documents from the ICC, he
was required to satisfy himself that the request was duly supported, and if so, to notify the Judge of the
request and seek issuance of an arrest warrant.
10. The ICC is a court which is, as far as Kenya is concerned, one established by a statute acceded to and
ratified pursuant to article 2(6) of the Constitution. Such statute therefore constitutionally forms part
of the law of Kenya and the ICC’s activities have been identified and recognized in the domesticating
Act under the provisions of section 4 of the ICA as having the force of law in Kenya. The ICC is
therefore a Court duly recognized and incorporated by the Constitution as a court with which, in
terms of the preamble and objects of the ICA, Kenya must cooperate in the performance of its
functions.
11. The ICC was under no obligation to inform the State Party or the petitioner prior to commencing on
the exercise of its discretion, or that the petitioner has a specific right to be tried in Kenya.
12. The question as to whether or not the Cabinet Secretary breached the Petitioner’s rights to a fair
hearing and fair administrative action must be examined in the following context: the subject at hand;
36
13.
14.
15.
16.
17.
18.
19.
20.
21.
and in light of the nature of the proceedings; and taking account of whether the Cabinet Secretary’s
action is a final act or decision; and the procedure under which the decision is taken; and the objects
of the law regulating his actions.
Whether the petitioner was entitled to be provided with material and to fair hearing at the pre-arrest
stage, must also be viewed through the lenses of the issues at hand, and the overall object of the ICA.
According to its long title the ICA aims, among other things, to: “…enable Kenya to co-operate with
the International Criminal Court established by the Rome Statute in the performance of its functions.”.
Therefore, whatever interpretation is adopted by the court, it must ultimately, and also efficiently and
effectively be geared towards the achievement of that goal.
There is no requirement for hearing the petitioner at the pre-arrest stage. However, should the suspect
be arrested, then the provisions of article 49 of the Constitution on the rights of arrested persons
would automatically kick in. It is to be remembered that, section 25 (1) of the ICA demands
confidentiality in the manner in which the Minister, the Attorney-General or any employee dealing
with requests for assistance from the ICC.
Under the Kenyan laws there is no provision that a person at the pre-arrest stage is entitled to a
hearing or to be provided with material that is to form the basis of the charge. Those rights are
available to the petitioner after arrest and throughout the process thereafter. That includes the
process before the ICC if, eventually, an order of surrender were to be finally made against the
petitioner after his arrest.
An arrest in Kenya is lawful with or without the issuance of a warrant. All that is required is either the
production before a magistrate of an arrested person or a complaint signed by a magistrate. It is not
unusual, however, that a person suspected of having committed an offence is arrested without the
opportunity of being heard. There is no doubt that arrest interferes with the fundamental rights of a
person, in that upon arrest he may be placed in custody, and his movements limited and freedoms
restricted. Therefore, the right to liberty can only be deprived on such grounds and in accordance with
such procedure as established by law.
Upon arrest, under the Constitution, a person’s right to a hearing and to challenge the grounds for
arrest cannot be curtailed, except under law. In some countries such as the United States of America,
before being arrested a person has rights that accrue to them, which are read to them by the arresting
officer. Such pre-arrest rights are commonly referred to as Miranda Rights or the Miranda Rule.
The ICC proceedings in respect of a warrant of arrest are special proceedings which do not entitle the
petitioner to an opportunity to be given a hearing prior to his arrest
The aspect of surrender is dealt with under sections 39-45, of ICA. The process is simply that if a
person is brought to the High Court under Part IV, which includes an arrest under warrant, the Court
has to determine whether such person is eligible for surrender. The criterion for eligibility is also set
out in section 39(3) ICA. 119. It must also be borne in mind that under Section 29 of the ICA, the
Minister’s role is fairly circumscribed, In addition even if the court issues a warrant of arrest, it is
open to the Minister under section 31(1) ICA to apply for the cancellation of the warrant. Therefore,
it was premature for the petitioner to have raised the issue of refusal to surrender on account of
exceptional circumstances as there was no basis yet for the exercise of the Minister’s discretion to
refuse surrender.
It is the discretion of the Minister to determine whether or not to make regulations. He has not done
so, however that does not invalidate the actions of the Minister who, having received by transmittal a
warrant of arrest for notification to a judge. The ICA is clear that the laws of Kenya apply. The CPC
has provisions for a procedure for the issuance of a warrant, although the procedure involves a
magistrate. Nothing prevents a High Court judge acting in accordance with the ICA playing the role
of the magistrate under the CPC, given that the High Court has unlimited original jurisdiction in civil
and criminal matters.
It would be wrong for the Court to intervene with the merits of the Minister’s decision unless the
petitioner proves that the proceedings commenced by the Minister;
i)
Had resulted in a failure to realize the intention of the Act; or
ii)
Results to an impediment in the exercise of fundamental rights or freedoms of
the petitioner; or
iii)
Results in a situation so unfair, irrational or unreasonable that any reasonable
person in the Minister’s position would, in the circumstances, readily have
made such regulations.
37
iv)
Amounts to a failure of a glaring and fundamental duty of the Minister which
the court would be entitled to remedy with an order to compel him to make such
regulations.
The petitioner was not able to demonstrate that any of the above criteria applied in his case.
Accordingly, there was no basis upon which to hold that the proceedings commenced by the Minister
were invalid, on account of his not exercising his discretion to promulgate rules under sections 172 or
173 of the ICA.
22. The High court had jurisdiction to order arrest and surrender of the petitioner to ICC.
The petitioners prayers (a) to (h) declined, prayer (i) granted to the extent that the order for security would
remain in force pending further orders in a previous application before the court.
M: Specific British & Indian Acts
Enactment of law is an expensive and time consuming exercise. At independence Kenya
lacked enough capacity to enact its entire legal frame. Kenya therefore borrowed heavily from
the English and Indian law. A number of Kenyan law is actually almost a cut and paste work
from UK. There are even some UK Acts which apply in Kenya alongside with those enacted
by our Parliament. These Statutes are commonly referred to as Statutes of General Application
that were in force in England on 12th August 1897. This old date is not a magic date. It is mere
cutoff date that avoids total application of the entire laws of UK in Kenya. It is referred to as
the reception date. The significance of reception date is that any modification of English law
must be incorporated in Kenya. The reception date itself acts as the limit of application of
English law in Kenya.
These specific Acts from British Law are well capture in the Judicature Act and they include:i)
The Admiralty Offences (Colonial) Act 1849.
ii)
The Evidence Act 1851, sections 7 and 11.
iii)
The Foreign Tribunals Evidence Act 1856.
iv)
The Evidence by Commission Act 1859.
v)
The British Law Ascertainment Act 1859.
vi)
The Admiralty Offences (Colonial) Act 1860.
vii)
The Foreign Law Ascertainment Act 1861.
viii) The Conveyancing (Scotland) Act 1874, section 51.
ix)
The Evidence by Commission Act 1885.
Due to our common colonial background with India, some Indian Acts have had some
application in Kenya. These included the Law of property and Law of contract which however
ceased to apply after enactment of our relevant laws.
It is important to note that once our Parliament has enacted a law to address the area addressed
by the foreign law, the foreign law ceases to apply. For example, we have been using the
English Married Women’s Property’s Act 1882 until 16th January 2013 when our Matrimonial
Properties Act No.49 of 2013 that was assented to by the President on 24th December became
effective. Section 19 of this Act provides “The Married Women Property Act shall cease to
extend to or apply in Kenya”.
Similarly the Indian Transfer of Property Act 1882 which was applied to Kenya by section 11 (
38
b) of the East Africa Order in Council, 1897 ceased to apply in Kenya on 2nd May 2012
following the enactment of The Land Registration Act, 2012. The Land Registration Act, 2012
is an Act of Parliament that revised, consolidated and rationalized the registration of titles to
land, to give effect to the principles and objects of devolved government in land registration,
and for connected purposes.
!!!
Note: The Acts will only be applicable in Kenya so far they are not inconsistent with any provision of the
Kenya Constitution.
N: Common Law
Common Law refers to the law that has developed from the customs, practices and procedures
of the English people and has been confirmed by the English courts. It is the ancient law of
England based upon societal customs and recognized and enforced by the judgments and
decrees of the courts. It is, therefore, the traditional law of UK created by judges when
deciding individual disputes or cases which is based on precedent (legal principles developed
in earlier case law) instead of statutes.
Common law is very rigid and takes time to change. It is also applied in United States of
America and former British colonies. It is distinct from the civil-law system, which
predominates in Europe and in areas that were colonized by France and Spain. It is applied in
Kenya by virtue of Section 3 of the Judicature Act which had earlier analyzed. However it
must not be forgotten that its application is limited since the said Section clearly states that it is
only applicable in Kenya if our circumstances so allow. This means if any provision, rule,
doctrine, or principle is against our Constitution, any of our written law or our custom then it
has no application.
Common Law has the following limitations:
i)
Common law did not recognize some rights and hence the aggrieved parties
were given no remedies.
ii)
Procedures used in common law ere lengthy and complex leading to delay and
denial of justice.
iii)
Common law was seen as inadequate hence the community lost faith in this law.
iv)
Common law provided for monetary compensational damages which were
inadequate in some cases.
O: Doctrines of Equity
Equity which means equality comes as a result of limitations contained in common law. Equity
is all about fairness and justice. It was developed to counter injustices and unfairness of
Common Law. This means it came after common law and as such where there is any conflict
between Common Law and Equity, Equity would it precedent. The superiority of Equity is
actually captured in The English Judicature Act of 1873 (which is a Statute of general
39
application in Kenya) since it provides that if there is any conflict between Common Law and
Equity, Equity is to prevail.
Equity developed into various maxims (principles) grounded on fairness and justice. Two
maxims form the primary foundations of equity:
i)
Equity will not suffer an injustice
ii)
Equity acts in personam.
The first of these explains the whole purpose of equity, and the second highlights the personal
nature of equity. Equity looks at the circumstances of the individuals in each case and fashions
a remedy that is directed at the person of the defendant who must act accordingly to provide
the plaintiff with the specified relief. All other maxims are consistent with them. Other popular
maxims of Equity are:
i)
Equity regards as done what should have been done- This maxim means that
when individuals are required, by their agreements or by law to have done some
act of legal significance, Equity will regard it as having been done as it ought to
have, even before it has actually happened.
ii)
Equity will not suffer a wrong to be without a remedy- where there is a right,
there must be a remedy.
iii)
Equity delights in equality- Where two persons have an equal right the
property will be divided equally. Thus Equity will presume joint owners to be
tenants in common unless the parties have expressly agreed otherwise.
iv)
Equity aids the vigilant- not those who slumber on their rights; delay defeats
Equity; Equity aids the vigilant, not those who sleep on their rights. Once a
party knows he has been wronged, he must act relatively swiftly to preserve his
rights. Otherwise, he will be guilty of laches.
v)
Equity follows the law- Equity works as a supplement for law and does not
supersede the prevailing law.
vi)
Equity will not aid a volunteer- Equity cannot be used to take back a benefit
that was voluntarily but mistakenly conferred without consultation of the
receiver.
vii)
He who seeks equity must do equity- if a person wants fairness he must have
been fair to others. One should act in good faith such that if injustice happens
equity is now used.
viii) Equity acts in personam- has coercive power and ability to hold a violator in
contempt and take away his or her freedom (or money) until he obeyed. The
applicant must be asserting a right of some significance, as opposed to
emotional and dignitary interests.
ix)
He who comes to equity must come with clean hands- If you seek equity it
means you must yourself not be guilty of breach of equity. Equity will not
permit a party to profit by his own wrong. If you ask for help about the actions
of someone else but have acted wrongly, then you do not have clean hands and
you may not receive the help you seek. No one is entitled to the aid of a court of
equity when that aid has become necessary through his or her own fault. Equity
does not relieve a person of the consequences of his or her own carelessness. A
court of equity will not assist a person in extricating himself or herself from the
40
circumstances that he or she has created. Equity will not grant relief from a selfcreated hardship. For example, if you desire your tenant to vacate, you must
have not violated the tenant's rights.
!!!
Case example
Everet v. Williams (1893), 9 L.Q. Rev. 197 (The Highwayman’s Case)
At the beginning of the eighteenth century one John Everet and one Joseph Williams formed a partnership
and duly went into business together. Their business, described as “dealing in several sorts of commodities”
was generally conducted on several highways and elsewhere" and consisted of dealing “with several
gentlemen for divers watches, rings, swords, canes, hats, cloaks, horses, bridles, saddles, and other things”
which they acquired “at a very cheap rate”. Or to put it bluntly, they were highwaymen and their business
was robbery.
As is often the case, there was eventually a falling out amongst thieves and John Everet came to believe that
his partner Joseph Williams was somehow managing to obtain a disproportionate share of the profits of their
joint enterprise. He sued his partner for discovery, an account and general relief, or to put it plainly,
requesting that the court order Joseph Williams to account for the profits of the partnership and to remit any
sums due.
The court considered the case to be “both scandalous and impertinent” and was dismissed. The case is often
cited as an example legal principle of “ex dolo malo non oritur action” that is, “no court will lend its aid to a
man who founds his cause of action upon an immoral or an illegal act”; or in plain English, illegal contracts
are unenforceable.
P: Case Law/Judicial Precedents/Judge made law
The main work of a judge is to interpret the law and make a decision thereof. In the process of
interpreting the law and making decisions judges end up making binding decisions which must
be followed by other courts especially those courts of lower ranking to it. These binding
decisions are what are referred to as case law or judicial precedents or judge made law.
Case law or judicial precedent/judge made law is reported in law reports from where references
are made. Therefore, case law is the set of reported judicial decisions of selected appellate
courts and other courts of first instance which make new interpretations of the law which can
be cited as precedents (authorities) in a process known as stare decisis.
The doctrine of Judicial Precedent (stare decisis) is the process through which judicial
precedents are made by treating similar cases the same way. Once a superior court has
pronounce a decision on a point of law all lower courts (courts below it) are bound by that
decision and they are expected to follow it and apply it in similar cases that may come before
them. Superior courts therefore make judicial precedents to be followed by others. A precedent
is something done/said that may serve as an example or rule to authorize or justify subsequent
act or a verdict reached or arrived at before past date and serves as law now. The principle or
the doctrine of judicial precedent is that in each case the judge applies principle of law from
earlier decision made in past cases from the existing/previous decision the judge makes a
present ruling.
There are four types of judicial precedent i.e. declaratory, distinguishing and overruling
original precedents. These precedents are discussed below:-
41
i)
Declaratory Precedent - This is where a judge applies an existing rule of law
from the previous cases without extending it. He is merely declaring the law
and his judgment forms a declaratory precedent.
ii)
Original Precedent - When there is no previous decision on a particular case
then the judge decides the present law by applying general principles of law.
He lays down an original precedent to be followed in future.
iii)
Distinguishing Precedent - If the court feels that earlier decisions when applied
might cause injustice then the earlier case/previous is distinguished from the
case at hand, i.e. the two cases are taken to be different from one another. If the
distinction between the two cases is made, a distinguishing precedent is formed.
Both the previous and the new precedent are considered as laws.
iv)
Persuasive Precedent – this is a precedent that is not binding to a court but can
persuade a judge to consider it positively when reaching his decision. They
include decisions of courts of equal ranking e.g. a judge the high court is not
bound by a decision of another high court judge or decisions of foreign courts
such as UK other commonwealth countries.
v)
Binding Precedent – this is an earlier decision that must be followed where the
facts in the subsequent case are similar. For example the Supreme Court
decision in the Raila Odinga 2013 Election Petition Case is binding to all other
courts in Kenya on matters relating to failure of electronic voting system.
vi)
Reversing Precedent – this is a decision that reverses a previous decision either
of the same court or a lower court on review or appeal.
vii)
Overruling Precedent - Done when it is felt that the previous ruling was
wrongly done. Overruling is only done by the higher court and a lower court
cannot overrule a decision by a superior court.
There are some factors that a judge must consider when using case law:
i)
Stare decisis (let the decision stand) - Determine the weight to be attached to
particular precedents. The general rule provided by this rule is that a decision
made by a superior court binds all lower court i.e. it must be followed by the
lower courts.
ii)
Ratio decidendi (reasons for) - The judge makes a decision and gives reasons
to support his judgment/sentence e.g reason for a sentence/judgment could be:
a) To curb the spread of a crime
b) To serve as an example to others
c) The constitution or the law says so about the crime
iii)
Obita dicta (by the way) - This refers to the statement made by the “way” in
the course of the judgment. Such statements unlike ratio decidendi don’t create
any precedent at all hence they are not binding but they are of persuasive
authority.
iv)
Per incuriam – This is a decision arrived at carelessly or erroneously,
inadvertently and in total ignorance of the relevant law. The decision is not
binding.
Case law has a number of advantages and disadvantages. The advantages of Case Law include
the following:
42
i)
ii)
iii)
iv)
Certainty - The doctrine of precedent makes it easy to know what the law is on
particular matter and by looking at previous decision to predict the outcome of a
particular case.
Flexibility and Growth - The judges have many past cases to dwell on and get a
ruling from them.
Practical - Judges have many practical cases and decision made previously and
hence easier to curb a given crime.
Detailed - The judges will use past cases in conjunction with other sources of
law before arriving to a decision. This help encouraging justice.
The disadvantages of Case law include the following:
i)
Bulky and Complicated - Case law has multiple decisions made of a number of
years and contained in a number of volumes of law report, it is therefore bulky
and complex leading to a waste of time as judges make their decision.
ii)
Unnecessary Details (over subtlety/over sharp minded) - Judges may end up
concentrating on unnecessary details in the expense of the important facts.
Being over sharp minded may lead to unnecessary original precedent or
sometimes injustice.
iii)
Rigidity - The judge has to give the rule as per the past record cases brining in
rigidity or inflexibility due to adopting past cases and then relating them to the
present case.
Q: Islamic Law
The application of Islamic law in Kenya has some history which can be traced to the execution
of two agreements on 5th October 1963 between the Prime Minister of Kenya and Prime
Minister of Zanzibar and second one on 8th October 1963 between the two Prime Ministers and
the Sultan of Zanzibar. The effect of the said agreements was to recognise the coastal strip as
part of the Kenyan territory and the application of Islamic law therein.
These agreements led to the entrenchment of kadhi courts and the application of personal
Islamic law of marriage, separation, divorce, maintenance and inheritance in the 1963
constitution and the 2010 constitution. It is applied in case of a dispute between two Muslims.
Its application is limited to the determination of questions of Muslim law relating to personal
status, marriage, divorce or inheritance in proceedings in which all the parties profess the
Muslim religion and submit to the jurisdiction of the Kadhis’ courts. The law is not applied in
criminal cases.
!!!
It would therefore be correct to argue that the application of Islamic law in Kenya is a creature of the law of
contract and principles of international law. The doctrine of pacta sunt servanda obliges Kenyan Government
to observe its Agreements of October 1963 with the Colonial Government and the Sultan of Zanzibar about
the Coastal Strip. Pacta sunt servanda as a doctrine means that states are obliged to fulfil in good faith their
commitments under international law.
The agreement was signed in London on 5th October, 1963 by Jomo Kenyatta and Mohammed Shamte,
Prime Minister of Zanzibar.
i)
That free exercise of any creed or religion will at all times be safeguarded and, in particular,
43
ii)
iii)
His Highness’s present subjects who are the Muslim faith and their descendants will at all
times be ensured of complete freedom of worship and the preservation of their own religious
buildings and institutions
The jurisdiction of Chief Kadhis will at all times be preserved and will be extended to the
determination of questions of Muslim law relating to personal status in the proceedings in
which all parties profess the Muslim religion
The freehold titles to land in the coast region that are already registered will at all times be
recognized, steps will be taken to ensure the continuation of the procedure for the
registration of new freehold titles and rights of freeholders will at all times be preserved save
for so far as it may be necessary to acquire freehold land for public purposes, in which event
full and prompt compensation will be paid.
As a follow up to this agreement, on 8th October, 1963 the two Prime Ministers and the Sultan of Zanzibar
His Highness Seyyid Jamshid bin Abdula signed a joint agreement with the S of S for Colonies Duncan
Sandays to revoke 1890 and1895 agreements it was agreed further that:
i)
The territories comprised in the Kenya protectorate shall cease to form part of His Highness
dominions and shall thereupon form part of Kenya
ii)
The agreement of 14th June 1890 in so far as it applies to those territories and the
agreement of 14th December 1895 shall cease to have effect.
R: African Customary law
African Customary Law is applied when it’s not repugnant (against) and not inconsistent with
any written law. It is derived from the practices and custom of the Kenyan communities.
It applies in matters relating to
i)
Land held under a common tenure
ii)
Marriage, divorce, maintenance and dowry
iii)
Pregnancy of unmarried woman or a girl
iv)
Adultery cases
v)
Matters affecting women status, widows, children etc.
vi)
Intestate succession and administration of intestate estate so far as not govern by
any written law.
African Customary law has the following limitations:
i)
Must be compatible with any written law
ii)
Applies in civil cases only
iii)
Must not be repugnant with natural justice equity and good conscience
iv)
Only applies where it has not been excluded by the two parties, i.e. the two
parties in the dispute must have agreed to use the law at the time of making the
contract.
S: Hindu Law
Due to the fact that Kenya has a big Asian community it became necessary to recognise their
culture and provide law that would regulate their personal law matters. Hindu customs on
marriage led to the enactment of Hindu Marriage and Divorce Act Cap 157 Laws of Kenya.
Hindu law provides a limited source of law in Kenya.
T: Interpretation of statutes or delegated legislation.
There some guiding presumptions and rules that a court interpreting a statute or delegated
legislation will presume and follow. The following are the common presumptions that the
court makes relating to the intent of a statute or delegated legislation:
i)
To have extraterritorial effect and will apply to Kenya only.
44
ii)
iii)
iv)
v)
To make fundamental changes to the common law if there are no positive and
clear words to that effect.
To impose criminal liability without proof of fault
To operate retrospectively, if there are no clear words to that effect and
To run counter to international law, where possible, will be interpreted to give
effect to international legal obligations.
!!!
Article 259 of the Constitution requires the interpretation of the Constitution to be in a manner that advances
the rule of law, permits the development of the law, and contributes to good governance.
As already noted it is duty of the superior courts to interpret statutes. There are five main rules
that are used by the court in the interpretation of statutes.
i)
Literal Rule – It is the easiest to apply where the phrases used in the statutes
(words) are given their ordinary English meaning. This rule applies where the
words used are clear and free from ambiguity. If the words are clear, they must
be applied, even though the intention of the legislator may have been different
or the result is harsh or undesirable. The literal rule is what the law says instead
of what the law was intended to say. However, use of the literal rule may defeat
the intention of Parliament. For instance, in the case of Whiteley v. Chappel
(1868; LR 4 QB 147), the court came to the reluctant conclusion that Whiteley
could not be convicted of impersonating “any person entitled to vote” at an
election, because the person he impersonated was dead. Using a literal
construction of the relevant statutory provision, the deceased was not “a person
entitled to vote.” If Parliament does not like the literal interpretation, then it
must amend the legislation.
ii)
Golden Rule - The Golden rule, or British rule, is a form of statutory
interpretation that allows a judge to depart from a word's normal meaning in
order to avoid an absurd result. It is used where lateral rule will cause
inconveniencies, inconsistency or be repugnant with natural justice. A statute is
interpreted in such a way to remove any inconsistency/injustice that might arise
from a literal interpretation of the words. In the case of Sigsworth, Re, Bedford v
Bedford (1935; Ch 89) the court held that no one should profit from a crime,
and so used the Golden rule to prevent an undesirable result, even though there
was only one meaning of the word “issue”. The facts of this case are often
misreported; a son murdered his mother and committed suicide. The courts were
required to rule on who then should inherited the estate, the mother's family, or
the son's descendants. There was never a question of the son profiting from his
crime, but as the outcome would have been binding on lower courts in the
future, the court found in favour of the mother's family.
iii)
Mischief Rule - It is interpreted to correct a particular offence and give a
remedy as well. Under this rule a statute must be interpreted to eradicate the
evil/defect/wrong or mischief in question. It attempts to determine the
legislator's intention. Its main aim is to determine the “mischief and defect” that
the statute in question has set out to remedy, and what ruling would effectively
implement this remedy. The rule was illustrated in the case of Smith v Hughes
[1960] 2 All E.R. 859, where under the Street Offences Act 1959, it was a crime
45
iv)
v)
for prostitutes to “loiter or solicit in the street for the purposes of prostitution”.
The defendants were calling to men in the street from balconies and tapping on
windows. They claimed they were not guilty as they were not in the “street.”
The judge applied the mischief rule to come to the conclusion that they were
guilty as the intention of the Act was to cover the mischief of harassment from
prostitutes.
Ejusdem Generis Rule - Ejusdem generis is Latin for “of the same kinds, class,
or nature”. The general words are to be taken as referring only to those things of
the same class as specifically mentioned. When a list of two or more specific
descriptors is followed by more general descriptors, the otherwise wide meaning
of the general descriptors must be restricted to the same class, if any, of the
specific words that precede them. Where a number of similar words with a clear
meaning are followed by a word or phrase whose meaning is not clear, the latter
should be interpreted as having meaning similar to those other word that have a
clear meaning. For example, where “cars, motor bikes, motor powered vehicles”
are mentioned, the word “vehicles” would be interpreted in a limited sense
(therefore vehicles cannot be interpreted as including airplanes) or “cats and
dogs” does not include wild animals. In Evans vs Cross, Evans was convicted of
driving his car in such a way as to cross the white line dividing lanes, in
supposed contravention of the Road Traffic Act of which says that drivers
should obey ...signals, warning sign posts, direction posts, signs, or other
devices for the guidance or direction of persons using roads. The substance of
his appeal -- which was successful -- was that white lines were not explicitly
mentioned along with the other items to be obeyed, and were not ejusdem
generis (of the same class) with them. This meant that white lines could not be
deemed to be included in other devices for the guidance... although, clearly,
common sense would suggest that they should be. However, the judgment of the
court did suggest that the outcome might have been different had there been no
other motoring offence with which errant line-crosser could be charged. Driving
without due caution, for example, was available in such cases.
Noscitur a Sociis Rule - Noscitur a sociis is Latin for “a word is known by the
company it keeps”. When a word is ambiguous, its meaning may be determined
by reference to the rest of the statute. Means that, the words meaning can be
gathered from the context. The words of doubtful meaning may take their
preposition from the nature of words and phrases with which they are
associated. The coupling of words together shows that they are to be understood
in the same sense.
U: The structure of Kenyan judicial system as per 2010 Constitution
Following the passage of the constitution of Kenya 2010, the structure of the Kenyan judicial
system fundamentally changed. The most notable changes are;
i)
The creation of the Supreme court of Kenya under the presidency of the Chief
justice. This is the highest court in Kenya today
ii)
The creation of two more courts at the of the High Court of Kenya one to hear
matters relating to employment and labour relations, and the other to hear
matters relating to environmental and land dispute matters
46
iii)
iv)
Room for the creation of other courts at the level of subordinate courts in
addition to the magistrate courts, Kadhi’s courts and Courts Martial
Categorization of the courts into superior courts and subordinate courts
NB: The figure below represents the structure of our judicial system in Kenya in a hierarchical
order.
SUPREME COURT
THE SUPREME COURT OF KENYA
The highest court in Kenya.
It is established as per Art.163 of the Constitution.
It has seven judges with the Chief Justice being its President.
It hears; Presidential election disputes, appeals from the Court of
Appeal & from any other court /tribunal.
Its decisions are binding to all other courts below it.
^
APPELLATE COURT
THE COURT OF APPEAL OF KENYA
This is the second highest court in Kenya
It is established as per Art.164 of the Constitution
It consist of the number of judges being not fewer than 12 as may be prescribed by
an Act of Parliament
Its President is elected by its judges from among themselves
It hears appeals from the High Court and any other court/tribunal as prescribed by
an Act of Parliament
^
COURTS OF HIGH COURT RANKING
THE HIGH COURT OF KENYA
INDUSTRIAL COURT
ENVIRONMENT & LAND
Third highest court in Kenya
Same rank with the High
COURT
established under Art.165 of the
Court.
Same rank with the High Court.
Established under Art.162 of the
Constitution.
Established as per Art.162 of
Presided by judges.
the Constitution.
Constitution
It has original & appellate
Principal judge elected by its judges
It has original & appellate
from among themselves.
jurisdiction to hear labour
jurisdiction over environmental
It has unlimited original jurisdiction
disputes.
and land disputes
in criminal and civil matters
Appeals go to the Court of
Appeals go to the Court of
It also hears appeals from the lower
Appeal.
Appeal. Organized &
court/tribunals below it
Organized & administered by
administered by Environment &
The Industrial Court Act
Land Court Act No.19 of 2011
No.20 of 2011
^
THE SUBORDINATE COURTS
THE MAGISTRATE COURTS
THE KADHIS’
THE
Subordinate to the High Court
COURT
COURTS
Composed of; chief magistrates, senior
Hears disputes relating
MARTIAL
principal magistrates, principal
to Islamic personal law
Hears
magistrates, senior resident magistrates,
only
military
resident magistrates or district
Established under
cases only
magistrates.
Appeals go
Art.170 of the
to the High
Most cases originate from these courts
Constitution
Court
Appeals go to the High Court
Appeals go to the High
Court
47
OTHERS
These include all other
courts/tribunals that may be
established by an Act of
Parliament other than those
under Art.162 (2)
Appeals go to the High Court.
The tribunals include the rent
tribunals, water tribunal and
electricity tribunal.
It is very important to appreciate that Kenya has several sources of law and that these sources are not of
equal importance. The Constitution is the most important source followed by Legislated law (Parliament)
and international law. The Constitution applies to all Kenyans. International law has similar application.
Acts of Parliament may apply to all Kenyans or to some sectors of population. Similarly case law, common
law and equity may have such level of application. However African customary law, Islamic law and Hindu
law apply to specific groups of people and only on matters of personal law. Courts main duty is to interpret
law and decide on cases before them. In the process of interpreting and making decision thereof courts
make law. The Constitution of Kenya 2010 provides a very elaborate judicial system in our country with the
Supreme Court being the highest court. The decisions of the Supreme Court are binding to all other courts
below it. Those of the Court of Appeal are binding to the High Court and all other court below while those
of the High Court are binding to the subordinate courts only.
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
xi)
xii)
xiii)
xiv)
xv)
SELF-ASSESSMENT QUESTIONS
What is the meaning of “source of law” and why is it important to know the source of law?
Which is the most important source of law in Kenya and why is it considered to be the most
important source?
The doctrines of equity are said to be the cure for the rigidity and harshness of common law.
Explain noting to use at least five principles of equity.
Which is the supreme law making organ in Kenya and why?
Why is Islamic law considered as good law in Kenya?
What is international law and why is it a source of law in Kenya? Give examples in support of your
answer.
What is a statute?
Why do we have delegated legislation and what are its limitations?
Outline the procedure for enactment of law in the Parliament of Kenya
With clear examples explain the limitations of the African Customary Law
What is a stare decisis?
List and explain four types of judicial precedents.
The duty of the court is to interpret law and apply it in the cases before it. Explain the rules that the
court uses to interpret law.
The Constitution of Kenya 2010 has fundamentally changed the structure of judiciary in Kenya.
Explain this statement with the help of an appropriate diagram.
What are the advantages and disadvantages of case law?
Please read the following to enable you understand the sources of Kenyan law better:
i)
Section 3 of the Judicature Act,
ii)
Chapters 1, Chapter 8 Part 4, and Chapter 10 Parts 1, 2, and 3 of the
Constitution of Kenya
48
LECTURE THREE
THE FOUNDATION OF BUSINESS LAW: THE LAW OF CONTRACT
3.1 Lecture Overview
Now that you have successfully completed the preliminaries in business law you are well
equipped to enter into the main substantive law in business law. Kindly allow me to welcome
you to the real foundation of business law. Without the law of contract there is no business law.
I must therefore ask you to be extremely keen in this discussion because once you are through
with it you will easily flow in the remaining topics.
Objectives
At the end of the topic, you should be able to;
i)
Define and explain a contract, its nature, purpose, and formation
ii)
Understand the central role played by the law of contract in business law
iii)
Appreciate the concept of contractual liability in relation to other liabilities
iv)
Appreciate the most relevant principles and concepts in the law of contract
v)
Apply the learnt skills in your business transactions
On the light touch
Two professionals, a lawyer and a doctor are in a bank, when, suddenly, two armed robbers burst in. While
one of the robbers takes the money from the tellers, the other lines the customers, including the two
professionals, up against a wall, and proceeds to take their wallets, watches, etc. While this is going on the
lawyer shoves something in the doctor’s hand. Without looking down, the doctor whispers, “What is it?” The
lawyer replied, “It is that KShs.10, 000/= I owe you.”
A: What is business/commercial law?
“…It’s almost anything. It goes much beyond the regulation of the relationships between merchants and
traders, and it goes beyond those parts of the law most commonly associated with business activities in that all
major and fundamental areas of law are now commonly associated with business activities.” (Justice Rogers
Giles – Commercial Law: What is it?)
According to Prof. Roy Goode, commercial law is that branch of law which is concern with
rights and duties arising from the supply of goods and services in the way of trade. It is the
body of law that governs business and commercial transactions. It is a branch of civil law and
deals with issues of both private law and public law.
Characteristics of commercial law: Commercial law has four distinctive and interrelated
characteristics.
i)
First, it is pragmatic – Goode points out that commercial law is about getting
things done, it is about problem-solving, about fashioning the contract structures
and other legal tools by which the legitimate needs of the market can be met. It
49
ii)
iii)
iv)
is not about theories only but most importantly, it is a tool for addressing and
solving commercial (business) problems.
Secondly, commercial law is responsive - It is presented as a body of rules
which has been developed in response to the needs of commerce. Goode says
that “commercial law represents the totality of the law’s response to mercantile
disputes… without trading there would be no commercial law.” Commercial
law is driven by, and is responsive to, the needs of commerce.
Thirdly, the role of commercial law is often described as facilitating the
effective operation of commercial transactions, rather than mandating the form
or content of those transactions.
Finally, commercial law tends to be consequentialist rather than normative, that
is, it is concerned with providing determinate outcomes; it is not overly
concerned with the question of whether those outcomes ought to be achieved.
Business law or commercial law is, therefore, a broad legal topic that among others
encompasses: Business transactions, Commerce and trade, Consumer transactions, Business
entities, their formation and management, Sale of goods, Secured transactions, Negotiable
instruments, and Debtor and creditor law among others.
The function of business law is to prevent disputes and to facilitate business relationships by
providing certainty in commercial agreements that in turn, enables transactions that might
otherwise be unstructured and unpredictable. One of the ways commercial activity in the
marketplace is governed is through the law of contract. Contracts are grounded on the principle
of “Pacta sunt servanda” which is a principle of the civil law and international law and means
that “pacts must be respected” or “contracts/agreements must be honoured”.
Business transactions revolve around the law of contract. The contract spells out the nature of
the business relationship and the obligations of each party to the business transaction they are
involved in. The law of contract facilitates commercial activity by creating a measure of
security and certainty in the business operations through binding agreements, which allow
business enterprises to plan for the future and to enforce their commitments to each other.
While many transactions are conducted on an informal or non-contractual basis, virtually any
significant transaction will be based on a fairly detailed contract to which and by which the
parties are bound both legally and ethically. Usually a contract is entered into once an
agreement is reached. It is important to agree at the beginning of the negotiations that all
agreements are reduced to writing before contracts are formalized in order to avoid disputes.
Contracts are negotiated by the parties in good faith. It is generally accepted that commitments
made will be strictly honoured to avoid disputes. The contract provides means for resolving
disputes. If the parties to the contract cannot reach agreement, an arbitrator or other third party
may be called on to interpret the contract. The contract is therefore the principal document that
governs business relationship. It is central to all commercial activities. Its primary purpose is to
specify the respective rights and obligations of the parties to an agreement and outline specific
procedures or actions that must take place. In this way, the possibility of disputes arising
between the parties is reduced.
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B: What is the law of contract?
“The law of contract may be provisionally described as that branch of the law which determines the
circumstances in which a promise shall be legally binding on the person making it”.
(Anson)
Business/commercial law is grounded in the law of contract. The law of contract is a set of
rules governing the relationship, content and validity of an agreement between two or more
persons (individuals, companies or other institution) regarding the sale of goods, provision of
services or exchange of interests or ownership. Contract law not only governs what happens
when the contract breaks down, but it also establishes what the terms of the contract are, in the
event of a dispute.
Goode notes that the primary function of the law of contract is to facilitate commercial
transactions by providing a reasonable assurance that each party will be held to his
undertaking. It is not concern with the actual value of the item being transacted. The
sufficiency of inducement to transact is left to the parties.
Contract Law is everywhere. It is with us everyday day. From the purchase of a newspaper in
the morning to the purchase of lunch, petrol, books, dinner, cloths, land, cars, and other utilities
together with employment, enrolment in school, university and any other commercial activity
you may be involved in.
The law of contract in Kenya was originally based on the Contract Act, 1872, of India, which
applied on contracts made or entered into before 1st of January 1961. The Indian Contract Act
applied to the three East Africa countries of Kenya, Tanzania and Uganda. Since then the
Kenyan law of contract has been based on the English Common Law of Contract, under the
Kenyan Law of Contract Act (Cap. 23), Section 2 (1).
C: What is a contract?
“…a contract is an agreement giving rise to obligations which are enforced or recognised by law. The
factor which distinguishes contractual from other legal obligations is that they are based on the
agreement of the contracting parties”.
(Treitel)
“…a promise or set of promises which the law will enforce”.
(Pollock)
Contracts are with us every day in matters touching all aspects of life. So much of everyday
life depends upon contracts. People buy or sell property, exchange goods or services, get
married. Some contracts are rather informal and may be merely an oral agreement or
understanding. Other contracts are written in precise legal terminology and may require
acknowledgment by a notary public and/or be filed in a court of law. Whether the contract is
informal or formal, written or oral, understanding the basic principles and elements of contract
law can help avoid legal disputes in the future. A consumer using a checklist of the elements of
the contract itself can determine whether the mutual set of expectations and obligations are
understood so that they can be fulfilled.
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A contract is an agreement that can be enforced in court; formed by two or more parties who
agree to perform or to refrain from performing some act now or in the future. Contracts are
legal agreements: A contract is an agreement between two or more parties. For a contract to be
valid and enforceable by law it must contain a number of elements. That is, it must follow a set
of principles. If these elements are present then the contract is enforceable and must be
honored. Failure to honor a contract can lead the party harmed by the failure of the other party
to satisfy the contract to seek legal remedy. A contract is, therefore, an agreement or a promise
which is legally binding or enforceable by the law.
The law of contract as administered in Kenya is an adaptation of the rules of English law of
contract modified by section 2 and 3 of the Law of Contract Act (Cap 23). Section 2(1)
provides;
Save as may be provided by any written law for the time being in force, the common law of England
relating to contract, as modified by the doctrines of equity, by the Acts of Parliament of the United
Kingdom applicable by virtue of subsection (2) of this section and by the Acts of Parliament of the United
Kingdom specified in the Schedule to this Act, to the extent and subject to the modifications mentioned in
the said Schedule, shall extend and apply to Kenya
D: Which agreements are contracts?
Not all agreements are contracts. Only those agreements which are enforceable at law are
contracts. Contract law is concern with agreements which create legal obligations which leads
to legal remedy in case of a breach. Agreements lacking the desire on the part of the parties to
create legal relations lack any cause of action. They include;
i)
Domestic arrangements- e.g. husband promise to pay house-keeping allowance
to the wife or to offer her a diamond ring on her next birthday. In the case of
Balfour v Balfour [1919] 2 KB Mr. Balfour who was working in Ceylon could
not be joined by his wife due to her medical condition. Mr. Balfour promised
her £30 a month until she was able to return to Ceylon. They drifted apart. Mrs.
Balfour sued to maintain the £30 a month. The Court of Appeal held that there
was no enforceable agreement as there was not enough evidence to suggest that
they were intending to be legally bound by the promise. The presumption that
there is no intention to create legal relations was not rebutted.
ii)
Domestic agreements are presumed not to be legally binding unless there is
clear intention. In the case of Jones vs. Padavatton,(1969) 1WLR, a mother
(Mrs. Jones) offered to pay her daughter, (Padavatton), to go to law school if
she would return from the US to live in England. The daughter returned and
lived in a house purchased by Jones. She also received maintenance from the
rent Padavatton collected from tenants. Jones attempted to back out of the
agreement and repossess the house. The Court held that there was no binding
contract. Although there would have been a contract if it was not the domestic
parties related, there was insufficient evidence to rebut the presumption against
domestic arrangements.
iii)
Gentleman’s promise- e.g. promise by A to lend his bicycle to B on a weekend
but subsequently refuses to do so.
52
iv)
Social invitation - e.g. A invites his friends B and C to a party at his house but
when they arrive, they find that A is not at home.
!!!
We have seen above that the law of contracts is not the whole law of agreements. Similarly, all legal
obligations are not contractual in nature. It is only a legal obligation having its source in an agreement that
give rise to a contract. Further, agreements to do an unlawful, immoral or illegal act, for example, smuggling
or murdering a person, cannot be enforceable at law.
A contract consists of two major elements: An agreement; and Legal obligation, i.e., it should be enforceable
at law. Contracts create contractual obligations (liability). In the above examples promises are not
enforceable at law as there was no intention to create legal obligations. Such agreements are social
agreements which do not give rise to legal consequences. This shows that an agreement is a broader term
than a contract. And, therefore, a contract is an agreement but an agreement is not necessarily a contract. In
case the promise is not supported by consideration, the promise will be nudum pactum (a bare promise) and is
not enforceable at law.
E: What are the terms of contract (conditions and warranties)?
A contract contains terms that may be regarded as conditions or warranties. A condition is the
most important category of contractual term since it goes to the root of a contract. A term
(clause) requiring that a car be repaired to the satisfaction of the purchaser is a condition
precedent to full performance of the contract for sale of the car. The remedy for breach of
condition at common law is repudiation and damages. A warranty is a term which is subsidiary
to the main purpose of the contract. A term requiring the seller of the car to replace or repair or
service the car at his own expense if it breaks down within a period of one year from the date
of purchase is a warranty (guarantee). Its breach leads to a claim for damages by the innocent
party.
The general rule is that the terms of a contract may be in writing, or oral, or inferred from
conduct, or a combination of any of these. However there are some contracts that must be in
writing. Such contract include sale of land contracts, insurance contracts, hire-purchase
contracts, and transfer of shares contracts. Some other contracts must be in form of a deed. A
deed is a formal document which is signed, witnessed, attested, registered, and delivered. It is
mainly used to convey or transfer a legal estate in land. The terms of a contract (conditions and
warranties) may therefore, be expressed in three ways:
i. Express terms that is, the obligations entered into by the parties. They may be oral or
set out in writing.
ii. Implied terms are those terms that are imposed upon the parties by trade customs, the
court, or by the law e.g. the sale of goods law.
iii. Exemption clauses are those clauses that seek to exempt a party from liability (or limit
it) if certain event occur e.g. in case of breach of a warranty. They are very common in
standard form contracts where courts may strike them out for being unfair to the weaker
party.
F: What are the essential elements of a valid contract?
“A contract is an agreement free from vitiating factors such as mistake or misrepresentation and
constituted by the unconditional acceptance of an outstanding offer involving a reasonably precise set of
terms between two or more contractually competent parties who intend to create mutual and reciprocal
53
rights and duties that may be the subject of judicial sanction if they are expressed in any required form,
are free from the taint of illegality or immorality and are not subsequently discharged by law, by
agreement, by breach or by sufficient supervening circumstances”
The general rule is that all agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful object and are not expressly declared to be void. From the
above quotation we are able to gather the following ten elements as the essential elements of a
valid contract:
i)
Agreement (offer and acceptance)
ii)
Intention to create a legally binding relationship.
iii)
Free and genuine consent.
iv)
Parties competent to contract.
v)
Lawful consideration.
vi)
Lawful object.
vii)
Agreements not declared void or illegal.
viii) Certainty of meaning.
ix)
Possibility of performance.
x)
Necessary Legal Formalities.
Formation of a valid contract: Formation of a valid contract involves harmonious interaction
and mixing of four basic essential elements of a valid contract listed above. The most
important elements in the formation of a contract are:
i)
Agreement (a valid offer & a valid acceptance),
ii)
Consideration (a valuable and lawful price paid for the accepted offer),
iii)
Contractual capacity (legal age, sound mind, absence of insolvency/bankruptcy,
and absence of ultra vires actions by a body corporate),
iv)
Intention (grounded on free and genuine consent/absence of vitiating factors) to
create a legal relationship.
G: What is an offer and how is it made?
“…an expression of willingness to contract on certain terms, made with the intention that it shall become
binding as soon as it is accepted by the person to whom it is addressed”.
(Treitel)
An offer can be equated with a proposal. A proposal is made when one person signifies to
another his willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other to such act or abstinence. An offer is synonymous with proposal. The
offerer or proposer expresses his willingness “to do” or “not to do” (i.e., abstain from doing)
something with a view to obtain acceptance of the other party to such act or abstinence. Thus,
there may be “positive” or “negative” acts which the proposer is willing to do. It is an
expression or willingness to enter into a contract as far as its terms are accepted by the offeree.
An offer is therefore an intimation by words or conduct of a willingness to enter into a legally
binding contract, specifying the terms of the binding agreement which will be formed should
the offer be accepted by the party to whom it is addressed.
54
An offer can be made by;
i)
Any express or implied act such as; by oral or written words through face to
face conversation, messages, telephone, advertisements, telegrams, letters, telex,
fax, email, etc. An implied offer is made by conduct such as positive acts or
signs so that the person acting or making sign means to say or convey. However
silence of a party can in no case amount to offer by conduct.
ii)
Omission. This includes such conduct or forbearance on one’s part that the other
person takes it as his willingness or assent.
Elements of a valid offer: An offer must have certain essential elements in order to constitute
it a valid offer. The following are requirements of a valid offer:
i)
The offer must be made with a view to obtain acceptance.
ii)
The offer must be made with the intention of creating legal relations.
iii)
The terms of offer must be definite, unambiguous and certain or capable of
being made certain.
iv)
The offer must be communicated to the offeree. An offer must be
communicated to the offeree before it can be accepted.
v)
The offer must not contain a term the non-compliance of which may be assumed
to amount to acceptance. Thus, the offerer cannot say that if the offeree does not
accept the offer within two days, the offer would be deemed to have been
accepted.
vi)
The Special terms, forming part of the offer, must be duly brought to the notice
of the offeree at the time the offer is made.
vii)
Two identical cross-offers do not make a contract.
Offer vs an invitation to treat: An offer must be distinguished from an invitation to offer or to
treat. Invitation to treat is 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 a supermarket.
According to decided cases this amounts to invitation to treat and not an offer. It is the
customer or the prospective buyer who makes an offer to the shopkeeper or attendant or the
cashier by picking up the good and expressing the desire to purchase them. Pharmaceutical
Society of Great Britain vs. Boots Chemist (1953) - the defendant had a self-service store in
which certain drugs were displayed on the shelves. It was unlawful 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 defendant had placed a registered pharmacist on duty at the
cash desk near the exit but not near the shelves. The defendant was charged with the offence
of selling listed drugs without supervision of a registered pharmacist. If the sale took place
when the customer picked up the drugs from the shelves, the defendant would be liable but if
the sale took place at the cash desk where the pharmacist was stationed, then the defendant was
not liable. Held: The defendant was not liable because the display of goods on the shelves was
merely an invitation to treat and not an offer. It was the customer who made an offer by
selecting the article and taking it to the cashier. Fisher vs Bell 1960 A shopkeeper displayed a
flick knife in his shop window with a price behind it. He was charged with the offence of
offering a flick knife for sale. The court had to determine whether the shopkeeper act
amounted to offering the knife for sale. Held: The display of an article with a price tag on it in
a shop window is merely an invitation to treat and not an offer.
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Offer vs a declaration of intention: An offer should be distinguished from a declaration of an
intention. Where a person expresses his intention to do anything or an act it does not bind him
to another person who suffers damages because he fails to carry out his intention despite the
fact that someone relied on his declaration and acted on it. When articles are sold at public
auction, the offer is said to be made by the bidder and accepted by the seller at the drop of the
auctioneer's hammer. Because of this rule, the seller can withdraw his article from sale at any
time during the auction. The purchaser may withdraw his bid at any time before the sale is
concluded. Harris vs Nickerson (1873) Nickerson an auctioneer advertised that (here would be
a sale of furniture. Harrison a prospective buyer travelled from London to attend the sale but
the sale was withdrawn. Harrison thereupon sued the auctioneer for the loss of time and
traveling expenses. Held: The auctioneer was not bound to sell the furniture and he was
merely stating his intention to sell not making an offer.
Offer vs supply of information: An offer should be distinguished from a mere supply of
information. A mere statement of the lowest price at which a person will sell property or goods
contains no implied conditions to sell at that price to the person making such an enquiry.
Harvey vs Facey (1893) in this case Harvey telegraphed to Facey “Will you sell us a bumper
ball pen, Telegraph lowest Price” F replied “Lowest cash price for bumper Hall Pen is £900”.
Harvey telegraphed back “We agreed to buy for £900 asked by you” Facey refused to sell and
Harvey sued him contending mat the telegram constituted a binding contract.
Held: Harvey was not entitled to damages as in replying F was merely stating the lowest cash
price and not making an offer.
Types of offer: The following are four main types of offers
i)
Counter offer - A counter offer is a reply to an offer whose effect is to vary the
terms of the original offer. It is in fact an offer in itself. A counter offer
therefore extinguishes the original offer. Hyde vs Wrench (1840) - W offered
to sell his farm to H for $1,000. The plaintiff replied that he was willing to buy
it at $950 amounted to a counter offer which extinguished the original offer of
$1,000. Held: The plaintiffs (H) reply by which he stated that he is willing to
buy farm at £950 amounted to a counter offer which extinguished the original
officer of £1,000 and consequently no contract existed between the plaintiff and
the defendant.
ii)
Cross offer: Where A offers his property for sale to B and B without being
aware of A’s offer, simultaneously offers to buy the same property from A, each
of these offers is a cross offer in relation to the other. The law is that cross offer
is not mutual acceptance of one another. A must therefore specifically accept
B’s offer or B that of A, if a valid contract is to be made at all.
iii)
Conditional Offer: A conditional offer is one which is made subject to a certain
condition or certain conditions which are required to be fulfilled. Such
conditions may be imposed by the offer e.g where an offer is required to be
accepted within a stipulated time or they may be implied by law. Where a
condition attached to an offer of is not satisfied the offer itself fails and no
contract can result from it.
56
iv)
Single or standing offers: The question as to whether an offer is single offer or
standing offer arises in the case of tenders. It is said to be a single offer where
the supplier is required to supply a definite quantity of goods within a specified
time, it makes no difference whether delivery is to be effected at once or in
instalments. A standing offer is constituted where it is stated that the supplier
may be required to supply within a specified period goods in a quantity not
exceeding a specified limit. A single offer entails a definite obligation and
acceptance results in a contract of definite terms. A standing offer entails no
definite obligation.
Rules of an offer: The following are the rules of an offer:
i)
An offer may be made to a specific person or to a group of persons or to the
whole world at large. Carlill vs Carbolic Smoke Ball (1893) - The defendants
were the manufacturers of medicine known as “The Carbolic Smoke Ball”.
They advertised a reward of £ 100 to anyone who contracted influenza after
using their smoke ball in accordance with their prescription adding that £100
had been deposited with the bankers to “show their sincerity”. The plaintiff
used the smoke ball according to the defendant’s instructions but still contracted
influenza. She claimed the reward of £100 from the defendants. Held: A
contract based on such offer is made not to the whole world but only to those
persons who come forward and personalize the conditions of the offer. There
was therefore a contract between the plaintiff and the defendants and the
plaintiff was entitled to a reward. An offer may be made by word of mouth in
writing or by conduct. An offer may contemplate giving rise to legal
consequences if accepted. The terms of an offer must be certain and free from
vagueness in expression.
ii)
Communication of an offer. The offer must be communicated i.e. made known
to the offeree within a relevant time. The communication may be made in
writing or orally (including communication by telephone). An offer becomes
effective only after it has been received by the offeree and in the case of offers
made by letters; the relevant time is the time of receipt of the letter by the
offeree but not the time of posting.
iii)
An offer may be terminated any time before acceptance. Offers may be revoked
by counter offer (Hyde vs Wrench). Revocation by post is not effective until it
is received by the offeree. Brian & Company vs Van Tien Haven (1880). The
defendant posted an offer to sell goods in New York. Brian received the letter
on 8th and immediately he telegraphed his acceptance on 11th. The defendant
wrote to Brian revoking the offer which was received on 25th. Held:
Revocation did not have any effect because it was received on 25th after the
acceptance dated on 11th.
iv)
Offer may be terminated by lapse of time. Ramsgale Victoria And Company Vs
Montefiore (1866) M applied for the purchase of shares in the plaintiff’s
company on June 8th. His offer was not accepted until November 23rd when the
57
letter of allotment was received. M refused to take the shares as by that time the
price of shares had fallen. Held: M was entitled to refuse as his offer had lapsed
before November 23 and so could not be accepted.
v)
Failure of condition: Offer lapsed by not being accepted in the manner
prescribed or if no manner is prescribed, in some usual manner implied by the
nature of the offer i.e. if an offer is made by post, the acceptance is implied by
post as well. Eliason vs Henshaw (1819) E offered to buy flour from H asking
the reply to be sent by the wagon driver who communicated the offer. The
wagon driven arrived before the letter of acceptance reached E. Held: There
was no contract
Termination of an offer: An offer is made with a view to obtain assent thereto. As soon as the
offer is accepted it becomes a contract. But before it is accepted, an offer can be terminated by;
i)
Counter offer
ii)
Revocation done by the offerer before the offeree has accepted the offer
otherwise it is too late and the offerer is bound by a timely acceptance.
iii)
Rejection by the offeree.
iv)
Death of either party- If the offeree dies it leads to total termination of the offer.
Same case applies if the offerer dies and the offer were of personal services. If
the offer was not of personal services the executor/or his estate are supposed to
go by the offer unless the offeree is notified of the offerer’s death.
v)
Failure of conditions
vi)
Supervening illegality of the contract
vii)
Lapse of time
viii) Lunacy
H: What is acceptance?
When the person to whom the proposal is made signifies his assent thereto, the proposal is said
to be accepted. Thus, acceptance is the act of giving consent to the proposal. A proposal when
accepted becomes an agreement.
Acceptance is a voluntary act by the offeree that shows assent to the terms of the offer. The
offeree’s act may consist of words or conduct. To exercise the power of acceptance effectively,
the offeree must accept unequivocally. Certain terms, when added to an acceptance, will not
qualify the acceptance sufficiently to constitute rejection of the contract.
Generally communication of acceptance is necessary. This is particularly so in bilateral
contracts. Communication of acceptance is not necessary if the offer dispenses with the
requirement. In a unilateral contract, notification is usually unnecessary because acceptance
requires full performance of some act. Acceptance need to be timely. The general rule is that
acceptance in a bilateral contract is timely if it is effected within the duration of the offer.
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Problems arise when the parties involved are not dealing face to face. In such cases, the offeree
may use an authorized mode of communication. Acceptance takes effect at the time the offeree
sends the communication via the mode expressly or impliedly authorized by the offerer. An
acceptance is therefore an unqualified assent to all the terms of the offer. Assuming the
presence of consideration and an intention on the part of the parties with full capacity to
contract to enter into legal relations a contract comes into being when an offer is accepted.
Acceptance must be an unqualified, unequivocal assent to all the terms of the offer. There must
be a correlation in an acceptance with all the terms of the offer. The case of Tinn v Hoffman &
Co (1873) held that agreeing to take 200 tons of wheat is not an acceptance of an offer to sell
300. Agreeing to pay £35 is not an acceptance of an offer to sell at £40. It is a counter offer, the
effect of which is to terminate the original offer.
Essentials of
acceptance:
i)
ii)
iii)
iv)
v)
vi)
vii)
a valid acceptance: The following are some of the key elements of a valid
Acceptance must be absolute and unqualified.
It must be communicated.
It must be according to the mode prescribed.
It must be given within the time specified or within reasonable time.
It must be in response to offer.
It must be made before the offer lapses.
It must be given by the person to whom the offer is made.
!!!
An offer may be revoked at any time before the communication of its acceptance is complete as against the
offerer, but not afterwards. Similarly an acceptance may be revoked at any time before the communication of
the acceptance is complete as against the acceptor, but not afterwards. An offer and acceptance constitute an
agreement but not necessary a contract. This is because once an offer is accepted there is a meeting of minds
by the parties involved.
I: What is consideration?
In simplest terms, consideration is what a promisor demands as the price for his promise. It is
the “price” you pay for the accepted offer. In Currie v. Misa (1875) L.R. 10 Ex. 162,
consideration was termed as “A valuable consideration in the sense of the law may consist
either in some right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.”
The term “consideration” is used in the sense of “quid-pro-quo” which means ‘something in
return.’ This “something” may be some benefit, right, interest or profit or it may also be some
forbearance, detriment, loss or responsibility upon the other party. It is the value given in return
for a promise. The “something of legally sufficient value” may consist of a promise to do
something that one has no prior legal duty to do, or the performance of an action that one is
otherwise not obligated to undertake, or the refraining from an action that one has a legal right to
undertake.
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The second element of consideration is that it must provide the basis for the bargain struck
between the contracting parties. The consideration given by the promisor must induce the
promisee to incur a legal detriment either now or in the future.
Consideration must be sufficient but need not be adequate. The consideration must have some
value. The court is not concerned with the adequacy of the consideration. In the absence of
duress or undue influence the court will uphold a contract even where it appears that the
consideration, objectively viewed, is not adequate. In the case of Chappell & Co v Nestle
(1960).To promote chocolate sales; Nestle advertised it would supply a record to anyone who
sent it money (1/6d) and three wrappers of its chocolates. One issue was whether the wrappers
formed part of the consideration for the sale of the record. Nestle argued that the wrappers
were not part of the consideration because they were of no value. However it was held: The
provision of wrappers was more than a mere ‘condition’ precedent; they were part of the
consideration and this was clear from the offer which stated that the wrappers would ‘help you
to get smash hit recordings’. Lord Somervell made the following famous statement:
“A contracting party can stipulate for what consideration he chooses. A peppercorn does not
cease to be good consideration if it is established that the promisee does not like pepper and
will throw away the corn.”
Consideration can therefore, be anything stipulated by the promisor. The court further held that
the wrappers were a good consideration despite the fact that the wrappers had little direct value
and were in fact thrown away after being collected by Nestle. This case strongly established
that courts will not inquire into the sufficiency or adequacy of the consideration as long as
there is some consideration.
Treitel argues that the consideration must have some economic value even though the value is
not capable of precise quantification. Legal sufficiency of consideration involves the
requirement that consideration be something of economic value in the eyes of the law and not
stemming from a preexisting legal duty.
Adequacy of consideration involves “how much” consideration is given. Adequacy concerns
the fairness of the bargain. Adequacy denotes a realistic economic equivalent of the promise it
buys. Courts do not question the adequacy of consideration if the consideration is legally
sufficient. Under most circumstances, a promise to do what one already has a legal duty to do
does not constitute legally sufficient consideration because no legal detriment is incurred.
Importance of Consideration: The general rule of law is “no consideration, no contract”. A
promise without consideration is purely gratuitous and, however sacred and binding in honour
it may be, cannot create a legal obligation. Consideration is what cements a contract. An
analysis of any contract will show that it consists of two clearly separable parts: (i) the promise
and (ii) the consideration for the promise. A person who makes a promise to do or abstain from
doing something usually does so as a return or equivalent of some loss, damage, or
inconvenience that may have been occasioned to the other party in respect of the promise. The
benefit so received and the loss, damage or inconvenience so caused is regarded in law as the
consideration for the promise. Thus, generally speaking, a contract cannot be thought of
without consideration.
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Rules regarding Consideration: The following are the rules that govern consideration:
i)
Consideration must move at the desire of the promisor.
ii)
Consideration may move from the promisee or any other person, i.e., a stranger
to consideration may maintain a suit.
iii)
A stranger to the contract cannot maintain a suit.
iv)
Consideration need not be adequate but it must be sufficient to satisfy the
promisor.
v)
Consideration must be real and competent – it must have some economic value.
vi)
Consideration must be legal.
vii)
Consideration must not be in form of performance of a duty owed. Performance
of a duty already owed under law is not a valid consideration. In the case of
Collins v Godefroy (1831) the Plaintiff was summoned to give evidence and
alleged that the Defendant promised to reimburse her expenses. The court held
that she could not enforce this promise as she was required by law to attend and
give evidence and had not therefore provided any consideration for the promise.
viii) If a person has a duty to do a particular act, an agreement to do that act is not
sufficient consideration. The performance of an act already required under a
prior contract cannot be a good consideration for a later promise. In the case of
Stilk v Myrick (1809) Sailors jumped ship. The Captain promised to divide their
wages among the remaining crew if they agreed to work the ship home
shorthanded. The Captain reneged on his promise. The sailors sued. The court
held that they had not provided any consideration and could not enforce the
contract.
J: What is contractual legal capacity and what is its importance in the law of contract?
Parties involved in a contract must have contractual legal capacity that is, they must be legally
competent to transact. The competency of the parties is of paramount importance in that if
parties are competent it denotes that they are able to understand the consequences of a contract
and they have authority to contract. The general rule is that every person has capacity to
contract.
However there are some exceptions. There are some factors that determine contractual legal
capacity; age, mental status, intoxication, bankruptcy/liquidation, status of a body corporate.
Those binding a body corporate must have the appropriate scope of authority to bind the
company or organization; this is, in terms of his position in the company and the objects of the
company to avoid the doctrine of ultra vires. For a person to avoid a contract on the ground of
their incapacity, they must also show that they lacked capacity to enter into a contract and that
the other party knew or ought to have known their incapacity. Where a party pleads lack of
contractual capacity the contract may be illegal, void, voidable, unenforceable or valid.
Void Contract: A party who has been adjudged mentally incompetent by a court of law prior to
entering into a contract and who has a court-appointed guardian cannot enter into a legally
binding contract.
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Voidable Contract: A party who has not been adjudged mentally incompetent by a court of law
may, nonetheless, avoid a contract if, at the time of contracting, he did not know he was
entering into a contract or lacked the mental capacity to understand its nature, purpose, and
consequences. If a party was so intoxicated at the time he entered into a contract as to either be
cognitively or volitionally incompetent and the other party knew or had reason to know of her
condition, then he may avoid the contract, even if his intoxication was purely voluntary.
Bankruptcy/liquidation also denies a party capacity to contract and creates offences against
such a person who transacts while in that state.
Liability for Necessaries: A minor who enters into a contract to purchase food, shelter,
clothing, medical attention, or other goods or services necessary to maintain her well-being
will generally be liable for their reasonable value even if she disaffirms the contract. Contracts
made by mentally incompetent parties may be void, voidable, or valid, depending on the
circumstances. Only the incompetent party has the option of disaffirming his contractual
obligations; any competent party to the contract remains bound unless released by the
incompetent party’s disaffirmance. An otherwise incompetent party who understood the nature,
purpose, and consequences of entering into the contract is bound by it. The law presumes
competency, so the party seeking to void or avoid the contract bears the burden of proving
incompetence.
A contract is voidable at the option of a party who, as a result of mental disorder or
intoxication, is unable to understand the nature of the contract being made - provided that the
other party knew, or ought to have known, of that person's disability. The party seeking to
withdraw from the contract has the onus of proving;
i)
That they were suffering from such a disability and
ii)
That the other party was, or ought to have been aware of it.
Ratification of a voidable contract: Such a contract can be ratified or disaffirmed. Ratification
is an act of accepting and giving legal force to an obligation that previously was voidable.
Ratification may be either express or implied. In express Ratification occurs when a person
lacking contractual capacity at the time he formed a contract may, upon gaining or regaining
the necessary capacity to do so, expressly ratifies the contract by stating, orally or in writing
that he intends to be bound by the contract. Implied Ratification occurs when a person lacking
contractual capacity at the time he formed a contract may, upon gaining or regaining the
necessary capacity to do so, impliedly ratifies the contract.
Justification for limiting companies’ contractual capacity: The primary justification for
limiting the capacity of non-natural persons such as companies and public authorities is the
protection of those on whose behalf these bodies act: shareholders and lenders in the case of
companies, and taxpayers in the case of public authorities. However, the law must balance their
interests with those who deal in good faith with the company or public authority.
A company is a legal person separate and distinct from its shareholders. Its capacity to act is
limited by the objects for which the company is set up, which are contained in the company’s
memorandum of association. If the company acts outside its objects, such acts are ultra vires
(beyond its powers or capacity). Contracts which are ultra vires the company are void
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(Ashbury Railway Carriage and Iron Co v Riche (1875). The ultra vires rule is not only a
logical corollary of statutory incorporation, but is also necessary to protect the shareholders
and lenders who rely on the objects clause to limit ‘the purposes to which their money can be
applied’ (Sinclair v Brougham (1918) at 520).
K: What is the importance of intention to create a binding legal relation?
Not all agreements create legal relationship enforceable in court. To determine enforceability
of an agreement one must look at the intention of the parties and ask whether they intended to
be legally bound. This helps in separating domestic and social agreements from commercial
agreement. Commercial agreements are presumed to be binding unlike domestic and social
contracts.
The question of intention is judged objectively. The court will ask whether, objectively
speaking, it appears that the parties had an intention for the agreement to be legally binding.
The following are some of the common domestic and social contracts that are presumed not to
have intended to create a binding legal relationship:
i)
Agreements between parents and children – the case of Jones vs Padavatton
(1969) Jones offered to pay her daughter, Padavatton, to go to law school if she
would return from the US to live in England. The daughter returned and lived in
a house purchased by Jones. She also received maintenance from the rent
Padavatton collected from tenants. Jones attempted to back out of the agreement
and repossess the house. The Court held that there was no binding contract.
Although there would have been a contract if it was not the domestic parties
related, there was insufficient evidence to rebut the presumption against
domestic arrangements.
ii)
Agreements between spouses – see the case of Balfour vs Balfour (1919)2 KB
571, the parties were husband and wife. The husband went abroad and the wife
claimed that he had promised to pay her some money per month. Atkin LJ
explained the presumption by giving the example of an offer of hospitality and
saying that ordinary, everyday agreements like that should not be governed by
the law. The presumption was rebutted is Merritt v Merritt [1970] 1 WLR 1211,
where the Court of Appeal held that an agreement between husband and wife
who had separated, was enforceable. The court distinguished Balfour on the
basis that when spouses break up they want a clean split and so when they make
agreements as to division of assets they intend for these to be enforceable. In
Parker v Clark [1960] 1 WLR 286, the claimants agreed to give up their home
and move in with an elderly couple. The couples had agreed to share expenses
as long as the elderly couple left the house in their will to the claimants. The
relationship broke down and the claimants left the house and started
proceedings. The court held that there had been an intention to create legal
arrangements and relied partly on how much the claimants had given up (they
sold their house) in reliance on the agreement. The case may have been decided
differently if the house had not been sold.
iii)
Social invitations – cancelled or dishonoured social invitations create no cause
of action. However the presumption can be rebutted in some situations where a
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iv)
party is able to prove reliance on a promise. A case in point is that of Simpkins
v Pays [1995] 1 WLR 975, where the Plaintiff lived with the Defendant as a
lodger. Each week the Plaintiff, Defendant and Defendant's granddaughter enter
a newspaper competition. The Plaintiff filled out the coupon in the Defendant’s
name. They shared the postage fee. One week they won some money and the
Defendant refused to pay the Plaintiff a one third share alleging the agreement
was not intended to be legal. The court held in as much as the arrangement was
social and informal parties intended to be bound.
Gentleman agreements whether social or commercial are likely not to create
legal relationship.
L: Vitiating (nullifying) factors
“The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of
his own property as he chooses. However improvident, unreasonable, or unjust such bargains or
dispositions may be, they are binding on every party to them unless he can prove affirmatively the
existence of one of the recognized invalidating circumstances, such as fraud or undue influence.”
(Sir John Salmond in Brusewitz v Brown [1923] NZLR 1106 at page 1109)
Non est factum, that is, the general rule is that parties are bound by their signature to a
document; the court is not interested if the person has read and/or understood the document.
This is because in contractual relationships there is consensus ad idem (meeting of minds).A
contract is created when there is an agreement between the parties. However, parties must
freely and voluntarily agree for a genuine “meeting of mind” to occur. A party’s genuine
consent is an essential element of a legally binding contract.
There are a number of events surrounding the formation of a contract which can make a court
nullify a contract at the behest of one of the parties. These events are connected with the
genuineness of the consent. Those events that affect the genuineness of the consent to enter
into a contract are called “vitiating factors” of a contract. For example, during contractual
negotiations, there may have been; undue influence, mistake, misrepresentation, duress, or
unconscionable conduct.
Each of these factors or events may mean that consent was not freely given by one of the
parties and that party may therefore be able to avoid their contractual obligations. If one party
misrepresents what they are offering or what they will exchange in the performance of the
contract, the contact is invalid. If the contract were to be entered into under duress by
threatening either physical or economic harm would also constitute a reason for invalidating
the contract. The “discovery” of these vitiating factors by one or more of the parties to a
contract, may in certain circumstances enable the court to declare the contract to be void ab
initio or voidable.
i)
Duress: Duress is a common law concept which, if established, renders the
contract voidable. The scope of duress at common law was originally very
narrow and confined to actual or threatened unlawful physical violence or
constraint of the other party. Duress is defined as “actual or threatened violence
to an individual to obtain a contractual promise”. The basis of duress is an
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unlawful threat amounting to “coercion of the will”. If it is established that
consent is obtained through duress then the weaker party may choose to avoid
the agreement. In the case of Barton v Armstrong, A threatened to have B
killed if he did not buy A's shares in a company of which B was the managing
director. The majority of the Privy Council held that the agreement was vitiated
by duress.
ii)
Undue influence: Undue influence exists where there is an inequality of power
between the contracting parties which results in the weaker party entering into a
contract with the dominant party. Where the weaker party cannot be said to
have entered into the contract voluntarily because of the influence of the
dominant party, the influence is said to be 'undue' and the court may set the
contract aside. It is an equitable concept. The English equity courts sought to
protect individuals, affected with a "weakness" that fell short of total incapacity,
against improper persuasion by others in positions of authority, control, trust,
familial relation, or the like, who had the means and opportunity to exercise
improper persuasion.
The narrow scope of the common law doctrine of duress led to the development,
in equity, of the doctrine of undue influence. The doctrine applies to certain
situations where improper pressure (not amounting to duress at common law)
was brought to bear on a party to enter a contract. It is evidenced by the
presence of elements of “some unfair and improper conduct, some coercion
from outside, some overreaching, some form of cheating and generally, though
not always, some personal advantage gained”. It is common in relationships
between a lawyer and his client, a doctor and her patient, a student and her
teacher, a church member and her pastor, a parent/guardian and his child, an
employer and an employee etc.
iii)
Unconscionable conduct/inequality in bargaining power: Unconscionable
conduct or inequality in bargaining power also deals with transactions between
dominant and weaker parties. Inequality in bargaining power encompasses the
idea that there are situations in which the bargaining powers possessed by the
individual parties are not only unequal but have directly led to an unfair
outcome. Bargaining power can be influenced by illiteracy, poverty, or
ignorance of the relevant facts/knowledge. You are not expected to take
advantage of any advantage you have, no matter how or how innocently your
advantage was brought about. It overlaps with duress and undue influence. The
deal becomes “a bad deal not brought about by any determinable bad conduct,
but rather bad only because of its intrinsic badness”.
In Fry v Lane (1888) 40 Ch D 312, it was held that where a purchase is made
from a poor and ignorant person at a considerable undervalue, the vendor
having had no independent advice, the court has an equitable jurisdiction to set
the contract aside. In Creswell v Potter [1978] 1 WLR 225 the doctrine was
applied to a post office telephone operator, who, being a member of the ‘lower
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income group' and ‘less highly educated' was held to be the modern equivalent
of poor and ignorant.
iv)
Mistake: Here, the parties, although apparently in agreement, have entered into
the contract on the basis of a false and fundamental assumption. A common
mistake occurs when both parties make the same mistake e.g. where they
contract without the knowledge that the subject matter of the agreement does
not exist or has ceased to exist. In the case of Couturier v Hastie (1856), a
cargo of corn, en route to London had to be sold at a port of refuge in Tunis as it
had begun to ferment. Unaware of this, the parties agreed a sale of the corn in
London. It was held that no contract of sale had come into being as the subject
matter effectively did not exist.
A mistake does not necessarily make a contract void at law. In the absence of a
warranty or misrepresentation the buyer has no remedy since a mistake as to
quality will not make a contract void where;
a) A man bought a horse mistakenly believed to be sound
b) If he bought a dwelling house mistakenly believed to be habitable
c) If he bought a garage on a road which was about to be starved of all
traffic by the construction of a by-pass.
d) A buys a picture from B; both believe it to be the work of an old
master and a high price is paid. It turns out to be a modern copy.
Where a mistake has occurred which shows that the parties have agreed to
different things, or where there are such different beliefs that the contract was
never properly understood, the contract may be declared void. Mistake is a
complex area of contract law and one where judges have traditionally been
pretty unsympathetic to someone who argues that he or she has made a terrible
mistake. As a general rule, being mistaken about some aspect of a contract will
not provide a party with a right to escape contractual obligations - even if that
mistake is fundamental.
v)
Misrepresentation: This is the giving of false information by one party to the
other before the contract is made, which induces them to make the contract. In
law misrepresentation can be fraudulent, negligent or wholly innocent.
Fraudulent misrepresentation was defined by Lord Herschel in Derry v Peek
(1889) as a false statement that is made knowingly, or without belief in its truth,
or recklessly, careless as to whether it be true of false. In negligent
misrepresentation liability depends on a duty of care arising from a “special
relationship” between the parties. The special relationship will only arise where
the maker of the statement possesses knowledge or skill relevant to the subject
matter of the contract and can reasonably foresee that the other party will rely
on the statement. Innocent misrepresentation refers to a statement made by a
person who has reasonable grounds for believing in its truth. Such a party is not
liable for damages.
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Once misrepresentation has occurred, the injured party has the following
remedies;
a) Rescission,
b) Damages for misrepresentation,
c) Damages in lieu of rescission,
Rescission means setting aside the contract. This may be done by the injured
party applying to the court for an order rescinding the contract, or the injured
party may rescind by notifying the other party or by any other act indicating
repudiation of liability, e.g. notifying the police if it is a fraudulent
misrepresentation. Rescission is available whether the misrepresentation is
fraudulent, negligent or innocent. The effect of rescission is to terminate the
contract “ab initio” and the innocent party is indemnified.
M: Effects of illegality in a contract
An illegal contract (one that is contrary to statute or to public policy) is, generally, void; and,
therefore, unenforceable on its face. In most cases, both parties to a void contract are
considered to be equally at fault (in pari delicto), and therefore cannot enforce the contract
against the other party. However there are some exceptions:
i)
Justifiable Ignorance: When one of the parties to an illegal contract has no
knowledge or any reason to know that the contract is illegal, that party will be
entitled to be restored to its pre-contractual situation.
ii)
Protected Classes: When a statute protects a class of people, a member of that
class may enforce an otherwise illegal contract, even though the other party
cannot.
iii)
Withdrawal from an Illegal Agreement: If a party withdraws from an agreement
before any illegality occurs, he may recover its value.
iv)
Fraud, Duress, or Undue Influence: A party induced to enter an illegal contract
by fraud, duress, or undue influence may either enforce the contract or recover
its value to him.
N: Classification of contracts
Contracts can be classified in the following ways;
i)
Express, implies and written contracts: An express contract is the one which the
parties specifically agree about the nature or terms of their relationship. An implied
contract is the one where the conduct of parties and surrounding circumstances
make this contact e.g boarding a matatu. Some contracts must be in writing and
they include; Contract of guarantee, Sale of goods above Kshs.200, Sale of land,
Hire purchase, Employment contracts for more than one month, Money lending
contracts. The memorandum or note prepared must contain the following
information:
a) The names of the parties or sufficient description of them
b) The subject matter of the contract with sufficient clarity
c) The signature of the party to be charged or his agent
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d) The consideration must be shown except in the case of the contract of
guarantee
e) Memorandum in writing may consist of more than one document provided
they could be interrelated expressly or by implication.
ii)
Valid, Voidable, Void, illegal and unenforceable contracts: A valid contracts is
enforceable by the law and therefore all the essentials are present. A void contract is
not binding and not enforceable by law. It has no legal effect e.g due to mistake. A
voidable contract is the one that is enforceable at the option of one party. Such a
contract mainly occurs when the contract of the other party is obtained by undue
influence or fraud. The contract is enforceable at the option of the aggrieved party.
Illegal contacts are the ones prohibited by the law. Where both parties are guilty of
illegality, it is said to be “in pari Delicto” (a doctrine that bars parties who have
participated in wrongdoing from recovering damages for loss resulting from the
wrongdoing). All illegal contracts are void. The reverse is not true. All collateral
and incidental agreement to an illegal contract is illegal provided the third party has
knowledge of the illegal agreement. Unenforceable contract is valid but cannot be
enforced. Therefore none of the parties can sue or be sued, for example sale of
goods above Kshs. 200 without a receipt
iii)
Executed, unexecuted, unilateral and bilateral contracts: Executed contracts are
where both parties have completely performed their share of obligations.
Unexecuted (executory) contracts are where both parties are yet to perform their
share of obligations. A unilateral contact is the one which only one party is bound
by the contract, e.g an offer for a reward e.g. John promises to pay Ksh.5000/= to
Ben if Ben walks from Kisumu to Nairobi. This is a unilateral contract because the
promisee has made no counter promise to perform. A contract only comes into
being when the promisee completes the required act. Bilateral contract is the one in
which both parties are bound e.g sale of goods contract.
iv)
Simple and Specialty Contracts: Simple contract is a contract which is not under
deed. It is also called parole and does not need to be in any form thus it can be in
writing, oral or partly oral and partly in writing. Contract under deed which is
otherwise known as a specialty contract or a contract under seal is the only formal
contract. It must be in writing, signed and delivered. Sealing and delivering are
mere formalities. Delivery may either be actual or constructive. An actual delivery
is the mere handing over of the sealed document while constructive delivery is more
formal. Here the party delivered the deed touches the deed with his fingers saying,
“I deliver to you as my act and deed”. Delivery of the document at a future date is
called ‘escrow”. Under the English law the following contracts must be entered
under deed;
a) Gratuitous promise, i.e. promises not supported by consideration
b) Conveyance of land and all leases for more than three years
c) Transfer of British ships or shares therein
d) Conditional bills of sale
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v)
Quasi or contracts record: A quasi contract is a contract that exists by order of a
court, not by agreement of the parties. Courts create quasi contracts to avoid the
unjust enrichment of a party in a dispute over payment for a good or service. They
are based on the equitable principle of restitution i.e. no person shall be allowed to
benefit himself or retain benefits at the expense of another. Contracts of record are
not true contracts because consent of both parties is absent. They are further
classified into two:
a) Judgment of the court- The previous right under a contract is merged in the
judgment. This judgment when entered on the court constitutes a contract of
record between the parties to the dispute, e.g A claims shs.1000 from B for
the goods delivered to B by him but B thinks that the goods are not more
than shs.600 in value. After hearing the case the court delivers its judgment
that B must pay Shs.800 to A. Whether B likes it or not he is under legal
obligation to pay this amount.
b) Recognizance- In criminal cases the accused may on his conviction be
bound to be of good behaviour and to keep peace.
vi)
Contracts of utmost good faith (Uberrimae Fidei): These are agreements in which
one party is under a fundamental duty to disclose all material facts and surrounding
circumstances that could influence the decision of the other party to enter the
agreement. Non-disclosure or a partial-disclosure makes such agreements voidable.
Example of such contacts includes;
a) Insurance agreements
b) Family settlements
c) Sale of land
d) Partnership.
e) Trusts and other agreements creating fiduciary relationships
vii)
Standard form contract or boilerplate/adhesion contract: A contract between two
parties where the terms and conditions of the contract are set by one of the parties,
and the other party is placed in a “take it or leave it” position with little or no ability
to negotiate terms more favorable to it. Usually the parties are not equal meaning
one party has a higher bargaining power. They quicken transactions in that they
follow a certain template. Examples include agreements for provision of utility
services such as, telephone, power, and water services.
viii)
Unconscionable contracts: Contracts which are unjust or unduly one-sided in favor
of the party who has the superior bargaining power. The adjective unconscionable
implies an affront to fairness and decency. An unconscionable contract is one that
no mentally competent person would accept and that no fair and honest person
would enter into. Courts find that unconscionable contracts usually result from the
exploitation of consumers who are poorly educated, impoverished, and unable to
shop around for the best price available in the competitive marketplace.
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O: Common doctrines/concepts/principles in the law of contract
There are a number doctrines, concepts, principles and rules that govern the law of contract.
Most of these doctrines, concepts, principles and rules are grounded in the doctrine of equity in
that they seek to do justice to the parties involved in a contract. They include the following:
i)
Privity of contract: The concept of privity provides that only a party to a contract
may sue or be sued under it. The concept has two general rules;
a) A third party cannot be made the subject of a burden imposed by the
contract.
b) A third party cannot enforce a contract that has the objective of conferring a
benefit to him.
Under the legal doctrine of privity of contract, only the parties to a contract owe
duties to one another and realize any benefits under the contract. The contracting
parties also have the ability to sue one another for breach of contract. The concept
has two parts. First, only a party to a contract may enforce its terms. Second, a
contract cannot impose obligations on a person who is not a party to the contract.
While the contracting parties have rights and responsibilities, third parties typically
do not enjoy any rights or have any obligations because they are not in privity of
contract. The basic rule is no one can sue or be sued on a contract to which he is not
a party. However there are some exceptions;
a) Statutory exceptions e.g, traffic accident claims where an injured passenger
may recover compensation from an insurance company once he has
obtained judgment against the insured person (that is against the
owner/driver of the m/v).
b) Assignment of rights in a contract
c) Collateral contracts e.g guarantees. A guarantee is an undertaking to answer
for another’s default. It is an undertaking to meet money liability of the
principal debtor arising from his default. The guarantor is simply saying “ if
you lend Peter Ksh.1,000,000/= I will repay you if he fails to repay.
d) Agency law – agency relationship provides an exception to the doctrine of
privity in that an agent may contract on behalf of his principal with a third
party and form a binding contract between the principal and third party.
e) Property law where restrictive covenants may, if certain conditions are
satisfied, run with the land and bind purchasers of it to observe the
covenants for the benefit of adjoining owners, for example, a right of way,
light, water, grazing, or any other kind of use or occupation.
f) Trusts – where a party clearly indicates that he has entered into a contract as
a trustee for a third party, the third party can enforce the contract.
g) Negotiable instruments – the holder of a negotiable instrument for value and
in good faith can enforce payment even though he was not a party in the
original transaction.
ii)
Part performance: The doctrine allows the court to allow a contract to be proved by
oral evidence when the following conditions are met;
a) The act of part performance must be capable of referring solely to the
contract sought to be enforced
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b) The act relied on should be of such magnitude that it would be fraudulent to
allow the defendant to take advantage of absence of writing
c) The contract must be itself capable of specific performance by the court e.g
sale of land
d) Inadequacy of damages as a remedy
e) Sufficiency of evidence to prove existence of a contract
iii)
Parol (oral) Evidence Rule: The general rule is that if there be a contract which has
been reduced into writing, verbal evidence is not allowed to be given of what
passed between the parties, either before the written instrument was made or during
the time that it was in the state of preparation, so as to add or subtract from or in
any manner to vary or qualify the written contract. The parol evidence rule is an
evidentiary principle that prevents external evidence that modifies or adds to a
contract from being introduced in court for determining a breach of the contract,
when that evidence occurred before or at the same time as the signing of the
contract. In the case of Goss v Lord Nugent (1833) it was held “Verbal evidence is
not allowed to be given...so as to add to or subtract from, or in any manner to vary
or qualify the written contract.” While the case of Rabin v Garson Berger
Association Ltd [1986] stated that the reasoning behind this is straightforward.
Those who have bound themselves by a contract in writing should be bound by the
written terms alone. There are some exceptions to the parol evidence rule: to show
later agreements between the parties, to help interpret the terms in the contract, or to
show fraud, mistake, duress, or lack of consideration.
iv)
Promissory Estoppel: Promissory estoppel is an equitable principle of contract law
that can cause a promise to be enforced even when consideration is lacking. If a
person makes a promise to another person, and the second person does something
or gives something up while relying on the promise, the person making the promise
must perform. For instance, if Steve tells Sally that she can have his computer if she
enrolls in college, and she enrolls in college, relying on the promise that he will
give her the computer, Steve must give her the computer. The doctrine operates as a
defence to a cause of action and not to found a cause of action in itself. It is a shield
not a sword. Being an equitable principle those who seek its protection must have
behaved equitably themselves. In the case of D & C Builders v Rees [1966]
Plaintiffs were owed £480 for building works. The defendant offered £300 which
was accepted. The defendant had delayed in payment and had indicated that it was
£300 or nothing, knowing that the builders were in serious financial difficulties.
The plaintiffs sued for the balance. It was held that the plaintiffs were entitled to the
full amount. The defendants had not behaved equitably. For the doctrine to apply
there must be a pre-existing legal relationship, a promise, a reliance on the promise,
and loss or damage has been suffered.
v)
Doctrines of frustration: Contracts are entered into to be performed. However a
contract that seemed sensible and practical would due to some circumstances
become impractical or impossible to perform. In this situation there is a need to
determine whether parties are discharged from their contractual obligations or not.
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This question is addressed by the common law doctrine of frustration and the
French doctrine of force majeure. A contract is said to be frustrated when a
supervening event occurs which so fundamentally affects the performance of the
contract that in the eyes of the law the contract comes to an end and both parties are
discharged from any future to perform. At common law the effect of frustration is to
terminate the contract and discharge the parties from liability for future
performance. A party in a frustrated contract could recover money paid if he could
prove total failure of consideration. A contract may be frustrated by;
a) Accidental destruction of the subject matter
b) Supervening physical disability in contracts of personal service
c) Supervening illegality
d) Supervening impossibility, for example, through government interferences
e) Inability to procure necessary statutory consents or approvals, for example,
a consent from the land control board for a sale of land transaction
f) A fundamental change in the basis of the contract.
In the case of Taylor v Caldwell (1863) the defendant agreed to hire to the plaintiff
a music hall for the purposes of entertainment. Before the day of the performance,
due to the default of neither party, the music hall was destroyed by fire. The
plaintiff sued the defendant for breach of contract. The court held the defendant was
not liable, the contract being frustrated by the fire. In the case of Krell v Henry
(1903) the Defendant agreed to hire a flat from the Plaintiff for June 26th and 27th,
1902. The contract contained no reference to the coronation processions, but they
were to take place on those days and were to pass the flat. The processions were
cancelled due to the illness of Edward VII and Plaintiff sued to recover rent not
already paid. The court dismissed the case on the ground that the processions and
the location of the flat were the foundation of the agreement and the contract was
frustrated.
vi)
Doctrine of Force Majeure: The doctrine of frustration can be compared and
contrasted with the doctrine of force majeure (acts of God) which had its origin in
French law. In its simplest characteristics, force majeure refers to those situations
outside the control of parties and which prevent them from performing the
obligations assumed under the contract. Under French law, the plea of force
majeure will avail a party seeking to be excused from performance if he can show
that the supervening event was unforeseeable, insurmountable, and external and
impossibility of performance persists. The traditional approach of drafting a force
majeure clause is to list specific events that may be triggered by natural, human or
other factors. These events may include acts of God, insurrection, riots, war, flood,
thunderstorms, earthquakes, explosion, terrorism etc.
Whilst frustration operates as a matter of law to bring the contract to an end,
whether or not the parties wish it, under force majeure impediment excuses a party
from non-performance of a particular obligation without affecting the continuance
of the contract. It is for the party complaining of non-performance to seek rescission
of the contract and for the court to grant rescission or to adjust the rights and
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obligations of the parties to take into account the effects of the impediments. A
party pleading force majeure must give notice as soon as is practicable
Whilst the doctrine of frustration is implied into every contract by operation of law,
force majeure is a matter of contract amongst parties, that is, parties have to provide
for it in their contract. Accordingly, the events constituting force majeure, its
impact and the conditions in which it may be invoked stem entirely from the terms
of the contract. If a contract is frustrated it automatically comes to an end. If it is
not, it must be performed however burdensome it is since in common law there is
no room for renegotiation unless it is provided for in the contract.
vii)
Quantum meruit: The phrase “quantum meruit” means “as much as merited” or “as
much as earned”. The general rule of law is that unless a person has performed his
obligations in full, he cannot claim performance from the other. But in certain
cases, when a person has done some work under a contract, and the other party
repudiated the contract, or some event happens which makes the further
performance of the contract impossible, then the party who has performed the work
can claim remuneration for the work he has already done. The right to claim
quantum meruit does not arise out of the contract as the right to damages does; it is
a claim on the quasi-contractual obligation which the law implies in the
circumstances A claim for quantum meruit arises in the following circumstances
a) When the contract is discovered to be unenforceable
b) When one party abandons or refuses to perform the contract
c) When a contract is divisible
d) When an indivisible contract is completely performed but badly.
viii)
Remoteness of damage: Not all losses suffered following a breach of contract are
recoverable. Only that loss which is reasonably foreseeable is recoverable. If a loss
is not foreseeable it is said to be too remote. Therefore, a loss is too remote if it is
not part of a type of loss that was within the reasonable contemplation of the parties
at the time of contracting. A loss is within the reasonable contemplation of the
parties when it is reasonable foreseeable. Foreseeability is assessed by the test of a
“reasonable person” that is, with regard to that information which one in a position
of the promisor could be expected to have in addition to that information which was
revealed by the promisee. This was the finding in the case of Hadley vs Baxendale
which set the following rule; “Where two parties have made a contract which one
of them has broken, the damages which the other party ought to receive in respect
of such breach of contract should be such as may 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 reasonably be supposed to have
been in the contemplation of both parties, at the time they made the contract, as the
probable result of the breach of it. Now, if the special circumstances under which
the contract was actually made where communicated by the plaintiffs to the
defendants, and thus known to both parties, the damages resulting from the breach
of such a contract, which they would reasonably contemplate, would be the amount
of injury which would ordinarily follow from a breach of contract under these
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special circumstances so known and communicated. But, on the other hand, if these
special circumstances were wholly unknown to the party breaking the contract, he,
at the most, could only be supposed to have had in his contemplation the amount of
injury which would arise generally, and in the great multitude of cases not affected
by any special circumstances, from such a breach of contract. For such loss would
neither have flowed naturally from the breach of this contract in the great multitude
of such cases occurring under ordinary circumstances, nor were the special
circumstances, which, perhaps, would have made it a reasonable and natural
consequence of such breach of contract, communicated to or known by the
defendants”.
ix)
Mitigation of damages: In as much as a party is entitled to be paid damages for
breach of a contract, he has a duty to ensure that he does not suffer heavy loss and
damage simply because he stands to recover the same from the other party. The
doctrine of mitigation of damages holds that when an individual has suffered
injuries or losses due to the deliberate or accidental actions of another individual,
the former must take reasonable action to prevent any additional losses or injuries.
It helps in reducing the amount of loss the innocent party will suffer and the
damages payable by the other party thus preventing a party from taking advantage
of the other. This safeguard prevents any unfair liability the defendant may have to
shoulder due to his actions. This doctrine of mitigation of damages is also referred
to legally as minimization of damages or doctrine of avoidable consequences. It
must always be remembered that a party is not allowed to enrich himself at the
expense of the other. Damages payable are assessed in such a manner to ensure it is
fair and just. “... you should as nearly as possible get at that sum of money which
will put the party who has been injured, or who has suffered, in the same position
as he would have been in if he had not sustained the wrong for which he is now
getting his compensation or reparation.” Livingstone v Rawyards Coal Co (1880)
x)
Assignment of contractual rights and liabilities: Assignment means transfer.
When a party to a contract transfers his right, title and interest in the contract to
another person or other persons, he is said to assign the contract. Assignment of a
contract can take place by operation of law or by an act of the parties. The instances
of assignment by operation of law are the assignment of interest by insolvency or
death of the party to the contract. In the case of insolvency, the Official Receiver or
Assignee acquires the interest in the contract and in the case of death, the legal
representative. The rules regarding assignment of contracts are;
a) The obligations or liabilities under a contract cannot be assigned. Thus, if
A owes B Ksh.100, 000/= he cannot transfer his obligation to pay to C and
compel B to collect his money from C. But, if the promisee agrees to such
assignment, he will be bound by it. In such a case, a new contract is
substituted for an old one. This is called ‘novation’. Thus, in the above
example, if B agrees to accept payment from C, the assignment will be valid
and A shall stand discharged of his obligation to pay.
b) Rights and benefits under a contract may be assigned. For example, where
A owes B Ksh.100, 000/=, B may assign his right to C. But, even a right or
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benefit under a contract cannot be assigned if it involves personal skill,
ability, credit or other personal qualifications. For example, a contract to
marry cannot be assigned.
P: Remedies for breach of contract
Every right must have a remedy for it to be a right. Law provides remedies where rights are
violated. Contracts are entered into to be performed. Any shortfall in performance however
minor is a breach of contract entitling the innocent party to some redress. The law of
contract provides three main avenues of redress; self-help, court action, and arbitration.
i)
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Self-help: Self-help means use of lawful means without involving the court or
arbitration processes. It is a remedy equated with the philosophy of “God helps
those who help themselves”. This remedy is advantageous in that it is fast and
cheap since it avoids lengthy and expensive legal and procedural obstacles.
However acts of self-help must be lawful acts to avoid any breach of law. Selfhelp remedy can be achieved through;
Refusal of any further performance while the other party remains in default,
Forfeiture of any security taken from the guilty party,
Set-off,
Lien,
Stoppage in transit,
Rescission,
Resale,
Repossession or seizure of his goods (reception),
Extra curial enforcement of security,
Termination of the contract for breach
ii)
Judicial (court) remedies: Court or judicial remedies are obtained through civil
litigation. The remedies for breach of contract can be under the statute, common
law and equity. The common law favours monetary approach for settlement of
disputes. The general rule in common law is a party has the option of
performing the contract or paying damages (compensation) to the other party.
The purpose of damages is to award the claimant the value of his defeated
contractual expectation and thus compensate him for the expenses caused by the
breach and also the gains prevented by it, that is, the loss of his bargain. This
means common law grants a party an option of buying himself out of a contract.
In making the award of damages the court considers two rules; remoteness of
damage (loss) and measure of damages. The rule governing remoteness of loss
in contract was established in Hadley v Baxendale. The court established the
principle that where one party is in breach of contract, the other should receive
damages which can fairly and reasonably be considered to arise naturally from
the breach of contract itself (“in the normal course of things”), or which may
reasonably be assumed to have been within the contemplation of the parties at
the time they made the contract as being the probable result of a breach.
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Courts employed two principles while determining the quantum of damages
payable. Firstly, the amount payable is to compensate the Plaintiff for the loss
suffered and not enrich him or punish the Defendant. Secondly, damages are
compensatory and not restitutionary. These two principles clearly demonstrate
that parties need to mitigate their damages.
Damages take many forms. They can be ordinary (general) damages, special
damages, exemplary damages, nominal damages, liquidated damages, or
punitive damages.
a.
b.
Ø
Ø
Ø
Ø
Ø
Ø
However equity goes further than common law by granting remedies like
specific performance of the contract, injunctions to restrain an actual or
threatened breach, orders for an account, and appointment of a receiver among
others.
Specific performance – granted damages are insufficient, sale of rare goods. Not
available in personal service contracts (employment), contracts requiring extensive
supervision, or against an infant since it cannot be enforced.
Injunction – order restraining the doing, continuance, or repetition of a wrongful act.
Injunctions include;
Mandatory injunction – requires taking of an action to do or undo a particular act.
Prohibitory injunction – restrains/prevents the action
Mareva injunction – orders not to remove certain assets from the court’s jurisdiction to
avoid defeat of justice
Anton pillar injunction – authorizes inspection, photographing, custody or removal of
documents or property.
Temporary injunction – pending final determination of the case
Permanent injunction – determines the suit permanently
iii). Arbitration: Litigation can be very expensive and time consuming. It also ends up
destroying business relationships. Business minded persons therefore would prefer a more
cost effective method of dispute resolution. Arbitration is such method. Arbitration is the
process of bringing a business dispute before a disinterested third party (arbitrator) for
resolution. The arbitrator hears the evidence brought by both sides and makes a decision
(an award) which is usually binding to the parties. The award can take the form of payment
of refund of money paid, damages, specific performance, injunction orders, etc.
Q: Discharge of contract
A contract may be discharged in the following ways;
i)
By performance or tender – since contracts are entered into to be performed,
once performance is done parties are discharged from their respective
contractual obligations.
ii)
By mutual consent – parties agree to discharge one another from their
contractual obligations.
iii)
By subsequent impossibility - Impossibility in a contract (frustration and force
majeure) may either be inherent in the transaction or it may be introduced later
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iv)
v)
vi)
by the change of certain circumstances material to the contract. It may be due
to; destruction of the subject matter, death of the parties, subsequent illegality,
declaration of war or non-existence/non-occurrence of a particular state of
affairs. This position is based on the maxims; “lexicon cogit ad impossibilia”
(the law does not recognize what is impossible) and “impossibilium mulla
obligato est” (what is impossible does not create an obligation)
By operation of law – this may occur due to; death, insolvency, merger or
unauthorized alteration by one party.
By breach – a breach which leads the innocent party to terminate the contract
and seek appropriate remedies for breach of contract. Termination unlike
rescission operates prospectively; it does not affect the accrued rights and
liabilities of the parties.
By rescission - which allows a party to cancel a contract in for example,
situations where a contract is entered into through misrepresentation whether
fraudulent, negligent or innocent. The whole contract is rescinded and parties
are returned to their original positions. The innocent party must give a notice
followed by a court action for a declaration of rescission. This protects the
innocent party from the being followed for breach of contract. The effect of
rescission is to cancel the contract from the beginning and restitution is done by
both parties. The right to rescind is lost if; restitution is impossible; if the
innocent party affirms the contract; delay (lapse of time) leading to presumption
of affirmation
R: The law of contract and torts
“There must be, and is, some general conception of relations giving rise to a duty of care, of which the
particular cases found in the books are but instances. ... The rule that you are to love your neighbour
becomes in law you must not injure your neighbour; and the lawyer's question: Who is my neighbour?,
receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can
reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The
answer seems to be — persons who are so closely and directly affected by my act that I ought reasonably
to have them in contemplation as long as so affected when I am directing my mind to the acts or
omissions that are called in question”.
Lord Atkin in the case of Donoghue vs Stevenson (1932)
Whereas the law of contract is all about lawful deals entered into by willing and competent
parties, the law of torts is about duty of care owed by a party to another breach of which leads
to liability. This means contractual obligations are voluntarily assumed, in that they derive
from agreements which individuals are free to make or refrain from making but tortious
obligations arise independently of the will of those involved, and derive from standards of
behaviour imposed by law.
The word ‘tort’ is derived from the Latin tortus, meaning ‘twisted’. It came to mean ‘wrong’. It
is a legal wrong for which the law provides a remedy. According to Prof. Winfield tortuous
liability arises from the breach of a duty primarily fixed by law. Many duties in tort arise by
virtue of the law alone and are not fixed by the parties. The law imposes a duty in tort not to
libel people, not to trespass on their land, and so on. By contrast, the law of contract is based
notionally on agreements, the terms of which are fixed by the parties.
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As duties in tort are fixed by law, the parties may well have had no contact before the tort is
committed. The pedestrian who is injured by a negligent motorist will probably never have met
the defendant until the accident which gives rise to the legal action. The remedy for breach of
duty in tort is usually a claim for damages, though equitable remedies are also available in
appropriate cases.
The main aim of tort is said to be compensation for harm suffered as a result of the breach of a
duty fixed by law. Tort seems to place greater emphasis on wrongs of commission rather than
wrongs of omission. Another important aim of tort is to deter behaviour which is likely to
cause harm. The main aim of contract on the other hand is to support and enforce contractual
promises, and to deter breaches of contract. Contract, then, has no difficulty compensating for
wrongs of omission. The doctrine of consideration, based on mutual promises, is all important
in the law of contract, and failure by omission to keep the terms of a promise is a breach of
contract which the law will seek to redress.
The aim of tort damages is to restore the claimant, in so far as money can do so, to his or her
pre-incident position, and this purpose underlies the assessment of damages. Tort compensates
both for tangible losses and for factors which are enormously difficult to quantify, such as loss
of amenity and pain and suffering, nervous shock, and other intangible losses. Tort damages
are therefore said to be ‘un-liquidated’. The claimant is not claiming a fixed amount of
compensation. The aim of the award of damages in contract is to place the claimant in the
position he or she would have been in if the contract had been performed. Thus tort is
concerned with restoring the status quo, while contract is concerned with loss of expectation
The law of tort deals with a wide range of wrongs mainly grounded on negligence, trespass to
person and land, nuisance, and defamation. Since it is primarily based on duty of care the
claimant (plaintiff) need to show the respondent (defendant) owes the duty in order to prove
liability which is usually based on fault even though in instances of strict liability fault need
not be present. In other situations some torts are actionable per se that is, without proof of loss
e.g. trespass and libel.
The fundamental relationship between contract and tort was canvassed in the classic “snail in
the ginger beer bottle” also known as “Paisley Snail case” that is, the case of Donoghue v
Stevenson (1932). This case is very important, as it set a major precedent in the tort of
negligence that is, legal concept of duty of care. Donoghue drank a bottle of Ginger Beer
manufactured by Stevenson. The beer was bought for her by her friend. Having drunk some of
the contents of the bottle, she claimed that the remnants of a decomposing snail plopped out
into her glass. Donoghue then contracted gastroenteritis and sued Stevenson. It should be noted
that as it was Donoghue friend who had purchased the ginger beer and not Donoghue herself,
she had to rely on the tort of negligence for her suit as it would have been impossible to bring
an action for breach of contract there being no contract between Donoghue and Stevenson.
The defendant argued that he owed no duty of care to the plaintiff and she was a total stranger
to him there being no contractual relationship between the two. He clearly applied the doctrine
of privity of contract and remoteness of damage. The minority judges in that case agreed with
Stevenson that the purchaser was not a party to the contract for the manufacture and sale of the
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goods and that if relief was to be granted to such a purchaser this would be a misapplication of
sale of goods law to the field of tortious liability.
However the majority who included Lord Atkin, disagreed arguing that the fact that a contract
of sale once existed between manufacturer and retailer should be disregarded and that the
correct question to be posed should therefore be whether a duty of care existed between the
manufacturer and the consumer as one who might reasonably foreseeably have been injured by
the negligent actions of the former upon the application of which test, contractual duties owed
to other parties became irrelevant. Judge, Lord Atkin, defined the "neighbour principle” by
stating "…neighbour was anyone who is so closely and directly affected by my act, or failure to
act, that I ought reasonably to have them in my contemplation".
As a result of this case, the legal principle of Duty of Care was formed. All manufacturers of
products bear responsibility for any damage that their products cause, even if the sufferer did
not buy the product themselves. This case allows a claim to succeed even where there is no
contractual relationship between the parties. The law remains relevant to suppliers as it is not
only people they contract with that can claim against them. This means a claimant will be
entitled to damages if he establishes the existence of;
i)
The duty of care (neighbour principle),
ii)
The duty was breached,
iii)
The defendant caused the breach, and
iv)
The claimant suffered harm.
Furthermore this principle extends not only to manufactured products but also services.
Sport and recreation organizations provide services and must ensure that such services are
safe for all the participants. However the law of contract remains the easiest way to prove
existence of duty of care since the duty is clearly established in the contract by the parties
Summary of the topic
In this topic we have been able to define a contract, how it is formed, and its essential elements. Vitiating
factors of a contract are familiar to you. We have also classified contracts in different ways. Now you
know the difference between valid, voidable, void, illegal and unenforceable contracts as well as executed
and executory contracts. You have also studies the various principles and doctrines in the law of contract
and the role they play in it. Since contracts are entered into to be performed any breach will occasion loss
and damage to the innocent party and he will be entitled to those remedies that you have learnt in this
topic. Unless a contractual obligation is discharged a party is contractually liable to the other. You have
also compared and contrasted the law of contract and the law of torts and you know whereas a
contractual liability is a creature of a contract tortious liability is a creature of the law primarily grounded
on duty of care. The reasons as to why the law of contract is the foundation of business law are well within
your knowledge and as such you will comfortably proceed to study the various contractual relationships
born of the law of contract.
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1.
2.
3.
4.
5.
6.
7.
SELF ASSESSMENT QUESTIONS
Define the term contract and explain the various essential elements of a valid contract
How are contracts classified?
Explain the importance of contractual capacity in a contractual relationship
What are vitiating factors of a contract and how do they affect a contractual relationship?
List and explain five important principles/doctrines that you have learnt in your study of the law of
contract
Identify and explain the various remedies available to an innocent party in a contractual relationship
How are contractual obligations discharged?
Further reading
Kindly get appropriate materials on the law of contract and go through them to enable build a strong
understanding in this crucial topic.
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LECTURE FOUR
CONTRACTUAL RELATIONSHIPS: THE LAW OF SALE OF GOODS
4.1 Lecture Overview
Having successfully studied the foundation of business, time has now come to study the
various contractual relationships in business law. The law of sale of goods is purely grounded
in the law of contract. Sale of goods transaction is therefore a contractual relationship. You
definitely remember the classification of contract into simple and specialty contracts. In this
law we find simple contracts that we enter into every day such as buying and selling of
household goods, food, cloths, medicine, reading materials, and other necessaries of life. You
will recall that simple contracts are those contracts that do not insist on adherence to strict legal
formalities unlike the special contracts (deeds).
Objectives
At the end of the topic, you should be able to:
i)
Discuss the nature of a sale of goods contract
ii)
Differentiate between a contract of sale and an agreement to sell
iii)
Differentiate between sale and contract of sale and material
iv)
Discuss the various types of goods, which form the subject matter of a contract of sale of
goods.
v)
Describe the conditions and warranties implied in a contract of sale of goods
vi)
Discuss the rules relating to the transfer of property in goods in a contract of sale of goods.
vii)
Explain the rules relating to delivery of goods by the seller as well as the buyer’s acceptance
of those goods.
viii)
Discuss the rights of the seller and the buyer in a contract of sale of goods.
On a light touch
A barber gave a haircut to a priest one day. The priest tried to pay for the haircut, but the barber refused,
saying, “You do God’s work.” The next morning the barber found a dozen bibles at the door to his shop. A
policeman came to the barber for a haircut, and again the barber refused to pay, saying, “You protect the
public.” The next morning the barber found a dozen doughnuts at the door to his shop. A lawyer came to the
barber for a haircut, and again the barber refused payment, saying, “You serve the justice system.” The next
morning the barber found a dozen lawyers waiting for a free haircut.
Points to ponder
What is your take? Are lawyers mean or they take advantage of every opportunity that comes their way? How
far can you extend your generosity?
B: Definition
The law relating to the sale of goods in Kenya is contained in the sale of goods act Cap 31
which has its foundation in the English Sale of Goods Acts applicable in UK in 1892 read
together with the applicable principles of Common Law and doctrines of equity. Sale of goods
is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer
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for a money consideration called price. It follows that this is essentially a transaction in which
one side promises to transfer the ownership of goods and the other pays the price in money.
This, therefore, excludes cases where there is no money price and situations where what is sold
is not goods but land or what is often called intangible property, that is, property interests
which cannot be physically possessed such as shares, patents, copyrights and so on. Section 2
of the Act define goods to include “all chattels, personal other than things in action or money,
and all implements, Industrial growing crops and thing forming part of the land which can be
severed before sale”.
C: Nature and form of a sale transaction
A sale of goods transaction encompasses the following;
i)
A contract – the contract can either be in the form of a sale or an agreement to
sell. Where the property in the goods is immediately transferred from the seller
to the buyer at the time of making the contract, the contract is a sale. E.g. a sale
over a counter in a shop. It is an executed contract. Where the transfer of
property in goods is to take place at a future time or subject to a condition to be
fulfilled thereafter, then the contract is an agreement to sell. It is an executory
contract.
ii)
Form of the contract - Sale may be made in writing (either with or without a
seal) or by word of mouth or partly in both or implies. However sale of goods
over Kshs.200/- must be in writing (or receipted by the seller/agent) for one to
sue for its breach where there is no part performance in support of its existence.
Section 6(1) provide as follows;
A contract for the sale of any goods of the value of two hundred shillings or
upwards shall not be enforceable by action unless the buyer accepts part of the
goods so sold, and actually receives them, or gives something in earnest to
bind the contract or in part payment, or unless some note or memorandum in
writing of the contract is made and signed by the party to be charged or his
agent in that behalf.
iii)
iv)
Goods – physical movable assets or chattels. Goods can be either existing goods
or future goods (ascertained goods or unascertained goods).
Consideration (price) – the price can be fixed by the parties in the contract or in
any other manner they may agree, or be determined later by the parties in the
course of their dealing. Where there is no fixed price, the buyer should pay a
reasonable amount for the goods. The price is payable at the point of delivery of
goods to the purchaser or as agreed by the parties and in default the seller who
has parted with possession of the goods can sue for the payment thereof.
NB: An agreement to sell becomes a sale when the time lapses or upon fulfilment of the
condition subject to which the property in the goods was to be transferred
D: Characteristics of a contract of sale of goods
The following characteristics are revealed in a contract of sale of goods;
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i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
The parties involved are a seller and a buyer. The seller is the person who sells
or agrees, to sell and the buyer is that person who buys or agrees to buy,
Sale includes a bargain and sale as well as a sale and delivery. Delivery is the
voluntary transfer of possession from one party to the other
The consideration is the money price paid,
The subject matter of the transaction is goods (movable items/chattels)
The transfer of property in goods must occur. It is not mere possession but
actual ownership changes from the seller to the buyer,
It can be either a sale or an agreement to sell.
A sale is unconditional and absolute transfer of property in goods to the buyer,
while an agreement to sell is a conditional sale in which the transfer is to occur
in the future,
The risk passes with the property once transfer of property in goods is done
unless otherwise agreed. This means, in case of a sale, if the goods are
destroyed, the loss falls on the buyer, even though he may never have taken
possession of them. On the other hand, in the case of an agreement to sell, the
loss will be borne by the seller even though the goods are in possession of the
buyer.
E: Distinction between contract of sale & other transactions
i)
ii)
iii)
Mortgage – a transfer of the general property in goods from the mortgagor to
the mortgagee to secure a debt
Pledge – delivery of goods by one person to another to secure payment of a
debt. It differs from a mortgage in that a mortgagee obtains the general property
in the goods whereas a pledge only obtains a special property necessary to
secure his rights, that is, only possession passes coupled with a power to sell.
Contract for work, labour & material – it is not a sale of goods because the
substance of the contract is the skill and experience of the laborer e.g. an artist
or mechanic services.
F: Difference between sale and contract of work and material
Where a contract is undertaking to use skill in producing particular article e.g painting a
portrait or repairing a m/v, the contract is of work and material and not contract of sale of
goods, even though a canvass for the painting or new parts are fitted to the m/v are involved.
The two must be distinguished because of two main reasons.
i)
Contract of work and material need not be in writing while sale of goods must
be in writing.
ii)
The implied conditions and warranties under the sale of goods act doesn’t apply
to contract of work and material.
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G: Difference between sale and agreement to sell
No
1
2
3
4
5
6
SALE
AGREEMENT TO SELL
The risk passes to the buyer immediately
No resale of property
The seller can sue for the price of the
goods even when the goods are in his
possession
The seller must deliver the goods even
when the buyer is insolvent
Buyer can recover the goods from official
receiver as the ownership of the property
rests with the buyer if the seller is
adjudged insolvent
The risk e.g. theft remains with the seller
Resale is possible
The seller can sue for damages only if the
buyer refuses to pay and take the goods
Delivery of goods is not required
If the buyer has already paid the price and
the seller is adjudged insolvent, the buyer
can only claim a ratable dividend as a
creditor since the property rests with the
seller
The property passes to the buyer at the Possession passes to the buyer at the time of
time of the contract
the contract
H: Classification of Goods
There are four main types of goods that subject to this law;
i)
Existing Goods - These are the goods which are physically in existence and which
are in the seller’s ownership and/or possession at the time of entering the contract.
Where the seller is in possession, as an agent or in pledge, he has the right to sell
them. Existing goods may be either “specific” or unascertained.
ii)
Future goods - These are the goods to be manufactured, produced or acquired by
the seller after making of the contract of sale. These goods may be either not yet in
existence or be in existence but not yet acquired by the seller. It is worth noting
that there can be no present sale of future goods. Therefore property can’t pass in
what is not owned by the seller at the time of the contract. So even if the parties
purport to affect a present sale of future goods, in law it operates only as an
agreement to sell. A typical example of future goods would arise where the seller
was to make the goods, but the category would also appear to include things which
will come into existence naturally, as where a dog breeder agrees to sell a puppy
from the litter of a pregnant bitch. In such a case, there is an element of risk that
things will not turn out as the parties hope; for instance, that all the puppies die or
that the buyer had contracted for a dog puppy and all the puppies are bitches. In
such a case, the court will have to analyze the agreement to see whether the seller’s
agreement was conditional on there being a live puppy or a puppy of the right sex.
iii)
Contingent Goods - These are the goods which the acquisition by the seller depends
upon an uncertain contingency. Obviously they are a type of future goods and
therefore a contract for the sale of contingent goods also operates as “an agreement
to sell” and “not sale” so far as the question of passing of the property to the buyer
is concerned. In other words, like the future goods, in contingent goods the
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iv)
property does not pass to the buyer at the time of making the contract. NB: A
contract of sale of contingent goods is enforceable only if the event on the
happening of which the performance of the contract is dependant happen, otherwise
the contact is not enforceable (becomes void).
Perishable Goods - Under Section 8, where there is a contract for the sale of
specific goods and the goods without the knowledge of the seller have perished at
the time of making the contract, the contract is void. Section 9 of the Act states that
where there is an agreement to sell the specific goods and subsequently the goods
without any fault on the part of the seller or buyer, perishes before the risk passes to
the buyer, the agreement is thereby avoided. Courier vs Hastle (1853).
I: Capacity to Buy and Sell
The law of sale of goods is governed by law concerning capacity to contract and transfer and
acquire property. Infants and persons of unsound mind must pay a reasonable price for
necessaries and not necessarily the agreed price. Necessaries are defined as goods suitable to
the condition of life of such infant, minor or other person and to his actual requirement at the
time of the sale and delivery as per Section 4(2).
J: Key Principles/doctrines in sale of goods
There are two key principles that work hand in hand in the law of sale of goods. These
principles or doctrines are
i)
Caveat emptor
ii)
Nemo dat quod non habet
Caveat emptor
The rule of caveat emptor (Buyer be aware) is applied in the sale of goods contract. According
to this doctrine, it is the duty of the buyer to be careful while purchasing goods of his
requirement and in the absence of any inquiry from the buyer; the seller is not bound to
disclose any defects in the goods. It is the buyer who knows why he is making the purchase
and as such it is his duty to find out whether the goods meet his need.
Exceptions to the rule of caveat emptor
“If you contract to sell peas, you cannot oblige a party to take beans. If the description of the article tendered is
different in any respect, it is not the article bargained for and the other party is not bound to take it”.
Lord Blackburn in Bowes vs Shan (1877
“If anybody ordered for Bombay ducks and somebody supplied him with ducks from Bombay, the contract to
supply Bombay ducks will not have been complied with.”
Justice Darling in Lemmy vs Watson (1915)
The doctrine is subject to the following exception:
i)
Where the seller makes a misrepresentation and the buyer relies on it this
doctrine does not apply.
ii)
Where the seller makes a false representation amounting to fraud or where he
conceals a defect of the goods.
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iii)
iv)
v)
vi)
Where the buyer makes it known to the seller the purpose of which he requires
the goods then the seller should ensure that the goods serve the purpose. In this
case the doctrine doesn’t apply.
Where the goods are purchased by description the doctrine doesn’t apply.
The doctrine doesn’t apply where the goods sold by samples does not
correspond with the sample earlier given.
Where the seller deviates from any of the implied conditions and warranties the
doctrine doesn’t apply.
Implied conditions and warranties in sale of goods - These exceptions are well captured in the
implied conditions and warranties in a sale of goods transaction. The conditions and warranties
are implied in every sale of goods transaction by the law and as such they need not be
expressly provided for in the contract. A breach of condition repudiates a contract and a breach
of a warranty leads to claim for damages.
Implied Warranties – the following are the key implied warranties in every sale of goods
transaction;
i)
The buyer shall have quiet possession and enjoyment of the goods
ii)
The goods shall be free of any encumbrance of change in favour of third parties.
iii)
The seller will disclose any damage of the goods bought to ignorant buyers.
Implied Conditions – the following are key implied conditions in every sale of goods
transaction;
i)
Rights to sell – meaning the seller is the owner of the goods or has full authority
to deal with them. In the case of Rowland V Divall (1923), a stolen car was
sold. After staying with it for four months, the buyer discovered it had been
stolen and he returned the same to the original owner. The buyer then sued the
seller for the recovery of the full price. It was held that there had been a breach
of an implied condition of right to sell which led to a complete failure of
consideration and as such the full purchase price was recoverable the usage of
the car for four months notwithstanding. NB: Rowland v Divall was carried a
stage further in Butterworth v Kingsway Motors (1954). Here X, who was in
possession of a car under a hire purchase agreement, sold it to Y before he had
paid all the instalments. Y sold the car to Z, who sold it to the defendant, who
sold it to the plaintiff. X, meanwhile, continued to pay the instalments. Several
months later, the plaintiff discovered that the car was subject to a hire purchase
agreement and demanded the return of the price from the defendant. Eight days
later, X paid the last instalment and exercised his option under the hire purchase
contract to buy the car. The result of this was that the ownership of the car
passed from the finance company to X and so on down the line to the plaintiff.
It followed that the plaintiff was no longer at risk of being dispossessed but it
was, nevertheless, held that he could recover the price.
ii)
Sale by description - Where goods are sold by description, there is an implied
condition that the goods will correspond with the description given. In the case
of Beale V Tailor (1967), the defendant advertised his car for sale as a “Herald,
convertible, 1961” and the plaintiff bought the car after examination. He later
86
iii)
iv)
v)
discovered that the car was not genuine since it was made of two parts which
had been welded together, only one of which was from a 1961 model. It was
held that the sale was by description and the words “1961 Herald” formed part
of the contractual description. The seller was accordingly bound to sell goods
fitting the description.
Sale by sample - Under this condition goods sold must correspond with samples
earlier given. In the case of Jafferali Abdul V Jan Mohammed an auctioneer
lifted a plate and said it was a sample of the twenty two cases of plates he was
selling and that the intending purchasers could inspect the goods in the auction
room. It was later discovered that many of the plates were broken. It was held
that this was a sale by sample and as such the price had to be refunded.
Condition as the Quality and Fineness - Seller is not under duty to disclose any
defect attaching to the goods which he sells since the buyer must look after his
own interest. Exceptions: Where the buyer make it known to the seller the
purpose of the goods he is buying and the seller is specialized in the sale of
those types of goods. There is an implied condition that the goods must be fit
for the purpose specified. In the case of Priest V Last (1838), a draper who had
no special knowledge of hot water bottles went to a shop of a chemist and asked
for a hot water bottle. He was shown an American rubber bottle which he
bought. The bottle, though meant for hot water could not stand boiling water.
Accordingly, the bottle burst after a few days while it was being used by the
buyer’s wife and she got injured. It was found that the bottle was not fit for use
as a hot water bottle. It was held that since the bottle could be used only for one
particular purpose, there was a breach of implied condition as to fitness and the
seller was liable to pay damages.
Condition as to Merchantability - A trader who deals in a particular type of
goods should ensure that the goods are of good quality and fit for the purpose of
which they are manufactured for. In the case of Grant V Australian Knitting
Mills Ltd (1936) under wears which were supplied contained excessive sulphide
chemical which could cause skin disease to a person wearing them next to the
skin. It was held that because of such defect, the under wears were not of
merchantable quality and the buyer was entitled to reject them.
NB: However you must be note that consumers have a responsibility to use goods they buy
appropriately. In the case of Hollinger vs Shoppers Paradise of New Jersey, Inc. (1975), the
Plaintiff bought raw pork chops in the Defendant’s supermarket. After preparing the pork and
serving it to her family, the woman and her children became ill from what was revealed to be
trichinosis, a parasitic infection common in pork. The woman sued the supermarket for, among
other things, a breach in the warranty of merchantability. In essence, the woman was arguing
the supermarket breached its promise to sell pork that was fit for its ordinary purpose. The
supermarket, however, argued the pork was fit for its ordinary purpose, which was for someone
to take home and cook thoroughly before serving in a meal. Such thorough cooking would
have eliminated the trichinosis. The court agreed with the supermarket and found the
supermarket was not liable to the woman.
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Consumer rights - Besides the protection offered by the law of contract and the sale of goods
law, Article 46 of the Bill of Rights under Chapter 4 of the Constitution of Kenya 2010
recognizes consumer rights. That Article state as follows;
1. Consumers have the following right:
a) To goods and services of reasonable quality;
b) To the information necessary for them to gain full benefit from goods and services;
c) To the protection of their health, safety, and economic interests; and
d) To compensation for loss or injury arising from defects in goods or services.
2. Parliament shall enact legislation to provide for consumer protection and fair, honest and
decent advertising.
3. This Article applies to goods and services offered by public or private persons.
Nemo dat quod non habet
"In the development of our law, two principles have striven for mastery. The first is for the protection of
property: no one can give a better title than he himself possesses. The second is for the protection of
commercial transactions: the person who takes in good faith and for value without notice should get a
better title. The first principle has held sway for a long time, but it has been modified by the common law
itself and by statute so as to meet the needs of our times."
Lord Denning in Bishopsgate Motor Finance Corp vs Transport Brakes Ltd [1949]
Nemo dat quad non habet - you cannot give a better title than you have. Where goods are sold
by a person who is not the owner, the buyer acquired no better title than the seller had. The rule
protects the true owner of the goods against anyone who buys his goods from a person who had
sold without his authority or without having any right to them.
Exceptions to the rule “Nemo Dat quad no habet”
i)
Sale under voidable title - When the seller has a voidable title on the goods but
his title hasn’t been avoided at the time of the sale, the buyer acquires a better
title provided he buys the goods in good faith and was unaware of the sellers
defect.
ii)
Sale by mercantile Agent - A person who buys goods from a factor, broker, or
an auctioneer will get full title to them even though the seller has exceeded his
authority or authority has been revoked by the true owner before sale.
iii)
Sale by buyer in possession - If the buyer obtains possession with consent of the
seller sells or pledges them either himself or through and agent, a person who
buys such goods obtains a good title of the goods as long as he bought them in
good faith.
iv)
Sale by seller in possession - Where the seller having sold the goods continues
to be in possession, or has documents of title of such goods and sells the same
goods either himself or through an agent to another person, the person who buys
such goods obtains a better title.
v)
Sale by court order - On sale by order of court of competent jurisdiction or
under any special common law or statutory powers of sale, the buyers get a
good title.
vi)
Title by Estoppel - Estoppel may arise where the owner by any act leads the
buyer to believe that the seller has a right to sell. If the buyer buys such goods
he gets a better title than the seller had.
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vii)
Sale by market overt - A market overt is an open public legally constituted
market. It is usually held at periodic intervals in some particular place and often
sells a particular kind of goods. A buyer acquires a better title of goods bought
from the market overt as long as he buys them in good faith. In London every
shop is by custom, a market overt but it is not recognized in Kenya.
K: Transfer of property in Goods
The essence of sale of goods is to enable the buyer acquire ownership of those goods. It is
therefore important to know the time the property in goods pass because;
i)
It helps in determining when ownership of the goods is acquired by the buyer,
ii)
Who should bear the risk if the goods perish or deteriorate,
iii)
What remedies are available to the respective parties,
iv)
In case of bankruptcy of either the buyer or the seller it is necessary to know
whether the goods are in the trustee of the bankrupt or not.
The general rule is that the loss will be borne by the party in whom the property was at the time
of the loss. The classic example is Sterns v Vickers (1923), where the sellers had some 200,000
gallons of white spirit in a tank belonging to a storage company. They sold to the buyers some
120,000 gallons of the spirit and gave the buyers a delivery warrant. The effect of the delivery
warrant was that the storage company undertook to deliver the white spirit to the buyers or as
the buyers might order. In fact, the buyers sub-sold, but the sub-purchaser did not wish to take
possession of the spirit at once and arranged with the storage company to store it on his behalf,
paying rent for the storage. Clearly, although there had been a sale and a sub-sale, ownership
was still in the hands of the original sellers since the goods were still unascertained. While the
bulk was un-separated, the spirit deteriorated. The Court of Appeal held that although there
was no agreement between the parties, the risk had passed as between the original seller and
buyer to the buyer. The reason for this was that as soon as the buyers had the delivery warrant,
they were immediately able to obtain delivery of the spirit and therefore risk should pass to
them even though they chose not to take immediate possession of the goods.
Rules of determining when the property passes – there are a number of rules that help in
determining when property in goods passes. Sections 18, 19 and 20 provide the principles that
are applied in this exercise. However the general position is that the passage of ownership is
determined by the nature of the goods. Where the goods are specific or ascertained property in
them pass as intended by the parties. The following rules apply
i)
Unconditional contract of sale - Where there is unconditional contract of sale of
specific goods in deliverable state, the property passes to the buyer when the
contract is made and it is immaterial that at the time of payment or delivery was
postponed. In the case of Dennant Vs Skinner 1948 an auctioneer knocked
down several motor cars to a bidder who later tendered payment by cheque
representing himself as the son of a well-known car dealer. Before being
allowed to drive away the car, the auctioneer made him sign a statement that the
ownership of the car would not pass to him till the cheque was honoured. The
bidder was a fraudulent person whose cheque was dishonored and who sold the
car to the defendant. Held: The contract was completed on the fall of the
hammer and the property had passed to the bidder.
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ii)
iii)
iv)
v)
Goods not in a deliverable state - Where there is contract of sale of specific
goods not in a deliverable state that is, the seller has still to work on them to put
them in a deliverable state the property does not pass to the buyer until the seller
does work is required and gives notice to the buyer. In the case of Underwood
Vs Burgh Castle Syndicate 1932 a fixed condensing engine was sold by the
Plaintiff to the Defendant. The engine was to be served and delivered free on
rail at a specified price. The engine was damaged in transit before it reached the
railway and the defendant refused to pay. Held: The defendants were not liable
to pay since the engine had not passed to them.
Specific goods in a deliverable state - Where there is a contract for sale of
specific goods in a deliverable state but the seller is bound to weigh, measure,
test, packaging etc for the purpose of ascertaining the price, the property does
not pass to the buyer until the seller does the above. In the case of Acraman Vs
Maurice the defendant had agreed to buy certain trunks of trees. The custom of
the particular trade was that the buyer measures, marks the portions that he
wanted and the seller would then cut off the rejected parts. The seller did not do
so but nevertheless sued for the price. Held: The defendant was not liable since
the property had not passed to him.
Unascertained goods - Where there is a contract for the sale of unascertained or
future goods by description, the property does not pass to the buyer until the
goods are ascertained. In the case of Livio Carle Vs Geom. R. Zompichiati
1961 the plaintiff ordered tiles from the defendant. He paid full price but on
delivery found many tiles broken and therefore rejected them. He later bought
them at a reduced price. L claimed the refund original prices. Held: This was a
Contract of unascertained goods. The property did not pass until delivery and
the plaintiff had (originally rejected them and therefore was entitled to a refund.
Delivery on approval of goods - Where the goods are delivered to the buyer on
approval, the property passes to the buyer:
a) When he signifies his approval to the seller or
b) Does any act which amount to adopting the transaction for
example breaking the bulk
c) If he doesn’t signify the approval to the seller and retains the goods
beyond a reasonable time.
In the case of Kirk ham Vs Attenborough 1897 the Plaintiff delivered jewelry
to X on sale or return basis. X pledged it with the defendant. Held: The pledge
was an act of adopting the transaction by X. Therefore the property passed to
him and the Plaintiff could not recover the jewelry from the defendant
L: Performance of the contract: Delivery and acceptance of goods
It is the duty of a seller to deliver the goods, in the right quantity and at the right time. It is the
duty of the buyer to accept and pay for the goods delivered once each party has performed his
duty then the contract of sale is said to be performed.
Delivery – delivery is the voluntary transfer of possession from one person to another. It is
usually done when the seller allows the buyer to collect the goods. Delivery in this technical
sense does not necessarily mean physical delivery. Delivery may take the following form;
90
i)
ii)
The physical transfer of possession,
Constructive delivery, for example by delivering a document of title such as a
bill of lading,
iii)
By handing over the means of control, for example the keys to a car,
iv)
By atonement, where a third party acknowledges that he holds on behalf of the
buyer.
The seller is under a strict duty to deliver the correct quantity as agreed. Breach of this duty
entitles the buyer to reject the goods but if he accepts the goods he must pay the contract price.
If the quantity is larger than agreed the agreed the buyer may accept the goods indicated in the
contract and reject the excess or reject the whole lot. The buyer is not obliged unless he agrees
to have delivery of the goods by installments
Rules of Delivery – there are a number of rules that guide delivery of goods as provided in
Section 30 of the Act. These rules include the following;
i)
Delivery is at the buyer’s place of business and if he does not have one, his
residence unless the contract states otherwise.
ii)
Where no time of delivery is specified, the seller should deliver the goods
within a reasonable time.
iii)
Where the goods at the time of sale are in possession of third parties, there is no
delivery by the seller to the buyer unless and until such third parties
acknowledges to the buyer that he holds the goods on his behalf.
iv)
Where the goods are not in a state of delivery unless otherwise agreed, the seller
must bear all the expenses of putting the goods in a deliverable state.
v)
Unless otherwise agreed, delivery expenses should be met by the seller.
.
Acceptance – acceptance takes place when the buyer;
i)
Intimates (communicates) with the seller that he has accepted the goods.
ii)
When the goods have been delivered to him and does any act to the goods
inconsistent with the ownership of the seller.
iii)
Retains the goods after the lapse of a reasonable time without telling the seller
that he has rejected them.
M: Rights of unpaid seller
The seller is deemed to be unpaid when:
i)
The whole price is not paid
ii)
When a negotiable instrument e.g a bill of exchange has been received by the
seller but the same has been dishonored.
Rights of the seller can be exercised against goods or against the buyer. The rights exercisable
against the goods are;
i)
Right to lien - it is the right to retain the possession of goods and refuse to
deliver them to the buyer until the price due is paid. The seller can exercise the
right in the following circumstances;
a) Where the goods have been sold without any stipulation as to credit
b) Where credit is stipulated but the duration of credit has expired.
c) Where the buyer becomes insolvent even though the period of credit
may not have expired.
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Termination of Lien
a) When the seller delivers the goods to a carrier or a bailee for the purpose
of transmission to the buyer without reserving the right of disposal of the
goods.
b) When the buyer or his agent lawfully obtains possession of the goods
c) By waiver of the lien: The seller may avoid the right of lien voluntarily.
NB: The unpaid seller who exercises the right of lien is only entitled to retain
the goods until the buyer pays the contract price.
ii)
Right of stoppage in transit - The seller may reclaim the goods in the hands of
the railway or any other carrier in the process of delivery. Also he has a right to
stop the goods in transit when they have been delivered for transmission to the
buyer if the buyer becomes insolvent.
NB: Stoppage in transit ends in the following cases:
a) If the buyer or his agent obtains delivery of the goods before they arrive
to the appointed destination.
b) If on arrival at the appointed destination the carrier acknowledges to the
buyer or his agents that he holds the goods in his behalf.
c) If the carrier wrongfully refuses to deliver the goods to the buyer.
d) If the goods are delivered to the master of the buyer’s ship
e) When a section of the goods have been delivered with an intention to
delivering the other part.
f) If the seller instructs a carrier to take the goods to a different place rather
than the buyers.
iii)
Right of resale - The seller may sell:
a) If the goods are perishable
b) Where the right is expressly reserved in the contract
c) Where he has given notice to the buyer of his intention to resale but the
buyer doesn’t collect them within a reasonable time.
NB: The unpaid seller will be able to recover his loss from the buyer. If a profit
is gotten after resale the seller is not bound to hand it over to the buyer.
Compare and contrast lien and Stoppage in transit
No.
LIEN
1
Arise when the buyer is insolvent or
not
2
Available when goods are in actual
possession of the seller
3
Ends when goods are surrendered to
the buyer
4
Stipulation of credit can destroy lien
5
Regains possession
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STOPPAGE IN TRANSIT
Arises mainly when the buyer is
insolvent.
Exercisable only when the goods are still in
transit
Right starts and remains as long as the goods
are in transit
Can be enforced in spite of credit having been
agreed upon
Regains possession
Rights exercisable against the buyer are;
i)
He can sue the buyer for the price of the goods if the goods have already passed
to the buyer.
ii)
He can maintain an action for damages if the buyer refuses to accept and pay for
the goods.
NB: Damages awarded will be the difference between contract price and the current market
price at the time when the goods ought to have been accepted, i.e D= M.P-C.P
N: Rights of the Buyer
i)
Can sue for damages if the seller does not deliver the goods
ii)
Can sue to recover the price if the goods are not delivered
iii)
Can sue for specific performance.
iv)
Suit for breach of warranty: Where there is a breach of warranty by the seller or
where the buyer elects or is compelled to treat any breach of condition as a
breach of warranty the buyer may set up against the seller;
a) The breach of warranty in diminution or extinction of price
b) Maintain an action against the seller for damages for breach of a
warranty
NB: Suit for breach of condition: Entitles the buyer to reject the goods and the contract is
repudiated.
Exception: The buyer cannot reject the goods in the following cases
i.
If the elects to treat a breach of condition as a breach of warranty.
ii.
If the contract of sale is not severable (can’t be cancelled) and the buyer has
accepted the goods or part thereof.
iii.
If the contract is for specific goods and property has passed to the buyer.
O: Auction Sale
Sec 58 enact the following rules in case of sale by auction
i)
Where the goods are put on sale in lots, each lot is prima-facie deemed to be
subject of a separate sale.
ii)
The sale is complete when the auctioneer announces the completion by the fall
of the hammer and until such an announcement is made any bidder may
withdraw his bid.
iii)
If the sale isn’t notified to be subject to a right to bid on behalf of the seller it is
unlawful to the seller to bid himself or employ any other person to bid on his
behalf.
iv)
A sale by auction may be notified to be subject to a reserved price.
v)
If the seller makes use of pretending bidding to raise the price, the contract is
voidable at the option of the buyer.
Summary of the topic
This topic has helped us to study our first contractual relationship after the law of contract. We have seen the
central role played by the law of contract in sale of goods transaction. Cap 31 of Laws of Kenya is the law
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governing sale of goods in Kenya. There can be no sale of goods without the law of contract. We have
identified and explained four major categories of goods which are the subject of this law i.e. existing, future,
contingent, and perishable goods. We now the nature of a sale transaction and the key principles involved in
it. The rights of both parties in the transaction are familiar to us now. We shall now move to the next
contractual relationship i.e. hire-purchase where we shall be able to discover that whereas sale of goods
transactions require simple agreements hire-purchase is a special transaction grounded in a special
agreement (deed) which is very rigid in its nature.
i)
ii)
iii)
iv)
Self-assessment questions
Identify and explain the various types of goods in the law of sale of goods noting to also
identify the appropriate type of contract of sale of goods mostly associated with each of them.
Identify and explain two important doctrines in the law of sale of goods noting to capture
their exceptions.
Explain the significant differences between a sale of goods transaction and a hire-purchase
transaction
What are the remedies available to both parties in sale of goods transactions and how are
they exercised?
Further reading
The law of sale of goods is well captured in The Sale of Goods Act Chapter 31 Laws of Kenya. The Act is
fairly simple and short. It is therefore advisable to read the entire Act in order to gain sufficient knowledge in
this law. You can easily access the Act from the Kenya law website.
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LECTURE FIVE
CONTRACTUAL RELATIONSHIPS: THE LAW OF HIRE-PURCHASE
5.1 Lecture Overview
Just like the sale of goods law hire-purchase law also deals with goods. It is grounded in the
law of contract. A hire purchase contract involves the hiring of goods from the owner (dealer)
with an eventual objective of acquiring title to the goods. Hire purchase transaction involves
two parties; the owner and the hirer. The hire purchase agreement is unique in that it is neither
a simple bailment nor a contract of sale but a combination of the two. The goods in the hire
purchase contract are said to be hired rather than sold because the title to the goods pass to the
hirer on paying the last instalment. In a hire purchase contract, the hirer assumes immediate
possession of the goods on paying a down payment or deposit and pays the balance of the hire
purchase price in definite instalments. The general rule is that the owner can repossess the
goods if the hirer defaults in paying the instalments as stipulated in the hire-purchase
agreement.
Objectives
At the end of this topic you shall be able to:
i)
Discuss the nature of hire purchase and appreciate the stipulations of the Hire Purchase Act
(Cap 507) Laws of Kenya.
ii)
Define a hire purchase agreement and differentiate between a hire purchase contract and a
sale of goods transaction
iii)
Appreciate the need to register a hire purchase contract
iv)
Discuss the conditions and warranties implied in a hire purchase contract
v)
Appreciate the obligations of the hirer in a hire purchase agreement
vi)
Discuss the circumstances, which can lead to the termination of a hire purchase contract.
vii)
Appreciate the rules relating to repossession of goods hired out by the owner.
viii)
Apply the law of hire purchase and analyze the position of the hire purchase business in
Kenya today.
On a light touch
A lawyer finds out he has an inoperable brain tumor. It is so large they have to do a brain transplant. His
doctor gives him a choice of available brains. There is a jar of rocket scientist brains for Ksh.100,000/= a
gram, a jar of regular scientist brains for Ksh.50,000/= a gram, and a jar of lawyer brains for the sum of
Ksh.10,000,000/= a gram all available on hire-purchase terms for lawyers only. The outraged lawyer says,
“This is a rip-off! How come the lawyer brains are so damned expensive?” The doctor replies, “Do you know
how many lawyers it takes to get an ounce of honest brains?”
Points to ponder
…..????
B: Definitions
At common law a hire purchase agreement is defined as a contract for the delivery of goods
under which the hirer is granted an option to purchase the goods. The Law relating to hire
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purchase in Kenya is contained in the Hire Purchase Act (Cap 507) of 1968. This Act applies
to situations where the value of the goods does not exceed Kshs.4,000,000/-. The law is based
on the English common law and came about through the enactment of a Private Bill which was
sponsored by the late Hon. J.M. Kariuki who was championing the rights of the poor in Kenya.
His aim was to provide a legal framework through which the young Kenyan graduate
employees would acquire household goods through an affordable payment procedure. The Act
is not applicable to body corporate. Under the Act, key terms are defined as follows:i)
Owner - is a person who lets or has let goods to a hirer in a hire purchase
agreement.
ii)
Hirer - is a person who takes or has taken goods from an owner under a hire
purchase agreement.
iii)
Hire purchase agreement - is an agreement for the bailment of goods under
which the bailee may buy the goods under which the property in the goods will
or may pass to the bailee.
iv)
Hire purchase business - is a business, whether carried on alone or with other
business of entering into hire purchase agreement, whatever the hire purchase
price under any agreement.
v)
Hire purchase price - means the total sum payable by the hirer under a hire
purchase agreement in order to complete the purchase of goods to which the
agreement relates including any sums payable by the hirer by way of deposit or
other initial payment.
C: Nature of the hire purchase transaction
From the outset it is very important to note that the parties in a hire-purchase transaction are
NOT “sellers” and “buyers”. They are “owners” and “hirers”. Sellers and buyers are found in
the law of sale of goods. Hire-purchase agreement is regulated by general principles of law of
contract e.g. there must be an offer and acceptance, the parties must have capacity to contract,
there must be valuable consideration etc. Under a hire-purchase agreement, the hirer agrees to
pay hiring charges to the owner of the goods by first paying an agreed deposit which is
followed thereafter by equal monthly installments for a specific period of time. On signing the
agreement the hirer can take possession of the goods and use them. However, ownership of the
goods remains with the owner until the hirer pays final installment.
Hire purchase is therefore, a bailment compounded with an option to purchase. A bailment is
the act of placing property in the custody and control of another, usually by agreement in
which the holder (the bailee) is responsible for the safekeeping and return of the property.
Ownership or title to the property remains in the bailor. Bailment is a contract whereby a
delivery of possession is given of specific goods to another for some purpose with the direction
that the goods shall be returned or disposed off on fulfillment of the purpose.
If the hirer fails to pay any installment, the owner has a right to repossess the goods and the
hirer will have no right to claim the installment already paid. Such installments paid are treated
as the cost of hiring the goods. In a hire-purchase agreement, the sale becomes complete and
effective only when the hirer pays the final installment i.e. on the payment of the last
installment, the ownership transfers automatically from the owner to the hirer.
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From the aforesaid we can easily conclude that
i)
The hire purchase transaction is governed by the general principles of the law of
contract
ii)
The hire purchase transaction can take two forms i.e. the option to purchase and
the hire.
iii)
The option to purchase is implied upon completion of the payment of the agreed
instalments.
iv)
The option to hire is implied upon termination of the hire purchase agreement
and returned of the hired goods.
v)
The person owning the goods (bailor) may hire (bail) them to the hirer (bailee)
for a specified period of time.
vi)
Once the hirer of the goods takes possession of the goods, ownership of such
goods does not pass to him until the time he pays the last instalment.
D: Distinction between a sale and a hire purchase agreement
The legal distinction between a hire purchase agreement and a sale of goods transaction is: The
hirer may buy the goods but he is not bound to buy them. This position was explained in the
case of Helby vs. Mathews. In this case, the owner of a piano agreed to let it on hire, the hirer
to pay a rent by monthly instalments, on the terms that the hirer might terminate the hiring by
delivering up the piano to the owner, he remaining liable for all arrears of hire; also that if the
hirer should punctually pay all the monthly instalments, the piano should become his sole and
absolute property, and that until such full payment the piano should continue the sole property
of the owner. The hirer received the piano, paid a few of the instalments and pledged it with a
pawnbroker as security for an advance. It was Held, that upon the true construction of the
agreement the hirer was under no legal obligation to buy, but had an option either to return the
piano or to become its owner by payment in full; that by putting it out of his power to return
the piano he had not become bound to buy; that he had therefore not “agreed to buy goods”
within the meaning of the Factors Act 1889 Section 9, and that the owner was entitled to
recover the piano from the pawnbroker.
Sale Agreement
1.
2.
3.
4.
Subject
The relevant
law
Parties
involved
Nature
of
the
agreement
Credit
facility
Hire Purchase Agreement
The Sale of Goods Act Chapter The Hire Purchase Act Chapter 507
31 Laws of Kenya
Laws of Kenya
Seller and Buyer
Owner and Hirer
It is an agreement to sell goods
An agreement to hire goods with an
option to purchase. A kind of a hybrid
of bailment and contract of sale
Available to the buyer. The Not available to the hirer. Instalments
buyer can even buy by must be paid as agreed since they are
instalments.
not made towards completions of the
purchase price but as hiring charges
until the hirer exercises his right to
purchase by paying all the
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5.
6.
Right
to The seller cannot repossess the
repossess
goods
Ownership
Ownership passes to the buyer
immediately
7.
Formalities
8.
Risk bearer
The buyer bears all the risk if the
goods are lost or destroyed since
he is the owner.
to The right is very limited
9.
Right
terminate
the
agreement
10. Right
to
return the
goods
11. Recovery of
the money
paid
12. Value of the
goods
13.
14.
15.
Some contracts of sale in cash or
credit need not be in writing,
registered, and delivered
The right is very limited. The
general rule is “goods once sold
are not returnable”
Money paid can be recovered in
some cases
The right is unlimited. The hirer can
terminate the agreement any time and
return the goods
Money paid is not refundable since it
is treated as hire fees/charges/costs
No limitation
In Kenya the hire purchase law
applies to goods of not more than
ksh.4million.
In Kenya body corporate (companies)
are excluded in that they cannot take
goods on hire.
To enable those who cannot afford
cash purchase hire goods on
favourable terms while protecting the
parties rights
Repossession of the goods, or suit for
their value if goods cannot be traced
or they are damaged.
Who should No limitation provided the party
contract
has contractual capacity for
some goods.
Main object The main object is to regulate
of the law
sale of goods transactions.
Remedies
instalments.
Can repossess the goods when the
hirer is in default.
Passes to the hirer on paying the last
instalment to the hire purchase
company.
A hire purchase agreement must be in
writing, registered with the Registrar
of Hire Purchase and be delivered to
the hirer.
The owner bears the risk if the hirer is
not to blame for the loss or
destruction
The
right
is
absolute
and
unconditional. Hirer can terminate
any time
The seller can be sue for the
payment of the price, or damages
if he refuses to take the goods
E: Essential elements of a hire purchase agreement
Rigidity of hire-purchase agreement – A reading of the Hire-Purchase Act reveals that there
are strict legal formalities that must be complied with in a hire-purchase transaction. These
requirements make a hire-purchase agreement a special formal agreement (deed).This
contractual document must outline the following;
i)
Full particulars of the parties including their postal and physical addresses (both
business and residential)
ii)
Hire purchase price and the cash price of the goods in question so as to give the
hirer an option to make cash purchase.
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iii)
iv)
v)
Amount of instalments and the dates of payment.
Description of the goods, sufficient to identify them.
The owner of the goods must furnish a copy of the agreement to the hirer within
21 days.
vi)
The agreement must be in writing, signed, and registered with the Registrar Hire
Purchase Agreements.
vii)
The agreement must also be stamped (indication that the stamp duty was paid)
viii) The agreement must be in the English language.
ix)
The agreement must be registered within 30 days of signing. Where this is not
done, extension of time to register can be sought from the Registrar who grants
such extension if satisfied it is merited.
x)
The agreement must state the rights of the hirer. Hirer’s rights include; right to
terminate, discharge of any further liability where unlawful repossession is
made, recovery of all money paid when unlawful repossession is made, account
for proceeds of repossessed goods, and statements of account upon demand
among others.
xi)
The agreement must not contain a provision authorizing the owner to enter upon
any premises for purposes of repossession of the goods or relieving him of any
liability for such entry. This means such entry can only be made with the hirer’s
consent.
xii)
The agreement must not contain a provision imposing upon the hirer any
liability over and above that which he is expected to bear if he terminates the
agreement.
xiii) The agreement must not purport to appoint any person who is acting for the
owner an agent for the hirer.
xiv) The agreement should not contain a provision purporting to relieve the owner
from his agent’s liability.
xv)
The agreement shall have an implied condition that the owner has a right to let
the goods.
xvi) The agreement shall have an implied warranty that the hirer shall have and
enjoy quiet and peaceful possession and user of the goods.
xvii) The agreement shall have an implied warranty that the goods are free from any
charge or encumbrance in favour of any third party at the time property is to
pass.
xviii) The agreement shall have an implied condition that the goods are of
merchantable quality. This does not apply in case of second-hand goods.
xix) The agreement may require the hirer to notify the owner of any change of
address and/or removal of the goods from one point to another and their new
location thereof provided such notification is not required to be made more than
ninety six hours before such changes are made.
xx)
The agreement may bar a landlord of where the goods are kept from levying
distress for rent over the goods on condition that the owner gives a written
notice of his ownership thereof.
xxi) The agreement may bar the hirer from removing the goods from Kenya without
his written consent
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xxii)
The agreement may contain any other provision that is not against the Hire
Purchase Act.
NB: Section 34 of the Hire Purchase Act provides that any person who knowingly gives false
information in any proposal form or document completed for the purpose of entering into hire
purchase agreement is guilty of an offence and liable to a fine not exceeding five thousand
shillings or to imprisonment not exceeding six months, or to both such fines and such
imprisonment.
F: Conditions and warranties implied in a hire purchase agreement
Section 8 of the Hire Purchase Act provides the conditions and warranties implied in every hire
purchase contract. The conditions and warranties are far much the same as those provided in
the Sale of Goods Act Cap 31. The terms are:
i)
A condition that the owner will have a right to sell the goods at the time when
property is to pass.
ii)
A warranty that the hirer shall have and enjoy quiet possession of the goods
iii)
A warranty that the goods will be free from any charge or encumbrances in
favour of a third party at the time when the property is to pass.
iv)
Except where the goods are second hand goods and the agreement contains a
statement to that effect, a condition that the goods will be of merchantable
quality.
v)
Where the hirer expressly or by implication makes known the particular
purpose, for which the goods are required, there shall be implied condition that
the goods will be reasonably fit for that purpose.
vi)
Legal ownership- A condition that the legal ownership and the title of goods
shall automatically be vested in the hirer upon payment by him of the hire
purchase price.
NB: The conditions and warranties implied above cannot be excluded by the agreement (via
exclusion clause except for the implied condition of fitness for particular purpose, which can
be excluded if the owner can show that before the agreement such exclusion clause was
brought to the notice of the hirer and its effect made clear to him.
G: Duties of the hirer
The duties of the hirer are not contained in the Hire Purchase Act but are usually included in
the hire purchase agreement for clarity. The duties include;
i)
Accept delivery - The hirer or his authorized agent should take delivery of the
goods delivered by the owner. Failure to accept delivery may result to losses to
the owner of the goods.
ii)
Take care of the goods - The hirer should take reasonable care of the goods
hired to him by the owner.
iii)
To pay instalments - The hirer has a duty to honour the agreed instalments as
and when they fall due.
100
iv)
v)
vi)
vii)
viii)
To notify the owner in case of change of address - The hirer should
communicate to the owner of the goods to inform him of the change in postal or
physical address.
Not to remove the goods from Kenya – The hirer has a duty not to remove the
goods from Kenya without a written authority from the owner.
Duty to continue hiring for the agreed period - In most agreements hiring is for
a fixed period. The hirer has the right to terminate before expiry of that period.
Duty to inform the owner of termination – The hirer has a duty to inform the
owner of his intention to terminate the agreement in writing.
Duty to return the goods to the owner upon termination – The hirer has a duty
to return the goods to the place they were picked from or delivered from once he
decide to terminate the agreement.
H: Termination of the hire purchase agreement
Section 12 of the hire purchase act provides that the hirer may terminate the agreement at any
time before final payment becomes due. Termination of the agreement can be done by the
hirer returning the goods to the owner and giving him written notice of termination of the
agreement. Where hirer terminates the agreement, he is liable to pay all the instalments due by
that time, together with the sum, if any that will make his total payment not less than 50% of
the total hire purchase price, unless a lesser sum is specified in the agreement. The hirer meets
expenses for returning the goods to the owner. The goods are returned to the place from where
they were picked or delivered from. If there is a change of address which results to extra costs
being occasioned to the hirer, the owner is required to reimburse them. The hirer is liable to
pay for damages in respect of goods damaged.
H: Right of recovery of possession
Section 15(1) protects the hirer of goods against repossession of such goods as long as the hirer
has paid two-third or more of the hire purchase price. If the owner ignores this stipulation the
hire purchase agreement is effectively terminated and:
i)
The hirer is released from all liability under the agreement and shall be entitled
to recover from the owner by suit all sums paid by him or any security given by
him under the agreement: and
ii)
The guarantor shall be entitled to recover by suit all sums paid by him under the
contract of guarantee or any security by him.
Section 16(1) provides that where the owner has instituted a suit in order to recover possession
of the goods he is not entitled to take any steps to enforce payment of any sum due under the
hire purchase agreement except by claiming the said sum in the suit. Pending the hearing of
the suit the court may take steps, as it may deem necessary for the purpose of protecting the
goods from damage or depreciation. On hearing the suit the court may make the following
orders;i)
Delivery of goods to the owner
ii)
Delivery of part of the goods to the owner and for the transfer to the hirer of the
owner’s title to the remainder of the goods; or
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iii)
Delivery of the goods to the owner, and postpone the operation of the order on
condition that the hirer or guarantor pays the unpaid balance of the hire
purchase price at such times and in such amounts as court thinks fit.
I: Position of hire-purchase business in Kenya today
There are quite a number of hire-purchase outlets in Kenya. These outlets include; Kenya
Credit Traders Ltd, African Retail Traders, Amedo Centres, Kukopesha among others. In the
1970s and early 1980s hire-purchase was the in-thing for the newly employed and out-ofcollege Kenyans. However hire-purchase business has been on decline since the liberalization
of our economy in 1990s.
Trade liberalization refers to the removal of government incentives and restrictions from trade
between nations. Trade liberalization was part of a broader push in Kenya to decrease the
government’s role in the economy and give market forces greater influence. In 1980s and
1990s international and domestic markets were liberalized through among others removal of;
foreign exchange controls, exchange rate reforms, price controls, numerous trade licenses and
permits, and privatization of non-strategic parastatals.
Trade liberalization had the following effects;
i)
Elimination of foreign exchange controls meant that the availability of foreign
exchange no longer determined the quantity of imports. People were therefore
able to import all manner of goods such as electronics, furniture and fittings,
second hand clothes, vehicles, equipment, and machinery. These importations
pushed down the prices of such goods thus making them readily available to
majority of Kenyans overnight.
ii)
Removal various trade licenses and permits meant that the playing ground was
levelled by removing protections in favour of monopolies. Some of the licenses
eliminated included those issued by Kenya Broadcasting Corporation for
ownership of TV and radios. These licenses were issued by KBC through the
few licensed dealers of such items who were mainly hire-purchase outlets.
iii)
The relaxing of the financial sector saw the influx in increase in the number of
financial services providers which included numerous Saccos and microfinance
institutions. This means people were able to access loan facilities to make cashpurchases of items that were offered on hire-purchase.
iv)
The air-waves were also liberalized meaning KBC ceased to be a monopoly that
was used by the hire-purchase dealers to market their products to their clientele
(mainly the young newly employed). This clientele had in any event shifted to
other social media networks and due to the flooding of the market with cheap
products they are able to acquire them cheaply thus denying hire-purchase its
market.
v)
Rapid technological changes lead to change in goods sold very fast a dealer can
easily be left with unsold goods. Hirers are also discouraged by these changes
which may make an item obsolete even before completion of instalments.
vi)
Other causes of decline in hire-purchase include; repossession problems, the
cumbersome nature of the transaction including need for guarantors and
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recommendation letters, poor marketing strategies, poor debt collection systems,
and high defaulting rate due to over borrowing particularly by civil servant.
Summary of the topic
Hire-purchase law is capture in the Hire-Purchase Act Chapter 507 of Laws of Kenya. Hire-purchase
transactions are governed by the law of contract. The law provides for strict mandatory procedure that must
be followed in entering a hire-purchase agreement. This makes hire-purchase agreement one of the most
rigid agreements in business law. Hire-purchase transaction must not be confused with sale by instalments.
In hire-purchase the hirer takes goods on hire and every payment made is not made towards clearing a
purchase price but it is rental payments and as such it is not refundable upon termination of the agreement.
We have no sellers and buyers in hire-purchase. However it must not be lost that once a hirer has completed
paying the agreed monthly instalments he exercises his right to purchase the hired goods and he
automatically becomes the owner of those goods.
i)
ii)
iii)
iv)
v)
vi)
Self-assessment questions
Discuss the nature, purpose and the rationale of hire-purchase law. Use appropriate
examples and the law.
Hire-purchase transaction is a hybrid of bailment transaction and sale transaction. Explain
by bringing out the relevant differences between hire-purchase agreement and the sale of
goods agreement.
Hire-purchase agreement is a very rigid and formal agreement with various essential
elements that must be met for it to be enforced. Discuss.
The general rule is that the owner of the goods has a right to repossess his goods in case of
default. Discuss the concept of repossession while capturing the rights of the owner and the
hirer.
Explain the various essential elements of a valid hire-purchase agreement.
“Hire-purchase is on its death bed in Kenya”. Do you agree? With very clear examples give
your reasons.
Further reading
Please read the Hire-Purchase Act Chapter 507 Laws of Kenya which is available at the Kenya law website.
103
LECTURE SIX
CONTRACTUAL RELATIONSHIPS: THE LAW OF PARTNERSHIPS
“If fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists
between partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that
they are partners in the first instance; it is because they continue to trust each other that the business goes on”
Bacon V.C. in Helmore v Smith (1885) 35 Ch D 436,
6.1 Lecture Overview
If you are considering going into business you need to decide whether you will be a sole
proprietor (sole proprietorship), a partner (partnership), or a shareholder (Limited Liability
Company). This topic will help you decide the form you should take. Advantages of coownership are many but it also has its share of stressful and trying moments particularly when
it comes to making group decisions, agree on business goals, distribution of work, profit and
loss sharing etc.
Shared ownership has advantages which include; synergy and enthusiasm, more cash, skills,
and resources, proper planning for leaves and time off, and succession arrangements. However,
the most important asset of any shared business is that held by the co-owners which include;
core competencies, determination to hard work, trust, shared dream (vision), and compatibility.
It must be noted in as much as friendship is important, not all friendship leads to a successful
business partnership.
Partnerships vary in size and formality. An informal association of two persons in a short-term
profit-making venture may be a partnership. Many small family businesses are conducted in
partnership. There are also professional or business partnerships with many members and
elaborate management structures. Partnerships carry on work in a wide range of business
activity. Many professionals such as lawyers, doctors, accountants, architects, engineers,
designers, beauticians, musicians etc carry on business in partnership. Partnerships are also
prominent in the retail trade and in the construction, manufacturing, agricultural and tourism
industries.
The law of partnership has continued to grow and change. Today we have what are called
Limited liability Partnerships (LLP). These partnerships enjoy some limited liability similar to
that of Limited Liability companies. This means partners do not incur personal liability for the
debts of the partnership. Secondly the partnership becomes a legal entity once registered and as
such it is able to own property in its own capacity, sue and be sued, and survive the
incapacitations of its partners. LLP are therefore a hybrid of a partnership and a limited
liability company
This topic shall therefore address partnerships formed under the three regimes of law that is,
the common law, the Partnership Act Chapter 29 of the Laws of Kenya, and the Limited
Liability Act No.42 of 2011. The Limited Liability Partnership is a fairly new creature of the
law which has generally changed the characteristics of a partnership as known in common law.
The main object of this new law was to repeal and replace the Limited Partnership Act
(Cap.30), to encourage the development of Kenya’s professional business, and to provide an
avenue for businesses to grow in a stable environment. Students are therefore warned not to
104
confuse the different legal regimes that govern partnerships in Kenya. NB: The Limited
Liability Partnership Act No.42 of 2011 came into effect on 8th March 2012 as per the Legal
Notice No.15 of 2012.
Objectives
At the end of this topic you should be able to;
i)
Define partnership
ii)
Appreciate differences between sole proprietorship, general partnership, limited liability
partnership, and a limited liability company.
iii)
Understand the general rules of a partnership and the importance of an express agreement
in a partnership.
iv)
Understand how a partnership is formed.
v)
Assignment of shares and responsibilities in a partnerships
vi)
Appreciate the relations of partners to one another and their relations with those they are
dealing with that is, their rights and duties to one another and to third parties.
vii)
Liability of partners including that of present, incoming, and outgoing partners as well as
those who hold-out as partners
viii)
Dissolution of partnership
On a light touch
Two law partners leave their office and go to lunch. In the middle of lunch the junior partner slaps his
forehead. “Oh no!! Not again!!” he says. “I forgot to lock the office safe before we left.” His partner
knowingly replies “What are you worried about? We are both here.”
Points to ponder
Relationship between partners – is it built on mutual suspicion?
B: Definition
A general partnership is a means by which business people pool their resources and skills in
the management of a business. It is a relationship. It is not an organization in its own right with
a separate legal personality. It merely comprises its members; unlike a company it cannot have
property vested in its personal capacity or create a floating charge over its assets. Contracts
taken in its name are enforced against its members; without its members it has no existence.
At common law, partnership depends upon an existing relationship which results from a
contract. A partnership relationship can arise only by mutual consent, which may be express,
implied, or inferred from parties’ conduct. The personal nature of partnership means that a
partner has agreed to associate with his co-partners and no-one else: no new partner can be
introduced without the consent of all the partners.
At common law therefore it is defined as; “A contract for the purpose of carrying on a commercial
business – that is, a business bringing profit, and dividing the profit in some shape or another between
the partners”. See the case of Pooley vs Driver
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In Kenya the law of partnership is ground on three main sources;
i)
The Partnership Act, Chapter 29 Laws of Kenya which govern general
partnerships relationships,
ii)
The Limited Liability Partnership Act, Cap 42 of 2011 which repealed Cap 30
Laws of Kenya (Limited Partnerships Act) regulates limited liability
partnerships.
iii)
The rules of equity and common law applicable to partnership in England
provided they are not inconsistent with the Kenyan Partnership Act. (see section
49 of Cap 29 which allows application of equity and common, as read together
with section 8 of Cap 42 of 2011 which allows application of Cap 29 in the
operation of Cap 42 of 2011)
Section 3(1) of The Partnership Act, states that “Partnership is the relation which subsists
between persons carrying on a business in common with a view of profit”
When the persons have created a partnership they form what is referred to as a “firm”. Section
6 of the same Act states that “Persons who have entered into partnership with one another are, for
the purposes of this Act, called collectively a firm, and the name under which their business is carried
on is called the firm-name”.
Section 2 of The Registration of Business Names Act Cap 499 of Laws of Kenya states that
firm “means an unincorporated body of two or more individuals, or of one or more individuals and one
or more corporations, or of two or more corporations, who or which have entered into partnership with
one another with a view to carrying on business for profit”;
Limited liability partnership is defined in the Limited Liability Act as “a partnership
registered under this Act” Under section 6 and 7 of Cap 42 of 2011, a limited liability
partnership is a body corporate separate from its partners. The section provides;
6. (1) A limited liability partnership is an entity formed by being registered under this
Act.
(2) On being registered under this Act, a limited liability partnership becomes a body
corporate with perpetual succession with a legal personality separate from that of its
partners.
(3) A change in the partners of a limited liability partnership does not affect the
existence, rights or obligations of the limited liability partnership.
7. (1) A limited liability partnership is, in its name, capable of;
1) Suing and being sued;
2) Acquiring, owning, holding and developing or disposing of movable and
immovable property; and
3) Doing such other acts and things as a body corporate may lawfully do.
(2) A limited liability partnership is required to acquire and maintain a common
seal that bears its name and to use the seal for the execution of all documents
that by law are required to be sealed.
Sections 16 of Cap 42 of 2011 are also relevant in the definition of partnership. Section 16
provide that “Two or more persons associated for carrying on a lawful business with a view to
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making a profit may, by complying with the registration requirements of this Part, register (the
persons) as a limited liability partnership under this Act”.
This therefore means there are essentially two types of partnerships in Kenya that is;
i)
General partnership (under cap 29) - This is the most common and usually
quite general in nature. Here an agreement is extremely important because it is
the constituting document of the relationship. In the absence of an agreement
there are some general rules which are presumed to apply. The general rules
among others equalize all partners in matters relating to profit and loss sharing
as well as management of the business. Partners have unlimited liability for the
partnership’s obligations.
ii)
Limited liability partnership (under cap 42 of 2011) - This is a relatively new
legal entity which is separate from its owners since it is a body corporate with
perpetual succession with powers to sue and be sued in its own name. This new
form of legal entity is an alternative to a limited liability company which
provides the benefits of a limited liability company and allows the partners the
flexibility of organizing their internal structure as a partnership based on a
mutual agreement rather than the rigid requirements of the company law.
Limited liability partnership therefore, has the benefit of enjoying the benefits
of a limited liability company and a partnership. Limited liability partnership is
a useful vehicle for investors, who do not wish to take an active role in the
management of their funds, to combine to create an investment fund. The
limited partner is liable only to the extent of his capital contributions in the
business. A limited liability partnership must have a manager who need not be a
partner. The manager is required to ensure that the partnership complies with
the law otherwise he is personally liable in default. However, the limited partner
loses limited liability if he takes part in the management of the partnership
business. Unlike a general partnership a limited liability partnership is a body
corporate separate from its partner with powers to sue and be sued, and to
acquire properties
NB: Limited Partnerships Act Cap 30 Laws of Kenya which was repealed by Cap 42 of 2011
provided for a limited partnership. The repealed law did not define a limited partnership but it
required that;
i)
It must have at least one general partner and one limited partner
ii)
General partner liable for all the firms debts & liabilities
iii)
Limited partners liable to the extent of his capital contribution
iv)
Must be registered with Registrar of Companies.
C: Relationship of partners to each other
There five key elements that constitute the relationship between partners.
i)
Good faith - partnerships are relationships that governed by the principle of
good faith. Each party has a duty to act in the best interest of the business. This
duty extends to rendering accounts and information relating to firm. By their
agreement partners may determine the nature and extent of the particular duties
which they undertake to each other and to the partnership.
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ii)
iii)
iv)
v)
Management – the general rule is that every partner is entitled to take part in
the management of the business. This means in absence of agreement all
partners are entitled to equal management. Decisions are by majority
Capital, profit & losses – the general rule is that capital, profits, and losses are
shared equally. However this position is usually regulated by an agreement
between the partners.
Indemnity – the position is that partners must be indemnified for any loss
suffered in the course of business. This means a partner must be reimbursed for
any expenses incurred on behalf of the partnership.
Property – It is not always easy to determine whether an asset is partnership property.
Property can be used for the purposes of the partnership and yet not be part of the
partnership’s property. Its status depends on the agreement, express or implied, between
the partners. The issue of property is thus better addressed by an agreement.
However in the absence of an agreement the initial property can be assumed to
be capital contribution by the partners. The subsequent property is property of
the partnership (partners in their respective shares) since it is acquired by the
business.
D: Essential elements in a partnership relationship
From the above discussion we are able to gather the following as the essential elements that are
present in a partnership;
i)
“Relation” – meaning a general partnership is not a legal entity separate from
its owners like in the case of limited liability partnership but a relationship
which can be compared to a marriage relationship
ii)
“Association” – meaning for a limited liability partnership, the entity created is
a legal entity. The constituting documents of a limited liability entity are usually
referred to as the articles and memorandum of association. Persons who sign
them create an association with a common intent.
iii)
“Persons” – meaning more than one parties need to be present in a partnership
relationship. In general partnership the number of parties is between two and
twenty (common law position). However in limited liability partnership, the
position is two or more persons, meaning there is no limitation as to the upper
limit of the numbers. Persons include legal persons meaning corporate bodies
are also included.
iv)
“Business” – meaning a trade, profession, or vocation undertaking need to be
present. A partnership is a vehicle by which persons carry on business. This
distinguishes it from non-business associations. “Business” is widely defined as
including “every trade, occupation, or profession”
v)
“Common interest” – meaning the business is being carried out for mutual
benefit of the partners and in good faith. Partners place mutual trust and
confidence in each other. They stand in a fiduciary relationship. A partner must
display utmost good faith towards his fellow partners in all partnership dealings.
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A partner owes his co-partners a duty to be honest in his dealings with third
parties, even if the transactions are not of a partnership nature
vi)
“Profit” – meaning the partners must intend to make profit in their undertaking
losses notwithstanding.
vii)
“Registered” – meaning for a limited liability partnership, registration is
mandatory under Cap 42 of 2011 unlike in general partnership.
viii)
“Statement” – Meaning a formal document that complies with section 17 of
Cap 42 of 2011 for purposes of registration is mandatory for limited liability
partnership. The statement is the constituting document in a limited liability
partnership.
ix)
“Agreement” – In both types there is need for an express or implied agreement
for the relationship to be concluded. This is because partnership arises out of an
agreement between the partners. The agreement may be formal or it may be
inferred from the way in which the parties have acted. The agreement is the
constituting document in a general partnership.
x)
“Agency” - Meaning the partners are agents of each other. In a general
partnership, a partner cannot be an agent of the partnership as an entity because
it lacks legal personality. Whenever a partner makes a contract, it is on behalf of
that partner and the other partners. If they breach the contract they will be liable
for any consequential loss without limit of liability.
E: General rules (default rules) in a partnership
“Most partnerships live and die by the terms of their constitutive contract, that is, the partnership
agreements. A good partnership agreement is unique in law as it, by definition, gives birth to, and prearranges the funeral of the business”.
As already noted partnerships are creatures of the law of contract. Where there is an agreement
between the parties their relationship is governed by the terms and conditions in that
agreement. It is very important for parties to have an agreement in place before entering into a
partnership so as to avoid some undesirable consequences that are imposed by the partnership
law. Section 24 of the Partnership Act (Cap 29) provides the general rules or default rules that
apply in a partnership relationship in absence of an express agreement to the contrary. These
rules have some undesirable consequences. The rules provide for the determination of mutual
rights and duties as follows;
i)
A partner is in a partnership at will. He can quit at any time.
ii)
All the partners are entitled to share equally in the capital and profits of the
partnership.
iii)
The partnership/partners shall indemnify each partner in respect of payments
made and personal liabilities incurred by the partner in the ordinary and proper
conduct of the business of the partnership and in doing anything necessary for
the preservation of the business or property of the partnership.
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iv)
v)
vi)
vii)
viii)
ix)
x)
xi)
xii)
xiii)
Each partner in a partnership is entitled to participate in the management of the
partnership.
A partner in a partnership is not entitled to remuneration for acting in the
business or management of the partnership.
A person can only become a partner in a partnership with the consent of all the
existing partners.
A matter relating to a partnership is to be decided by a resolution passed by a
majority of the partners.
Each partner in a partnership shall provide to the partnership/partners true
accounts and full information of all matters affecting the partnership about
which the partner has knowledge or over which the partner has control.
If a partner in a partnership, without the consent of the partnership/partners,
carries on a business of the same nature as, and competing with the
partnership/partners, that partner shall account for, and pay over to the
partnership, all profits made by that partner in that business.
A partner in a partnership shall account to the partnership/partners for any
benefit derived by the partner without the consent of the partnership/partners
from any transaction concerning the partnership, or from any use by that partner
of the property, name or any business connection of the partnership.
A partner in a partnership may not be expelled by a majority of the other
partners unless a power to do so has been conferred by an express agreement
among the partners.
Subject to contrary agreement between them, each partner owes a duty of good
faith to the partnership/partners
Irrespective of agreement between them, every partner in a general partnership
is an agent of the other partner(s) for the purpose of the business of the
partnership
F: Formation of a partnership
“A good partnership agreement must be a living document, one which the partners can readily
understand and use to run the business”
In Khan Vs Miah the House of Lords made it clear that a partnership commences when the
parties embark on the venture on which they have agreed. It is not necessary that they should
be trading. Where partners are collaborating in preparation for trading, for example in fitting
out a shop or an office, they have embarked upon their venture and will be treated as being in
partnership.
A partnership can only come into existence by an agreement between the partners. Such an
agreement may be written, oral or inferred from conduct in whole or in part. The law of
contract therefore plays a central role in partnership relationship. The partnership agreement
commonly referred to as “the partnership deed” is the constitution which governs the
partnership and the relationship between the partners.
The agreement may contain a mechanism for the amendment of certain of its terms, for
example by a special majority vote. In the absence of such a provision it requires the agreement
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of all the proposed partners or, after the partnership has been formed, all the partners to vary
the partnership agreement.
If an agreement is lacking the already noted general rules (default rules) come in operation.
The application of the general rules may not be to the interest of the partners. An express
(preferably written) agreement is therefore desirable in order to provide for the following
matters among others;
i)
Names and full particulars of the partners
ii)
Name of the intended partnership (firm name)
iii)
Place & nature of the business
iv)
Term (period)
v)
Capital ratio
vi)
Bank account details
vii)
Management and employment issues
viii) Meetings and quorum
ix)
Sharing of profit (ratios)
x)
Accounting system
xi)
Death/retirement issues
xii)
Partnership properties
xiii) Admission of new partners
xiv) Partners’ liability
xv)
Insurance and indemnification issues
xvi) Limitations e.g. adverse competition
xvii) Dissolution
xviii) Arbitration etc.
G: Authority of partners
The general rule is that every partner is an agent of the firm and therefore has implied authority
to bind the firm while acting within the course of business. The following acts are considered
to be within the scope of partnership business;
i)
Borrowing money
ii)
Signing cheques
iii)
Employment issues
iv)
Receiving payments
v)
Transactions for goods and services (buying, selling, and procuring)
However there are acts considered to be outside implied authority. These acts include;
i)
Consenting to a judgment against the firm
ii)
executing a deed
iii)
giving a guarantee
iv)
Referring a dispute to arbitration
v)
Accepting property other than money in payment of a debt.
H: Partners liability
The liability of partners can be in form of tortious liability, or contractual liability, or even
criminal liability. This Part deals with six issues relating to the way in which a partner binds
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the partnership and the secondary liability of partners for the debts and obligations of the
partnership. The issues are;
i)
The agency of a partner,
ii)
The liability of the partnership for obligations incurred by a partner,
iii)
The nature of a partner’s liability for partnership obligations,
iv)
The liability of the incoming partner,
v)
The liability of the outgoing partner, and
vi)
The liability of a person who appears to be, but is not, a partner - the apparent
partner.
NB: Each of these elements is explained herein below
The agency of a partner
“Every partner is an agent of the partnership, and his rights, powers, duties, and obligations are in many
respects governed by the same rules and principles as those of an agent. A partner indeed virtually embraces
the character both of a principal and of an agent. So far as he acts for himself and his own interest in the
common concerns of the partnership, he may properly be deemed a principal, and so far as he acts for his
partners, he may as properly be deemed an agent. The principal distinction between him and a mere agent is
that he has a community of interest with the other partners in the whole property and business and
responsibilities of the partnership, whereas an agent, as such, has no interest in either”. Mr. Justice Story
1841
The common law position is that a partner is the agent of the other partners. The partner is not
an agent of the partnership since a partnership is not a legal entity. However in a limited
liability partnership, a partner is the agent of the partnership because of the creation of a
separate legal entity. The agency of a partner is a special form of agency which arises out of his
status as partner and not out of a contract of agency with his principal.
In Kenya the position appears to be that a partner is an agent of the partnership. This is the
position in both types of partnership that is, general partnership and limited liability
partnership. However in a general partnership the agency relationship extends to both the firm
and other partners, whereas in a limited liability partnership it covers the partnership only.
Section 11 (1) of Cap 42 of 2011 provides; “A partner of a limited liability partnership is the
agent of the limited liability partnership”.
Section 7 of Cap 29 provides; “Every partner is an agent of the firm and his other partners for the
purpose of the business of the partnership; and the acts of every partner who does any act for carrying
on in the usual way business of the kind carried on by the firm of which he is a member bind the firm
and his partners, unless the partner so acting has in fact no authority to act for the firm in the
particular matter, and the person with whom he is dealing either knows that he has no authority or does
not know or believe him to be a partner”..
The liability of the partnership for obligations incurred by a partner
i)
The general rule is that each partner is jointly liable for the partnership’s
obligations. This means every partner is liable for his own actions, actions of his
fellow partners, and actions of employees/servants/agents of the partnership. A
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ii)
iii)
iv)
partnership is bound by the acts of a partner through the agency of a partner.
The liability of the partnership covers;
Wrongs committed by a partner,
Misapplication of money or property received for the partnership or in its
custody,
Improper employment of trust property for partnership purposes.
NB: The liability of a partnership for the wrongs committed by a partner does not extend to
liability for loss or injury caused to another partner in the same partnership.
The nature of a partner’s liability for partnership obligations
In common law partners are jointly liable with one another for the obligations of a partnership.
This means a creditor of the partnership can recover a partnership debt by enforcement against
a partner’s assets without first enforcing against and exhausting the assets of the partnership.
In Kenya, a general partner is jointly liable for the actions of the firm. Section 11 of Cap 29
provides; “Every partner in a firm is liable jointly with the other partners for all debts and obligations
of the firm incurred while he is a partner, but a person who is admitted as a partner into an existing
firm does not thereby become liable to the creditors of the firm for anything done before he became a
partner; and after his death his estate is also severally liable in the due course of administration for
those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of his
separate debts”.
The position of a limited liability partner is different. The partners are not liable for acts of the
partnership. This is because of the principle of limited liability. Section 10 of Cap 42 of 2011
states as follows;
i)
ii)
iii)
iv)
v)
vi)
A limited liability partnership shall be solely obligated to an issue arising from
contract, tort or otherwise.
A person is not personally liable, directly or indirectly, for an obligation referred to in
subsection (1) only because the person is a partner of the limited liability partnership.
Subsection (1) shall not affect the personal liability of a partner in tort for the wrongful
act or omission of that partner.
A partner is not personally liable for the wrongful act or omission of another partner of
the limited liability partnership.
If a partner of a limited liability partnership is liable to a person other than another
partner of the partnership as a result of a wrongful act or omission of that partner in
the course of the business of the limited liability partnership or with its authority, the
partnership is liable to the same extent as that partner.
The liabilities of a limited liability partnership are payable out of the property of the
limited liability partnership.
The liability of the incoming partner
A person who is admitted as a partner into an existing partnership does not thereby become
liable to the creditors of the partnership for anything done before he became a partner. Thus if
the partnership entered into a contract before he became a partner, he would not incur
secondary liability in relation to the contract. Similarly if an act or omission which occurred
before he became a partner gave rise to loss and thus to a claim against the partnership after he
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had joined the firm, he would not incur secondary liability in relation to that claim. This
position is well captured in sections 11 (quoted above) and 21 of Cap 29. Section 21 provides;
1. A person who is admitted as a partner into an existing firm does not thereby become liable
to the creditors of the firm for anything done before he became a partner.
2. A partner who retires from a firm does not thereby cease to be liable for partnership debts
or obligations incurred before his retirement.
3. A retiring partner may be discharged from any existing liabilities by an agreement to that
effect between himself and the members of the firm as newly constituted and the creditors
and this agreement may be either express or inferred as a fact from the course of dealing
between the creditors and the firm as newly constituted.
The liability of the outgoing partner
A partner who retires from a partnership does not thereby cease to be liable for partnership
debts or obligations incurred before his departure. However the outgoing partner can be
released from such obligations by agreement with the other partners and the creditors of the
partnership. Retirement and admission of a new partner leads to reconstitution of the
partnership.
The liability of a person who appears to be, but is not, a partner (Holding out)
Holding out - the situation where as a result of a representation a non-partner (A) appears to a
third party (B) to be a partner and, in reliance on the representation, B deals with the
partnership and ends up being owed some money which the partnership does not pay. A is
personally liable to B.
This means where a person who is not a partner (“A”) represents himself, or knowingly allows
himself to be represented, as one, and another person (“B”) deals with the partnership in
reliance on that representation, A should be liable as if he were a partner for the whole amount
of any obligation which the partnership incurs to B as a result;
I: Dissolution of a general partnership
“The dream of perpetual succession is an elusive one for partnerships. Almost all partnerships inevitably
end and they rarely end nicely. With a good partnership agreement, issues can be pre-determined.
Otherwise, the only winners where a partnership dissolves will be the lawyers”.
The general rule is that a partnership exists at will. A partnership falls into one of two
categories namely a partnership at will or a partnership for a fixed term. A partnership at will
exists where the partnership agreement is silent as to the duration of the partnership. A
partnership at will can be dissolved anytime by notice. In absence of agreement between the
partners to the contrary, the partnership must then be wound up. Transactions begun but
unfinished may be completed, and the partnership’s assets distributed.
General Partnerships can therefore be dissolved in the following ways;
i)
By effluxion of time. This means it comes to an end upon expiry of its term.
ii)
By termination of the adventure. This can be upon completion, or stoppage of
the venture.
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iii)
iv)
v)
vi)
vii)
By death or bankruptcy or insanity of a partner unless contrary stated in
agreement.
By subsequent illegality.
By agreement of the partners
By notice.
By order of the court
NB: Authority of partners continues dissolution for wind-up purposes.
J: Dissolution of a limited liability partnership
A limited liability partnership being a separate legal entity is not dissolved or terminated like
the general partnership. Bankruptcy, death, or insanity of a partner does not dissolve the
partnership nor does the partner cease to be a partner unless otherwise provided in an
agreement.
Section 14 provides;
1. This section applies to a limited liability partnership unless otherwise provided for in the
relevant limited liability partnership agreement.
2. If a partner of the limited liability partnership is adjudicated bankrupt by a court in Kenya or
elsewhere, the bankruptcy is not by itself cause for the partner to cease being a partner of the
partnership, but the restriction on the partner being a manager of the partnership under Part
VI applies.
3. The Official Receiver or a trustee of the estate of the bankrupt partner is not entitled to
interfere in the management of the limited liability partnership but is entitled to receive
distributions from the partnership that the bankrupt partner is entitled to receive under the
limited liability partnership agreement.
A limited liability partner may cease to be a partner in the following circumstances;
i)
As provided in the partnership agreement,
ii)
By giving a written notice of resignation of not less than 90 days,
iii)
Death of the partner,
iv)
Dissolution of the partnership.
These circumstances in which a partner of a limited liability partnership may cease to be a
partner are provided for in Section 13 which states;
1. A partner of a limited liability partnership may cease to be a partner—
a) by complying with the requirements of the relevant limited liability partnership
agreement; or
b) in the absence of such an agreement, by giving not less than ninety days’ notice to the
other partners of the intention of the partner to resign as partner.
2. A partner of a limited liability partnership also ceases to be a partner on the partner’s
death or on dissolution of the partnership.
3. If a person ceases to be a partner of a limited liability partnership, then, unless otherwise
provided for in the limited liability partnership agreement (if any), that person, or the
person’s personal representative, or the liquidator (if any) of the partner’s estate, is
entitled to receive from the limited liability partnership an amount—
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a) equal to the person’s capital contribution to the limited liability partnership and the
person’s right to share in the accumulated profits of the limited liability partnership
after the deduction of losses of the limited liability partnership; and
b) Determined as at the date the person ceased to be a partner.
4. A person who was formerly a partner of a limited liability partnership, or, if the person has
died, the person’s personal representative or a liquidator is not entitled to interfere in the
management of the partnership.
K: Insolvency of a limited liability partnership
If the partnership fails to meet its financial obligation the law provides for the appointment of
an Official receiver. An Official receiver is a person appointed by the creditor (debentureholder) to realize the assets subject to the charge and repay the debenture-holder.
If the receiver has to carry on the company’s/partnership’s business until realization of the
security he must be appointed as a Receiver-manager so as to have management powers.
In most cases when a receiver is appointed with a view to sale of assets of the
company/partnership it leads to liquidation. Liquidation (winding-up) is the process by which
the life of a corporate is brought to an end and its assets administered for the benefit of its
members and creditors.
The appointment of the Official receiver and the management of the business thereafter is
provided for by Section 34 and the rules in the Fourth Schedule. Section 34(1) provides;
If a limited liability partnership becomes insolvent, the Fourth Schedule shall have effect with
respect to the appointment of a receiver or manager in respect of the partnership and the
conduct of the receivership or management of the affairs of the partnership.
L: Procedure for winding-up of a limited liability partnership
“the ultimate objective of bankruptcy process is to discharge the bankrupt from his liabilities, so
that he can begin again with a clean slate, free from the burden of his debts, and thus rehabilitate
himself into the community. The ultimate fate of a company in winding-up is not discharge but
dissolution, that is, the termination of its existence”. Prof Goode
Winding up is the process of liquidating (bringing to an end/dissolution) a corporation or
partnership. It involves;
i)
The process of collecting the assets ,
ii)
Paying the expenses involved,
iii)
Satisfying the creditors’ claims and
iv)
Distributing whatever is left first to any preferred shareholders according to
their liquidation preferences and rights, then to any other shareholders with
more than normal liquidation rights, and finally pro rata among the rest of the
shareholder.
v)
A limited liability partnership comes to an end after the successful conclusion of
winding-up proceedings as governed by the Act. The Fifth Schedule of Cap 42
of 2011 provides the procedure for winding-up of a limited liability partnership.
Winding-up proceedings are of two types;
i)
By the order of the Court, or
ii)
Voluntary
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Application for winding up by Court
The Court can wind-up a limited liability partnership after receiving an application by the any
of the following parties as provided in Rule 2 of the Fifth Schedule;
i)
The partnership
ii)
Partner(s)
iii)
Creditor(s)
iv)
Official receiver or a trustee of the estate of a bankrupt partner
v)
Liquidator
vi)
Minister
Rule 3 of the Fifth Schedule provides circumstances that may support an application for
winding-up. It provides;
3(1) The Court may order the winding up of a limited liability partnership on any of the
following grounds;
(a) the partners have resolved that the limited liability partnership be wound up by the
Court;
(b) the partnership carries on business with fewer than two partners for more than two
years;
I the limited liability partnership is unable to pay its debts;
(d) the Court is of the opinion that it is not reasonably practicable the business of the
partnership to be carried on in conformity with the limited liability partnership
agreement;
(e) the Court is of the opinion that it is just and equitable that the limited liability
partnership be wound up;
(f) the partnership is being operated—
(i) for an unlawful purpose; or
(ii) for a purpose prejudicial to public peace, welfare or good order; or
(iii) contrary to national security or the national interest.
NB: A certificate issued by the Minister responsible for internal security stating that the
Minister is satisfied that the limited liability partnership referred to in the certificate is being
operated for a purpose that is contrary to national security or the national interest is conclusive
evidence that the partnership is being used for such purposes.
If an application has been made by the Minister under paragraph 2 for the winding up of a
limited liability partnership on the ground that it is being operated for a purpose contrary to
national security or the national interest, the Court may, on the application of the Minister,
pending the hearing of the winding up application or the making of a winding up order, make;
i)
An order restraining the partnership or its partners, managers, officers or
employees from doing any act or from carrying out any activity specified in the
order; and
ii)
Such other interim orders as the Court thinks fit.
Voluntary winding-up
Partners can voluntarily wind-up by passing such a resolution. This is as provided in Rule 36 of
the Fifth Schedule;
36(1) A limited liability partnership may be wound up voluntarily by resolution passed by all of
the partners.
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(2) A limited liability partnership shall;
(a) within seven days after passing a resolution for its voluntary winding up, lodge a
copy of the resolution with the Registrar; and
(b) within fourteen days after passing the resolution, publish notice of the resolution in
at least one daily newspaper circulating generally within Kenya.
(3) If a limited liability partnership fails to comply with subparagraph (2), the partnership, and
each of its officers commits an offence and is liable on conviction to a fine not exceeding one
hundred thousand shillings.
M: Sole Proprietorship and Limited Liability Companies
NB: The Sole Proprietorship and Company Law is not the subject of this unit but it is
necessary to briefly address them in order to make the necessary connection and comparison
with partnership law. It also offers an appropriate introduction to Law II (Company Law) that
you are expected to study in the next Trimester. You are therefore, encouraged to take your
time and appreciate the notes below.
What is a sole proprietorship?
Sole proprietorship is the basic and elementary method of doing business. It is the most
common and popular mode of doing business all over the world. In Kenya it controls the
transport system (matatu), the “jua kali” sector, professionals like lawyers, doctors, architects,
accountants/auditors, retail traders etc. “Sole” means single or one and “proprietorship” means
ownership. It means only one person or an individual becomes the owner of the business. Thus,
the business organization in which a single person owns, manages and controls all the activities
of the business is known as sole proprietorship form of business organization. The individual
who owns and runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’.
A sole proprietor pools and organizes the resources in a systematic way and controls the
activities with the sole objective of earning profit. A sole proprietorship is therefore a business
enterprise exclusively owned, managed and controlled by a single person with all authority,
responsibility and risk.
What are its characteristics and advantages?
It has the following characteristics;
i)
Single ownership
ii)
Unlimited liability
iii)
One man control
iv)
No sharing of capital and profit and loss
v)
Easy to start due to absence of involving legal formalities
vi)
Easy decision making process
vii)
Flexibility
viii) Self-employment
ix)
Business secrets well kept
However sole proprietorship has its limitations which include;
i)
Unlimited liability
ii)
Limited source of capital and management skills
iii)
Limited growth
iv)
Limited confidence with creators
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v)
vi)
Limited client/ customer confidence
Lacks continuity that is, it dies with the owner
What is a limited liability company?
Sole proprietorship and partnerships failed to adequately provide for the development of
capitalism and business due to the issue of owners liability. This led to the birth of Limited
Liability Companies which have separate legal personality from their shareholders. A limited liability
company is a registered body corporate with a legal personality distinct from that of its creators and
enjoys various rights and having some duties.
It is the most important mode of trade due to the protection it offers its shareholders through the concept
of limited liability. The basic idea of using the registered company as a tool or medium for trade
and commerce is straightforward. A company is formed or ‘incorporated’ by a promoter.
Shares are issued by the company to shareholders (who are initially ‘the subscribers’ to the
company’s constitution), who then enjoy control over the company by voting in meetings; in
proportion to the number of shares they hold.
The day to day running of the company’s business is normally delegated to directors who are
appointed by the shareholders and are usually, but not necessarily, from among their number.
In the simplest model, the company acquires its money and assets by issuing shares. The
consideration which is used to pay for the shares is then known as the ‘capital’.
Any assets accumulated by the company are owned both legally and beneficially by the
company alone and the shareholders have no direct interest in them at all. This is as a result of
the fact that a registered company is an incorporated association and that, on its formation, a
new legal personality, with its own legal rights and obligations, is created in addition to and
separate from those persons who are associating together. It is this new personality or entity
which owns the accumulated assets.
A company is able to enjoy a perpetual existence, the death or retirement of the members
having no necessary effect on its continued existence. A change of members by a transfer of
shares can be accomplished without affecting the company.
The management of the company can be assigned to specific persons, the directors, so that
other members do not have the authority to represent or legally bind the business with third
parties. Limited liability against the trading debts is enjoyed by those investing in the business.
Types of companies include;
i)
Chartered companies which are formed through grant of a charter by the State for
example, universities,
ii)
Statutory Companies which are formed through special Act of Parliament for
example, State Corporations like Kenya Power & Lighting Company Limited,
Kenya Wildlife Service, Kenya Pipeline Corporation, Agricultural Development
Corporation among others,
iii)
Registered Companies which are incorporated under the Companies Act and
include;
a) Those limited by shares,
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b) Those limited by guarantee,
c) Those unlimited
Compare and contrast companies & general partnership
i)
A company is created under Companies Act, Special Act, or Charter but a
general partnership is by an express, implied, or inferred agreement and need
not be registered,
ii)
It is more expensive to create and run a company than a partnership due to
various legal requirements,
iii)
A company is a separate legal person from owners unlike a general partnership
which is not a legal entity (personality),
iv)
Shares in a public company are freely transferable through stock exchange but a
partner cannot transfer his shares without the consent of the other(s),
v)
No limit of number of members in a company but partnership must have at least
2 and not more than 20 members except in case of professionals where there is
no limitation,
vi)
Company members are not involved in management unless they are directors
but in partnership members are governed by their agreement or the general rules
(default rules) if there is no agreement,
vii)
Company member not an agent of the company and as such his acts cannot bind
the company unlike in partnership,
viii) Members’ liability in a company is limited by the shares taken or guarantee,
ix)
Powers and duties of company are regulated by Companies Act, and its
Memorandum and Articles of Association unlike partnership which is led by
agreement or default rules,
x)
Property in the name of the company belongs to the company unlike in
partnership where it is jointly owned by the partners,
xi)
Company members only have a right to their shares,
xii)
Company has a legal personality capable of suing and being sued, and owning
property,
xiii) Perpetual succession of the Company is guaranteed since it is not affected by
the death or any form of incapacitation of its members.
Summary of the topic
We have successfully handled the partnership law and we are now able to appreciate the meaning of
partnership, purpose, and the two types of partnerships we have in Kenya today i.e. the general and limited
liability partnerships. We know one is not a legal personality while the other is. This means the differences
between the two is like day and night. We also know the importance of the law of contract in the creation and
management of partnership. The dangers of not having an agreement in a partnership business can not be
overstated. The application of the default rules is not desirable. Partner’s authority and liability is within our
knowledge. We can also explain how different partnerships are dissolved. Having had a small introduction to
the Company Law we are now confident to proceed to the next trimester and appreciate Law II fully.
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i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
ix)
x)
Self-assessment questions
Outline the importance of each legal regime that govern partnerships in Kenya and define
the concept of partnership in each of them.
There are a number of essential elements in the concept of partnership. Explain these
elements while identifying their relevant legal regimes.
“Partnership arises out of a mutual consent, which can be express, implied, or inferred from
the conduct of the parties and as such a formal agreement is a mandatory requirement in
the creation of a partnership”. (Anonymous). Do you agree? Give your reasons.
Explain the requirements for the formation of a partnership in each of the legal regimes
discussed in this unit.
A limited liability partnership is a recent creature of the law in Kenya. Why was it created
and how is it different from a limited partnership and a limited liability company?
Explain the importance of an express a agreement in a partnership.
“Since a partner is an agent of his fellow partners/partnership he has unlimited authority to
bind his fellow partners/partnership”. (Anonymous). Discuss with very clear examples.
“Since partnerships are creations of mutual consent, they can only be dissolved by mutual
consent”. (Anonymous). Do you agree? Explain yourself.
A limited liability partnership is above the usual imponderables of human beings that
implode a general partnership. Explain
Kelvin who is your classmate in Business Law believes that a sole proprietorship is the best
means of conducting business because all you make is yours and your decisions are
unquestionable. Do you agree? Give your reasons.
Further reading
Our usual further reading must include the two statutory laws that govern partnerships in Kenya. Both are
available at the Kenya law website.
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LECTURE SEVEN
CONTRACTUAL RELATIONSHIPS: THE LAW OF AGENCY
7.1 Lecture Overview
Business transactions can be quite involving to the extent that a person may find it necessary to
engage the services of another to act on his behalf. The law of agency comes in to sort out such
needs. Agency is a branch of the law of contract which describes the stipulations of the
relationship between a person and another, who he engages to undertake an activity on his
behalf. An agent is a person who is engaged by another to represent him in trading with third
party. It includes an employee or a servant who is required to create a binding contract on
behalf of the employer or master. The person on whose behalf the agent acts is called the
principal. The contract between the agent and the principal (regarding the extent and conditions
for which the agent will represent the principal in dealing with the third parties) is called
agency contract. The agent creates a contractual relationship between the agent and the
principal. It is therefore important that both the third party and the principal possess
contractual capacity.
Objectives
At the end of the topic you should be able to:
i)
Explain the nature of agency and appreciate the types of agents.
ii)
Discuss the ways in which agency contract is created
iii)
Describe the nature of an agent’s authority.
iv)
Discuss the rights and duties of both the principal and the agent
v)
Describe the liability of the principal and the agent in an agency contract.
vi)
Explain how the agency contract may be terminated
On a light touch
Two doctors boarded a flight out of London. One sat in the window seat, the other sat in the middle seat. Just
before takeoff, a lawyer got on and took the aisle seat next to the two doctors. The lawyer kicked off his shoes,
wiggled his toes and was settling in when the doctor in the window seat said, "I think I'll get up and get a
coke." "No problem," said the lawyer, "I'll get it for you." While he was gone, one of the doctors picked up
the lawyer’s shoe and put a thumbtack in it. When he returned with the coke, the other doctor said, "That
looks good, I think I'll have one too." Again, the lawyer obligingly went to fetch it and while he was gone, the
other physician picked up the other shoe and put a tack in it. The lawyer returned and they all sat back and
enjoyed the flight. As the plane was landing, the lawyer slipped his feet into his shoes and knew immediately
what had happened. "How long must this go on?" he asked. "This fighting between our professions? This
hatred? This animosity? This putting tacks in shoes and spitting in cokes?"
B: Nature of agency relationship
Agency relationship is;
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i)
ii)
iii)
iv)
Mainly a commercial relationship – most agency relationships are business
oriented.
Fiduciary relationship – the parties involved and in particular the agent owes the
principal duties of good faith, trust, confidence, and care. An agent agrees to act for
and on behalf of the principal. He is in no sense a proprietor entitled to the gains of
enterprise, nor is he expected to carry the risks.
Mainly a contractual relationship – most agency relationships arise out of a contract
and as such the law of contract is its foundation. The relationship is a consensual
one; an agent agrees, or at least consents to act under the direction or control of the
principal.
A relationship with three parties – the principal, the agent, and the third party. The
principal appoints the agent to deal with the third party on his behalf.
C: Types of agents
There are several types of agents who range from purely commercial to non-commercial
agents. Those in the category of commercial include commission agents, brokers, factors,
clearing and forwarding agents, auctioneers, etc. Non-commercial agents include professionals
like advocates, surveyors, accountants, auditors, certified public secretaries, as well as political
appointees like diplomatic agents, etc.
The following are some of the common types of agents.
i)
General agent or universal agent: This refers to a person who represents another
in a particular business, profession or undertaking. He has authority to bind the
principal in all transactions undertaken by him within that line of business,
occupation or profession. An example is a director of a company. The director is
allowed by the principal (Company) to transact on its behalf in: all the business
dealings. The directors bind the company in all contracts signed by them on behalf
of the company with or without authority provided the third party acts in good faith
and with no notice of absence of authority on the part of the directors. Under the
Company Act (Cap 486). This concept is expounded under the doctrine of indoor
management. This type of agency can also be created through a duly registered
general power of attorney.
ii)
Special agent: A person who is contracted to represent the principal in a specific
deal or act. Once the act or deal is completed, the authority of the agent ceases, e.g.
a person who is engaged to sell some land by another. The authority of the agent to
bind the principal is restricted to the land transaction. Once the land is sold, the
agent’s authority ceases and the principal cannot be held liable for contracts created
beyond the authority granted to the agent. The third parties are therefore advised to
be very careful when dealing with agents. They should where possible seek
communication with the principal before creating the contract with the agent. A
duly registered special power of attorney can create this type of agency.
iii)
Brokers: The law relating to brokers is the Brokers Act, Cap 527 Laws of Kenya,
which is an Act of Parliament that makes provision for the licensing and control of
the businesses of brokers, money-changers and goldsmiths and silversmiths.
Brokers are agents who represent the principal in a trading transaction without
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iv)
v)
vi)
vii)
viii)
ix)
physically handling the goods. Brokers can act on behalf of the buyer or on behalf
of the sellers. Once the buyer and the seller meet, the authority of the broker is
terminated. Brokers may negotiate the prices on behalf of their principal but cannot
sell in their own names. They simply arrange for contracts to be entered into
between the principal and third party. Examples of brokers are stock exchange
agents and insurance brokers.
Factors: These are agents who enjoy more powers than the brokers. They sell
goods on behalf of the principal in their own name, physically handle the goods,
receive payment on behalf of the principal and can advance credit to third parties on
behalf of the principal.
Del Credere agents: These are factors (sell goods in own possession, in own name
and can give credit) who undertake to indemnify the principal the risk of bad debts
i.e. in case a debt turns bad, the agent becomes personally liable. The agent earns
the usual factor commission and is entitled to additional commission called the de
Credere commission in consideration for undertaking the risk of bad debts. They
simply offer some assurance to their principals that the third parties they have
introduced to them shall honour their contractual obligations by undertaking to pay
if they fail to do so. This is particularly important where credit worthiness of the
third party is not known to the principal.
Forwarding agents: These are agents who represent importers and exporters. To
achieve this they must be conversant with the laws and rules regarding imports and
exports. They should in particular be conversant with booking of freight space,
transportation to the docks, customs clearance, packaging, insurance, consolidation
and deconsolidation of cargo, warehousing, etc.
Auctioneers: Auctioneers Act, Cap 526 Laws of Kenya, is an Act of Parliament
that consolidates and amends the law relating to auctioneers, to provide for the
licensing and regulations of the business and practice of auctioneers, and for
connected purposes. These are agents who are employed to sell goods to the highest
bidder. Auctioneers sell the goods on the fall of the hammer. The Auctioneer sells
goods in his possession and receives the price. He enjoys lien on the goods in his
possession. They are agents of the seller up to the point when the sale is completed
at which point they becomes the buyer’s agents for purposes of drawing and
executing transfer documents.
Estate agents: These are provided for under Estate Agents Act, Cap 533 Laws of
Kenya, which is an Act of Parliament to provide for the registration of persons who,
by way of business, negotiate for or otherwise act in relation to the selling,
purchasing or letting of land and buildings erected thereon; for the regulation and
control of the professional conduct of such persons and for connected purposes. An
estate agent is engaged in real estate transactions. In real estate brokerage, the
buyers or sellers are the principals themselves and the broker or his salesperson that
represents each principal is his agent.
Promoters: Promoters are persons engaged in the formation of a company. They
come together with the sole aim of forming a company for some specific objective.
They are agents of the unincorporated company.
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x)
xi)
xii)
xiii)
xiv)
Bankers or fiscal agents: These do the banking business on behalf of their
principals. They include banks and financial institutions that collect and disburse
money and services.
Partners: Once a partnership is formed partners become agents of one another.
Advocates: As per the provisions of The Advocates Act, Cap 16 Laws of Kenya. A
duly appointed advocate represents his client in all matters relating to the case in
issue including and not limited to receiving and filing court papers, negotiating the
matter, compromising the matter, and concluding it etc.
Pawnbrokers: Persons engaged in lending money in exchange for personal property
that is deposited as security for the repayment of the debt. In the event of default
they are able to sell the pledged security.
Diplomatic agents: These are duly appointed national representatives in foreign
countries and they include ambassadors, consuls, envoys, charges d’affaires,
commissioners, accredited ministers etc.
D: Creation of agency
Agency relationship can be created by an express or implied agreement, necessity, ratification,
estoppel, or cohabitation and presumption of marriage, and holding out. All these methods of
creating agency are explained herein below.
i)
Creation of agency by express agreement - It is the most common. The principal
and the agent agree on the issues involved in the agency contract orally or in
writing. The agreement (oral or written) basically covers issues relating to the
authority of the agent the duration of agency, the subject matter and any other issue
that may relate to the contract. Agency transactions relating to execution of deed
(for instance sale of lease or land) must be made in writing. The appointment is said
to have been done by “power of attorney” i.e. the deed, which evidences the
contract. For instance Ali contracts Juma to find a buyer for his car and sell the car
for Ksh350, 000/-. This is an express statement creating the agency whether or not
it is made in writing.
ii)
Creation of agency by implication - Agency relationship is implied if it is not
expressly made in writing or by word of mouth. The agency relationship in this case
is deduced from the circumstances of the case, from the behavior of the Parties or
from the general connection or association between the parties. Agency by
implication can be in two ways i.e. by estoppel, or by holding out.
iii)
Agency by estoppel - arises when an agent acts as if he (she) has the authority while
indeed he (she) does not have such authority. The law comes up to protect the
interest of the third party who acted in honest belief that such agency existed. The
alleged principal is precluded from denying the existence of such agency. To give
rise to estoppel, the following facts must be proved;
a) The agent made a statement or representation, which was intended to
influence the conduct of the third party
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b) There was indeed reaction from the third party to whom the statement was
made primarily motivated by the statement made. This reaction could be an
act done or omitted by the party.
c) The person to whom the statement was made should have suffered a loss.
The loss could be financial or otherwise.
An example of agency by estoppel would be the responsibility of a partner for debts
incurred by the partnership firm after the partner leaves where a third party dealt
with the partnership firm without knowing that the partner has left and were not
informed that the partner had left.
v)
Agency by holding out - out arises when a principal induced third parties to believe
that the agent takes some actions with his (her) full authority. For instance where
an employer has a habit of honouring debts procured by an employee, he (she) may
be liable to pay for goods procured by an agent without his (her) authority. The
only exception to (his would be where the employer sends the employee to procure
the goods in writing and the employee fails to provide the written authority. The
written document restricts the agent’s authority otherwise it is assumed that the
agents authority was not restricted i.e. the case of a universal agent.
vi)
Agency by cohabitation and presumption of marriage - This is agency created by
the operation of the law. It is also referred to as domestic agency. At common law a
wife is presumed to be her husband’s agent. A deserted wife can therefore pledge
her husband’s credit for necessaries. Where a man and a woman are living together,
the woman is presumed to be the man’s wife and can pledge his credit for
necessaries. The man is, however; free to rebut the presumption in any of the
following ways:a) The woman was adequately provided with necessaries or the means with
which to purchase them.
b) That he had forbidden her to pledge his credit
c) That he had previously warned the shopkeeper not to give any credit to his
woman.
d) That he gave a public notice in the newspapers to the effect that he will not
be answerable for his woman’s debt.
e) That the woman’s order was excessive in quantity and extravagant in
quality.
vii)
Creation of agency by necessity - This arises where the agent incurs a transaction,
without authority from the principal out of need to save the principal from suffering
losses. The essence here is that the agent is faced with an inevitable act, which can
result to loss. In such cases, the agent is assumed to have full authority to act on
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behalf of the principal. To prove necessity as a basis of action without authority
from the principle, the following facts must be proved;
a) There was real necessity to act on behalf of principal. Necessity arises out
of danger, inevitable accident or unforeseen circumstances likely to cause
harm to people or goods,
b) It was not possible to reach or communicate to the principal within the
available time,
c) The agent acted in good faith and to the benefit of the principal; and
d) The agent’s action was the most favourable given the circumstances
implying that the agent did not get a personal benefit.
Agency by necessity arises in the following cases:
a) Where the agent acts in case of an emergency to prevent damage to goods:
An agent who sells goods of the principal without authority to prevent them
from perishing is said to have acted out of necessity as long as the goods were
in real risk to damage, he sold the goods at the best possible price given the
circumstances and he could not reach the principal before selling the goods.
b) Where the transporter of goods acting as a bailiff, does anything to protect or
preserve the goods in an emergency without authority: The carrier of goods
acts in necessity if he sells the goods or pledges the goods to save their value.
This decision was reached in Couturie Vs Hastle where the captain of a ship
sold some corn, which had become overheated in transit. The corn would have
been destroyed if the captain had not sold it. It is however important to note
that no necessity arises if the agent was negligent or if there was no emergency.
c) Where a wife contract for supply of necessaries on credit: Where a married
woman procures necessaries on credit from third parties, she is presumed to be
an agent of the husband. This presumption arises even when the husband has
deserted the wife. The effect of this is that the husband has to pay for the goods
just as if it is him who procured the goods. Necessaries are defined as “things
that are really necessary and suitable to style in which the husband chooses to
live, in so far as the articles fall fairly within the domestic department which is
ordinarily confided to the management of the wife.” If anything it is the seller
who should prove that the goods were necessaries and not the wife!
There are However circumstances under which the husband is not liable to the
necessaries procured by the wife on credit. The circumstances are:
a) Where the husband had forbidden the wife from procuring goods or services on
credit. This exception is enforced even if the seller of the goods was not aware
of the husband’s forbidding order.
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b) Where the husband had expressly forbidden the seller not to deliver goods to the
wife on credit.
c) Where the wife procured goods or services not falling in the category of
necessaries. This decision was reached in Fhillipson v Hayter (1870) where the
necessaries were defined as goods suitable to the style in which the husband
chooses to live.
d) Where the husband had supplied the necessaries or had given allowance to the
wife to purchase the necessaries. This may not be the case where the husband
supplies the necessaries but then continues to honour credit purchases by the
wife. In Miss Gray ltd Vs Cathvart, it was held that if then husband continues
to honour the wife’s obligations after supplying the necessities, then he will be
acknowledging or holding her out as his agent. In that case he will be
responsible for further purchases made by the wife with or without his authority.
viii)
Creation of agency by ratification - To ratify is to approve, endorse or sanction as
transaction otherwise done without full or due authority. Where an agent
undertakes a transaction without authority and the principal on becoming aware of
the transaction adopts or accepts to be bound by it, agency relationship is
automatically created through ratification. Ratification is therefore retrospective i.e.
it arises in respect of a transaction, which has already been initiated by the agent
and not a transaction, and not a transaction which is to be done in the future. For
instance if Peter finds a buyer for Karen’s car and sells it without authority from
Karen and later Karen approves Peter’s action, Peter becomes a bonafide agent to
Karen through ratification or subsequent adoption of the act by Karen. Valid
ratification can be express (by word of mouth or in writing) or it can be implied by
the conduct of the principal. For instance in the above case, Karen can ratify the
transaction by either a word of mouth, or in writing, or by simply accepting the
proceeds from the sale of the car and becoming contended with the transaction. The
essence of ratification is that the principal becomes liable to the third parties just as
if he (she) had given full authority to the agent at the time of contracting.
For ratification to be legal, the following issues must be fulfilled:a) Existence of the principal: The agent must have acted for a principal who
was in contemplation or who is expressly identifiable. The agent must
therefore disclose that he (she) is actually undertaking the transaction on
behalf of that specified principal. In Natal land Company Ltd V Pauline
Colliery syndicate, it was held that ratification was ineffective since the
company adopting the act had not been incorporated at the time the
transaction was undertaken. As a rule legally non-existence persons do not
have legal capacity to contract.
b) Lawful transaction: As a general rule, the courts cannot enforce an illegal
transaction. The transaction could be against the law, against the
memorandum of association of the company or against the general
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principles of public interest. For instance the whole body of shareholders of
a company cannot ratify a transaction that is against the memorandum of
association. Such a decision was reached in an Obita dictum contained in
Ashury Carriage Company V Riche (1875).
c) Disclosure of the principal by the agent: To have valid ratification, the
agent should have disclosed the principal he (she) is acting on behalf of to
the third party. In Keighley v Durant, it was held that an undisclosed
principal could not ratify a contract.
d) Awareness of the material facts by the principal: Before ratifying the
transaction, the alleged principal must be made aware of all the material
facts of the transaction. Where the agent makes partial disclosure or
misrepresents the material facts, the agent is said to have acted fraudulently
and so ratification cannot be enforced.
e) Ratification of the whole contract: For ratification to be effective, the
principal must adopt the whole contract. Partial ratification is not
acceptable and is therefore no ratification. The effect here is that a principal
cannot ratify the rights in the contract and reject the duties of obligations.
f) Ratification within a reasonable time: Ratification must be done within the
specified time (between agent and third party) or where no time is expressly
stipulated within a reasonable time. Whatever time is reasonable depends
on the circumstances of each and every case.
g) Ratification must not injure a third party: The law is meant to protect the
interest of all people especially those who are likely to be affected by the
decisions of other people- Where a third party is likely to suffer a financial
loss or otherwise, ratification would not be enforced.
h) Capacity to contract: The principal must have contractual capacity at the
time of contracting and at the time of ratification of the contract.
E: Agents’ authority
In the case of Freeman and Lockyear V Buckburst Park Properties ltd (1964), agents’
authority was defined as;
“…a legal relationship between principal and agent created by a consensual agreement, which
they alone are parties. Its scope is to be ascertained by applying ordinary principles of
construction of contracts, including any proper implications from the express words used, the
age of trade or the course of business between parties”.
From this statement, it can be noted that an agents’ authority can be express, implied, apparent,
or usual.
i)
Express authority (actual authority) is one, which is directly communicated to the
agent either by word of mouth or writing by the legitimate principal. Where there is
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express or actual authority, the agent binds the principal to the extent of the
authority granted e.g. where the director of a college instructs a lecturer to actually
place advertisements and admit students or manage the college, the lecturer
acquires actual or express authority.
ii)
Implied authority arises when the parties to the contract presume it i.e. the parties
conduct themselves in a manner to suggest that they have full authority e.g. when
the board of directors of a company appoint one of their own to be the managing
director, he assumes the authority of that office despite the fact that he (she) was not
appointed by the shareholders. Such a director will be assumed to have the
authority that is commensurate with the position held. Watteau v Fenwick (1893) A
bar administrator was instructed by the defendant, the owner of a bar, not to
purchase cigars on credit. The administrator disregarded the instructions and
purchased cigars on credit from the plaintiff who was not aware of the instructions.
It was held that the administrator had implied authority to purchase on credit unless
express instructions were made to the seller not to sell to the bar manager on credit.
In this case the bar owner had to pay for the cigars.
iii)
Apparent authority is the authority of the agent as it appears to others. It is also
known as ostensible authority. In Freeman v Locker, Lord Diplock described it as
“the legal relationship between the principal and the contractor created by a
representation, made by the principal to the contractor, intended to be and is in fact
acted upon by the contractor, that the agent has authority to enter on behalf of the
principal into a contract of a kind within the scope of the ‘apparent’ authority, so as
to render the principal liable to perform any emergency. Such are the cases where
the agency relationship is created by necessity.
iv)
Usual or customary authority is the authority an agent in a particular trade or
profession is known or deemed to possess due to passage of time and practice.
Lawyers are deemed to have authority to compromise their clients’ cases. Where a
principal wishes to preclude such authority he must expressly communicate the
same to third parties in order to escape liability.
v)
Inherent Agency Power - inherent agency power is derived not from actual
authority, apparent authority or estoppel, but solely from the agency relation and
exists for the protection of persons harmed by or dealing with a servant or other
agent. The agency relationship may somehow give the agent the power to harm
third parties even if there is no manifestation by the principal that the agent is acting
on his behalf. This authority is closely related to the usual or customary authority in
that one is presumed to have it by virtue of the position he is holding.
F: Duties of an agent
"Every servant and every agent owes to his master or principal duties of good faith and fidelity.
He owes those duties because the law imports those duties as a contractual term or because
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the contract contains an express term to that effect or because a court of equity would have
imposed an obligation of good faith and fidelity as a matter of conscience."
Regardless of the way the agency relationship was created, an agent would be indebted to the
Principal to fulfil the following duties:
i)
To abide by the principal’s directions and business customs: The agent must at all
time act within the extent of authority granted by the principal. He must follow all
the rules and instructions given by the principal. The principal is generally not
liable to acts done by the agent without his (her) authority. The agent must also
account for profits made within the scope of his authority.
ii)
To perform the task or duty with reasonable skill and diligence: The agent must
at all times carry out the specified task with care, professionalism and diligence
generally expected from similar agents. For instance a clearing and forwarding
agent must carry out his (her) duties with reasonable care and professionalism
expected from such agents. The agent would be liable for losses arising out of his
neglect of professionalism. A factor must for instance apply his skills in attesting
the credit worthiness of a buyer before granting I credit. An insurance broker has a
duty to advise the principle on the legality of the ‘insurance contract that the
principal may be interested in. An agent appointed to sell a car j must seek the
highest price. An agent appointed to buy must seek the least price etc.
iii)
To keep proper and true accounts and to render them to the principal whenever
called upon to do so: the agent must account for the principal’s money and
property at iris control. The accounts should be surrendered to the principal on
demand or without or within the stipulated periods.
iv)
To inform the principal and seek instructions: The agent must at all times seek
the principal for instructions on what to do whenever he (she) finds himself in such
a position. An exception to this is in the case of an emergency or where the
principal cannot be reasonable reached.
v)
Not to make any secret profit: A secret profit in this context implies a financial
gain to the agent from the subject matter of the agency contract. An agent has an
obligation to disclose all profits made from the agency contract and surrender the
profits to the agency. This is so because there is a fiduciary (stewardship)
relationship between the agent and the principal. Where an agent makes a secret
profit, the principal can recover the amount of the secret profit from the
remuneration of the agent and if he had already paid him his commissions, he can
sue for the recovery of the secret profit. The principal can even repudiate the
contract.
vi)
Duty to surrender all property and proceeds of the principal: all property subject
matter of the agency and proceeds thereof do not belong to the agent and they must
be surrendered to the principal or to the personal representatives of the principal in
case of death, personal incapacitation or legal incapacitation of the principal. This
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duty should be exercised in case of death, insanity, bankruptcy or other
incapacitation of the principal.
vii)
Not to delegate his authority: the general principle of the law is delegates do not
protest delegate i.e. delegate cannot sub delegate. It means that no one can delegate
authority, which has been delegated to him. The exceptions to this rule would
apply in the following cases:a) Where the principal has expressly or impliedly allowed the agent to
sub delegate:
b) Where it is a business custom to sub delegate;
c) Where the nature of the work is such that a sub delegate must be
appointed;
d) Where the issue in question is discretionary in nature i.e. it does not
relate to powers conferred to the office by the law; and
e) Where unexpected issues arise, which render the appointment of a sub
delegate essential especially in cases of an emergency or necessity to
prevent financial or other loss to the principal.
G: Duties of the Principal
As much as the principal enjoys the services of the agent and has right to demand that the agent
renders his duties faithfully, he (she) has the following legal obligations to the agent:
i)
To pay remuneration of the agent: The principal must pay to the agent the agreed
commission.
ii)
Indemnity: The principal has got a duty to indemnify or reimburse the agent all the
out of pocket expenses incurred by him in the rightful and bonafide conduct of his
agency duties.
H: Rights of the agent
The agent who has been legally appointed can demand the following rights from the principal.
i)
Remuneration: The agent has a right to receive the agreed remuneration precisely
in accordance with the terms of the agency agreement. Where no remuneration is
agreed, the agent is entitled to a reasonable remuneration unless he agrees to
volunteer. This right is enforced once the agent has completed the work even if
performance was not executed (provided the agent was not to blame for the nonexecution). Where the agent fails to carry out his duties with reasonable skill and
dignity, the principal can withhold the remuneration and to some extent the
principal can withhold the remuneration to cover his losses but such remuneration
withheld should commensurate with the loss suffered.
ii)
Retainer: The agent has a right to recover his remuneration and other expenses
paid by him from the money received on behalf of the principal and pay the
principal the net amount due.
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iii)
Lien: This is the right to withhold the property, documents of title and or goods of
the principal until the principal pays the remuneration and other agency expenses
due to the agent. This right can only be enforced where the agent has the goods or
papers with him it cannot be exercised if the agent has already passed the goods to
the principal.
iv)
Indemnity: The agent has a right to be indemnified against all expenses incurred in
respect of the agency provided that the agent incurred the expenses within his
authority.
I: Rights of the principal
The rights of the principal in the agency contract are indirectly the duties of the agent. The
rights are;
i)
Right to give instructions and expect them to be acted upon by the agent
ii)
Right to have the agent act with reasonable care skill and diligence;
iii)
Right to have proper and true accounts presented to him by the agent on demand or
within the agreed periods;
iv)
Right to receive all the proceeds of the agency from the agent including any secret
profits;
v)
Right to withhold remuneration of the agent where the agents is guilty of
misconduct;
vi)
Right to be consulted in case of an emergency; and
vii)
Right to have his property or proceeds of the agency contract surrendered to his
personally
viii)
Representatives in case of personal or legal incapacitation.
J: Liability of the Principal in an agency contract
As a general rule, the principal is liable to the third parties in an agency contract. The extent of
the Principal’s liability to third parties is discussed below:
i)
The principal is liable for all acts done by his agent within the scope of his
authority. The authority in question may be express, implied or apparent.
ii)
In case the agent exceeds the authority granted to him the principal can ratify the act
(making it binding on him) or can disown the act (making it not binding on him).
iii)
Where the agent misrepresents a transaction that is within his authority the principal
becomes liable on the transaction.
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iv)
Liability of unnamed principal. An unnamed principal is one whose existence is
disclosed but the agent does not disclose his name. His disclosure of the existence
of the principal by the agent makes the principal liable to the third party despite the
fact that the principal’s name is not disclosed. Once discovered, the legal position
of the unnamed principal becomes the same as that of a named principal, unless
there is a trade custom making the agent personally liable for instance in the case of
the stock exchange where the broker is personally liable on the contract.
v)
Liability of the undisclosed principal. Undisclosed principal is one who is neither
named or his existence is made known to the third part by the agent. The effect is
that the agent contracts as if he is the principal knowing very well that there exists a
principle. The legal issues involves in this case are as follows:
a) The agent personally liable to the third part as he did not disclose the
existence of the principal. He can sue the third party and can as well be
sued by the third party to enforce the transaction.
b) In case the third party sues the agent on the contract and any time before
judgment comes to learn of the existence of the principal, he may sue the
agent, the principal or both.
c) In case of non-performance by the third party, the principal can intervene
and sue the third party. However he can only sue for the rights that the
agent was entitled to and must also fulfil all the duties and rights of the third
party, which would otherwise been acted upon by the agent.
d) If the third party learns of the existence of the principal before executing his
part of the contract, the third party can refuse to perform his party of the
contract and argue that if he had known that the principal was in existence,
he would not have entered in to contract.
K: Personal Liability of the agent to third parties
As pointed earlier, the responsibility to third parties in an agency contract is primarily borne by
the principal. The agent is however personally liable in the following cases.
i)
Where he expressly agrees to be liable: Where the agent volunteers to be liable to
a contract, he becomes personally liable to the third party in case of breach of
contract
ii)
Where the principal is a foreigner: An agent who acts for a foreign principal is
presumed to be personally liable.
iii)
Where the principal is undisclosed: Where the agent fails to disclose the existence
and name of the principal, he becomes personally liable unless if the third party
discovers the existence of the principal and rescinds the contract.
iv)
Where the principal does not have legal capacity: A principal would lack legal
capacity if he cannot be sued for instance ambassadors and the present. In such a
case the agent assumes personal liability to the third parties.
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v)
Where the agent acts in excess of his authority. The agent is personally liable to
the acts done by him in excess of this because the liability of the principal is
limited to the extent of the authority, which he expressly gives,
vi)
Where’ in the ordinary course of business the agent becomes personally liable: In
some businesses, the agent becomes personally liable whether or not the principal is
disclosed. Such is the case in the stock exchange where the jobber holds the broker
liable for losses sustained.
vii)
Where the agent has interest in the subject matter of the contract; where the agent
will benefit in one way or another from the performance of the subject matter of the
contract with the third party, his authority is said is be coupled with interest and can
therefore bear personal responsibility.
M: Liability of the third party
A third party may find himself to blame in some situations and he may end up bearing the loss
personally. To avoid such eventualities, a third must;
i)
Check authority of the Agent before dealing
ii)
Investigate suspicious sales
iii)
Avoid any kind of collusion between him and the agent
Where neither the existence nor the identity of the principal is disclosed, the third party has the
following rights:i)
If a cause of action has accrued in favour of the third party. He may elect to sue the
agent or the principal.
ii)
If the third party has elected to sue one, and obtained the judgment, it will
extinguish the right to sue the other.
N: Termination of the agency contract
The relationship between the agent and the principal can come to an end in two ways;
i)
Through an act of the parties or
ii)
Through the operation of law.
Termination by the parties occurs in the following ways;
i)
Mutual consent: The agent and the principal can agree to have their relationship
come to an end. In the case they settle their transactions to the extent that the
contractual obligations amongst themselves were fulfilled.
ii)
Revocation by the principal: this implies withdrawal of authority by the principal.
The principal can actually withdraw his authority any time before the agent
exercises such authority. Where the agent has already exercised the authority such
authority cannot be withdrawn. It is said to be irrevocable. Where the authority of
the agent is continuous in nature, it can only be revoked for the future but not the
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past. Where the authority of an agent is granted for a specific period, and the
authority is revoked before the expiry of the period, the agent can sue for
compensation. Such is the case where a director’s contract is terminated before the
end of the contract period. NB: Agency is however irrevocable if the agent has an
interest in the subject matter of the contract for instance if a creditor is appointed by
the debtor to sell some goods so that he may recover the proceeds of the debt and
pay the balance to the creditor, such authority cannot be revoked as it would mean
that the agent (creditor) would suffer a loss. Another example would be where a
surveyor of land signs a contract with the owner of the land to sell a piece of the
land and recover his dues from the proceeds. Revoking the authority would mean
that the surveyor suffers a loss. Agency is also irrevocable where the agent has
incurred personal liability in accordance with the terms of the agency contract.
Revoking the authority would subject the agent to loss and uncertainty.
iii)
Renunciation by the Agent: To renounce is to voluntarily withdraw from an agreed
issue or transaction. Renunciation is based on the basic principle of law that no one
can be forced to carry out a task against his wish. Where the agent has continuous
authority, he can only renounce his future authority. Where the authority is
bestowed to the agent for a specific period and the agent renounces such authority,
the principal can sue the agent for damages. In any case, the agent has a legal duty
to give the principal some notice of renunciation of authority.
Termination by operation of law occurs in the following ways;
iv)
Performance: An agency contract comes to an end once the objective of the
agency contract is achieved or completed. For this matter, the authority of an
advocate in a specific suit ends once tine suit is heard and determined by the court
similarly the authority of a contractor comes to an end once the construction of the
subject matter is concluded.
v)
Expiry of the agency duration: Where the agency contract is meant to cover a
specific period the authority of the agent ends on expiry of that period.
vi)
Death of the parties: On the death of either the principal or the agent, the agency
contract is automatically terminated. In case of death of the agent, the principal
must pay the dues of the agency to his personal representatives. Similarly in the
event of death of the principal, the agent must pay the property and money in his
stewardship to the personal representatives of the principal.
vii)
Personal incapacitation of the agent or principal: In case of insanity, disability or
other incapacitation that befalls a party to the agency contract, which renders
performance impossible the agency contract, is effectively discharged. The capable
party must discharge the rights of the incapable party to the personal representatives
of the incapable party.
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viii)
Non-existence of the subject matter: Agency contract is made on the basis of
certain specified subject matter. If the subject matter is destroyed or otherwise
ceases to exist the agency contract is effectively terminated.
ix)
Bankruptcy of the principal: Where the principal is declared bankrupt by the court
the agency contract is effectively terminated. Similarly if the principal is a
corporate body, dissolution or liquidation of the body discharges the agency
contract.
x)
Where a party to the contract becomes an enemy: Where the agent and the
principal are from different countries, the agency contact comes to an end if the
countries from which they hail get in to war. This is based on the basic principle of
law that countries at war cannot trade with one another. In fact trading will a
person in a country at war with Kenya is a crime triable in the courts martial.
Summary of the topic
We have successfully gone through the law of agency and we have learnt that agency is mainly a commercial
contractual relationship between three parties; the principal, agent, and third party. We have also identified
and explained the various types of agency such as general and special agencies, brokers, auctioneers, bankers
and factor agents among others. In as much as agency is mainly a contractual relationship we have seen the
various ways of creating the same and as such agencies out of express and implied agreements, necessity,
ratification, cohabitation, estoppel, and holding out are not strange to you. The authority, duties and rights of
an agent and the principal are within your knowledge now. Agency as a vehicle for facilitating business
transactions is now very clear to you and you are ready to move to the next topic, that is, insurance law.
i)
ii)
Self-assessment questions
“No agency ever arises without some action or conduct on the part of the principal. The proposed
agent cannot by his own conduct alone establish the relationship. An agency is a matter to be proved,
and third persons dealing with an agent do so at their peril. The duty rests upon the third party to
ascertain the nature and extent of the agent's authority”.
a) List and explain, with appropriate examples, the various ways in which agency relationship
is established noting to show the role played by the principal in each and every situation.
b) What should a person prove to in order to prove existence of an agency relationship?
c) Identify and explain the nature and extent of the agent’s authority.
d) The principal is always liable for the acts and omissions of his agent. Discuss
Ken operated the famous “Ambassadorial Coffee Café” in town and deposited the money in his
mother’s account. Ken’s mother is an ambassador and as such works outside the country. Every
time she is in the country, she would sign a number of blank cheques and gave them to Ken to enable
him settle various bills for the café as they became due. She never gave her son any authority to
represent her, since he was actually carrying on his own business. The business failed and one of the
creditors, who had relied upon the credit of the mother, desires to recover from her.
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a) Can the creditor recover his money from Ken’s mother?
b) Identify and explain the various types of agents that you have come across in the law of
agency.
iii)
Mr Otieno is a prominent politician. He was recently involved in an accident while driving to Kisumu
in his new BMW. His car needed some serious repairs. He had “Otis Auto-care Ltd” inspect it and
estimate what it would take to put it in first-class shape again. It was estimated that the cost would be
Kshs.500,000/= whereupon Mr Otieno contracted with Otis Auto-care Ltd for the repair of the car at
that figure. In performing the work it became necessary for Otis Auto-care Ltd to purchase some
spare parts worth Kshs.350,000/= on credit “Ali Auto Spares Ltd”. In order to obtain the credit Mr.
Otis informed Mr Ali that he was repairing Mr. Otieno’s car a known customer of Ali Auto Spares
Ltd.
a) Is Mr. Otieno liable to Ali Auto Spares Ltd in case Otis Auto-care Ltd fails to pay for them?
Give your reasons.
b) Who may be an agent?
c) What is the difference between an actual and an ostensible agent?
d) Is any particular form required for the appointment of an agent?
iv)
Mr. Ngugi a Director of “Masomo Academy” hires Mr. Kilonzo to buy some books from “Books and
Pens Enterprises”. Soon afterwards, the Director of Masomo Academy realizes that he cannot make
use of the books.
a) Must Mr. Ngugi accept delivery and pay Books and Pens Enterprises? Give your reasons.
b) Identify and explain the kind of authority possessed by Mr. Kilonzo.
v)
“Books and Pens Ltd” recently dismissed Mr. Mwangi who was its sales agent, but gives no notice to
the public. Shortly thereafter, Mr. Mwangi contracts to sell goods by separate contracts to “Masomo
Academy”, “Kalamu Academy”, and “Kitabu Peke Academy”. Masomo Academy had known of Mr.
Mwangi’s former employment. Mr. Mwangi showed Kalamu Academy a letter from Books and Pens
Ltd to Mr. Mwangi stating that Mr. Mwangi was its sales agent. Kitabu Peke Academy had not
known of Mr. Mwangi’s employment and relied wholly on Mr. Mwangi’s oral statement.
a) Do the three academies have valid contract claims against Books and Pens Ltd?
b) How is agency terminated?
Further reading
Please obtain some reading materials on the law of agency and read the same for your further knowledge.
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LECTURE EIGHT
CONTRACTUAL RELATIONSHIPS: THE LAW OF INSURANCE
8.1 Lecture Overview We are all exposed to some kind of danger every day. These dangers are
not limited to human beings but they extend to everything connected with human beings
including their businesses and properties. These dangers include:
i)
Personal injuries while traveling by any means or at our work place.
ii)
Damage or loss of property due to any kind calamity whether natural or
malicious.
iii)
Sicknesses to ourselves or our livestock, pets and other kinds of animals etc.
Due to our inability to accurately predict the effects of future events, we are bound to suffer
some loss and damage if unfavourable events occur. These dangers that we constantly face are
the unpredictable risks of life. “Risk is the inability to accurately predict the effects of future
events which might result in losses.” People tend to ensure that they take some steps that would
cover their loss and damage when it occurs. Buying insurance (taking an insurance
cover/policy) is one method of controlling the financial aspects of the unknown future.
A person who takes out an insurance policy exchanges a situation of risk for a situation of
financial certainty. This is because the insurers guarantee the insured, subject to certain
provisos, that his or her financial position will not be affected by the occurrence or nonoccurrence - as the case may be - of certain specified events. In effect, the risk is transferred
from the insured to the insurer. In Kenya the law of insurance is stipulated in The Insurance
Act, Cap 487 Laws of Kenya.
i)
ii)
iii)
iv)
v)
Objectives
Define insurance
Appreciate the nature of the contract of insurance
Introduce the fundamental principles of insurance
Explain other general concepts of insurance.
Introduce the branches and types of insurance.
B: Definitions
“An insurance relationship arises when one person, called the insurer, undertakes, in return for the
agreed consideration, called the premium, to pay to another person, called the insured, a sum of
money or its equivalent on the happening of a specified event”
Insurance contracts have two parties “the insurer” and “the insured”. An insurance contract is a
contract whereby, in return for a consideration known as a “premium”, the insurer (the
insurance company) undertakes to pay money or if specifically agreed make provision in kind
to the insured/the policyholder or to a third party on the occurrence of the incident on which it
has been agreed that the insurer’s obligation depends.
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Insurance is, therefore, an agreement where, for a stipulated payment called the premium, one
party (the insurer) agrees to pay to the other (the policyholder or his designated beneficiary) a
defined amount (the claim payment or benefit) upon the occurrence of a specific loss. This
defined claim payment amount can be a fixed amount or can reimburse all or a part of the loss
that occurred. The insurer considers the losses expected for the insurance pool and the potential
for variation in order to charge premiums that, in total, will be sufficient to cover all of the
projected claim payments for the insurance pool.
The premium charged to each of the pool participants is that participant’s share of the total
premium for the pool. Each premium may be adjusted to reflect any special characteristics of
the particular policy. Insurance companies operate on the basis of “pooling of risk”. This
implies that the insurer takes premiums from the insured believing that only a few of them
would suffer the covered loss. Those who suffer the risk are compensated; those who do not
suffer the risk do not have refunds for the premiums paid.
Insurance is, therefore, an agreement by which one party, the policy owner, (insured) pays a
stipulated consideration called the 'premium' to the other party called the insurer in return for
which the insurer agrees to pay a defined amount of money or provide a defined service to the
insured/beneficiary or a third party if a covered event occurs during the currency of the policy.
C: Nature of an insurance contract
The law of contract plays a central role in insurance transactions. As a general rule, it is the
insured that makes the offer to the insurer. The offer is made through a formal proposal
document which is usually provided by the insurer. The law requires/obliges the parties to
provide information in utmost good faith unlike in other commercial transactions where we
find the rule of caveat emptor in play.
While the insurer is evaluating the proposal, it issues a cover note (temporary cover) which,
however, can be rescinded any time before its expiry. Once the insurer has evaluated and
accepted the offer it issues an insurance policy before the expiry of the cover note. The
insurance policy is the true document that evidences the insurance contract even if no
premiums have been paid by the insured.
D: Characteristics of insurance
The basic characteristics of insurance are:
i)
Pooling of losses - pooling of risks or the sharing of losses is the heart of
insurance. Pooling is spreading of losses incurred by the few over the entire
group, so that, in the process, average loss is substituted for actual loss. It
implies; sharing of losses by the entire group, and Prediction of future losses
with some accuracy based on the law of large numbers.
ii)
The law of large numbers - states that the greater the number of exposures, the
more closely will the actual results approach the probable results that are
expected from an infinite number of exposures.
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iii)
Payment of fortuitous losses - payment is made for losses that are unforeseen
and unexpected and occurs as a result of chance. This means the loss must be
accidental.
iv)
Risk transfer - in this, a pure risk is transferred from the insured to the insurer
who is in a stronger financial position than the insured.
v)
Indemnification - means the insured is restored to his or her approximate
financial position prior to the occurrence of the loss
E: Functions of insurance
The main function of insurance is to compensate the “insured” (the person or organization who
“effected” or “took out” and paid for the insurance) for loss or damage caused by the risk
insured against. In many cases the “compensation” by the insurers takes the form of
“indemnity” that is, placing the insured in the same position financially as he or she or it was in
immediately before the loss or damage took place. The insured should be no better and no
worse off than he or she or it was before the loss or damage occurred. Indemnity may be in any
of the following forms:
a) A payment of money ( equal to the sum assured or part thereof)
b) The replacement of the lost or damaged item.
c) The repair of a damaged item.
d) Restoration, for example, rebuilding a house destroyed by fire.
Other secondary functions of insurance include the following:
i)
Risk control – insurers advise people/organizations on ways and means of
reducing the likelihood of risks becoming reality and of reducing the effects of
risks
ii)
Reducing fear of the future- it gives some peace of mind in that one is assured
of some compensation in the event of loss occurrence.
iii)
Confidence building - It promotes and gives confidence needed in undertaking
new and risky ventures. This ends up encouraging research and development
and economic growth
iv)
It promotes saving – life policies have this effect since the sum assured is
payable upon death or upon expiry of the term
v)
It promotes investment – reserve funds held by the insurance companies are
invested in the economy
vi)
It reduces demands on social services – this is particularly so in third party
motor accident claims whether compensations by insurance companies help in
reducing dependence on the state facilities.
F: Elements of an insurance contract
“The large print giveth, the small print taketh away”
Archbishop Fulton J. Sheen (1895-1979)
Often the insured gets upset when he finds out that the company he is insured with will not cover a
specific medical need. But usually the company has spelled out very carefully what it will not cover--in
the small print! So read the small print very carefully!
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An insurance contract is a contract of utmost good faith and as such it remains voidable upon
discovery of absence of good faith by either party. This means the insured must disclose all
material facts about the item or risk to be insured to the insurers, whilst the insurers must
disclose to the insured the full details and terms of the insurance to be provided.
It is a formal document usually called “the insurance policy” which must be signed by both
parties and must specify the following:
i)
The particulars of the contracting parties
ii)
The name of the beneficiary of the insurance,
iii)
The period of cover
iv)
The person or the item covered
v)
The value of the policy or the property at risk
vi)
The type of risks (the “insured risk”)
vii)
The maximum limit of the insurer’s liability (the “insured sum”)
viii) The exceptions to cover (if any)
ix)
The premium payable and its mode of payment
x)
The applicable law
G: Fundamental principles in insurance contracts
The most important fundamental principles related to insurance contracts are:
i)
The principle of utmost good faith - An insurance contract is based on the
principle of utmost good faith which is supported by three important legal
doctrines: Representations, Concealment, and Breach of warranty (promise
made by the insured in the contract). Both parties are entitled to rely on good
faith upon the representations of the other. The rule of caveat emptor does not
generally apply. The Insurer believes the representations of the Insured.
Representations of insured are statements of his or her age, weight, height,
occupation, state of health, family and personal history or any other information
required in the proposal form. Here both the parties are under an obligation not
to attempt to deceive or withhold material information from the other. The
insurance contract is voidable at the insurer's option if the representation is
material to the contract, that is, if the insurer had known the true facts, the
policy would not have been issued or would have been issued on different
terms.
ii)
The principle of indemnity - The principle of indemnity states that the insurer
agrees to pay no more than the actual amount of the loss, which means the
insured should not profit from a loss. The principle has two fundamental
purposes. To prevent the insured from profiting from a loss, and To reduce
moral hazard.
iii)
The principle of insurable interest - This principle states that the insured must
be in a position to lose financially if a loss occurs, or to incur some other kind of
harm if the loss takes place. It means the insured must be so circumstanced in
relation to the subject matter of the insurance as to benefit by its existence or be
prejudiced by its destruction. It helps in prevention of gambling, to reduction of
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moral hazard and in measuring the amount of the insured's loss (in property
insurance).
iv)
The principle of subrogation - This strongly supports the principle of
indemnity. Subrogation means substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third person for a loss covered by
insurance. In an accident the insured victim gives legal rights to the insurer to
collect damages from the negligent third party instead of collecting himself
directly from the third party. The claim against the wrong doer is made in the
name of the insured by the insurer who “steps into the shoes of the insured”
after having indemnified the insured so as to recover the loss. The main
purposes of subrogation are: to prevent the insured from collecting twice for the
same loss, to hold the negligent person responsible for the loss and to hold down
insurance rates.
v)
The principle of contribution - Subrogation and Contribution are corollaries to
the principle of indemnity. Both these arise only in property insurance.
Contribution arises with the liberty of double insurance which means the
assured can insure the same property with more than one insurer which may
lead to over-insurance. The conditions to satisfy this right of contribution are:
All the insurance must relate to the same subject matter; they should cover the
same interest of the same insured; They should cover same peril; and All of
them should be in force at the time of loss. When all these conditions are
satisfied then the insurer who has fully paid the sum assured, can claim
contribution from the other co-insurers in a pro-rata basis.
vi)
The principle of proximate cause - The legal doctrine of proximate cause is
based on the principle of cause and effect. It does not concern itself with the
cause of causes. The law provides the rule “causa proxima non remota
spectatur” which means to be proximate; a cause must be immediate cause,
which is effectual in producing that result but not the remote or distant one. The
cause has to be selected by applying common sense standards, that is, the
standards of a man in the street. An insurance policy is designed to provide
compensation only for insured perils but not for uninsured and excepted or
excluded perils. The selection of proximate cause is not an easy and simple task
because loss may be caused by several events acting simultaneously or one after
the other. It is necessary to differentiate between the insured peril, the excepted
peril and the uninsured peril. This doctrine serves not only to define the scope of
coverage under the contract but serves also to protect the relative rights of the
parties to the contract. It maintains a balance between the rights of the insured
and insurer. In the absence of this rule, every loss could be claimed by the
insured and every loss could be rejected by the insurer.
H: Other issues in insurance law
i)
Over-insurance - This is a situation where a person overstates the value of the
property so that in the event of occurrence of the risk; the amount compensated
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will be more. This is definitely against the indemnity principle, as the person
would make a profit out of the insurance issues as well as the doctrine of utmost
good faith as the insured must have lied before the signing of the contract. If a
person over insures his property, and a loss occurs, the insurer compensates the
amount of loss actually suffered and not the amount insured. Where there is a
partial loss on the side of the insured the average clause is applied.
ii)
Under-insurance - This is the opposite of over-insurance and involves an
insured quoting lesser value for the property so as to pay lesser premiums. The
concept is against the doctrine of utmost good faith.
iii)
Re-insurance - This implies an insurer insuring with another insurer. This
concept is especially relevant when the subject matter of the insurance is quite
expensive. In the event of occurrence of the risk, the insurer compensates the
insured who is in turn compensated by the re-insurance company.
iv)
Double insurance - This is a situation where a person insures his property with
more than one insurance company. If this is done and the value of the property
is not overstated and there is collaboration between the two companies, the
principle of contribution applies but if there is no collaboration between the
insurance companies, it amounts to double insurance. In double insurance, the
insurer hopes to gain from each of the two companies in the event of occurrence
of the risk which is against the principles of utmost good faith and indemnity.
The issue of double insurance does not apply in the event of life insurance as
life insurance is not a contract of indemnity. One can have as many life
insurance policies as he wishes with many different insurance companies.
I: Branches of insurance
Insurance contracts are classified as life or general insurance. Life insurance (assurance)
involves taking a policy on ones’ life.
i)
Life insurance policy - The contract involves payment of premiums in consideration to
a sum assured (a capital) sum payable on expiry of a specific period or death. The
assured can withdraw from the contract. In that case the premiums paid will be
refunded. The amount refunded will be less than the amount contributed. The amount
refunded is called “surrender value”. The excess of the premiums paid over the
surrender value account for the damages for breach of contract. Life policies are freely
assignable. This means that one can transfer the life policy to someone else. The
insurance company charges a nominal amount called transfer fees. Life policies holders
may be given the right to participate to the dividends of the company. Such a policy is
referred to as a “with-profit-policy”. If the privilege is not there, then the policies are
said to be “without-profit-policies”. The profit payable can be paid in any of the
following three forms:
a) Cash bonus: Where the amount is paid in cash.
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b) Bonus in reduction of premiums: Where the premiums payable by the
insured are reduced by the amount of the bonus; and
c) Reversionary bonus: Where the amount of the bonus is accumulated and
paid over to the insured together with the sum assured.
A policy holder can borrow a loan from the insurance company, where the
collateral or security is the life policy. Life insurance is a form of saving and
can therefore be used in lieu of pension especially for the self-employed
persons.
Life insurance can be classified into two:
a) Whole life policy: It’s a policy taken, with a promise to repay the sum assured
on the death of the insured. It means that the sum assured is for the benefit of
the beneficiaries and not the insured. In whole life policy, one undertakes to
pay premiums to the insurance company during his lifetime.
b) Endowment policy: It’s a life policy taken for a specified period of time e.g 5
years, 10 years or any other period. The insurer undertakes to compensate the
insured, in the event of expiry of the stated period or death, whichever is earlier.
The two forms of life insurance differ in the following ways;
Endowment policy
Period involved definite in terms of years
Beneficiary can be the insured or his
selected beneficiaries.
Amount of premiums relatively higher
Whole life policy
Lifetime
Payment of sum on expiry of the stated
period or death. (whichever is earlier)
Lesser than in endowment
The following factors determine the amount of premiums payable by the insured to the
insurer in the cases life insurance.
a) The sum assured
b) Age of the assured
c) The type of life policy i.e. whole life or endowment
d) Nature of work. Some jobs environments pose danger or health hazards.
e) Long-term illnesses: those with long-term diseases are risky to insure than those
without.
f) Affordability of the policy to the assured.
ii)
General insurance - This refers to insurance other than life insurance. It differs with
life insurance in the following respect:
Life insurance
General insurance
Period involved
Definite in terms of years Short periods usually annual
Transferability
Life policies can be Transferred
assigned or cannot be
transferred
Eventuality of occurrence Occurrence of death is Occurrence of risk is not an
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of death
Subject matter
certain hence insurance
Life of an individual
Form of contract
Not a contract
indemnity
No harm
Double insurance
assurance
Some lifeless property but with
monetary value
of A contract of indemnity
Harmful on the part of the
insured
Withdraw
One can withdraw or No surrender value in case of
surrender
withdrawal
Bonus and profit payment
Possible
Not possible
Application of the average Not applicable
Applicable
clause
Loans
Policyholder can borrow Policy holder cannot borrow
from
the
insurance
company
Subrogation
Not applicable
Applicable
Investment
It is an investment
Not an investment
There are various forms of a general insurance
a) Fire Insurance: It involves insuring the property against the loss of fire, in the case of
businesses, building can be insured as well as stock and loss of profits during the period
of dislocation.
b) Theft and burglary insurance: This policy covers losses caused by robbers.
c) Bad debts insurance: This policy covers losses caused by debtors failing to honor their
obligations.
d) Marine insurance: Insurance policy covering the firm against the loss of the ship or
the cargo when overboard. It can be classified into; Voyage policy: Marine insurance
cover for a specific journey over the seas. Time policy: Marine insurance cover for a
specific period. Floating policy: marine insurance cover for a specific route for a
particular time period. Mixed policy: Marine insurance cover for both the voyage and
the period involved. Port policy: covers the ship at the time it is at the port.
e) Fidelity guarantee policy: this policy covers the firm against the loss of cash by
fraudulent cashiers.
f) Vehicle insurance: This is the insurance of motor vehicles used on road. There are two
types of vehicle insurance policies i.e. the comprehensive policy and the third party
policy. Third party policy is mandatory under Cap 405 Laws of Kenya. The third party
policy covers only the third party i.e. any person who was injured in the accident other
than
the
owner.
The
policy
ensures
those
injured/damaged
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passengers/pedestrians/property are compensated. The owner and his vehicle is not
compensated unlike in a comprehensive policy situation.
g) Professional indemnity: This policy is common with professionals such as lawyers,
doctors, architects etc. it compensates clients who may suffer loss in the hands of their
professional advisors.
Summary of the topic
Insurance relationships are created through the law of contract. An insurance relationship arises when one
person, called the insurer, undertakes, in return for the agreed consideration, called the premium, to pay to
another person, called the insured, a sum of money or its equivalent on the happening of a specified event.
The main purpose of insurance is to indemnify the insured for the loss suffered. An insurance contract is a
contract of utmost good faith and as such it remains voidable upon discovery of absence of good faith by
either party. Insurance contracts are classified as life or general insurance. Life insurance (assurance)
involves taking a policy on ones’ life. General insurance has several classes such as motor vehicle, fire and
burglary, professional indemnity among others.
i)
ii)
iii)
iv)
Self-assessment questions
Explain the nation of insurance law and its functions
List and explain the basic principles that govern insurance law
Why is the principle of utmost good faith of paramount importance in insurance transaction?
Is the doctrine of privity of contract strictly applicable in insurance law? Explain with examples.
Further reading
Read relevant materials on insurance together with Cap 487 Laws of Kenya to gain some general knowledge
on insurance law.
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LECTURE NINE
CONTRACTUAL RELATIONSHIPS: THE LAW OF PROPERTY
9.1 Lecture Overview
Property is defined as any item that belongs to a person either movable or immovable. Any
item capable of being legally owned where ownership is defined as “the entirety of the powers
of use and disposal allowed by law” . There are a number of legal implications for a business
that relate to property; The legal implications relating to property involve the unique set of
laws that apply to the purchase of existing property, construction of new premises, or leasing
existing premises. In addition, occupation of a business premises will likely be subject to
regulations concerning matters such as fire and health and safety. A further legal implication
for business arising from property relates to customers who may be injured on their premises.
In such instances, a business may be held liable for the injuries and be required to pay damages
to its injured customer.
Objectives
At the end of the topic you should be able to:
i)
Define the term property
ii)
Discuss the various types of property
iii)
Explain the various ways in which property may be acquired
iv)
Discuss the nature of land as property
v)
Differentiate between lease and tenancy
vi)
Discuss the duties of the tenant in a contract of lease.
On a light touch
A lawyer was driving his big BMW down the highway, singing to himself, “I love my BMW, I love my BMW”.
Focusing on his car, not his driving, he smashed into a tree. He miraculously survived, but his car was totally
wrecked. Oh my BMW!! Oh my BMW!!” he cried. A Good Samaritan drove by and cried out, “Sir, sir, you are
bleeding! And my god, your left arm is gone!!!” The lawyer, horrified, screamed “Oh my Rolex!!! Oh my
Rolex!!!
B: Classification of Property
i)
Real (realty) Property - Refer to immovable property. It includes land,
building, mineral, trees and other things affixed to the land. Real property is
sometimes referred to as Landed property.
ii)
Personal Property (personalty/chattels) - Refer to any property which is
movable and includes chattels, furniture, books, vehicles etc. (chattels/leases)
iii)
Choses in action - It is intangible right which is incapable of physical
possession e.g. a copyright, goodwill, trademarks, patents, debt etc.
iv)
Choses in possession - It is a tangible movable right or thing which is capable
of physical possession such as cars, pets, jewellery, etc.
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C: Acquisition of ownership
Ownership is a matter of law and it defines the relationship between a person and any right that
is vested on him over the property. A person is the owner of the property if he has the ultimate
legal right over its uses and disposal. On 2nd May 2012, three new land laws came into effect in
Kenya. These laws were enacted in order to implement Article 68 of the Constitution. The new
laws are;
i)
The Land Registration Act No.3 of 2012,
ii)
The National Land Commission Act No.5 of 2012, and
iii)
The Land Act No.6 of 2012.
Section 7 of The Land Act provides several ways of acquiring title to land. According to this
Act title to land can be acquired through;
i)
Allocation
ii)
Land adjudication process
iii)
Compulsory acquisition
iv)
Prescription
v)
Settlement programs
vi)
Transmissions
vii)
Transfers
viii) Long term leases exceeding twenty one years created out of private land
ix)
Any other manner prescribed in an Act of Parliament.
These various ways of acquiring title to land can be reduced into four broad categories as
follows;
i)
Original claim - it is where a person may acquire ownership of property by
asserting the original claim over it. This may be done where the property in
question has never been owned by anyone else e.g “a virgin land” Where a
person creates something new or acquires something with no ones claim
amounts to ownership by original claim. Here we find land adjudication process
being applied.
ii)
Derivatively- Where a property is acquired from the original owner e.g where
the owner sells it to the buyer or where the owner makes a gift to another person
the right of ownership is transferred to the later. Such property is said to be
owned derivatively that is, the new owner does not acquire ownership originally
but derives his right from the previous owner. In this category we find transfers,
allocations, settlement programs, long term private leases, and compulsory
acquisitions.
iii)
Succession- Where the previous owner dies, the property may pass to his heir or
to someone else under the will. Transmissions apply in this category.
iv)
Possession- It is a matter of fact, it is the physical detention and intention to
hold the things detained as one’s own. These can be converted into ownership
under:a) If wrongful possession of land continues for 12 years or if it is goods for
6 years. This deals with prescription as a method of land title
acquisition.
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b) The holder of a negotiable instrument: a factor and a seller in the market
overt can give a better title than they themselves had provided. The
buyer takes what they offer for value and in good faith.
D: Co-ownership
If the property rights in relation to land are held by two or more persons together, it is known
as co-ownership. The following are forms of co-ownership;
i)
Joint ownership or tenancy- It is where two or more persons jointly hold
property as tenants. It has the following features;
a) Doctrine of survivorship:- It helps to determine the rights of joint
tenants to the property jointly held by them. In the event of one or more
of the joint tenant under this doctrine dies, his interest in the property
passes to the other joint tenant and this continues until one survivor is
left who then becomes entitled to the whole property. If a tenant wishes
to transfer his interest to his descendant, then he should not hold the
property in joint tenancy.
b) Unity of possession- each and every joint tenant is entitled to any part of
the land. None of them can point any part and say it belongs to him.
c) Unity of interest- the interest of each joint tenant is the same in extent,
nature and duration; hence there is no joint tenancy between leaseholder
and the freeholder.
d) Unity of title- Each joint tenant must have been created by the same
act/document.
e) Unity of time- The interest of each tenant must have arisen at the same
time in order to qualify for joint tenancy.
ii)
Ownership in common/tenancy in common- Each tenant in common has a
fixed share in the property and in the tenancy. The doctrine of survivorship is
not applied. The holder of the property can make provisions to their prospective
dependants. A tenant in common is free to dispose of his interest in any manner
he likes without restriction by his co-owners.
Termination of co-ownership can occur in the following ways;
i)
Partition- Co-owner may voluntarily agree to partition the property where each
co-owner becomes the owner (sole tenant) of the piece allotted, to him.
ii)
By sale- Co-owner may decide to sell the property but they remain entitled to
their proportionate shares in the proceeds of sale in some cases the court may
order a sale in lieu of partition e.g where a single house is to be partitioned.
iii)
Union to a sole tenant- It happens when the sole property is vested in a sole
tenant e.g upon death of other tenants. Similarly where one co-owner acquires
the interest of his co-owner e.g by purchasing co-ownership is terminated.
iv)
By severance- Joint tenancy may decide to severe their tenancy into distinct
shares thus converting it into tenancy in common thus bringing the joint tenancy
into an end.
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D: Legal nature of land
The term land includes the following:i)
Surface of the earth
ii)
incorporeal e.g easement
iii)
Corporeal e.g minerals, building, trees – etc
iv)
Fixtures e.g seats secured to the floor of a cinema. Whatever is attached to the
land forms part of the land
E: Freeholds and leaseholds
i)
Freeholds- An estate whose duration is fixed but uncertain e.g right to enjoy a piece
of land until death as long as one remains active. The following are types of
freeholds;
a)
Fee simple freehold:- The estate survives or continues as long as the tenant
or any of his heirs, survives. The duration of the estate is fixed to the life of
the tenant but uncertain because no one knows how long the tenant will
continue to have heirs.
b)
Life interest freehold:- Estate last for the life of the grantee only. When he
dies the estate revert back to the grantor (owner of the property).
c)
Estate per autre vie “Estate lasts for the life of another person e.g If A is
given an estate for life of B and B dies before A, the estate revert to the
grantor.
d)
Fee tail interest:- Gives a person on a life interest followed by successive
interest to the person’s close descendants only. Upon the death of his
descendants, the property reverts to the grantor.
e)
Absolute- Here the ownership is not subject to any conditions.
ii)
Leases and tenancies- A lease is an interest which confers a right to exclusive
possession of land for a definite period or capable of definition. The grantor of the
lease is called a lessor or landlord and the grantee is a tenant/lessee. The difference
is the period of the lease and tenancy, whereby a lease takes a number of years
whereas tenancy takes a shorter duration. Leases have the following features;
a) It confers a right to exclusive possession
b) It relates to defined premises
c) Refer to a period that is certain.
The following are some of the common forms of leases and tenancies;
a) Lease for a fixed period of time:- It is a lease for a fixed period and it is
created by express agreement. Termination of the lease must be certain
before the lease comes into effect.
b) Periodic tenancies:- These are leases from year to year , half year to half
year, month to month etc. It continues from one period to another until it is
terminated by a proper notice. It may be created expressly or by
implication.
c) Tenancies at will:- Arises when a person occupies land as a tenant with the
landlord’s consent on the understanding that the tenancy can be terminated
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any time. It may be converted into periodic tenancy if the tenant pays rent
and the landlord accepts it.
d) Tenancy by sufferance:- It arises where the landlord holds the land of
another person without his consent. Sometimes it occurs when the tenant
has lawful title and entry of possession but afterwards keeps it without any
title at all.
NB: The tenant is liable to compensate the landlord for the use and occupation of his land
without his consent.
F: Encumbrances over land
i)
Easements - It is a right which one has over the land of another person. It is a
right to use or restrict the use of another person’s land in some way. Such a right
can only amount of easement if created in the manner prescribed by law and if it
has certain characteristic required by law. E.g a right of way, a right of water, a
right to light, a right to use lavatory situated on the land of another etc.
ii)
Profits - A profit a is a right to enter another person’s land and take something
capable of ownership in that land e.g a right to pasture, mine, fish etc from
another land. But with the easement, there is no participation in the soil or its
produce e.g. a right to collect water from your neighbour’s springs.
iii)
Mortgages/charges - A mortgage is a form of security for a loan. It involves
the transfer of interest in land from the borrower (mortgagor) to the lender
(mortgagee) with a provision for redemption on repayment of the loan. A charge
is also a form of security for a loan which does not involve the transfer of
interest in land but only an entry of the lender’s (chargee’s) interest in the
register giving him the right to sell the land in the event the loan is not repaid by
the borrower (chargor)
iv)
Licenses - A person who owns no land can have a license to enter into another
person’s land.
v)
Customary rights - Local customary right exists where an indefinite and
fluctuating class of persons is entitled to exercise certain rights over individual
land, e.g inhabitants in a village passing across an individual land when going to
church, market etc. An easement lies in grant and there must be two separate
people each owning a piece of land for an easement to be created.
G: Duties of a landlord
i)
To ensure that the tenant gets quiet enjoyment
ii)
The landlord should not use the adjoining land or permit in such a way that
makes it difficult the use of the property.
iii)
Property let e.g. houses must be fit for human habitation
iv)
The repair of premises in some cases (except for long term leases
v)
Must disable any defect of the property to the tenant.
H: Duties of the tenant
i)
Paying rent on time
ii)
Pay rates and taxes other than the ones payable by the landlord
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iii)
iv)
v)
vi)
Duty to repair leased property as per the agreement
Must not damage the leased property
Must not transfer part of the leased property
Must permit the landlord or his agent to enter the premises for inspection.
I: Termination of leases
i)
By notice (either by tenant or landlord)
ii)
Expiry of time
iii)
Forfeiture (If the tenant has not been paying rent)
iv)
Frustration e.g. if the premises is destroyed
v)
Merger- where the lease is merged to a greater estate.
vi)
Surrender-done by lessee/tenant by taking the property back.
Summary of the topic
Property is defined as any item that belongs to a person either movable or immovable. Property can be in the
following forms; real, personal, choses in action, or choses in possession. A person is the owner of the property
if he has the ultimate legal right over its uses and disposal. There are four main ways of acquiring title to land;
original claim, derivatively, succession, and possession. If the property rights in relation to land are held by two
or more persons together, it is known as co-ownership. Ownership of land can be in the form of a freehold or
leasehold. Land can be encumbered through easements, profits, charge/mortgages, licenses, and customary
rights. Landlords and tenants enter into tenancy agreements and they have rights and duties to each other.
i)
ii)
iii)
iv)
Self-assessment questions
Explain the concept of co-ownership and how it is terminated
Property can be acquired in various ways. Identify and explain them noting to use appropriate
examples
Identify and explain the various types of encumbrances you have studied in this topic noting to
capture their respective purposes.
What are the duties of a landlord and a tenant?
Further reading
Identify an appropriate text book in the library and read more on this topic.
153
LECTURE TEN
CONTRACTUAL RELATIONSHIPS: THE LAW OF NEGOTIABLE
INSTRUMENTS
10.1 Lecture Overview
Exchange of goods and services is the basis of every business activity. Goods are bought and
sold for cash as well as on credit. All these transactions require flow of cash either immediately
or after a certain time. In modern business, large numbers of transactions involving huge sums
of money take place every day. It is quite inconvenient as well as risky for either party to make
and receive payments in cash. Therefore, it is a common practice for businessmen to make use
of certain documents as means of making payment. Some of these documents are called
negotiable instruments. In this topic therefore we are going to study some of these documents
with an emphasis on how they facilitate business transactions.
i)
ii)
iii)
iv)
Objectives
Define the term negotiable instrument
Discuss the negotiable instruments in use in Kenya
Explain the characteristics of negotiable instruments.
Discuss the nature and purpose of bills of exchange, cheque and promissory notes.
On a light touch
An old man was on his death bed. He wanted badly to take all his money amounting to Ksh.300, 000,000/=
with him. He called his priest, his doctor and his lawyer to his bedside. "Here is Ksh.100, 000,000/= cash to be
held by each of you. I trust you to put this in my coffin when I die so I can take all my money with me." At the
funeral, each man put an envelope in the coffin. Riding away in a limousine, the priest suddenly broke into
tears and confessed that he had only put Ksh.90, 000,000/= cash into the envelope because he needed Ksh.10,
000,000/= for urgent church repairs. "Well, since we are confiding in each other," said the doctor, "I only
put Ksh.60, 000,000/= in the envelope because we needed a new machine at the hospital which cost Ksh.40,
000,000/=" The lawyer was aghast. "I am ashamed of both of you," he exclaimed. "I want it known that
when I put my envelope in that coffin, it held my personal cheque in favour of the old man for the full sum of
Ksh. 100,000,000/=”
B: Definitions
To understand the meaning of negotiable instruments let us take a few examples of day-to-day
business transactions. Peter, a motor vehicle dealer has sold a car to Paul for Kshs1, 000,000/on three months credit. To be sure that Paul will pay the money after three months, Peter may
write an order addressed to Paul that he is to pay after three months, for value of car received
by him, Kshs1,000,000/- to Peter or anyone holding the order and presenting it before him
(Paul) for payment. This written document has to be signed by Paul to show his acceptance of
the order. Now, Peter can hold the document with him for three months and on the due date
can collect the money from Paul. He can also use it for meeting different business transactions.
For instance, after a month, if required, he can borrow money from Susan for a period of two
months and pass on this document to Susan. He has to write on the back of the document an
instruction to Paul to pay money to Susan, and sign it. Now Susan becomes the owner of this
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document and she can claim money from Paul on the due date. Susan, if required, can further
pass on the document to Ann after instructing and signing on the back of the document. This
passing on process may continue further till the final payment is made.
In the above example, Paul who has bought a car worth Kshs.1,000, 000/- can also give an
undertaking stating that after three month he will pay the amount to Peter. Now Peter can retain
that document with himself till the end of three months or pass it on to others for meeting
certain business obligation (like with Susan, as discussed above) before the expiry of that three
months’ time period.
You must have heard about a cheque. What is it? It is a document issued to a bank (by its
account holder) that entitles the person whose name it bears to claim the amount mentioned in
the cheque. If he wants, he can transfer it in favour of another person. For example, if Andrew
issues a cheque worth Kshs. 500,000/= in favour of Bernard, then Bernard can claim Kshs.
500,000/- from the bank, or he can transfer it to Charles to meet any business obligation, like
paying back a loan that he might have taken from Charles. Once he does it, Charles gets a right
to Kshs. 500,000/- and he can transfer it to David, if required. Such transfers may continue till
the payment is finally made to somebody.
In the above examples, we find that there are certain documents used for payment in business
transactions and are transferred freely from one person to another. Such documents are called
Negotiable Instruments. Thus, we can say negotiable instrument is a transferable document,
where negotiable means transferable and instrument means document. To elaborate it further,
an instrument, as mentioned here, is a document used as a means of making some payment and
it is negotiable i.e., its ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments, the ownership of
which can be transferred from one person to another many times before the final payment is
made. A negotiable instrument is, therefore, a written document that represents money or
property of a given party which passes from one person (transferor) to a transferee as long as
the transferee takes it in good faith. The term negotiable instruments literally mean a written
document easily transferable by mere delivery. Any defect on the title cannot affect him
(transferee). Therefore a negotiable instrument is a legal document which must meet the
following conditions; Written form; Signed by the maker or drawer; That contains an
unconditional promise or order to pay; A fixed amount of money (with or without interest in a
specified amount or at a specified rate); On demand or at an exact future time; To a specific
person, or to order, or to its bearer.
The law governing negotiable instruments in Kenya are The Bill of Exchange Act Cap 27
Laws of Kenya whose preamble states: “An Act of Parliament relating to bills of exchange,
cheques and promissory notes”.
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C: Negotiation, endorsement and validity of a negotiable instrument
i)
ii)
iii)
Meaning of Negotiation - A bill is negotiated when it is transferred from one
person to another in such a manner to constitute the transferee the holder of the
bill.
Meaning of Endorsement - It is the signing of the bill transferring it to the
holder of another person. If no space is left on the face of the bill to make
endorsement, a slip of paper is attached to the bill called an allonge of
presentment. If the drawer signs a forged cheque, the instrument cannot be a
bill. Endorser of such an instrument with forged sign is liable as if genuine bill
by the doctrine of statutory estoppel. Similarly if the bill is accepted by the
acceptor, he is also stopped by the law to deny genuineness of the drawer’s
signature. The requisites of a valid endorsement are;
a) Must be written and signed by the endorse
b) Endorsement must be of the entire bill.
c) Where payable to the order of two or more payees or endorsees who are
not partners, all must endorse unless one has the authority.
d) Where there are two or more endorsements on a bill, each is viewed as a
separate bill unless viewed contrary.
e) Where in a bill payable to order, the payee or endorsee is wrongly
designated or his name is misspelt, he may endorse the bill if he thinks
fit and add his proper signature.
f) An endorsement may be in blank (name of payee not stated meaning it is
payable to the bearer) or special (name of the payee is stated thus
limiting its negotiability)
g) It may also contain some restrictions, conditions and qualifications.
Validity of negotiable instruments - the following does not affect validity of a
negotiable instrument;
a) Not dated - The fact that an instrument is undated does not affect its
negotiability, unless the date of the instrument is necessary to understand
the payment term;
b) Postdating or antedating an instrument does not affect its negotiability;
c) Inter-lineation and other written or typewritten alterations need not
affect negotiability;
d) If the instrument fails to specific the applicable interest rate, the
judgment rate of interest (defined by statute) becomes the interest rate on
the instrument.
e) Notations that an instrument is “non-negotiable” do not affect the
negotiability of a cheque but may make other instruments nonnegotiable.
D: Features of Negotiable Instruments
The common features of negotiable instruments are;
i)
A negotiable instrument is freely transferable. Usually, when we transfer any
property to somebody, we are required to make a transfer deed, get it registered,
pay stamp duty, etc. But, such formalities are not required while transferring a
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negotiable instrument. The ownership is changed by mere delivery (when
payable to the bearer) or by valid endorsement and delivery (when payable to
order). Further, while transferring it is also not required to give a notice to the
previous holder.
ii)
Negotiability confers absolute and good title on the transferee. It means that a
person who receives a negotiable instrument has a clear and undisputable title to
the instrument. However, the title of the receiver will be absolute, only if he has
got the instrument in good faith and for a consideration. Also the receiver
should have no knowledge of the previous holder having any defect in his title.
Such a person is known as holder in due course. For example, suppose Rebecca
issued a cheque payable to Susan. It was stolen from Susan by a person, who
passed it on to James. If James received it in good faith and for value and
without knowledge of cheque having been stolen, he will be entitled to receive
the amount of the cheque. Here James will be regarded as ‘holder in due
course’.
iii)
A negotiable instrument must be in writing. This includes handwriting, typing,
computer print-out and engraving, etc.
iv)
Unconditional order or promise - In every negotiable instrument there must be
an unconditional order or promise for payment.
v)
Specific amount to be paid - The instrument must involve payment of a certain
sum of money only and nothing else. For example, one cannot make a
promissory note on assets, securities, or goods.
vi)
The time of payment must be certain - It means that the instrument must be
payable at a time which is certain to arrive. If the time is mentioned as ‘when
convenient’ it is not a negotiable instrument. However, if the time of payment is
linked to the death of a person, it is nevertheless a negotiable instrument as
death is certain, though the time thereof is not.
vii)
The payee must be a certain person - It means that the person in whose favour
the instrument is made must be named or described with reasonable certainty.
The term ‘person’ includes individual, body corporate, trade unions, even
secretary, director or chairman of an institution. The payee can also be more
than one person.
viii) Signature of the maker - A negotiable instrument must bear the signature of its
maker. Without the signature of the drawer or the maker, the instrument shall
not be a valid one.
ix)
Delivery - Delivery of the instrument is essential. Any negotiable instrument
like a cheque or a promissory note is not complete till it is delivered to its payee.
For example, you may issue a cheque in your brother’s name but it is not a
negotiable instrument till it is given to your brother. The negotiable instrument
can be transferred by the payee to a third party by mere delivery. The third
party can sue in his own name.
E: Characteristics of negotiable instrument
i)
Easy negotiability - This document is transferable from one person to another
without any formality, Transfer can occur either by delivery or endorsement or
both.
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ii)
iii)
iv)
v)
vi)
vii)
Exception to the rule of privity to a contract - The holder of a negotiable
instrument can sue in his own name and is not affected by the rule of privity to a
contract i.e he can sue the drawer or the endorser in his own name although he
was not a party to the original contact.
An exception to the rule of Nemo dat quod non Habet - (You cannot give what
you don’t have). A transferee who takes a negotiable instrument in good faith
acquires a better title of the transferor. This constitutes an exception to the rule
that a person cannot pass a good title than his own.
It is an exception to the rule of consideration “must not be past - In negotiable
instrument past consideration constitutes a variable consideration to maintain a
court action.
Absence of notice - No notice of transfer is required to be given to the person
reliable to the instrument.
Exception to the rule that chooses in action are not assignable - Chooses in
action, is the property which don’t take physical possession. Ant right under
commercial contract may be assigned.
Legal presumptions - certain presumptions apply to all negotiable instruments.
These presumptions are:
a) The instrument is drawn or accepted for consideration
b) It was drawn on the date appearing on the instrument
c) It was transferred before its maturity date
F: Essentials elements of a negotiable instrument
i)
ii)
iii)
iv)
v)
It must be a promise or an order - A negotiable instrument must contain an
express order or promise to pay. A mere acknowledgment of a debt is not
sufficient without evidence of an affirmative undertaking on the part of the
debtor to repay the debt.
The order must be unconditional - A promise or order is conditional (and,
therefore, not negotiable) if it states an express condition to payment, that the
promise or order is subject to or governed by another writing, or that the rights
or obligations with respect to the promise or order are stated in another writing.
It must require payment to be made to a specified person or bearer - It must be
addressed from one person to another. A negotiable instrument must be payable
“to the order of” an identified payee (e.g., “Pay to the Order of John Mwenda”)
or “to” an identifiable person “or order” (e.g., “Pay to John Mwenda or Order”),
or “to bearer” or to “cash,” rather than to an identifiable payee. The “bearer” is
the person holding a bearer instrument. Any instrument payable to the following
is a bearer instrument.
It must be in writing and signed by the drawer - A negotiable instrument must
be written on material that lends itself to permanence, and portable. The
signature must be any symbol made manually or by means of a device or
machine, using any name, including a trade or assumed name, word, mark, or
symbol executed or adopted by the maker, or his authorized agent.
Must promise or order payment of a certain sum of money - An amount
ascertainable from the face of the instrument – with or without reference to
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vi)
some outside source of information identified on the face of the instrument. The
amount due under the instrument must be payable in money form.
It must be paid on demand or on a specified date - An instrument is payable on
demand, “at sight,” or “upon presentment” if it is subject to payment
immediately upon being presented to the payer or drawee. If no time for
payment is specified, a negotiable instrument is presumed to be payable on
demand. An instrument is payable at a definite time if it states that it is payable
on a specified date, or within a definite period of time, or on a date or at a time
readily ascertainable at the time the promise or order is made.
G: Function and importance of negotiable instruments
i)
Although they do not constitute legal tender, they are used as a substitute for
money.
ii)
They constitute the media of exchange for most commercial transactions.
iii)
They serve as a medium of credit transactions.
iv)
They provide means to conduct business transactions while avoiding the risk
associated with the transport of large sums of money.
v)
They produce the effect of payment only when they are encashed thus providing
a credit facility in the meantime.
H: Examples of negotiable instruments include:
The following are excluded from negotiable instruments; Money orders, Postal orders, Share
certificate, Letters of credit, and Fixed deposit receipts. Examples of negotiable instruments are
as listed explained herein below;
i)
Bills of exchange
ii)
Cheque
iii)
Promissory note
iv)
Treasury bills
v)
Bearer debentures
vi)
Dividend warrants
vii)
Share warrants
Bill of exchange - It’s an unconditional order in writing addressed by a person to another
signed by the person writing it/giving it, requiring the person to whom it is addressed to pay at
a fixed future date/time a specified sum of the bill to the bearer/payee. Suppose Martin has
given a loan of Kshs.1, 000,000/= to Sam, and Martin owes Kshs.1, 000,000/= to Tabitha. In
this case, Martin can make a document directing Sam to make payment up to Kshs.1,
000,000/= to Tabitha on demand or after expiry of a specified period. This document is called a
bill of exchange, which can be transferred to some other person’s name by Tabitha.
Parties of a bill of exchange
a) Drawer: It is a person who makes the bill
b) Drawee: It is the person to whom the bill is directed to and has to make payments.
c) Payee: It is the person to whom payment is to be made to.
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Types of bills of exchange
a) Bearer bills: It is a bill payable to the bearer (the person holding it) and where the
payee is named he is fictitious or non-existent.
b) Order Bill: It is a bill payable to a person who has no intention declared that it should
not be transferable. It is transferable/negotiable by delivery or endorsement
c) Non-Transferable. It is transferable and or negotiable by delivery or endorsement.
d) Inchoate bill. Where a simple signed paper is delivered to another person, so that it may
be converted to a bill. It operates a sufficient (prima-facie) authority same as a
complete bill.
e) Inland and Foreign bills: an inland bill is the one that is drawn payable to East Africa
while foreign bills involve transactions of international nature.
f) Accommodation bill: It is a bill which no value has been received and whose purpose
is to strengthen the credit worthiness (improve the financial position of another person
in order for him to obtain credit facilities) e.g loans. The party who signs the bill is
called an accommodation party.
g) Bill in a set: it is where a bill is drawn in copies of three and each party of the set is
numbered and contains a reference to the other party, the three different parts forms one
bill. They are used in foreign trade.
Rules of a bill in sets
a) The three parts form one bill
b) When a holder of a bill endorses two or more parts to different persons, he is liable, for
each part endorsed is treated as a separate bill.
c) When two or more parts is negotiated to different holders then the first holder who get
his part first is entitled to the other part and the money presented by the bill.
d) Where one part of the bill drawn in set has been discharged by payment or otherwise,
the whole bill is discharged.
NB: Bills in set are usually drawn when they have to be sent from one country to another:
Advantages of a bill of exchange
a) They are safe to use except the bearer’s bills
b) Double secured instrument i.e if dishonored the payee can sue the drawer or the
drawee.
c) It can be discounted by a bank before maturity if the holder needs immediate money.
d) Two separate debts can be paid using a single bill by endorsement.
NB: Presentment of a bill of exchange to be accepted by the drawee is not necessary although
it is advisable. If the drawee refuses to accept the bill he becomes liable immediately.
Circumstance where presentment is a must
a) Where the bill is payable after sight presentment for acceptance is necessary to
ascertain the date of maturity.
b) Where the bill expressly stipulates that it must be presented for acceptance.
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c) Where the bill drawn is payable elsewhere than the place of resident or place of
business of the drawee.
Rules of presentment for acceptance
Presentment must be made in conformity with the following rules:
a) Presentment must be made by the holder or his agent to the drawee or his agent at a
reasonable hour on a business day and before the bill is overdue.
b) Where there are two or more drawees who are not partners, presentment must be made
to both.
c) If the drawee is dead, the presentment must be made to a personal representative(s).
d) If the drawee is bankrupt, presentation must be made to him or his trustee.
e) Presentment may be made by post if the manner is authorized by agreement or usage.
Excuse for non-presentment
Presentment is dispensed with and the bill is taken as dishonored non-acceptance under
following cases:a) Where the drawee is dead, bankrupt a fictitious person, or a person not having
capacity to contract e.g people of unsound mind or infants.
b) Where after the exercise of reasonable diligence such presentment can’t
effected/taken place.
c) Where although presentment has been irregular, acceptance has been refused to
same or other grounds.
the
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Types of acceptance
i)
General acceptance- Where the drawee accepts to pay the face value of the bill
without imposing any conditional qualification.
ii)
Qualifying acceptance- This is where the drawee accepts the bill subject to
some condition. Types of qualified acceptance include;
a) Conditional acceptance: Payment is made by the drawee or acceptor
dependant on the fulfillment of a certain condition.
b) Partial Acceptance: e.g a bill drawn for Ksh. 5,000 only can be accepted
for Ksh. 3,000.
c) Local acceptance: An acceptance to pay at a specific place e.g a
Standard Bank Nakuru Branch.
d) Acceptance to time: The drawee accepts to pay the bill after a different
time rather than the one expressed by the drawer.
e) Acceptance by some of the drawee only.
NB: Capacity; If the drawer of the bill/endorser lack contractual capacity the holder’s right to
payment is not lost only that he cannot enforce such. Signature; A person is liable as a drawer,
endorser or acceptor of the bill only if he has signed it. A person who signs a bill using an
assumed bill is liable as if he had signed it in his own name. Consideration; A bill must be
supported by valuable consideration just like any other contract.
Rules of consideration to a bill
a) A bill may be constituted or drawn to meet a given debt or liability;
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b) Any party whose signature appears on a bill is prima-facie deemed to become a party
there to for value.
c) Consideration for a bill is presumed until the provision is proved contrary.
d) The holder of a bill need not to prove himself furnished consideration for a bill.
Holder in due course
He is a person who accepts the face value of a bill and acquires it in good faith. Section 29 of
the Bill of Exchange Act defines a holder in due course as a holder who has taken a bill
complete and regular on the face of it;
a) Before it was overdue
b) In good faith and for value
c) Without notice that it had been previously dishonored if such was die fact.
d) Without notice at the tune the bill was negotiated to him of any defect on the title of the
person who negotiated it.
Holder for value
It is the person who holds the bill having supplied no consideration. Example: A obtains a bill
from X for the goods sold to him. A endorses it to B before the goods were supplied to him. B
endorses the bill in charity to Z without receiving any consideration. Therefore Z is the holder
for value.
Acceptance for honour
Sometimes the name of a person is inserted by the drawer to whom the bill may be presented
incase it is dishonored such a person is called the referee in case of need. However there are
some conditions for a valid acceptance for honour.
a) The bill must have been noted and protested.
b) The acceptance for honour must be made with the consent of the holder.
c) It must be signed by the acceptance for honour.
d) Acceptance for honour is allowed when the original drawee refuses to accept the bill.
Notice of dishonor
When the bill is dishonored, the holder should give notice to:
a) All the parties whom the holder wants to make liable.
b) It may be given to the party liable or his duly authorized agent or when dead, to the
personal representative.
c) It need not be given to the acceptor.
Excuse for delay or failure to give notice
a) When after exercise of reasonable diligence notice can not be given or can not reach the
person intended.
b) When notice is waived, expressly or implied before and after it becomes due.
NB: As regards the drawer, notice is dispensed with:
a) Where the drawer and the drawee are the same person
b) Where the drawer is fictitious or person not with a capacity to contract.
c) Where the drawer is a person whom the bill is presented for payment.
d) Where the drawer has countermanded payment.
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As regards the endorser, notice is dispensed:
a) Where endorser is aware the drawee is fictitious
b) Where the endorser is a person to whom the bill is presented for payment
Noting and protesting
a) Where a bill or a promissory note is dishonored, the holder may if he desires such
dishonor be noted (recorded) by a person called a notary public either on the bill or on a
paper attached to it.
b) Protesting; a protest is a formal declaration in form of a certificate attesting the
dishonor of a bill. In case of a dishonored foreign bill, a holder must inform the drawer
and endorser otherwise the two are discharged from any liability.
NB: A valid protest must contain;
a) Names of persons to whom the bill is protested against
b) The bill itself or a copy of it
c) Date, place and reason for protesting the bill.
d) Signature of the notary public
e) The amount of the notary fee
f) The demand made and the answer given.
Rights of a holder
a) May sue on the bill in own name.
b) Where he becomes a holder in due course, he holds the bill from any defect of title of
prior parties.
c) Where his title is defective;
i)
If he endorses the bill to a holder in due course, such a holder acquires a better
title
ii)
If he obtains payment on the bill, the person who pays him in due course gets a
valid discharge of the bill.
The duties of a holder
a) Duty to present the bill for acceptance to the drawee
b) Duty to present the bill for payment
c) Where the bill is not payable on demand, presentment must be done when it matures.
d) Where the bill is payable on demand, presentment must be made within a reasonable
time after its endorsement to make the endorser liable.
e) Presentment must be made by a holder or his agent at a reasonable hour on a business
day at a proper place.
f) Where authorized by agreement, presentment through the post office is sufficient.
g) Where the bill is presented at the right place but the person authorized to pay refuses,
no further presentment is required.
h) Duty to give notice of dishonor
i) Duty to note or protest the bill.
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Differences between presentment for acceptance and presentment for payment
a) Presentment for acceptance is personal because its purpose is to obtain the drawee’s
undertaking to pay.
b) Presentment for payment is for the purpose of obtaining actual payment.
c) The bill must be presented for acceptance at the place of the drawee.
d) Presentment for payment is made where the bill is payable.
e) The date for presentment for payment is, except for the bills payable on demand,
determinable on the bill.
f) Presentment for acceptance on the other hand, can be made wherever suitable the
holder provided it is within a reasonable time.
Discharge of a bill
a) By payment in due course or on behalf of the drawee or the acceptor
b) Where the holder at or after maturity renounces his rights against the acceptor i.e
discharge by renunciation or by waiver.
c) By cancellation: Where the holder of a bill intentionally cancels the name of any party
in a bill, such a party is discharged from his liability on the bill. An intentional
cancellation or cancellation by mistake doesn’t discharge by renunciation or by waiver.
d) By cancellation: Where the holder of a bill intentionally cancels the name of any party
in a bill. Such a party is discharged from his liability on the bill. An intentional
cancellation or cancellation by mistake doesn’t discharge any party.
e) By material alteration; If the bill is altered and the alteration is immaterial i.e carries
weight it becomes void unless the drawer or the endorser authorized it. The following
constitute material alteration:
i)
Changing the date of the bill
ii)
Changing the sum payable
iii)
Changing the place of payment
Lost bill; Holder may apply to the drawer to get another bill as long as the holder is prepared to
furnish security to indemnify the drawer against claim arising when the original or lost bill is
profound.
Cheques - It is a bill of exchange payable on demand drawn on a specified banker. It is a bill
of exchange with two additional qualifications;
i)
Drawn on a specified banker
ii)
It is always payable on demand
Types of Cheques
i)
Post-dated cheques. This is a cheque bearing a date later than the actual date of
drawing.
ii)
Open cheque. A cheque is called ‘Open’ when it is possible to get cash over the
counter at the bank. The holder of an open cheque can do the following; receive
its payment over the counter at the bank; Deposit the cheque in his own
account; Pass it to someone else by signing on the back of a cheque.
iii)
Cross cheques. Since open cheque is subject to risk of theft, it is dangerous to
issue such cheques. This risk can be avoided by issuing another type of cheque
called ‘Crossed cheque’. The payment of such cheque is not made over the
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iv)
counter at the bank. It is only credited to the bank account of the payee. A
cheque can be crossed by drawing two transverse parallel lines across the
cheque, with or without the writing ‘Account payee’ or ‘Not Negotiable’.
Traveller’s cheques- These are cheques issued by a banker to a traveller e.g a
business man whereby the issuing banker is obliged to pay the amount on the
cheque to the traveller when it is presented.
Differences between a cheque and a bill of exchange
CHEQUES
BILL OF EXCHANGE
Drawn by a banker
Drawn by anyone including a banker
Payable on demand
Payable upon maturity or on demand
No period of grace
Three days period of grace
Do not require acceptance
Acceptance required
Notice of dishonour not necessary
Notice of dishonour necessary
May be crossed
Cannot be crossed
Endorsement done at the bank
Done on the face value or by an allonge
Liability of a banker
i)
Duty to treat every account as private and confidential
ii)
Duty to honour cheques.
NB: The terms R/D written on the face value by the banker amounts to defamation innuendo as
long as the customer has sufficient funds in the account.
Liability of the drawer
Failure to present a cheque for payment within a reasonable time discharges the drawer to the
extent of any damage he may suffer from the delay but such a failure do not discharge him
from the contract.
Termination of banker’s liability
i)
Where the customer countermands payment- Where he has given instructions
not to honour the Cheque.
ii)
Notice of customer’s death.
iii)
Notice of customer’s bankruptcy.
iv)
Notice of customers lunacy or insanity
v)
Insufficient funds.
vi)
Holder’s defective title.
vii)
When the banker has received a garnishee order. A court order.
viii) Assignment- Transfer of the credit balance of a customer to another person.
ix)
Alteration
Crossed cheque - It is a cheque with two parallel lines or crossings on its face value. There are
two main types of crossings
i)
General crossings; A cheque bears crosses with words “& company” “Not
negotiable” or two parallel lines having any abbreviation thereof between them
or two crossed lines with no words.
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ii)
Special Crossings; Includes words like “KCB NOT NEGOTIABLE”. A cheque
may be crossed by a drawer, a holder of an account or a banker concerned with
the cheque.
Collecting banker
He is the one who received the cheque from the holder on behalf of the customer. The
collecting banker is protected;
i)
If he receives payment from a customer inform of a cheque he is not liable if a
customer has a detective title.
ii)
If he credits customer’s account with such an amount as in above situation, he is
not liable.
However the collecting banker is liable for negligence in the following situations;
i)
Opening a current account for a customer without making proper enquiry.
ii)
Accept a cheque from a customer crossed as “a/c payee only” and the payee is
not named in it.
iii)
Paying a cheque in a customer’s account which is payable to him on an official
capacity.
NB: If the paying banker pays a cheque with a forged endorsement in good faith and in normal
course of the business he is not liable. However he is totally liable where the original figures of
the cheque have been fraudulently increased whether he pays in good faith or not. He can
escape the liability by proving that the customer contributed to this by leaving a space for
fraudulently.
Promissory note - It is an unconditional order in writing made by one person to another
engaging to pay on demand or at a fixed further date or time a certain sum of money to a
specified person or the hearer.
Suppose you take goods worth Kshs.500, 000/= on credit from your friend Rebecca. You can
make a document stating that you will pay the money to Rebecca or the bearer on demand. Or
you can mention in the document that you would like to pay the amount after three months.
This document, once signed by you, duly stamped and handed over to Rebecca, becomes a
negotiable instrument. Now Rebecca can personally present it before you for payment or give
this document to some other person to collect money on her behalf. She can endorse it in
somebody else’s name who in turn can endorse it further till the final payment is made by you
to whosoever presents it before you.
Distinction between a promissory note and a bill of exchange
PROMISSORY NOTE
BILL OF EXCHANGE
It contains an unconditional promise
It contains an unconditional order
There are two parties (maker and payee)
Three parties (drawer, drawee and payee)
It is made by the debtor
It is made by the creditor
Acceptance is not required
Acceptance by drawee is necessary
Absolute liability of the maker/drawer
Non-payment creates liability
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Summary of the topic
Negotiable instruments are documents meant for making payments, the ownership of which can be transferred
from one person to another many times before the final payment is made. It is a written document that
represents money or property of a given party which passes from one person (transferor) to a transferee as long
as the transferee takes it in good faith. The term negotiable instruments literally mean a written document
easily transferable by mere delivery. Any defect on the title cannot affect him (transferee). It must meet the
following conditions; Written form; Signed by the maker or drawer; That contains an unconditional promise
or order to pay; A fixed amount of money (with or without interest in a specified amount or at a specified rate);
On demand or at an exact future time; To a specific person, or to order, or to its bearer. They provide means to
conduct business transactions while avoiding the risk associated with the transport of large sums of money.
The following are excluded from negotiable instruments; Money orders, Postal orders, Share certificate,
Letters of credit, and Fixed deposit receipts. Examples of negotiable instruments are as listed explained herein
below; Bills of exchange, Cheque, Promissory note, Treasury bills, Bearer debentures, Dividend warrants, and
Share warrants
i)
ii)
iii)
iv)
Self-assessment questions
What is the meaning of the following; negotiable instrument, negotiation in a negotiable instrument,
and endorsement?
Explain the critical features of negotiable instruments
What are the functions of negotiable instruments?
How do negotiable instrument facilitate business transactions?
Further reading
Identify an appropriate book in the library and read more
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LECTURE ELEVEN
CONTRACTUAL RELATIONSHIPS: THE LAW OF ARBITRATION
11.1 Lecture Overview
Every business transaction that you enter into has its share of legal consequences. These
consequences include liability of one party to the other as well as to third parties. If issues of
liability are not properly addressed by the parties they result to disputes. Once a dispute arises
it may end up in a court of law.
Litigation is the most common method of dispute resolution. However due to its disadvantages
business people find it more convenient to use Alternative Dispute Resolution (ADR) methods
such as negotiation, mediation, conciliation, adjudication and arbitration.
Of all other ADR methods arbitration is the most favourable to the business community due to
it various advantages. The main advantage of arbitration over other ADR methods is that
decisions made through arbitration are binding and enforceable.
Objectives
At the end of the topic, you should be able to:
i)
Define the term arbitration
ii)
Identify the sources of arbitration power/authority
iii)
Explain the essentials of a valid arbitration agreement.
iv)
Explain implied terms in an arbitration agreement
v)
Explain the various ways through which a dispute may be referred to arbitration
vi)
Discuss the advantages and disadvantages of arbitration as a way of settling disputes
vii)
Discuss the legal issues involved in removing an arbitrator.
viii)
Discuss an award
On a light touch
A group of professionals were attending a convention. Four of them a doctor, a lawyer, an accountant and a
counsellor decided to leave, and walked out together. The counsellor said to the other three, “People are
always coming to us with their guilt and fears, but we have no one that we can go to when we have problems.”
The others agreed. Then the lawyer said, "Since we are all professionals, why don't we take some time right
now to hear each other out?”. The other three agreed. The doctor confessed, “I have an uncontrollable desire
to kill my patients.” The accountant said, “I love expensive things and so I find ways to cheat my clients out
of their money whenever I can so I can buy the things I want.” The counsellor confessed, "I'm involved with
selling drugs and often get my patients to sell them for me.” The lawyer confessed, “I know I'm not supposed
to, but no matter how hard I try, I can't keep a secret...”
B: What is arbitration?
Arbitration is the process by which formal disputes are put to one or more persons referred to
as arbitrators or collectively as an arbitral tribunal, chosen by the parties in order to make a
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final binding and enforceable decision. It is loosely referred to us “litigation behind closed
doors”.
Arbitration is, therefore, “the settlement of disputes and differences relating to civil matters
between one party and another in a quasi-judicial manner; by the decision of one or more
persons, called arbitrators, appointed by contending parties, without having recourse to a court
to law.”
From the definition, the following issues are noted;
i)
Arbitration is the solving of disputes out of court
ii)
The disputes referred to arbitration must be civil in nature for instance breach of
contract, property rights or tort and not criminal disputes.
iii)
The arbitrator is appointed by the parties to the dispute
iv)
The parties can appoint one or more arbitrators
v)
The arbitral award is binding in law and enforceable in a court of law
C: Source of the arbitrators’ power
Being a private dispute resolution method recognised in law the process derives its power and
authority from three main sources;
i)
Arbitration agreement - The arbitrators derive their powers to decide a case
from a private agreement of the parties and the arbitrators are expected to
proceed and decide the case on the basis of such an agreement.
ii)
Statutory law - Arbitration is the only mode of alternative dispute resolution in
Kenya that has an Act of Parliament governing it, that is, the Arbitration Act 4
of 1995, which repealed CAP 49 Laws of Kenya. The Act allows for parties to
have the liberty to determine how they want to have the arbitration process
conducted.
iii)
The court – The court provides some essential judicial oversight in the
arbitration process. The intervention of the court is required at the enforcement
stage. Once an arbitral award is made, the parties are required to abide by it
otherwise the aggrieved party would seek court’s assistance in enforcing the
same.
D: Arbitration agreement
According to the Act “arbitration agreement” means an agreement by the parties to submit to
arbitration all or certain disputes which have arisen or which may arise between them in
respect of a defined legal relationship, whether contractual or not. It is a written agreement to
refer present or future differences to arbitration, whether an arbitrator is named in it or not.
Where a valid arbitration is in force, the parties cannot refer a dispute to the courts of law and
if one of the parties does that, the other party can apply to the court to stay the proceedings and
actually refer the case back to arbitration. However to be granted the staying order the party
asking for the stay of the proceedings should not have pleaded in the case or taken any steps in
respect of the proceedings.
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NB: Section 4(1) of the Act provides;
i.
An arbitration agreement may be in the form of an arbitration clause in a contract or in the form
of a separate agreement.
ii.
An arbitration agreement shall be in writing.
iii.
An arbitration agreement is in writing if it is contained in:
a. a document signed by the parties;
b. an exchange of letters, telex, telegram, facsimile, electronic mail or other means of
telecommunications which provide a record of the agreement; or
c. an exchange of statements of claim and defence in which the existence of an agreement is
alleged by one party and not denied by the other party.
vi.
The reference in a contract to a document containing an arbitration clause shall constitute an
arbitration agreement if the contract is in writing and the reference is such as to make that
arbitration clause part of the contract.
E: Provisions implied by the law in an arbitration agreement
The Arbitration Act imposes some implied provisions, which must be adhered to unless
expressly excluded by the parties in the agreement. They include;
i)
Reference to a single arbitrator
ii)
Where two arbitrators are appointed, they must appoint an umpire immediately
after their appointment.
iii)
The need for an arbitrator or umpire to make an interim award.
iv)
The power of the arbitrator to direct the party that should pay the costs of
reference to arbitration and the manner in which such costs will be paid
v)
The power of the arbitrator to enforce specific performance of the contract
vi)
The power of the arbitrator to correct an error arising in an award.
F: Reference to arbitration
Civil disputes can be referred to arbitration in either of the following ways:i)
Agreement amongst the parties: The parties can make an arbitration agreement
to the effect that any civil disputes amongst themselves (arising in the future)
shall be referred to arbitration. The parties can go ahead and name an arbitrator
or arbitrators.
ii)
Court: A court of law has powers to refer technical cases to arbitration.
However the consent of the parties must be obtained.
iii)
Statutes: Reference to arbitration may be dictated upon by an Act of
parliament.
G: Advantages of arbitration as a method of solving disputes
i)
ii)
iii)
iv)
Speed- Disputes can be solved with absolute speed by the arbitrators instead of
going through the lengthy court process.
Arbitration is less expensive compared to litigation.
Parties are free to arrange for the place and time of hearing of the dispute by the
arbitrator.
Arbitrators may be experts in their specific areas of jurisdiction,
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v)
vi)
Arbitration is done in private and so the dispute in question remains a secret
amongst the parties.
Award of the arbitrator once approved is final.
H: Disadvantages of arbitration
i)
ii)
Arbitrators may be experts in their arrears of operation but may not have sound
knowledge of law,
Arbitration decisions lack uniformity and precedents.
I: Removal of an arbitrator
A party to an arbitration agreement can apply to the High Court to have an arbitrator or Umpire
removed if the arbitrator or umpire fails to execute his duties impartially. The High Court may
remove the umpire or arbitrator due to misconduct e.g. receiving a bribe. When the court
removes the arbitrator, he will not be entitled to receive any remuneration from the parties.
J: The Award
This refers to the decision or judgment made by the arbitrator. The award should be in writing
and signed by the arbitrators or umpire. An award is binding on the parties but the High Court
has power to remit the award for reconsideration by the same umpire or arbitrators.
Reconsideration may be done if;
i)
Incapacitation of a party in an arbitration agreement
ii)
Legal invalidity of the award
iii)
Lack of proper notice to a party
iv)
Award deals with issues not referred for arbitration
v)
Arbitral tribunal or procedure not as agreed
vi)
Award induced by fraud, bribery, corruption etc
vii)
Dispute not capable of being settled by arbitration
viii) Award against public policy.
Summary of the topic
Arbitration is the process by which formal disputes are put to one or more persons referred to as arbitrators or
collectively as an arbitral tribunal, chosen by the parties in order to make a final binding and enforceable
decision. Being a private dispute resolution method recognised in law the process derives its power and
authority from three main sources; arbitration agreement, the statutory law, and the court. It is from these
three sources of power that civil disputes can be referred to arbitration. Business persons being profit minded
prefer arbitration due to its advantages which include timely disposal of cases in a private environment. The
arbitrator’s award is final.
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i)
ii)
iii)
Self-assessment questions
What is arbitration and how is it different from litigation?
From whence does the arbitrator derive his powers?
How does arbitration facilitate business transactions?
Further reading
Read the Arbitration Act Cap 49 laws of Kenya for a better understanding of this law.
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