FORMATION OF A CONTRACT

A contract is formed by an offer by one person and the acceptance of this offer by another person. The
intention of both parties must be to create a legal relationship and they must have the legal capacity to
make such a contract. There must be also some consideration against the contract between the two parties.
The formation of a contract involve the following factors:_

a) The offer

b) The Acceptance

c) Consideration

d) Contractual Capacity

e) Intention to Create a Legal Relationship

1. AN OFFER

An offer is defined as an expression of willingness to enter into a contract on definite terms, as soon as
these terms are accepted. It is made by a person known as the offeror and addressed to the offeree. Thus if
A write to B stating his desires to sell his properties to B at a specified price, A is said to have Made an
offer to B. A is the offeror and B is the Offeree. An offer may be expressed (where the offeror specifically
makes his intention known to offeree, whether in writing or by word of mouth), or it may be implied from
the conduct of the parties, particularly the offeror. An offer is valid only if its terms are definite, but not
where they are vague.

Offer and Invitation to Treat

An offer as defined above must be distinguished from an invitation to treat. The latter is merely 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 supermarket. According to decided case, this amounts to an invitation to
treat, not an offer: it is the customer or prospective buyer who makes an offer to the shopkeeper or
attendant or a cashier by picking up the goods and expressing the desire to buy them.

Types of offer

a) Counter offer

a counter offer is a reply to an offer whose whose effect is to vary the terms of the original offer. It is in
fact an offer in itself which operates as a rejection of the original offer. A counter offer therefore
extinguishes the original offer.

Hyde v. Wrench (1840)

The defendant offered to sell his firm to the plaintiff for $ 1.000. the plaintiff replied that he was willing
to buy it at $ 950; but the defendant refused. The plaintiff then purported to accept the original offer of $
1000.

Held: the plaintiff’s reply by which he stated that he was willing to buy the firm at $ 950 amounted to
counter offer, which extinguished the original offer of $ 1000; and consequently no contract existed
between the plaintiff and the defendant.

It follows from above case that a counter offer in itself cannot result in a contract; it can only do so if its
terms are accepted by the original offeror. Thus, where an offeree’s counter offer is rejected he must, in
his own interest, endeavor to get the original offer renewed by the offeror.

b) 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 in relation to the other.
The law is that cross offers are not mutual acceptances of one another and no valid contract can result
from them alone. A must therefore specifically accept B’s offer or B that of B or A, if a valid contract is
to be made at all.

c) 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 condition(s) may be imposed by the offer (e.g where the offer is required to
be accepted within a stated time) or they may be implied by law. Where a condition attached to an offer is
not satisfied, the offer itself fails and no contract can result from it.

d) Single and Standing offers

The question whether an offer is a single offer or a standing offer arises in the case of tenders. There is
said to be a single offer where the tenderer is required to supply a definite quantity of goods within a
specified time, it makes no difference whether delivery is to be affected at once or in instalments. E.g,
where the tenderer is required to supply 5000 bags of maize during the month of June to September 1991
to be delivered as and when demanded. A single offer, as such, entails a definite obligation and its
acceptance results in a contract of definite terms. On the other hand, a standing offer is constituted where
it is stated that the tenderer may be required to supply, within a specified period, goods in a quantity not
exceeding a specified limit, e.g. where the tenderer is required to supply not more than 5000 bags during
the year 1991, to be delivered if and when demanded.

The Offeree

The offeree may be an individual, a special group of persons or the world at large. An offer made to a
particular individual can only can only be accepted by that individual and by no one else; where it is made
to a special group of persons, only a person who is a member of that group can (and no one else) may
accept it, and where it is made to the world at large it may be accepted by anyone.
Communication of the Offer

The offer must be communicated, i.e. made known, to the referee. The communication may be made in
writing or orally (including communication by telephone). An offer becomes effective only afyer it has
been received by the offeree and ond in the case of offers made by letter, the relevant time is time of
receipt of the letter by the offeree but not the time of posting.

Termination of the Offer

An offer is terminated or brought to an end by any of the following events:

a) Revocation: an offer is said to be revoked when it is effectively withdrawn by the offeror.

Revocation is possible only before the offeree has accepted the offer otherwise it is too late
and the offeror is bound by a timely acceptance. Like the offer itself, a revocation must be
communicated to the offeree.
b) Lapse of time: where the offer is silence about the time within which it is required to be
accepted, it must be accepted within a reasonable time. After the lapse of a reasonable time,
the offer will be terminated. What is a reasonable time depends on the circumstances of the
case. Thus the offer to sell perishable goods will lapse in a much shorter time than would an
offer to sell durable goods.
c) Death: the effect of death on an offer depends on whether it is the offeror or the offeree who
has died. We saw that an offer made to a particular person can be accepted by him and him
alone. It follows from this that the death of the offeree automatically terminates the offer.
d) Failure of Condition: we saw above that a conditional offer is terminated by a failure of the
condition on which it was made.
e) Counter offer: a counter offer, as already seen, has the effect of terminating the original
offer.
f) Rejection: finally, an offer is terminated when it is rejected by the offeree. Thus, if the
offeree subsequently changes his mind and wishes to proceed on the offerors terms, he must
take steps to ensure that the offer is renewed.

2. THE ACCEPTANCE

An acceptance is an assent to the terms of an offer. It must correspond to the terms of an offer, and it is
for this reason that a counter offer, cross offer or conditional assent is not an acceptance in the legal sense
of the word. An acceptance may be made in any way that is expedient but sometimes the offer itself may
dictate the mood of acceptance. For example, the offeree may be required to notify his acceptance in
writing or to lodge it at a named place or to a named person or to communicate it within a specified
period of time etc.
 3. CONSIDERATION

The offer and acceptance are not enough to bring about a valid and binding contract. In the case of simple
contracts, these are required to be supported by consideration. Otherwise the contract is void. Specialty
contracts are an exception.

Why does the law insist on consideration before a valid contract can be made??

The rationale behind this requirement is that the law of contract generally enforces only bargains and not
bare promises for which no value is given. This follows from the fact that, the law of contract is generally
intended to promote commercial relations. These are relations which necessarily impose an element of
bargain, an element without which there would be no commerce at all. Indeed it is on this element that the
whole doctrine of consideration is centered. When we talk of bargain, what we have in mind is an
exchange of relationship within the context of a money economy.

Types of Consideration

a) Executory Consideration - The word executory is used to denote that the promised act is yet to be
done. Thus A promises to sell and deliver to deliver to B three sacks of charcoal to be paid by B. Before
delivery of the charcoal, A’s promise to B is in the nature of executory consideration for B’s promise to
pay the price. Similarly, before payment of the price, B’s promise to A is in the nature of executory
consideration for A’s promise.

b) Executed Consideration – the word executed is used here to denote that the promised act has already
been done. To take the example given above, after A has delivered the charcoal to B, A is said to have
furnished executed consideration for B’s promise to pay the price. Similarly, after B has paid the price, he
is said to have furnished executed consideration for A’s promise to sell and deliver to him three sacks of
charcoal.

c) Past Consideration – once negotiations are over and the parties have struck a bargain, any subsequent
or fresh promise made by either party in relation to that bargain is known as past consideration. The law
is that for a promise to constitute valid consideration, it must have been made during the negotiations. As
such, past consideration is not valid consideration for the bargain in respect of which it is given; it is in
fact no consideration at all and the promises (promised party cannot rely on it). Consideration must move
from the promise

The rule is that consideration must move from the promise. This means that before the promise (the
promised party) can enforce the promise of the promisor (the party giving the promise), the promise must
prove that he himself has furnished consideration for the promise; otherwise he has no write to enforce it.

d) Sufficiency of Consideration – a sufficient consideration is a consideration deemed by law to be of

sufficient value to support an ordinary contract between parties. It is also defined as a consideration that is
sufficient to support a particular transaction. Freedom of contract demands that the parties must be free to
make their own bargain. No court of law will concern itself with the question whether the price agreed
upon is worth the goods supplied. In short the consideration furnished by one party need not to be equal
of proportionate to that furnished by the other party.

4. INTENTION TO CREATE LEGAL RELATIONSHIP

A contract apparently supported by consideration will not result in a binding contract unless it was the
intention of the parties to enter into or create legal relationship. If for example X promises to take out Y
for lunch and Y accepts and patiently waits for X, there is no legally binding agreement and Y cannot sue
X for failure to honor his promise. This promise is made under a social relationship with no intention to
create a legal relationship.

5. CONTRACTUAL CAPACITY

An essential ingredient of a valid contract is that the contracting parties must be competent to contract.
Every person is competent to contract who is of the age of majority and who is of sound mind and is not
qualified from contracting by any law. Only a person who has contractual capacity be a party to a
contract. This includes artificial as well as natural persons

The general rule is that any person may enter into any kind of contract. But special rule supply the
following persons:

a) Minors

b) Persons of unsound minds and drunken persons

c) Married women

d) Aliens and non-citizens

e) Corporations

f) Co-operative societies

g) Trade unions.

MINORS

Minor’s contracts are governed by common law roles as modified by the infants relief acts 1874. Under
the Contract Act (Cap 23), contracts in Kenya are governed by the common law of England relating to
contracts as modified (interalia) by “the general statutes in force in England on 12th August 1897. It may
therefore be said that the Infant Relief Act 1874 applies in Kenya.

A contract made by minors may be binding, voidable or void. These are discussed under:
 a) Binding Contract

There are two types of contracts which are binding on minors.

i. Contract for the Supply of Necessaries

Certain things are regarded as “necessaries”. These are things without which the minor could hardly live,
are therefore things which are essential to his maintenance. Under the Sale of Goods Act, “necessaries”
are defined as “goods suitable to the condition in life of a particular infant or minor, and to his actual
requirement at the time of sale and delivery. Included here are things like food, clothing and medicine.
But whether a particular commodity falls within the category of necessaries depends on the circumstances
of a particular case, and in particular items of luxury are excluded. Thus while a suit may be an item of
necessary in the case of a minor who hails from a well to do family, it might be an items of luxury to a
peasant’s son particularly where there are a cheaper alternatives within a peasants means. Once a
particular item has been placed within the category of necessaries the next question is: to what extent can
the other contracting party enforce on sale against the minor? Under the above Act, a minor is liable to
pay a “reasonable price” for goods which are necessities.

Nsah v. Inman (1908)

A tailor supplied an infant with 11 fancy waistcoats, but the infant failed to pay. The infant was a
university undergraduate. His father gave evidence that the infant was adequately supplied with prper
clothes according to his station in life.

Held: the clothes were not necessaries and the infant was not liable to pay from them. The fact that a
minor has a sufficient allowance does not prevent him from contracting for necessities on credit.

Where a minor gets a loan to buy necessaries, the lender may recover his loan under the doctrine of
subrogation, i.e. he does not recover in his own right as lender but instead stands in the place of the
person who supplied the necessaries and it is only in this later capacity that he may recover the money.

ii. Beneficial Contracts of Service

Besides contracts for the supply of necessities, minor is bound by a contract of service whose nature is
that, considered as a whole, it is intended for his benefit.

Clements v. London and N.W. Railway Co. (1894)

X, a minor, was employed by a railway company as a porter. He joined the company’s insurance scheme
and agreed to relinquish his statutory right for suing for personal injury under the Employer’s Liability
Act 1880. Though the scheme fixed a lower scale of compensation, its terms were generally more
favorable that those embodied in the Act: the scheme covered more accidents in respect of which
compensation was payable.

Held: the agreement was generally for the benefit of X and it was therefore binding on him.
 b) Voidable Contracts

Voidable contracts as far as minor are concerned, are those contracts which a minor is entitled to
repudiate either during minority or within a reasonable time after attaining majority age. Apart from the
minor’s opinion to repudiate, a voidable contract is similar to a binding one in that in either case the
contract must be beneficial to the minor. But in the case of voidable contracts, the subject matter is
generally of a permanent nature and the obligations created by the contract are of a continuous nature.
The most outstanding examples are:

• Leases agreements (by which the minor acquires an interest in land)

• Contract for the purchase of shares (by which a minor acquires an interest in a limited company)

• And contracts of partnership (By which the minor becomes a partner in a firm)

Like any other voidable contract, a minor’s voidable contract remains binding on him until it is duly
terminated by him. He must take timely action to avoid the contract, otherwise he will be bound by its
terms;

Davis v. Beynon – Harris (1931)

X an infant, leased a flat from the plaintiff two weeks before attaining majority age. Three years later his
rent was in arreas and the plaintiff sued him.

Held: X had failed to avoid the lease within a reasonable time after attaining majority age and it was now
too late to do so; consequently, he was liable to pay the arrears of rent.

c) Void Contracts

Under Section 1 of the Infant Relief Act 1874, the following contracts entered into with minors are
declared to be absolutely void:

• Contract for the repayment of money, lent or to be lent (i.e. loan contract)

• Contracts for goods supplied or to be supplied other that necessaries

• All accounts stated (or settled accounts)

None of these three types of contracts can be exposed against a minor

Smith v. King (1892)

X, a minor was indebted to Y, who were stock brokers. After X had attained majority age, Y sued him for
the debt. Y then accepted two bills of $ 50 each in full settlement of the debt. Y later brought an action
against X based on the bills. The acceptance by Y of the two bills amounted to a ratification of a debt
contracted by him during minority, such ratification was void under the Infant Relief Act (1874) and X
not was therefore liable for the bills.
PERSONS OF UNSOUND MINDS AND DRUNKEN PERSONS

A contract made with a person of unsound mind (PUM) is binding on him only if it was made by him
during a lucid, i.e. an interval during which he is sane. For this purpose, it is immaterial that the other
party may have been aware of the PUM mental capacity. Apart from this, a contract that is entered into a
PUM with a person who knows him to be mentally incapacitated is voidable at the instance of PUM.
However, where the PUM has obtained necessaries under the contract he is, like a minor, liable to pay a
reasonable price for the Sale of Goods Act.

As for a drunken person, his contractual capacity is generally the same as that of a PUM. If the
drunkenness is to the knowledge of the other party, such as to render him incapable of appreciating his
Act, a contract entered into in these circumstances is voidable at the instance of the drunken person upon
sobering up. But like a minor and PUN, he is liable to pay reasonable price for necessaries: sale of goods
Act.

MARRIED WOMAN

At common law a married woman could not enter into a contract. But under the Law Reform Act
(Married Woman and Tortfeasors) Act, 1935, the married woman casue and be sued in contract in the
same way as single woman.

ALIENS OR NON – CITIZENS

Alien, i.e. a person who is not a citizen of Kenya can sue and be sued. Any enemy alien i.e. a person
resident in a country which is at war with Kenya cannot sue, but if sued can defend an action

CORPORATION

In the case of corporation, its contractual capacity is limited by the provisions of its Memorandum of
Association. It can only enter into those contracts authorized by the memorandum; any other contract is
ultra vire and cannot be entered into by the corporation. In case of a statutory corporation, it can only do
those things which are expressly or impliedly authorized by the state. Any contract entered into which are
not authorized by statute are’ ultra vires’ and therefore void.

CO-OPERATIVE SOCIETIES

A cooperative society registered under the Co-operative Societies Act (Cap 490) can enter into contracts,
sue and be sued in accordance with the provisions of the Act.
TRADE UNIONS

Sec 25(1) of the Trade Unions Act (Cap. 233) provides:

‘Every trade union shall be liable on any contract entered into by it or by an agent acting on its behalf:
provides that a trade union not be liable on any contract which is void or unenforceable by at law”

A registered trade union may sue and be sued and be prosecuted under its registered name.

THE DOCTRINE OF PART PERFORMANCE

The doctrine of part performance is concerned with the effect of failure to comply with the requisite
formality. Common law takes a rigid stand. Once the required formality has not been complied with no
action whatsoever can be maintained on the contract. Common law as such, offers no remedy in such a
case.

The Kenya law applies equity principle in cases of failure to comply with the requisite formalities of
various contracts. Equity has a remedy to each wrong. Thus where one of the parties has performed, or
partly performed his part of the contract equity will not allow the other party to take unfair advantage of
the fact that the contract in question has not complied with a particular formality. This is where the
equitable doctrine of part performance comes in.

Principally, the doctrine of part performance applies to contracts relating to land but it is still debatable
whether it is so restricted or whether it equally applies to other contracts as well. Under the doctrine an
agreement which does not comply with a formality imposed by law (usually) the need for writing or
written evidence) may nonetheless be enforced upon proving that there has been an act of part-
performance on the part of the party seeking to enforce it. Whether or not there is an act of part
performance depends on the circumstances of each case. Where, for instance one of the parties (the lessee
takes possession of the leased property, this is an act of Part-performance on his part on the basis of
which an oral lease agreement for a term not exceeding three years may be enforced.

Before the doctrine of part-performance can apply, the following conditions must be satisfied.

• There must be sufficient oral or other evidence of the contract

• The circumstances must be such that if the defendant were allowed to take advantage of the lack
of writing of written evidence, this would amount to a fraud on the plaintiff

• The contract must be capable of specific performance and the circumstances must be such that
damages would not be an adequate remedy.
TERMS OF CONTRACT

In the course of negotiations, a number of statements may be made by each of parties. Some of these
eventually form part of the contract while others are left out. Statements which form part of the contract
are known as terms of the contracts. Those which are made in the course of negotiations but are
ultimately left out of the contract are called representations. A representation is a statement that is not
within the contract. If turns out to be a false representation, either fraudulently or innocently made, it is
called a misrepresentation. If the statement is within the contract then there a further problem of deciding
whether it is a classified as express and implied terms.

The rights and obligations of parties to contract depend on the terms of the contract, not on mere
representations. It is therefore always important to determine whether a particular statement is a term or a
representation.

Oscar Chess, Ltd v. Williams (1957)

The defendant offered a plaintiff a second-hand Morris as part of the consideration for hire - purchase
contract. The registration book of the Morris stated that the car was a 1948 model, and this was confirmed
by the defendant in good faith. But it turned out later that the car was in fact 1937 model, which should
have been valued at lower figure. The plaintiffs who were car dealers sued the defendant for the
difference in value. The court had to determine whether his statement as to the age of the car was a term
of the contract or a mere representation.

Held: the statement as the age of the car was not a term of the central but a mere representation.

The plaintiffs were therefore not entitled to recover the difference in value.

Dick Bentley Productions v. Harold Smith Motors Ltd. (1965)

The defendants sold a Bentley car to the plaintiffs, stating that the car had done only 20000 miles from
the time it was fitted with a replacement engine and gear box. This statement turned out to be false, the
car proved unsatisfactory and the plaintiffs sued. The court had to determine whether the defendant’s
statement as to mileage was to term of the contract or a mere representation.

Held: the statement as to mileage was a term of the contract; and the plaintiffs were entitled to damages
for breach of contract.

Looking at the above decisions together, it is clear that it is not always easy to determine whether a
particular statement is a term or a mere representation. Generally, a statement made by a person possessed
of a special knowledge or skill is treated seriously, to the extent of being considered a term of the
contract; while a statement made by a person not possessed of such special knowledge or skill is not
given very serious consideration and will usually be regarded as mere representation. Thus in Oscar
Chess Ltd. V Williams the purchasers of the car (the plaintiffs) were themselves car dealers and as such
were in a position to ascertain the age of the car independently of any statement made by the defendant.
As car dealers they possessed of some special knowledge or skill; the defendant’s statements would not
therefore mean much to them and it was rightly held to be a mere representation. On the other hand, in
Dick Bentley case, the defendant had been in possession of the car and were in a better position,
compared to the plaintiffs, to tell the mileage which had been done by the car, their statement therefore
had to be a term of the contract.

Express and Implied Terms

Parties to a contract are free to make their own bargains under the banner of “freedom of contract” they
may therefore agree on any terms as long as these are covered by law. But standard form contract are an
exception. In this type of contract, one of the parties virtually dectates all the termsof the contract, which
are contained in a special document presented to the other party for signature – e.g. insurance contracts.\

Express terms are those especially or expressly agreed upon by the parties, whether orally of in writing or
partly orally and partly in writing.

In the absence of specific (or express) agreement on any matter in a particular contract, certain terms may
be treated by law as governing the matter in question. These are known as implied terms. Terms may be
implied in a contract by:

• Statute (e.g. the Sale of Goods Act implies certain termd in every contract of sale of goods);

• Custom (e.g. trade customs);

• Courts (e.g. in contracts of employment or master/servant relationship).

Sometimes an implied term is excluded by the express terms of the contract.

CONDITIONS AND WARRANTIES

Not all terms of a contract carry the same weight. Some are important than the others. Those which are
regarded as major terms of the contract are known as conditions, while those which are minor or of less
consequence are called warranties. The distinction between conditions and warranties is best illustrated
by the effect which a breach of each one of them has on the contract. In a contract of sale of goods, for
example, a breach of condition by one party entitles the other (innocent) the other party to treat himself as
discharged from his obligation under the contract , while a breach of warranty by one party only entitles
the other (injured) party to damages, but not to as right to regard himself discharged from his obligations
under the contract.

Both conditions and warranties may be express or implied. But conditions are further sub divided into
conditions precedent and conditions subsequent.

A condition precedent – a condition precedent is one which must be satisfied before a contract can
become effective or operational: until such condition is satisfied the existence or operation of the contract
is suspended and none of the parties has any enforceable right in the meantime.

For example; if A enters into a contract with B in which B is to construct a number of residential houses
for A and A is required to obtain permission from the city council before the construction work can
commence, the need to get permission is a condition precedent to carrying out the obligation imposed on
B by the contract.

A condition subsequent – a condition subsequent, on the other hand, is a condition whose occurrence may
affect the rights of the parties under a contract which is already in operation. For instance where there is a
provision that a contract is to remain valid until a stated event occurs, the occurrence of the event is a
condition subsequent which terminated the contract.

VITIATING ELEMENTS OR FACTORS

A contract supported by consideration, in which there is an intention to enter into a legal relation may still
be of no effect where it is affected by a vitiating factor. A vitiating factor or element is one which tends to
affect the validity of a contract. The vitiating elements consist of:

1) Mistake

2) Misrepresentation

3) Duress (or coercion)

4) Undue influence

5) Illegality

These are explained below:

1. MISTAKE

Mistake may be defined as an erroneous belief concerning something. It may be of two kinds:

a. Mistake of law

b. Mistake of kind

Mistake of law

Mistake of law may be further classified as:

• Mistake of the general law of the country

• Mistake of foreign law

• Mistake of private rights of a party relating to property and goods.

A mistake of law can never be pleaded as a defense. But mistake of foreign law and mistake of private
rights may be treated as mistake of fact.
Mistake of fact

A mistake of fact is also known as an operative mistake. Under common law an operative mistake renders
a contract void ab initio, i.e. where an operative mistake is proved, the legal position is that the parties are
in the same position as if the contract was never entered into.; the contract was void right from the
beginning. Equity on the other hand approaches mistake with some lenience and provides some measure
of relief to the parties.

The traditional approach is to divide mistakes into three distinct categories: common mistake, mutual
mistake and unilateral mistake.

Common Mistake – a common mistake is made where both parties assume a particular state of affairs
whereas the reality is the other way round. Both parties therefore make exactly the same mistake. A
contract entered into as a result of common mistake is a nullity (or null and void) at common law.

Couturier v. Hastie (1853)

A contract was entered into for the sale of goods which at the time of the contract were supposed to be in
transit aboard a certain ship. None of the parties new that the goods had deteriorated and that by the time
of the contract, they has in fact been dispose off already by the master of the ship.

Held – both parties had contemplated that the goods were in existence at the time of the contract, and
since the goods were not actually in existence at that time, the contract was void and the buyer was not
liable to pay the price

Mutual mistake – in relation to a particular matter, one party may assume one thing while the other party
assumes a totally different thing, so that they both misunderstand one another. They are then said to have
made a mutual mistake. The mistake is different for each party, unlike the case of a common mistake
where both parties make the same mistake. A contract made under mutual mistake may or may not be a
nullity, depending on the circumstances of the case.

Scott v. Littledole (1858)

In a contract of sale of goods by sample, a plaintiff bought from the defendants 100 chests of tea, which
were then lying in a specified place. The plaintiff though he was buying the tea combined in the 100
chests but the defendant thought they were selling the plaintiff only tea of the same quality as the
samples. The tea in the chests turned out to be of higher quality than the samples submitted to the
defendant and the defendant refused to deliver it to the plaintiff.

Held – there was a valid contract between the plaintiff and the defendant and the defendant was liable to
deliver the 100 chests.

Unilateral mistake – if one of the parties to a contract is mistaken and the other party is aware of this
fact, there is said to be unilateral mistake (compare mutual mistake where one party’s mistake is not
known to the other party). Instances of unilateral mistake are common in fraud cases where one party
misrepresents his identity to the other, thereby inducing the other party into contracting with him in the
false belief that he is contracting with the person whose identity has been given.
 2. MISREPRESENTATION

A representation means a statement of fact made by one party to the other, either before or at the time of
the contract, relating to some matter essential to the formation of the contract, with an intention to induce
the other party to enter into a contract. It may be expressed by words spoken or written or implied from
the acts or conducts of parties (e.g. non – disclosure of a fact)

A representation when wrongly made either innocently or intentionally is termed as a misrepresentation.

Misrepresentation may either innocent or intentional or deliberate with intent to deceive the other party.
In law, the former kind is, the term ‘misrepresentation and for the latter, the term fraud is used,

A misrepresentation is a representation or statement of fact which is false. The law gives some form of
remedy to a party aggrieved by misrepresentation made by the other party to the contract. But for
misrepresentation to be operative, it must have the following characteristics:

• It must be a misrepresentation of fact, not of law or opinion – everyone is presumed to know the
law and therefore a party to contract cannot claim to have been misled by a misrepresentation of law
made by the other party. As for opinion, an opinion is a statement of belief, nor of fact, so it cannot be
made the basis for an action for misrepresentation.

• The fact misrepresented must be a material fact – it is not every trifling misstatement of fact that
can be relied upon as a means of escaping liability under the contract. The fact must be material in the
sense that its falsity must tend to nullify the consent of the party claiming to have been misled by it.

Types of misrepresentation

There are three types of misrepresentation. These are:

a. Fraudulent misrepresentation

A fraudulent misrepresentation is a statement made without honest belief in its truth or recklessly without
caring whether it is true or not. This type of misrepresentation therefore requires proof of fraud or
dishonest; and once proved it is actionable at common law.

b. Innocent misrepresentation

This is simply whereby the maker of the statement honestly believes that the statement is true. An
innocent misrepresentation is one made honestly or without falt on the part of the representor. This type
of misrepresentation is not actionable at common law, and the representee has no remedy at all.

c. Negligent misrepresentation

A negligent misrepresentation occurs when someone makes a statement without regard to the true facts, if
you tell a person that a stereo system is brand new when it is four years old and has been used heavily,
then this can be considered negligent misrepresentation. This form of misrepresentation is one of the three
legally recognize types of misrepresentation under contract law. Negligent misrepresentation is when a
person does not lie directly (saying something knowing it to be untrue), buy has made a statement about a
subject with known reason to believe it to be fact.

Remedies for Misrepresentation

Misrepresentation renders a contract voidable at the instance of the representee (the innocent party).
Consequently, the remedy of the rescissions is available to him. Besides, he is also entitled to damages for
loss that may have been suffered by him as a result of misrepresentation.

3. DURESS

Duress refers to actual violence or threat of violence calculated to produce fear in the mind of the person
threatened. The requirement of agreement in the establishment of a contractual relationship presupposes
that each of the parties is a free contracting agent. But the freedom of the party subjected to duress (or
coercion) is obviously restricted. Duress, as such, is a vitiating factor which is actionable at common law
(and is sometimes referred to as legal duress)

For a threat to amount to duress:

• It must be a threat to the person, not to goods

• It must relate to an unlawful thing – a threat to do a lawful thing immaterial because it is a

requirement of public policy

• The threat must have induced the threatened party to enter into the contract

The dominant view is that contract entered into under duress (coercion) is voidable at the instance of the
party coerced.

4. UNDUE INFLUENCE

Undue influence is another factor which tends to restrict the freedom of a party in entering into a
particular contract. It is based on the equitable principle that no person may take an unfair advantage of
the inequalities between him and another party so as to force an agreement on the other party.

A contract is said to be induced by undue influence where:

• The relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other; and

• He uses the position to obtain an unfair advantage over the other.

A person who seeks to relay on undue influence as a defense must prove that the other party has in fact
exerted influence over him and that he would not otherwise have entered into the contract. But where a
confidential (fiduciary) relationship exists between the parties, undue influence is presumed, and the
burden if shifted onto the other party to prove that there has been no undue influence on his part.

The following are relations in which undue influence is presumed.

1) Parent and child

2) Doctor and patient

3) Trustee and beneficiary

4) Advocate and client

5) Guardian and ward

6) Religious advisor and disciple.

Where undue influence if sufficiently proved to have existed at the time of the contract, the contract is
voidable at the instance of the party unduly influenced and may on this ground be set aside.

Williams v. Bayley (1866)

A son gave to his bank several promissory notes upon which he had forged the endorsements of his
father. The bank threatened that unless some agreement was reached, it would have the son prosecuted.
Fearing for the safety of his son, the father agreed to execute a mortgage in favor of the bank.

Held – the bankers had exploited the fears of the father for the safety of his son, as such the mortgage
agreement was invalid and not binding on him ( the father) on the ground of undue influence.

5. ILLEGALITY

An illegal contract is one which is prohibited by law or which contravenes a provision of law or one
which is contrary to public policy. Where both parties are guilty of illegality, they are said to be in pari
delicto and none of them can enforce the contract. But where only one of the parties is guilty of the
illegality, the contract may in certain circumstances be enforced by the innocent party.

Illegal contracts include the following:

1) Contract to commit a crime, tort or fraud

2) Contracts that are prejudicial to the administration of justice

3) Contracts liable to corrupt public life

4) Contracts that are prejudicial to public safety

5) Contracts to defraud the revenue

6) Contracts that are sexually immoral

7) Contracts that are prejudicial to the country’s foreign relation.

Pearce v. Brooks (1866)

The plaintiffs entered into a higher purchase agreement with the defendant, under which they supplied the
defendant with a carriage. The defendant was a prostitute and intended to use the carriage to attract men,
and the plaintiffs were aware of this. The defendant defaulted in payment and an action was brought
against her.

Held – the contract between the parties was illegal and could not be enforced.

Regazzoni v. Sethia (1958)

Indian law prohibited export to South Africa. A contract was made in England, under which goods were
to be imported from India and resold in South Africa.

Held – the contract was prejudicial to British Diplomatic Relations with India, it was therefore illegal.

PRIVITY OF A CONTRACT

A person who is a party to a contract is said to be privity to the contract. In technical terms there is privity
of contract between him and the other contracting party. Only a person who is a party to a contract can
derive a benefit from it or have obligations imposed on him by it; and it is only such person who may sue
or be sued on the contract. A stranger to a contract cannot derive any benefit from it or have obligations
imposed by the contract on him. This is the general rule, commonly referred to as the doctrine of privacy
of contract:

Tweddle v. Atkinson (1861)

The plaintiff intended to marry the defendants daughter. His father and the defendant entered into a
contract in which each promised a sum of money to the plaintiff, but the plaintiff himself was not a party
to the contract. The defendant failed to pay and the plaintiff sued him.

Held – the plaintiff was a stranger to the contract and could not therefore take advantage of it, not
withstanding that it has been made for his benefit.

Exception to the Privity Doctrine

The general rule is no doubt rigid: once you are a party to a particular contract, you cannot enforce it, nor
can it be enforced against you. This general rule is however subject to certain recognized exceptions.
These are:

a) Agency

Under the law of agency, a person who is not a party to a contract may in certain circumstance sue or be
sued on it. Where A, acting for B, enters into a contract with C without disclosing the fact that the
contract is being made on behalf of B, B is known as an undisclosed principal. Upon discovering the true
facts, B has a right to intervene and directly enforce the contract against C.

b) Statutory provision

A statute may confer rights or impose obligations on a parson who is not a party to a particular contract,
for instance, under the Married Woman’s Property Act (1882) a married person may take out a policy of
insurance on his/her life on the benefit of his/her spouse or children. In this case the beneficiary of the
policy is given rights under the contracts of insurance although he/she was not a party to it.

c) Doctrine of constructive trust.

This doctrine is another exception to privity doctrine. It is described in the following terms:

Where a contact is made with A for the benefit of B, A can sue on the contract for the benefit of B and
recover all that B could have recovered if the contract could had been made with B himself. The basis of
the principle is that A must be regarded as trustee for B under an implied trust.

d) Restrictive Covenants

A restrictive covenant is a negative term of a contract, it is a promise given by one party to another, an
undertaking, to refrain from doing a particular act. Such covenants are covenants are common in contracts
relating to the disposition of an interest in land. Thus where A purchases land from B and promises B
that, in developing the land he will take care not to obstruct a neighboring ploy from light. Such promises
by A is restrictive covenant: it is an undertaking by A to refrain from obstructing the neighboring plot
from light.

DISCHARGE OF CONTRACT

A contract is said to be discharged (or terminated) where the parties to it are freed from their mutual
obligation. In other words, when the rights and obligations arising out of a contract are distinguished, the
contract is said to be discharged or terminated. A contract may discharge in any of the following ways

• Discharge by performance

• Discharge by agreement

• Discharge by frustration

• Discharge by breach

• Discharge by operation of law.

1) Discharge by performance
When a contract is duly performed by both the parties, the contract comes to a happy ending and nothing
more remains. The contract in such a case, is discharged or terminated by due performance. But if the one
party only performs his promise, he alone is discharged. Such a party gets a right of action against the
other party who is guilty of breach.

Performance of the contract is the principle and most usual mode of discharge of a contract. Performance
may be:

• Actual performance

• Attempted performance or tender.

Actual performance: when each party to a contract fulfills his obligation arising under a contract within
the time and in the manner prescribed, it amounts to actual performance of the contract and the contract
comes to an end or stands discharged.

Attempted performance of tender: when the promisor offers to perform his obligation under the
contract but is unable to do so because the promisee does not accept the performance, it is called
attempted performance or tender. Thus “tender” is not actual performance but is only an “offer to
perform” the obligation under the contract. A valid tender of performance is equivalent to performance.

2) Discharge by Agreement

Where a contract is still executory, i.e. where each of the parties is yet to perform his contractual
obligation, the parties may mutually agree to release each other from their contractual obligation: each
party’s promise to release the other is consideration for the other party’s promise to release him.

Where one party has fully performed his part of the contract, he may agree to release the pther party from
his contractual obligation. In this case, however, the discharge is effective only if made under seal or
where the party being discharged has furnished consideration for it; otherwise the party giving the
discharge will not be bound and the other party remains liable.

A contract may be discharged by agreement in the following three ways:-

 Novation
 Accordance and Acceptance: a party to may be willing to pay lesser sum than what was
contracted for or lesser fulfillment of the promise made and if the other party accepts it then the
contract is discharged and this method is known as “accord and acceptance method”.
 Waiver: waiver means the deliberate abandonment or giving up of a right which a party is entitled
to under a contract, where upon the other party to the contract is released from his obligation. In
this case, both parties can release each other from their respective obligation and rights.
 3) Discharge by Frustration

A contract is said to be frustrated if an event occurs which brings its further fulfillment to an abrupt end;
and upon the occurrence of the event the contract is immediately terminated and the parties discharged.
But the doctrine of frustration only relates to the future. This means that the parties are discharged from
their future obligation under the contract but remain liable for whatever rights that may have accrued
before the frustration. Thus goods supplied or services rendered before the frustration must be paid for,
although the parties are both excused from further performance of the contract.

It is difficult to determine the frustrating events. Some examples of frustrating events are:

Destruction of Subject Matter: “in contracts in which the performance depends on the continued
existence of a given person or thing, a condition is implied that a condition is implied that the
impossibility of performance arising from the perishing of the person of thing excuse the performance”
this statement of law was given by Blackburn J. in the case given below.

Taylor V. Caldwell (1862)

A let a music - hall to B in order that B might use it for holding concerts on specific days. Before the
concert could be held the music hall was accidentally destroyed by fire. B sued A for breach of contract.

Held: the destruction of music hall had frustrated the contract and B’s action could not be maintained.

Death or Incapacity: just as the destruction of the subject-matter of the contract terminates it, the death
or serious indisposition of a party whose personal services were contemplated by the contract will
similarly terminate it. Thus, if a doctor contracts to care for all my medical needs, his death is a
frustrating event which automatically terminates the contract. Again, if A contracts to stage a series of
shows during the month of June – September but is in may sentenced to imprisonment for one year, or
becomes insane permanently or for a substantial part of the period in question the contract will similarly
be discharged by frustration – the frustration event being constituted of the imprisonment of insanity.

Frustration of the common venture: Where both parties contemplate a particular object as forming the
basis of their contract, such contract constitutes their common venture. The law is that if the common
venture subsequently becomes incapable of fulfillment, the contract is frustrated.

Krall v. Henry (1903)

The plaintiff agreed to let a room to the defendant for the day when Edward VII was to be crowned.
Though not spelt out in the agreement itself, both parties understood that the purpose of the letting was to
enable the defendant view the coronation process. The king subsequently became ill and the coronation
was cancelled.

Held: the cancellation of the coronation discharged both parties from their contractual obligation, because
the process was the foundation of the contract and its cancellation meant that the substantial purpose of
the contract could no longer be achieved.
 4) Discharge by Breach

Breach of contract means breaking of obligation. It occurs when a party to the contract does not fulfill his
contractual obligation or by his own act makes it impossible that he should perform his obligation. Breach
of contract means the failure of a party to perform his obligations. The party that fails to perform his
obligation is said to have committed a breach of contract and can be sued by the innocent party as per the
law but the contract as such stands terminated.

5) Discharge by Operation of Law

A contract may be discharged by operation of law in certain cases. Some important instances are as
under:-

Lapse of time: if a contract is made for a specific period, then after the expiry of that period the contract
is discharged e.g. partnership deed, employment contract e.t.c.

Death: the death of either party to the contract discharges the contract where personal services are
involved.

Substitution: if a contract is substituted with another contract then the first contract is discharged.

Bankruptcy: when a person becomes bankrupt, all his rights and obligations pass to his trustee in
bankruptcy. But a trustee is not liable on contracts of personal services to be rendered by the bankrupt.

REMEDIES FOR BREACH OF CONTRACT

Whenever there is a breach of contract the injured party becomes entitled for some remedies.

These remedies are:

• Damages

• Quantum Meruit

• Specific Performance

• Injunction

• Rescission

a. Sue for damages: damages are monetary compensation allowed to the injured party for the loss or
injury suffered by him as a result of breach of contract. The fundamental principle underlying damages is
not punishment but compensation. By awarding damages the court aims to put the injured party into the
position in which he would have been, had there been performance and not breach. As a general rule,
compensation must be commensurate with the injury of loss sustained, arising naturally from the breach.
If actual loss is not proved, no damages will be awarded.
b. Quantum meruit: quantum meruit literally translates to “as much as is earned” or “in proportion to
the work done”. At times when one party of the contract is prevented from finishing his performance of
the contract by the other party, he can claim quantum meruit. So he must be paid a reasonable
remuneration for the part of the contract he has already performed. This could be the remuneration of the
services he has he has provided or the value of the work he has already done.

c. Sue for the specific performance: this means the party in breach will actually have to carry out his
duties according to the contract. In certain cases, the courts may insist that the party carry out the
agreement. So if any of the parties fails to perform the contract, the court may order them to do so. This is
a decree of specific performance and is granted instead of damages.

d. Injunction: “injunction” is an order of a court restraining a person from doing a particular act. It is a
mode of securing the specific performance of the negative terms of the contract. Where a party is in
breach of the negative terms of the contract (i.e. where he is doing something which he promised not to
do), the court may by issuing an injunction, restrain him from doing what he promised not to do. Thus
injunction is a preventative relief. It is particularly appropriate in cases of “anticipatory breach of
contract” where damages would not be an adequate relief.

In prohibitory injunction, the court stops the commission of an act and in a mandatory injuction it will
stop the continuance of an act that is unlawful.

Recession of contract: when there is a breach of contract by one party, the other party may rescind the
contract and need not perform his part of obligation under the contract the contract and may sit quietly at
home if he decides not to take any legal action against the guilty party. But incase the aggrieved party
intends to sue the guilty party for damages for breach of contract; he has to file a suit for recession of the
contract. When the court grants recession, the aggrieved party is free from all his obligations under the
contract and becomes entitled to compensation for any damage which he has sustained through the non-
fulfillment of the contract.
AGENCY

Meaning and Definition of Agency

Agency law is a special branch of the law of contract.

An agent is a person employed to do any act for another or to represent another in dealings with third
persons. The person who delegates the authority is known as principal. To whom the power is delegated
is known as agent. The relationship that is created is known as agency. A person who acts in place of
another is an agent and the person on whose behalf he acts – principal. Thus where A appoints B to buy
10 bags of sugar on his behalf, A is the principle, B is the agent and the contract between the two is
agency.

Characteristics of Agency

 The agent represents or performs a service for the principle.

 Principle is answerable to third parties for the acts of agent.
 No consideration is necessary to create an agency
 Principle must be competent to employ an agent – only a person who is competent to contract can
employ an agent (major, sound mind)
 Agent may not have contractual capacity – a minor or a person of unsound mind may act as an
agent and bind the principle to the third persons.

Capacity of Agent

An agent is supposed to create contractual relations between his principle and a third party. The principle
and the third party must possess contractual capacity and it is not necessary whether the agent himself has
contractual capacity or not. It means even a minor can be appointed as an agent he can bind his principle
in a contract with a third person.

Agency relationship differs from trusts and bailment.

Distinguishing Agency from Trust and Bailment

TRUST

This is an equitable relationship where by a party known as trustee expressly, impliedly, or constructively
holds property on behalf of another as beneficiary. It is similar to agency in that:

 Some of the duties of the trustees are similar to those of the agent e.g. must act in good faith and
avoid conflict of interest
 Some of the remedies available to the beneficiary against the trustee are available to the principle
against the agent e.g. account.

However, they differ in that:

 Whereas most agencies are contractual, trust are not.

  Whereas the principal’s action against the agent for fraud is limited by the statute of limitation an
action by the beneficiary against the trustee has no time limitation.

BAILMENT

This is a contract where by a party known as bailer delivers goods to another known as Bailee with
specific instructions that the goods be dealt with in a particular manner or be returned as soon as the
purpose for which they were bailed is accomplished. Bailment includes:

 Deposit or storage for safe storage

 Contract of hiring
 Pledge
 Contract for work or repair
 Carriage of goods

It differs from agency in that:

 The bailee does not represent the bailor

 Acts of the bailee does not affect the legal position of the bailor.

CLASSES / TYPES OF AGENTS

The agent may be classified from the point of view of:

1) The extent of their authority

2) The nature of work performed by them

Various classes of agents are as follows:

The extent of their authority

a) General agent: a general agent is one who is employed to do all acts connected with the business of
trade of his employer, e.g. a manager of a firm. He can bind the principle by doing anything which falls
within the ordinary scope of that business, whether he is actually authorized for any particular act or not,
is immaterial, provided the third party act bonafide.

b) Special Agent: a special agent is one who is employed to do some particular act or represent his
principal in some particular transaction. e.g. an agent engaged to sell a motor car. As soon as the act is
performed, the authority of the agent comes to an end. If a special agent does anything outside his
authority, the principle is not bound by it and third parties are not entitled to assume that the agent has
unlimited powers.
c) Universal agent: is one who is employed to all such act which a principal can lawfully do and can
delegate. A universal agent is said to have unlimited authority. He enjoys extensive powers to transact
every kind of business of behalf of his principle. This type of agent is very rare.

Nature of Work

From the point of view of nature of work to be done to be performed we have the following classes of
agents:

a) Brokers: a broker is an agent who represents a buyer or seller in negotiating a purchase or sale without
physically handling the goods involved. He is only concerned with making bargains and contracts
between other parties. A broker receives a commission or brokerage for his services. He is concerned
with bargains and connecting the buyer the seller but does not possess the goods and has limited power
over the price and terms of sale. He does not sell in his own name.

a) Factors: mercantile agent to whom the possession of goods are given for the purposeof selling them.
He usually sells the goods in own name. he can exercise a general right of lien on the goods delivered to
him for balance of payment if any.

c) Auctioneer: is an agent who is appointed by the principle to sell goods on his behalf at a public
auction for a reward in form of commission. Where the auctioneer is appointed to sell goods “without
reserve” he has the implied authority to sell to the highest bidder. He has a lien on the goods in his
possession for his charges.

d) Commission agents: is a mercantile agent who is employed to buy and sell goods for his principal on
best possible term. He transacts in his own name and is entitled to commission. He may or may not have
possession.

e) Del Credere agents: is an agent who is employed to sell the goods of his principal. He gives an
undertaking to his principle to make good the losses that may arise from the failure of parties to whom he
sells goods under the agency business. Over and above the usual commission, the principle has to give, a
del credere agent an extra remuneration called del credere commission for giving the undertaking that the
principal will not have to incur any loss arising from the failure of buyers to pay their dues.

f) Forwarding agent: forwarding agents are persons who work as agents of either exporters or importers.
They are employed to collect and deliver goods on behalf of others. When they act as agents of exporters
they collect the good and attend to the packaging and marking and dispatch of goods to the proper
destination. When they act as agents of importers, they take delivery of the goods at the port of
importation, examine their quantity and quality and attend to their proper warehousing or transportation to
the place of business of the importers.
CREATION OF AGENCY

Once an agency relationship is created, an agent comes into existence. An agency relationship may come
into existence in the following ways:

• By express agreement

• By implied agreement

• By ratification

• By necessity

• By presumption of from cohabitation.

1. AGENCY BY EXPRESS AGREEMENT

Creation of agency by agreement arises when parties mutually agree to create it. Their minds must be at
ad idem and both parties must have the requisite capacity. Agency is created in express agreement
specifying the scope of the authority of agent. The agent may be in such a case, be appointed by word of
mouth or by agreement in writing. However, in certain cases, e.g. to execute a deed for sale or purchase
of land, the agent must be appointed by executing a formal power of attorney on a stamped paper.

2. AGENCY BY IMPLIED AGREEMENT

Implied agency arise when there is no express agreement appointing a person as an agent, but instead the
existence of agency is inferred from the circumstances of the case, or from the conduct of the parties on a
particular occasion, or from the relationship between parties. Such agency may take the following forms.

a) Agency by estoppel; and

b) Agency by holding out.

Agency by estoppel: such agency is based on the equitable doctrine of estoppel. It arises where a person
permit another to act on his behalf. The principle is estoped from denying his agent’s authority. Agency
by estoppel arises in circumstances:

 Where the parties have no relationship but one of them represents the other as agent and third
parties rely upon the relationship.
 Where an agency relationship exists between the parties but the principle represent the agent as
having more authority.

Illustration: A tells B in the presence of P that A is the agent of P. P does not contradict the statement. B
enters into contract with P on the belief that A is P’s agent. In such a case, P would be bound by the
contract.

Requirements for agency by estoppel

The following conditions laid down in Ramas case must exist:

 A representation by word or conduct intended to be acted upon

 Reliance upon the representation by the representee
 Change in legal position as a result of the reliance
 It would be unfair not to estop the representor.

Agency by holding out: such agency is based on the ‘doctrine of holding out’ which is part of the law of
estoppel. In this case also the alleged principal is bound by the acts of the supposed agents, if he has
induced their persons to believe that they are done with his authority.

But unlike an agency estoppel, holding out requires some affirmative or positive act or conduct by the
principal to establish agency subsequently. Thus, where P sends A to buy goods on credit from C, A buys
goods on credit for himself and refuses to pay. C sue P. P cannot plead that A had no authority.

3. AGENCY OF NECESSITY

In certain circumstances, the law confers an authority on one person to act as agent for another without
any regard to the consent of the principal. Such an agency is called an agency of necessity. Bowstead has
rightly observed: “an agency by necessity is conferred by law in certain cases, where a person is faced
with an emergency in which the property or interests of another are in imminent danger, and it becomes
necessary in order to preserve the property or interest, to act before the instructions of the owner can be
obtained. The law assumes the consent of the owner to the creation of the relationship of principle and
agent”.

The conditions that enable a person to act as an agent of necessity of another are as follows:

 There should be a real necessity for acting on behalf of the principal.

 It should be impossible to communicate with the principal within the time available.
 The alleged agent should act bonafide in interests of the principal.

Generally, agency by necessity arises in the following cases:

 Where the agent exceeds his authority, bonafide, in an emergency

 Where the carrier of goods acting as a bailee does anything to protect or preserve the goods in an
emergency, although there is no express authority in that regard.
 When a husband improperly leaves his wife without providing proper means for her survival.

4. AGENCY BY RATIFICATION

Ratification means the subsequent adoption or acceptance by a person of an unauthorized act done by
another on his behalf without any authority. Thus where a principal affirms or adopts the unauthorized act
of his agent, he is said to have ratified that act and there comes into existence an agency by ratification
retrospectively.
Illustration: X buys 5 bags of wheat on behalf of Y without his knowledge or authority. Y would be
bound by the contract, if he ratify or accept the same. It can be expressed or implied.

Ratification by the principal:

 Creates the agency relationship

 Validates the transaction entered into by the agent
 Relieves the agent from any personal liability

Essentials of a valid ratification

A valid ratification must fulfill the following conditions:

a) The agent must purport to act as agent for a principal who is in contemplation – the agent must
expressly contract as an agent for a principle in the knowledge of third parties. The principle must be
named and must be identifiable and it is not sufficient to indicate to indicate simply that he is acting as
agent of someone.

b) The principal must be in existence – for a valid ratification it is essential that the principal must be in
existence at the time when the original contract is made, because rights and obligations cannot attach to a
nonexistence person.

c) The principle must have the full knowledge of all the material facts – X bought certain goods for why
at the price greater than the market value in the name of Y. Y ratified the transaction without knowing the
same (high price) the ratification if invalid.

d) The principle must ratify the whole transaction – ratification must be of the whole contract. Once a part
is accepted, it is an implied acceptance of the whole. There cannot be partial rejection or partial
acceptance.

e) Ratification must be made within reasonable time – for ratification to be valid, it must be made within
a reasonable time after the original contract is made.

f) There should be an act capable of ratification - act to be ratified must not be void or illegal.

g) Ratification must not injure a third party – ratification cannot be effective where its effect is to subject
a third person to damages or terminate any right or interest of a third person.

h) Ratification must be communicated.

The Extent of Agent’s Authority.

The authority of an agent means his capacity to bind the principal to third parties; the agent can bind the
principal only if he acts within the scope of his authority. The scope of an agent’s authority is determined
by his:
a. Actual authority: actual authority refers to specific powers expressly conferred by a principal (often
an insurance company) to an agent to act on the principal’s behalf. This power may be broad, general
power of it may be limited special power. Specific powers are also known as express authority.

How actual authority works

Actual authority arises where the principal’s words or conduct rationally cause the agent to believe that
he/she has been empowered to act. And agent receives actual authority either orally or in writing.

b. Ostensible or apparent authority: is the power of an agent to legally bind its principle with a third
party and arises from conduct of a principal by permitting the agent to make contract of a particular kind
on its behalf.

c. Authority in emergency: an agent has authority, in an emergency to do all such acts for the purpose of
protecting his principal from loss and would be done by a person or ordinary prudence, in his own case
under similar circumstances.

RIGHTS AND DUTIES OF THE PARTIES

Duties of an Agent:

1) To follow principal’s direction: an agent must act within the scope of the authority conferred on
him. E.g. An agent was instructed to insure goods, he failed to do so, the goods were destroyed.
He was held liable to the extent of loss.
2) To follow the customs in the absence of instructions: B, a broker, in whose business, it is not
the custom to sell on credit, sell goods of A on credit to C whose credit at the time was very
high. C, before payment, becomes insolvent. B must make good the loss to A.
3) To conduct business with reasonable care skill and diligence: A, an agent for the sale of
goods, having authority to sell on credit, sells to B on credit, without making the proper and usual
enquires as to the solvency of B. B at the time of such sale, is insolvent. A must make
compensation of his principal in respect of any loss thereby sustained.
4) Not to deal on his own account: if an agent wants to deal on his own account, he must seek the
consent of the principal first and must acquaint him with all the material facts (purchase)
5) Not to make secret profits: as a fiduciary, an agent is bound to act in good faith for the benefit
of the principal. His actions must be guided by the principle of utmost fairness.
6) To keep and render account to principle when demanded: the agent is bound to explain to the
principal the application of money or goods that comes into his hands during the relationship. The
account must be complete and honest
7) Respect for the principle’s title or estoppel: the agent must respect the principal’s title to any
property he holds on the principal’s behalf. He cannot deny that the principal has title thereto.
8) Secrecy / confidentiality: the agent must not disclose hid dealings with principal to third parties
without the principal’s consent.
Rights of an Agent

1) Right of retainer: the agent has a right to retain, out of any sums received all money due to him
in respect of remuneration, advance made, expenses incurred in conducting business
2) Right to receive remuneration: agent has the right to receive his remuneration if he has received
his task. He is not entitled to any remuneration for part transaction.
3) Right of lien: he has rights to exercise particular lien over the goods, paper, and property until
the amount due to him for commission expenses has been paid.
4) Right to sue: if the principle fails to remunerate of indemnify the agent, the agent has an action
in damages for breach of contract.

Duties and Rights of the Principal

 To pay remuneration to agent

 To recover compensation for breach of duty by the agent
 To forfeit agent’s remuneration where he is guilty of misconduct
 To receive any extra profit made agent