LAW OF CONTRACT
1. INTRODUCTION
The essence of business life is the making contracts – contracts to perform
work; contracts to buy and sell; contracts to make something or to employ
someone; or to use something. We must therefore, know what a contract is,
and when we have one.
2. DEFINITION OF A CONTRACT
A contract is a legally binding agreement between two or more people. Two
people agree about something to be done. They are called “the parties”. A
contract is therefore, an agreement which legally binds the parties.
To determine whether or not an agreement has been reached, the court will
consider whether one party has made a firm offer which the other party
accepted.
Offer and acceptance may be made orally, or in writing, or they may be
implied by the conduct of the parties. The person making an offer is the
offeror and the person to whom the offer is made is an offeree.
The underlying theory is that a contract is the outcome of consenting minds.
However, parties are judged by what they have said, written or done, rather
than by what they were actually thinking.
Per Treitel: A contact may defined as an agreement which is either enforced
by law, or recognized by law as affecting the legal rights or duties of the
parties. The law of contract is, therefore, primarily concerned with three
questions:
 Is there an agreement?
 Is it one which should be legally recognized or enforced? Or,
 in other words, what remedies are available to the injured party, when
the contract has been broken?
3. FACTORS AFFECTING THE MODERN CONTRACT
a) Inequality of bargaining power
It is invariably the case that the two parties to a contract bring with them
differing levels of bargaining power. Many contracts are made between
experts and ordinary consumers. It may be said that there is a stronger
party and a weaker party.
This inequality of bargaining power does not, however, of itself invalidate
a contract. If a stronger party and a weaker party wish to enter into a
contract with each other, there is no reason for the law to intervene and
Page 1 of 5
LAW OF CONTRACT
prevent this. The law will intervene where the former takes advantage of
his position.
b) Standard form of contract
The standard form contract is a standard document prepared by many
large organisations and setting out the terms on which they contract with
their customers. However, the individual must take it or leave it – if he does
not really ‘agree’ to it.
c) Consumer protection
In the second half of the twentieth century, there has been a surge of
interest in consumer matters. The protection agencies include
government agencies and independent bodies such as CAMA; and
legislation.
4. ESSENTIAL ELEMENTS OF A CONTRACT
The courts will usually look for the evidence of three elements in any contract.
The essential elements of a legally enforceable contract are as follows:
1) Agreement - i.e. offer and acceptance
2) Intention – to create legal relations
3) Consideration –something of value in exchange for the promise (offer).
As a general rule, the law will not enforce gratuitous promises i.e. those
which are not supported by consideration, e.g. putting down a deposit
for a car.
Even if the essential elements can be shown, a contract may not necessarily
be valid. The validity of a contract may also be affected by any of the
following factors:
a) Contractual capacity – Each party must have the power to legally bind
himself contractually to the agreement – minors (people who are under
the age of 21) and people who are either drunk (i.e. results in a contract
being flawed on the grounds of undue influence) or insane have
limitations placed on their power to agree to a contract.
Page 2 of 5
LAW OF CONTRACT
b) Form – The general rule is that a contract may be in any form whatsoever.
Thus, most contacts are valid irrespective of whether they have been
made orally, in writing, or even implied by the conduct, as in Carlill v
Carbolic Smoke Ball Co (1893).
c) Certain contracts must be in writing by virtue of an Act of Parliament,
including:
i.
Bills of exchange (e.g. cheques) and promissory notes (e.g. bank
notes)
ii.
Contracts of marine insurance are void unless made in writing
iii.
A transfer of shares in a limited company
iv.
Consumer Credit Agreements (e.g. higher purchase);
v.
Contracts for sale or other dispositions of land
vi.
Certain contracts must be evidenced by writing (although the
contract itself may be oral). The main example here is the contract
of guarantee– such a contract cannot be enforced unless the
person giving guarantee has given some written evidence of his
agreement.
d) Legality – the contract must not be illegal. An example of an illegal
contract would be the one for the supply of illegal drugs such as cocaine
or heroin.
e) True consent – there must be no vitiating factors such as duress or undue
influence.
5. A CONTRACT WHICH DOES NOT SATISFY RELEVANT TESTS
A contract which does not satisfy the relevant test may be void, voidable or
unenforceable.
a) A void contract is not a contract at all. The parties are not bound by it and
if they transfer property under it they can sometimes (unless it is also
illegal) recover their goods even from a third party.
b) A voidable contract is a contract which one party may avoid, that is,
terminate at his option. Property transferred before avoidance is usually
irrecoverable from a third party.
Page 3 of 5
LAW OF CONTRACT
c) An unenforceable contract is a valid contract and property transferred
under it cannot be recovered even from the party to the contract. But if
the party refuses to perform or complete his part of the contract, the
other party cannot compel him to do so. A contract is usually
unenforceable when the required evidence of its terms, for example,
written evidence of a contract relating to land, is not available.
6. CLASSIFICATION OF CONTRACTS
There are two classes of contract – contract under seal (or specialty
contracts) and simple contracts.
a) Contracts under seal/Deed ( or specialty contracts)
These form an overriding exception to the rule that, unless a contract is
required by statute to be in writing or evidenced by it, it is equally valid if
merely oral.
A contract by deed must be in writing and must be signed. Delivery must
take place. This need not be a physical transfer of possession. Delivery is
conduct indicating that the person executing the deed intends to be
bound by it.
Contracts under seal, usually called “deeds” technically “specialties” –
can be used for any contracts but the must be used for:

Conveyance or transfer of legal estate
mortgage);
in land (including

Leases of over three years or more;

A contract or promise not supported by consideration – e.g. a
covenant to make annual payment to a charity.
The limitation period for taking action in respect of contracts under seal is
12 years; Limitation Act 1939 – that is, law will not enforce a contract
unless an aggrieved party takes action within a certain time after any
cause of action arises. This is called “the limitation period”
b) Simple contracts
These are all contracts whether in writing or parol (i.e. verbal). The
limitation period for simple contracts is six years.
7.0 CONTRACTS “UBERRIMAE FIDEI”
Contracts “uberrimaefidei” (of utmost good faith) are those in which it is
essential that there is complete and honest exchange of information of all
material facts between parties. The best examples of such contracts are
Page 4 of 5
LAW OF CONTRACT
those relating to insurance. Here the insurer must be supplied with all the
material facts by the insured party before he/she accepts the risk.
Other examples of such contracts are those relating to title in contracts for
the sale of land (as regards title only), contracts to subscribe for shares in
companies, contracts of family arrangement, and contracts made
between persons who have previously entered into contracts of suretyship
and partnership.
If full disclosure of facts is not made, the other party has the right to
rescind the contract and damages may be claimed for any negligent
misstatements.
Page 5 of 5