Commercial Transactions 9-03-2017

Compiled by Kevin Ndoho Macharia on 9th March, 2017
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THE LAW OF COMMERCIAL TRANSACTIONS
Compiled by
Kevin Ndoho Macharia
9th March, 2017
1ST EDITION

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THE LAW AND PRACTICE OF COMMERCIAL TRANSACTIONS
Compiled by Kevin Ndoho Macharia
1st Edition
9th March, 2017
Westlands,
Kenya.

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Acknowledgement
Perhaps failure is the mother of invention.
This compilation comes about from a student who failed his commercial law paper at the Kenya school of law as
administered by the Kenya Council of Legal Education. He failed because he relied on the little exposure at university
and is continuously astonished at the breadth and deepness of commercial law.
This compilation is familiar to nearly all persons who have ever been law students at the Kenya School of Law. Its history
is long and varied, beginning with a 2003 recording of a University of Nairobi Lecture by an unknown student, to the
various reworks by Kenyan lecturers who in their varied teaching at more than one university at a single semester found
little time to create new material and chose to amend and use this as their teaching guide; to the various students at the
Kenya school of law who felt the need to have a common book of reference for ATP 109: Commercial Transactions Unit
at the school of Law. What can be said is that this work owes many debts to the many persons who have previously come
across this work.

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Forward
This book is intended for those who will soon be sitting for the commercial law CLE exam in Kenya.
However, it may also serve as a guide to the mastery of the law and practice of commercial law for the beginner as well
as for the seasoned lawyer who is just starting out in commercial law. It may even come as a welcome addition to the
library of commercial law gurus.
It is therefore my pleasure to invite you to enter this area of law which is so full of life and wonder. It begins with the
basic components of commercial law and expands to introduce the specialized areas of commercial law practice which lie
at the periphery of what is required to pass the bar exam. In the latter case, these wide areas serve as the beginning points
for this who are about to start a commercial law practice and also serves as a stepping stone to those who are out to
research commercial law and practice.
All in all, this book has quite some value to add to commercial law and practice and seeks to inspire excellence and
mastery of this subject.
The book is a work in progress and will require much further reading. It serves as a map for the later areas which are not
herein contained. This compiler is looking for any financing or research grant in order to finish this compilation and
create a new original work on this subject. It is a worthy cause and would greatly add to the dearth of African legal material
in the subject topics contained in this book!
Ever yours,
Kevin Ndoho Macharia
9th March, 2017.
Westlands,
Kenya
kndoho@outlook.com

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General table of Contents
A. CHAPTER ONE COMPANIES .......................................................................................................... 21
B. CHAPTER 2 - PARTNERSHIPS ....................................................................................................... 79
C. CHAPTER THREE - SALE OF GOODS AND AGENCY ............................................................... 86
D. CHAPTER FOUR - THE LAW OF AGENCY ................................................................................114
E. CHAPTER 5 - HIRE PURCHASE AGREEMENTS........................................................................152
F. CHATTELS ........................................................................................................................................165
G. INSURANCE ......................................................................................................................................165
H. BILL OF EXCHANGE & PAYMENT SYSTEMS ............................................................................165
I. JOINT VENTURES ...........................................................................................................................165
J. MERGERS AND ACQUISITIONS ..................................................................................................165
K. LABOUR LAW ..................................................................................................................................165
L. PATENTS, COPYRIGHTS, INDUSTRIAL DESIGNS...................................................................165
M. OIL AND GAS ...................................................................................................................................165
N. STRUCTURING COMMERCIAL SOLUTIONS.............................................................................165
O. BANKING AND CHEQUE LAW .....................................................................................................165
P. INSOLVENCY OF INDIVIDUALS AND COMPANIES ...............................................................165
Q. COMPANIES ACT 2016 ZND ITS AMMENDMENT ACT ........................................................165
R. INTERNATIONAL SALE OF GOODS AND INCOTERMS ........................................................165
S. COMPETITION LAW .......................................................................................................................165
T. CONSUMER PROTECTION LAW .................................................................................................165
U. DRAFTING AGREEMENTS AND OTHER COMMERCIAL PAPER .........................................165
V. OTHER AREAS OF LAW AFFECTED BY COMMERCIAL LAW EG. PROBATE AND

SUCCESSION LAW ..........................................................................................................................165
W. STEPS OF REGISTRATION OF VARIOUS COMMERCIAL PROPERTY ................................165
X. COMMERCIAL DISPUTE RESOLUTION NATIONAL AND INTERNATIONAL IN REGARDS

TO I.P.; BANKING; M&A; CORPORATE LAW; LABOUR LAW ...............................................165
Y. TAX LAW ..........................................................................................................................................166
Z. CONSTRUCTION LAW ...................................................................................................................166
AA. MARTIME LAW ................................................................................................................................166
BB. AIRCRAFT AND AIRSPACE LAW ...............................................................................................166

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CC. NEGOTIATING COMMERCIAL CONTRACTS ...........................................................................166
DD. THE BUSINESS DECISION QUESTION ........................................................................................166
EE. RESEARCHING COMMERCIAL LAW AND INTERNET SCOURCES ......................................166
FF. STARTING A COMMERCIAL LAW PRACTICE .........................................................................166
GG. COMMERCIAL CLIENT MANAGEMENT ....................................................................................166
HH. WAR AND COMMERCIAL LAW ...................................................................................................166
II. GLOBALIZATION VS NATIONAL & REGIONAL COMMERCIAL LAW ................................166
JJ. PAST PAPERS...................................................................................................................................166
KK. EXPOSURE & MENTORING A COMMERCIAL LAW PUPIL ....................................................166
LL. REMARKS ON THE FURTURE OF COMMERCIAL LAW .........................................................166
MM. COMMERCIAL LAW AND THE INDUSTRIES ............................................................................166
NN. COMMERCIAL LAW AND ACCADEMIA ....................................................................................166

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Detailed Table Of Contents

A. CHAPTER ONE COMPANIES .......................................................................................................... 21
I. TYPES OF COMPANIES .............................................................................................................. 21
II. FUNDAMENTAL CONCEPTS OF COMPANY LAW ............................................................... 21

1) The Concept of Legal Personality ............................................................................................................................... 21
2) Capacity to Create Legal Binding Relations ............................................................................................................. 22
3) Limited Liability............................................................................................................................................................... 23
III. ADVANTAGES OF INCORPORATION .................................................................................... 23

1) Limited Liability............................................................................................................................................................... 23
2) Holding Property ............................................................................................................................................................. 24
3) Suing and Being Sued .................................................................................................................................................... 24
4) Perpetual Succession ...................................................................................................................................................... 25
5) Transferability of Shares .............................................................................................................................................. 25
6) Borrowing Facilities ........................................................................................................................................................ 25
IV. IGNORING THE CORPORATE ENTITY (LIFTING THE VEIL OF INCORPORATION) .. 25

1) Reduction in the Number of Members ....................................................................................................................... 26
2) Fraudulent Trading ........................................................................................................................................................ 26
3) Holding and Subsidiary Companies ........................................................................................................................... 26
4) Misdescription of Companies ....................................................................................................................................... 27
V. IGNORING THE CORPORATE ENTITY UNDER COMMON LAW ..................................... 27

1) 1. Where There Is an Agency Relationship ............................................................................................................... 27
2) 2. Fraud & Improper Conduct ...................................................................................................................................... 29
3) 3. Group Enterprise ........................................................................................................................................................ 29
4) THE DOCTRINE OF ULTRA VIRES.............................................................................................................................. 29
5) Loss of Substratum ......................................................................................................................................................... 30
VI. INCORPORATION OF COMPANIES ........................................................................................ 30

1) COMPANIES...................................................................................................................................................................... 30
2) Company limited by Guarantee .................................................................................................................................. 31
3) Unlimited Companies ..................................................................................................................................................... 31
4) NAME OF COMPANY ...................................................................................................................................................... 31
5) THE MEMORANDUM AND ARTICLES OF ASSOCIATION ..................................................................................... 32
a) A sample Memorandum and Articles of Association .......................................................................................... 34
b) Sample Form ............................................................................................................................................................... 39
c) Sample Form ............................................................................................................................................................... 41
d) Sample Form ............................................................................................................................................................... 42
e) Sample Form ............................................................................................................................................................... 44

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f) Sample Form ............................................................................................................................................................... 45
6) LODGEMENT OF DOCUMENTS ................................................................................................................................... 47
a) REGISTRATION AND CERTIFICATE OF INCORPORATION ................................................................................. 47
b) MEMORUNDUM AND ARTICLES OF ASSOCIATION ............................................................................................. 48
7) EFFECTS OF MEMO & ARTICLES ................................................................................................................................ 48
8) ALTERATION OF ARTICLES ......................................................................................................................................... 49
VII. PROMOTERS ................................................................................................................................. 49

1) Duties of a Promoter ...................................................................................................................................................... 49
VIII. MEMBERS OF A COMPANY....................................................................................................... 49

1) How do you become a member? .................................................................................................................................. 50
2) Subscribers to the Memo ............................................................................................................................................... 50
3) Other members ................................................................................................................................................................ 50
4) Personal Representatives .............................................................................................................................................. 50
5) Trustees in Bankruptcy ................................................................................................................................................. 50
IX. Other Companies ........................................................................................................................ 51
X. Register of Members .................................................................................................................. 51
XI. Public Company .......................................................................................................................... 51
XII. Inspection of the Register ........................................................................................................ 51

1) Importance of the Register ........................................................................................................................................... 51
2) Power of the Court to Rectify the Register................................................................................................................ 51
XIII. CHARTERED COMPANIES ........................................................................................................ 52
XIV. STATUTORY CORPORATIONS ................................................................................................ 53
XV. DIRECTORS AND SECRETARY ................................................................................................ 53

1) DIRECTORS ...................................................................................................................................................................... 53
a) Statutory Duties ......................................................................................................................................................... 54
b) Common Law Duties ................................................................................................................................................. 54
i. Duty to act with care and skill .......................................................................................................................... 54
ii. Fiduciary relationship between directors and the company ....................................................................... 55
2) SECRETARIES................................................................................................................................................................... 57
XVI. ALLOTMENT AND TRANSFERS OF SHARES ........................................................................ 58

1) ALLOTMENT .................................................................................................................................................................... 58
2) TRANSFER ........................................................................................................................................................................ 59
a) See sample form ........................................................................................................................................................ 59
XVII. SHARE CAPITAL AND DEBENTURES ..................................................................................... 60

1) Prospectus ......................................................................................................................................................................... 60
a) What is a prospectus? ............................................................................................................................................... 60

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b) LIABILITY FOR UNTRUTHS....................................................................................................................................... 63
c) STATUTORY CIVIL AND CRIMINAL LIABILITY ..................................................................................................... 63
d) Common law civil and criminal liability ................................................................................................................ 63
2) CONVERSION OF COMPANIES .................................................................................................................................... 64
3) DEBENTURES AND DEBENTURE STOCKS ................................................................................................................ 65
a) Advantages of Debenture Stock .............................................................................................................................. 65
b) Floating charges ......................................................................................................................................................... 65
i. Floating ................................................................................................................................................................. 65
ii. Realizing security ................................................................................................................................................ 65
iii. Registration of Charges ..................................................................................................................................... 65
a. Method of Registration ................................................................................................................................ 65
iv. Registrar’s duty ................................................................................................................................................... 66
v. Effect of Not Registering.................................................................................................................................... 66
vi. Mitigation.............................................................................................................................................................. 66
vii. Effect of Registration ................................................................................................................................... 66
c) Enforcement of Debentures ..................................................................................................................................... 66
viii. Costly .............................................................................................................................................................. 66
ix. Functions of Receiver ......................................................................................................................................... 66
x. Position of Receivers .......................................................................................................................................... 66
XVIII. MANAGEMENT OF COMPANIES ............................................................................................. 67

1) Functionaries ................................................................................................................................................................... 67
2) DIVISION OF POWERS ................................................................................................................................................... 67
d) Prominence of the GM .............................................................................................................................................. 67
3) MEETINGS OF SHAREHOLDERS ................................................................................................................................. 68
a) CONVENING OF GENERAL MEETINGS .................................................................................................................... 68
i. Who can convene? ............................................................................................................................................... 68
ii. By the Directors: .................................................................................................................................................. 68
iii. By Directors on requisition: .............................................................................................................................. 68
iv. By Members on requisition: ............................................................................................................................... 68
v. By the Court: ........................................................................................................................................................ 68
vi. By the Registrar: .................................................................................................................................................. 68
b) NOTICE OF MEETINGS ............................................................................................................................................... 69
c) PROCEEDINGS AT MEETINGS................................................................................................................................... 69
i. Introduction: ........................................................................................................................................................ 69
ii. Chairman: ............................................................................................................................................................. 69
iii. Quorum: ................................................................................................................................................................ 69
iv. Adjournment:....................................................................................................................................................... 69
v. Voting: ................................................................................................................................................................... 69

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vi. Voting agreements .............................................................................................................................................. 70
vii. Proxies: ........................................................................................................................................................... 70
viii. Resolutions: ................................................................................................................................................... 70
d) PROMINENCE OF ARTICLES OF ASSOCIATION ..................................................................................................... 70
4) MEETINGS OF BOD......................................................................................................................................................... 71
a) Formal meetings: ....................................................................................................................................................... 71
b) Written resolutions: ................................................................................................................................................... 71
c) Unanimous assent: .................................................................................................................................................... 71
d) Notice: .......................................................................................................................................................................... 71
e) Quorum: ...................................................................................................................................................................... 71
f) Minutes: ....................................................................................................................................................................... 71
5) CONTROL OF DIRECTORS BY MEMBERS ................................................................................................................. 71
a) RESIDUAL AND DEFAULT POWERS OF GM ........................................................................................................... 72
b) EXCEPTIONAL POWERS OF GM ................................................................................................................................ 72
XIX. WINDING-UP OF COMPANIES .................................................................................................. 72

1) Modes of Winding up S. 212 ......................................................................................................................................... 72
2) Contributories .................................................................................................................................................................. 73
3) Qualifications ................................................................................................................................................................... 73
4) WINDING UP BY THE COURT ...................................................................................................................................... 73
a) When is a company deemed unable to pay its debts? (See s 220) .................................................................... 73
b) What are the instances when the court can declare that it is just and equitable that the company be wound
up? ......................................................................................................................................................................... 74
c) Application to court for winding up (see s. 221) ................................................................................................. 74
d) Powers of court on hearing the petition (see s. 222) .......................................................................................... 74
e) Commencement of winding up (see s. 226) .......................................................................................................... 74
f) Winding up order ....................................................................................................................................................... 74
i. Effect of the order: .............................................................................................................................................. 75
g) Official receiver (OR) ................................................................................................................................................. 75
h) Liquidator .................................................................................................................................................................... 75
i) Committee of inspection (COI) ................................................................................................................................ 76
5) VOLUNTARY WINDING UP ........................................................................................................................................... 76
a) Creditors’ voluntary winding-up ............................................................................................................................. 76
i. Consequences of commencement of voluntary winding up ....................................................................... 76
ii. Declaration of Solvency ..................................................................................................................................... 76
b) Members’ Voluntary Winding-Up ............................................................................................................................ 77
i. Consequences of commencement of voluntary winding up ....................................................................... 77
ii. Declaration of solvency ...................................................................................................................................... 77
6) WINDING UP SUBJECT TO SUPERVISION OF THE COURT.................................................................................. 78

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B. CHAPTER 2 - PARTNERSHIPS ....................................................................................................... 79
I. DEED OF PARTNERSHIP............................................................................................................ 79
1) The parties to the agreement ....................................................................................................................................... 79
2) The nature of the business ........................................................................................................................................... 79
3) The name of the firm ..................................................................................................................................................... 79
4) Dates of commencement and dissolution.................................................................................................................. 80
5) The capital of the firm and of the individual partners ......................................................................................... 80
6) The salary and profit entitlement of the partners .................................................................................................. 80
7) The management of the business ............................................................................................................................... 80
8) Banking arrangements and the right to draw cheques ......................................................................................... 80
9) The firm’s accounts ........................................................................................................................................................ 81
10) Admission and expulsion of partners: ................................................................................................................. 81
11) Death or retirement of partners: .......................................................................................................................... 81
12) Valuation of the goodwill ....................................................................................................................................... 81
13) Arbitration ................................................................................................................................................................. 81
14) Other important matters that should be considered are: ............................................................................... 82
a) Variation of partnership agreement: ...................................................................................................................... 82
b) Numbers of partners: ................................................................................................................................................ 82
c) Capacities of partners: .............................................................................................................................................. 82
II. REGISTRATION ........................................................................................................................... 82

1) The registration is carried out as follows: ................................................................................................................ 82
III. CHANGE OF PARTNERS ............................................................................................................ 82
IV. DISSOLUTION AND WINDING-UP ........................................................................................... 83

1) DISSOLUTION .................................................................................................................................................................. 83
a) Dissolution by partners ............................................................................................................................................ 83
b) Dissolution under a provision of the Act .............................................................................................................. 83
c) Dissolution by court order ....................................................................................................................................... 83
2) WINDING UP..................................................................................................................................................................... 84
a) Realisation of the firm’s assets ............................................................................................................................... 84
b) Options available where a partner has died ......................................................................................................... 84
c) Rules for final settlement of accounts................................................................................................................... 84
C. CHAPTER THREE - SALE OF GOODS AND AGENCY ............................................................... 86
I. INTRODUCTION TO COMMERCIAL LAW ............................................................................. 86

1) PRINCIPLE SOURCES OF COMMERCIAL LAW ......................................................................................................... 86
a) CONTRACT ................................................................................................................................................................. 86
b) EXPRESS AND IMPLIED TERMS GENERALLY .......................................................................................................... 86
c) UNCODIFIED CUSTOM AND USAGE ....................................................................................................................... 86

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d) CODIFIED CUSTOM AND USAGE ............................................................................................................................. 87
e) DOMESTIC AND INTERNATIONAL LEGISLATION ................................................................................................ 87
2) IMPORTANT PRACTICAL INDICATORS ON CONTRACT MAKING AND INTERPRETATION ..................... 87
a) THE PROBLEM OF LANGUAGE ................................................................................................................................. 87
b) CONTRACT MAKING ................................................................................................................................................. 87
c) COMMERCIAL CONTRACTS ..................................................................................................................................... 88
II. SALE OF GOODS .......................................................................................................................... 88

1) Specific Objectives under Sale of Good Are: ............................................................................................................ 88
2) PRINCIPLES SOURCES OF SALE OF GOODS TRANSACTIONS ............................................................................ 88
3) THE DEFINITION OF SALE OF GOODS CONTRACT .............................................................................................. 89
4) Sale of Goods Act Cap 31 Laws of Kenya Section 3 (4) ......................................................................................... 89
a) Section 3(5) ................................................................................................................................................................. 89
5) SALE DISTINGUISHED FROM OTHER CONTRACTS .............................................................................................. 89
a) Distinction between sale and exchange: ................................................................................................................ 90
b) Distinction between sale and gift: .......................................................................................................................... 90
c) Distinction between sale and bailment:................................................................................................................. 90
d) Distinction between sale and hire-purchase: ........................................................................................................ 90
e) Distinction between sale and loan on security:.................................................................................................... 91
f) Distinction between sale of goods and supply of services: ............................................................................... 91
g) Distinction between sale and agency: .................................................................................................................... 91
h) Sale of contract distinguished from patents : ...................................................................................................... 92
6) SUBJECT MATTER OF THE CONTRACT ................................................................................................................... 92
a) MEANING OF GOODS ................................................................................................................................................ 92
b) THE POSITION OF COMPUTER SOFTWARE: DO THEY CONSTITUTE GOODS WITHIN THE MEANING OF THE
ACT? ...................................................................................................................................................................... 92
c) CATEGORIES OF GOODS........................................................................................................................................... 93
i. Existing goods...................................................................................................................................................... 93
ii. Future goods ........................................................................................................................................................ 93
a. Sale upon a Contigency ............................................................................................................................... 94
b. A Spes or Sale of a Chance .......................................................................................................................... 94
d) KEY TYPES OF GOODS .............................................................................................................................................. 94
7) TRANSFER OF PROPERTY ............................................................................................................................................ 95
a) The Practical Consequences of Transferring Property ....................................................................................... 95
b) PASSING OF PROPERTY ............................................................................................................................................ 95
c) Rules in Section 20 .................................................................................................................................................... 96
d) The case of Dennant vs. Skinner & Collom is Important for: ............................................................................ 97
e) Read concept of identification and setting aside. ............................................................................................... 97
8) PRICE.................................................................................................................................................................................. 98

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i. Fixed by the contract .......................................................................................................................................... 98
ii. Left to be fixed in a manner thereby agreed .................................................................................................. 98
iii. Determined by the course of dealings between the parties ........................................................................ 98
iv. A reasonable price as a question of fact ......................................................................................................... 98
9) AGREEMENT TO SELL AT VALUATION .................................................................................................................... 99
10) OBLIGATIONS CREATED UNDER SALE CONTRACT ................................................................................... 100
a) STATUTORY IMPLIED TERMS ................................................................................................................................ 100
i. A. FUNDAMENTAL TERMS ............................................................................................................................... 100
ii. B. CONDITIONS .................................................................................................................................................. 101
iii. IMPLIED CONDITIONS ...................................................................................................................................... 101
iv. IMPLIED WARRANTIES ..................................................................................................................................... 101
v. C. INNOMINATE TERMS.................................................................................................................................... 101
vi. D. STIPULATIONS AS TO TIME ........................................................................................................................ 101
vii. E. REPRESENTATIONS ................................................................................................................................ 102
11) THE TRANSFER OF TITLE ................................................................................................................................... 102
i. NEMO DAT QUOD NON HABET PRINCIPLE .................................................................................................. 102
a. Cap 31 Section 23 (1): ................................................................................................................................ 102
b. EXCEPTIONS TO NEMO DAT ..................................................................................................................... 104
ii. ESTOPPEL BY REPRESENTATION .................................................................................................................... 104
a. Giving employee authority to dispose of goods ................................................................................... 105
b. Allowing third party to have possession of goods and registration documents ............................ 105
c. Cases where a sufficient representation was made ............................................................................. 105
iii. ESTOPPEL BY WORDS ....................................................................................................................................... 105
iv. ESTOPPEL BY CONDUCT .................................................................................................................................. 106
v. ESTOPPEL BY NEGLIGENCE .............................................................................................................................. 106
a. Duty of care ................................................................................................................................................. 106
b. Breach and causation ................................................................................................................................. 106
vi. SALE UNDER THE FACTORS ACT 1889 : SALE BY A MERCANTILE AGENT ........................................... 106
a. CONDITITONS TO BE FULFILLED BY THE MERCHANTILE AGENT ..................................................... 107
vii. SALE UNDER A SPECIAL POWER OF SALE .............................................................................................. 108
viii. SALE UNDER A VOIDABLE TITLE ............................................................................................................. 109
ix. SALE BY SELLER IN POSSESSION ..................................................................................................................... 110
x. SALE BY BUYER IN POSSESSION...................................................................................................................... 110
xi. SALE IN A MARKET OVERT ............................................................................................................................. 111
12) PERFORMANCE OF THE CONTRACT ............................................................................................................... 111
a) DUTIES OF THE SELLER........................................................................................................................................... 111
i. Pass a good title ................................................................................................................................................ 111
ii. Duty to deliver the goods ................................................................................................................................ 111

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a. MEANING OF DELIVERY ............................................................................................................................. 112
b) PAYMENT AND DELIVERY ...................................................................................................................................... 112
c) Duties of the Parties ................................................................................................................................................ 112
d) Breach of Contract by buyer .................................................................................................................................. 113
i. Remedies of unpaid seller ............................................................................................................................... 113
a. Action for the price-where property has already passed to buyer or a payment date has been
agreed. .................................................................................................................................................... 113
b. Action for damages – where buyer wrongfully refuses to accept goods ......................................... 113
c. Right of lien-right to retain goods until price is paid .......................................................................... 113
d. Stoppage in transit- right to resume possession of the goods as long as they are still in transit
until payment is made ........................................................................................................................ 113
e. Right of resale- e.g. where goods are perishable .................................................................................. 113
e) Breach by Seller ........................................................................................................................................................ 113
i. Remedies of buyer ............................................................................................................................................ 113
a. Damages for non-delivery ......................................................................................................................... 113
b. Specific performance- in case of breach to deliver specific or ascertained goods. ........................ 113
D. CHAPTER FOUR - THE LAW OF AGENCY ................................................................................114
I. INTRODUCTION ........................................................................................................................114
1) WHAT ARE THE ESSENTIALS OF A CONTRACT OF AGENCY.......................................................................... 114
a) By consent; ................................................................................................................................................................ 114
b) By operation of law; or ........................................................................................................................................... 114
c) By the doctrine of apparent authority. ................................................................................................................ 114
2) SOURCES OF AGENCY LAW ...................................................................................................................................... 114
3) THE LEGAL USE OF THE TERM “AGENT” ............................................................................................................. 114
4) AUTHORITY AND POWER OF AGENT .................................................................................................................... 115
II. CLASSES OF AGENTS ...............................................................................................................115

1) THE EXTENT OF AUTHORITY .................................................................................................................................. 115
a) UNIVERSAL ................................................................................................................................................................ 115
b) SPECIAL AGENTS ...................................................................................................................................................... 116
c) GENERAL AGENTS ................................................................................................................................................... 116
2) NATURE OF WORK PERFORMED ............................................................................................................................. 116
a) MERCANTILE AGENT ............................................................................................................................................... 117
b) FACTORS AGENTS ................................................................................................................................................... 117
c) CONSIGNMENT ......................................................................................................................................................... 117
d) DISTRIBUTORSHIP ................................................................................................................................................... 117
ii. SOLE DISTRIBUTION AGREEMENT ................................................................................................................. 118
iii. EXCLUSIVE DISTRIBUTION AGREEMENT....................................................................................................... 118
iv. SELECTIVE DISTRIBUTION AGREEMENT ....................................................................................................... 118

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v. NON-EXCLUSIVE DISTRIBUTION AGREEMENT ............................................................................................. 118
a. BROKER ........................................................................................................................................................ 118
b. AUCTIONEER ............................................................................................................................................... 118
c. COMMISSION AGENT ................................................................................................................................. 119
d. BANKER ........................................................................................................................................................ 119
e. DEL CREDERE .............................................................................................................................................. 119
3) OTHER NON-MERCANTILE TYPES OF AGENT ..................................................................................................... 119
a) ADVOCATES/COUNSEL/SOLICITORS ................................................................................................................... 119
b) INSURANCE AGENT ................................................................................................................................................. 120
c) CLEARING AND FORWARDING AGENT ............................................................................................................... 120
d) ESTATE AGENT......................................................................................................................................................... 120
e) DIRECTORS ............................................................................................................................................................... 120
f) PARTNERS ................................................................................................................................................................. 120
g) WIFE............................................................................................................................................................................ 120
III. AGENCY DISTINGUISHED FROM OTHER RELATIONSHIPS ...........................................121

1) TRUSTEES ...................................................................................................................................................................... 121
2) SERVANTS AND INDEPENDENT CONTRACTORS............................................................................................... 121
3) BAILEE ............................................................................................................................................................................ 121
IV. THE FORMATION OR CREATION OF AGENCY ................................................................122

1) EXPRESS AGREEMENT/APPOINTMENT ................................................................................................................. 122
2) IMPLIED AGENCY ........................................................................................................................................................ 122
3) OPERATION OF LAW................................................................................................................................................... 123
a) NECESSITY................................................................................................................................................................. 123
i. There must be an actual and definite commercial necessity for the creation of the agency, i.e. there
must be a genuine emergency. ................................................................................................................. 124
ii. It must be impossible to get the principal’s instructions .......................................................................... 124
iii. The agent of necessity must act bona fide in the interests of all parties concerned. .......................... 124
iv. The act must be done for the benefit of the owner and not merely for the convenience of the agent:
Sachs -v- Miklos30. ........................................................................................................................................ 124
b) COHABITATION ....................................................................................................................................................... 124
c) STATUTE ................................................................................................................................................................... 125
d) RATIFICATION.......................................................................................................................................................... 125
e) ESTOPPEL................................................................................................................................................................... 126
V. THE AUTHORITY OF THE AGENT .......................................................................................126

1) TERMINOLOGY ............................................................................................................................................................. 126
2) EXPRESS ACTUAL AUTHORITY ............................................................................................................................... 126
3) IMPLIED ACTUAL AUTHORITY................................................................................................................................ 127
4) USUAL OR CUSTOMARY AUTHORITY ................................................................................................................... 128

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5) AUTHORITY BY RATIFICATION .............................................................................................................................. 128
6) AUTHORITY (AGENCY) BY OPERATION OF LAW ................................................................................................ 129
7) APPARENT (OSTENSIBLE) AUTHORITY ................................................................................................................. 130
VI. PRINCIPAL AND AGENT .........................................................................................................131

1) FORMALITIES................................................................................................................................................................ 131
2) CAPACITY ...................................................................................................................................................................... 131
3) CONSIDERATION ......................................................................................................................................................... 132
VII. DUTIES AND RIGHTS OF AGENT AND PRINCIPAL .........................................................132

1) DUTIES OF AGENT TO HIS PRINCIPAL.................................................................................................................. 132
a) Due care, skill and diligence .................................................................................................................................. 132
b) Personal performance ............................................................................................................................................. 132
i. Exceptions: ......................................................................................................................................................... 133
c) Good faith ................................................................................................................................................................. 133
d) Duty to account ........................................................................................................................................................ 134
e) Obedience.................................................................................................................................................................. 134
VIII. GENERAL REMEDIES AVAILABLE TO PRINCIPAL FOR BREACH OF DUTIES BY AGENT

.......................................................................................................................................................135
2) DUTIES OF THE PRINCIPAL ...................................................................................................................................... 135
a) Commission or other remuneration..................................................................................................................... 135
b) Indemnity .................................................................................................................................................................. 136
3) RIGHTS OF THE AGENT............................................................................................................................................. 137
a) Indemnity .................................................................................................................................................................. 137
b) Lien ............................................................................................................................................................................. 137
c) Remuneration or commission ............................................................................................................................... 138
d) Account ..................................................................................................................................................................... 138
e) An agent has a right to have an account taken. ................................................................................................. 138
f) Stoppage in Transit ................................................................................................................................................. 138
g) Right to interpleader ............................................................................................................................................... 138
IX. RELATIONSHIP BETWEEN PRINCIPAL AND THIRD PARTY..........................................138

1) CONTRACTUAL RELATIONS .................................................................................................................................... 139
a) Doctrine of privity & Limitations .......................................................................................................................... 139
i. Privity .................................................................................................................................................................. 139
ii. Limitations ......................................................................................................................................................... 140
a. Deed executed in the name of agent: ...................................................................................................... 140
b. Bills of exchange: ........................................................................................................................................ 140
c. Foreign principal: ........................................................................................................................................ 140
d. Third party election: .................................................................................................................................. 140

Page 17 of 166
e. Settlement with agent ................................................................................................................................ 140
f. Set-off ........................................................................................................................................................... 140
g. Fraud, Misrepresentation & Concealment .............................................................................................. 141
h. Corruption ................................................................................................................................................... 141
2) TORT LIABILITY ........................................................................................................................................................... 141
a) Fraudulent misrepresentation ............................................................................................................................... 141
b) Negligent misrepresentation ................................................................................................................................. 142
c) Representation as to credit .................................................................................................................................... 142
3) CRIMINAL LIABILITY .................................................................................................................................................. 142
a) Exceptions: ................................................................................................................................................................ 142
4) PROPERTY ..................................................................................................................................................................... 142
X. RELATIONS BETWEEN AGENT AND THIRD PARTIES. ...................................................143

1) LIABILITIES OF THE AGENT ..................................................................................................................................... 143
a) Disclosure or non-disclosure of Principal ........................................................................................................... 143
i. Agency not disclosed:....................................................................................................................................... 143
ii. Existence known but Identity of Principal not disclosed: .......................................................................... 143
iii. Principal disclosed: ........................................................................................................................................... 144
2) Exceptions are ............................................................................................................................................................... 144
a) Documents signed in agent’s name:..................................................................................................................... 144
b) Warranty of Authority ............................................................................................................................................ 144
3) Summary ........................................................................................................................................................................ 145
4) Liability to Repay Money: ........................................................................................................................................... 146
5) Tort Liability & Breach of Trust ............................................................................................................................... 146
a) Tort Liability: ............................................................................................................................................................ 146
b) Conversion: ............................................................................................................................................................... 146
c) Breach of Trust:........................................................................................................................................................ 147
6) RIGHTS OF THE AGENT............................................................................................................................................. 147
a) RIGHT TO ENFORCE CONTRACT .......................................................................................................................... 147
b) RECOVERY OF MONEY PAID .................................................................................................................................. 148
7) PARTNERSHIPS AND LIMITED COMPANIES ........................................................................................................ 148
a) A PARTNER’S SCOPE OF AUTHORITY .................................................................................................................. 148
b) COMPANY DIRECTORS AND AGENTS .................................................................................................................. 148
XI. TERMINATION OF AGENCY ...................................................................................................148

1) ACT OF THE PARTIES................................................................................................................................................. 149
2) Mutual agreement........................................................................................................................................................ 149
3) Performance .................................................................................................................................................................. 149
4) Revocation ..................................................................................................................................................................... 149
a) Authority coupled with an interest. ..................................................................................................................... 149

Page 18 of 166
b) Executed authority .................................................................................................................................................. 150
c) Statutory authority .................................................................................................................................................. 150
5) OPERATION OF LAW................................................................................................................................................... 150
a) By death of the principal or agent; ....................................................................................................................... 150
b) By bankruptcy of principal, or agent, .................................................................................................................. 150
c) By insanity of principal or agent, .......................................................................................................................... 150
d) By intervening illegality .......................................................................................................................................... 151
e) By effluxion of time ................................................................................................................................................. 151
f) By frustration, .......................................................................................................................................................... 151
6) EFFECT OF TERMINATION........................................................................................................................................ 151
E. CHAPTER 5 - HIRE PURCHASE AGREEMENTS........................................................................152
I. INTRODUCTION ........................................................................................................................152
1) ESSENTIAL OF HIRE PURCHASE AGREEMENTS .................................................................................................. 152
2) CAPACITY TO ENTER INTO HIRE-PURCHASE AGREEMENTS ......................................................................... 152
a) Children ..................................................................................................................................................................... 153
b) Mentally Retarded and Drunken Persons ............................................................................................................ 154
c) The Bankrupt ............................................................................................................................................................ 154
d) Corporations ............................................................................................................................................................. 154
II. FORMAL REQUIREMENTS OF HIRE PURCHASE CONTRACTS ......................................155

a) It must be in writing. Section 5(1)......................................................................................................................... 155
b) It contains pre-contractual statements showing:............................................................................................... 155
c) The Agreement must be signed by the hirer S.6 (2). ......................................................................................... 155
d) It must contain mandatory statements: .............................................................................................................. 155
e) Notice of Right of Hirer in a statutory form. ...................................................................................................... 156
III. IMPLIED TERMS BY THE COURT-SECTION 8 ....................................................................156
IV. THE HIRER'S RIGHTS ...............................................................................................................157
V. Owner’s rights ...........................................................................................................................158
VI. THE PASSING OF PROPERTY/TITLE IN THE GOODS ......................................................158
VII. REPOSSESSION BY THE OWNER ...........................................................................................159
VIII. THE MINIMUM PAY CLAUSE AND DAMAGES ...................................................................160
IX. DAMAGES FOR BREACH OF CONTRACT ...........................................................................161
X. HIRE PURCHASE AS DISTINGUISHED FROM OTHER COMMERCIAL TRANSACTIONS

.......................................................................................................................................................161
1) HIRE PURCHASE AND CONTRACT OF SALE ........................................................................................................ 161
2) HIRE PURCHASE AND MONEY LENDING .............................................................................................................. 162
3) HPA AND AGREEMENT FOR SIMPLE HIRING....................................................................................................... 162

Page 19 of 166
XI. STATUTORY CONTROLS ........................................................................................................162

1) STEPS IN THE TRANSACTION.................................................................................................................................. 162
2) LICENSES........................................................................................................................................................................ 162
3) CONSEQUENCES OF DEFAULT BY HIRER ............................................................................................................. 162
4) REGISTRATION OF HPAs ........................................................................................................................................... 163
XII. ADVANTAGES OF HIRE PURCHASE AGREEMENTS ........................................................163
F. CHATTELS ........................................................................................................................................165
G. INSURANCE ......................................................................................................................................165
H. BILL OF EXCHANGE & PAYMENT SYSTEMS ............................................................................165
I. JOINT VENTURES ...........................................................................................................................165
J. MERGERS AND ACQUISITIONS ..................................................................................................165
K. LABOUR LAW ..................................................................................................................................165
L. PATENTS, COPYRIGHTS, INDUSTRIAL DESIGNS...................................................................165
M. OIL AND GAS ...................................................................................................................................165
N. STRUCTURING COMMERCIAL SOLUTIONS.............................................................................165
O. BANKING AND CHEQUE LAW .....................................................................................................165
P. INSOLVENCY OF INDIVIDUALS AND COMPANIES ...............................................................165
Q. COMPANIES ACT 2016 ZND ITS AMMENDMENT ACT ........................................................165
R. INTERNATIONAL SALE OF GOODS AND INCOTERMS ........................................................165
S. COMPETITION LAW .......................................................................................................................165
T. CONSUMER PROTECTION LAW .................................................................................................165
U. DRAFTING AGREEMENTS AND OTHER COMMERCIAL PAPER .........................................165
V. OTHER AREAS OF LAW AFFECTED BY COMMERCIAL LAW EG. PROBATE AND

SUCCESSION LAW ..........................................................................................................................165
W. STEPS OF REGISTRATION OF VARIOUS COMMERCIAL PROPERTY ................................165
X. COMMERCIAL DISPUTE RESOLUTION NATIONAL AND INTERNATIONAL IN REGARDS

TO I.P.; BANKING; M&A; CORPORATE LAW; LABOUR LAW ...............................................165
Y. TAX LAW ..........................................................................................................................................166
Z. CONSTRUCTION LAW ...................................................................................................................166
AA. MARTIME LAW ................................................................................................................................166
BB. AIRCRAFT AND AIRSPACE LAW ...............................................................................................166
CC. NEGOTIATING COMMERCIAL CONTRACTS ...........................................................................166
DD. THE BUSINESS DECISION QUESTION ........................................................................................166
EE. RESEARCHING COMMERCIAL LAW AND INTERNET SCOURCES ......................................166

Page 20 of 166
FF. STARTING A COMMERCIAL LAW PRACTICE .........................................................................166
GG. COMMERCIAL CLIENT MANAGEMENT ....................................................................................166
HH. WAR AND COMMERCIAL LAW ...................................................................................................166
II. GLOBALIZATION VS NATIONAL & REGIONAL COMMERCIAL LAW ................................166
JJ. PAST PAPERS...................................................................................................................................166
KK. EXPOSURE & MENTORING A COMMERCIAL LAW PUPIL ....................................................166
LL. REMARKS ON THE FURTURE OF COMMERCIAL LAW .........................................................166
MM. COMMERCIAL LAW AND THE INDUSTRIES ............................................................................166
NN. COMMERCIAL LAW AND ACCADEMIA ....................................................................................166

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A. CHAPTER ONE COMPANIES
I. TYPES OF COMPANIES
A registered company is a legal person, a juristic person, Capable of owning land and other property, enter into contracts,
sue and be sued, have a bank account in its own name, owe money and be a creditor to others.
Registered company is liable for torts and crimes committed by its servants and agents and the company is distinct and
separate from its founders/members.
Section 2 (1) of the Companies Act Cap 486 Laws of Kenya states what company means as 'a company formed and
registered under this Act or an existing company. This is a very vague definition, in the statute the word company is not
a legal term hence the vagueness of the definition. The legal attributes of the word company will depend upon a particular
legal system.
In legal theory company denotes an association of a number of persons for some common object or objects in ordinary
usage it is associated with economic purposes or gain. A company can be defined as an association of several persons
who contribute money or money’s worth into a common stock and who employ it for some common purpose. Our legal
system provides for three types of associations namely:
 Companies
 Partnerships
 Upcoming is the cooperative society
The law treats companies in company law distinctly from partnerships in partnership law. Basically company law consists
partly of ordinary rules of Common law and equity and partly of statutory rules. The common law rules are embodied in
cases. The statutory rules are to be found in the Companies Act which is the current Cap 486 Laws of Kenya. It should
denote that the Kenya Companies Act is not a self contained Act of legal rules of company law because it was borrowed
from the English Companies Act of 1948 which was itself not a codifying Act but rather a consolidating Act.
Exceptions to the Rules are stated in the Act but not the rules themselves. Therefore fundamental principles have to be
extracted from study of numerous decided cases some of which are irreconcilable. The true meaning of company law
can only be understood against the background of the common law.
II. FUNDAMENTAL CONCEPTS OF COMPANY LAW

There are two fundamental legal concepts:
 The concept of legal personality; (corporate personality) by which a company is treated in law as a separate entity
from the members.
 The concept of limited liability;
1) The Concept of Legal Personality

Legal personality means that the law recognizes certain persons as having certain legal rights and duties which can be
enforced by the courts. Apart from human beings, the law also accords legal personality to corporations. A corporation
is an artificial person created by law, and once it comes into being it is treated by law as a person in its own right, and is
independent from the individual members who compose it. The word corporation is derived from the Latin word Corpus
which inter alia also means body.

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A corporation is therefore a legal person brought into existence by a process of law and not by natural birth. Owing to
these artificial processes they are sometimes referred to as artificial person not fictitious persons. Corporate personality
thus encompasses the capacity of a corporation to have a name of its own, to sue and be sued, and to have the right to
purchase, sell, lease, and mortgage its property in its own name. In addition, property cannot be taken away from a
corporation without due process of the law.
2) Capacity to Create Legal Binding Relations

The validity of a business transaction may rest almost entirely on the status of the parties and on their legal capacity to
create a relationship attended by legal consequences. Accordingly, to attract legal intervention in any case, recognition as
a person, body corporate is vital, that is, the capacity to act or engage in any legal process as a party depends upon ones
status and recognition as a legal person.4 Therefore, legal personality is a fundamental ingredient of capacity without such
a person cannot enter into a binding contract.
In regards to the capacity to create legal relations of legal bodies endowed with corporate personality, the nature of such
institutions is juristic person, since they are recognized by law as separate legal entities from the natural persons who
form it by virtue of their formal registration in accordance with the law under which they are created. 5 However,
noncompliance with such statutory requirements constitutes it as an unincorporated association which is not regarded
as a corporate legal entity.
Institutions that enjoy Corporate Personality, separate from members who formed it are:
 Companies registered under the Companies Act (Cap 486).
 Statutory corporations established by Acts of Parliament.
 Chartered companies.
There are institutions, on the other hand, that do not have legal personality and do not attract recognition as legal entities;
they advance group interests of a social rather than commercial nature. 6 Examples are clubs, societies, guilds, non-
governmental organizations etc
Due to the fact that they lack the status of body corporate, they cannot be liable for contractual debts and obligations
incurred by officers on their behalf whether or not they purport to act for and on behalf of their members.
In such institutions, liability vests in actual officers who act on behalf of members or who have been given express
authority by members to carry out certain acts.. In effect, officers of an unincorporated association may bind their
members vicariously only if they have actual or apparent authority to act on their behalf. 7
In societies, as an example of an unincorporated association though registered and regulated by statute, they do not enjoy
recognition as legal entities and are not conferred with corporate personality, that is, as a separate entity from members
who formed it.8 It may transact business in its own name, but its members are jointly and severally liable to account for
its debts and obligations of the association without limitation. An example are trade unions, though unincorporated, they
are often referred to as quasi corporation .This is the case since they can use their name to sue or be sued, they may be
held liable on any contracts entered into by it, and they may hold property which is vested in its trustees for the use and
4
Laibuta, K.I. Principles of Commercial Law (2006)
5
ibid
6
Abbot, K. et al, Business Law, (2004)
7
Supra 1
8
Supra 3

Page 23 of 166
benefit of the union and its members. Nonetheless, this does not constitute a body corporate with legal personality within
the meaning of the Companies Act.9
3) Limited Liability
Basically liability means the extent to which a person can be made to account by law. He can be made to be accountable
either for the full amount of his debts or else pay towards that debt only to a certain limit and not beyond it. In the
context of company law liability may be limited either by shares or by guarantee.
Under Section 4(2) (a) of the Companies Act, in a company limited by shares the members liability to contribute to the
company’s assets is limited to the amount if any paid on their shares.
Under Section 4 (2) (b) of the Companies Act in a company limited by guarantee the members undertake to contribute a
certain amount to the assets of the company in the event of the company being wound up. Note that it is the members’
liability and not the companies’ liability which is limited. As long as there are adequate assets, the company is liable
to pay all its debts without any limitation of liability. If the assets are not adequate, then the company can only be
wound up as a human being who fails to pay his debts.
Nearly all statutory rules in the Companies Act are intended for one or two objects namely
1. The protection of the company’s creditors;
2. The protection of the investors in this instance being the members.
These underlie the very foundation of company law.
III. ADVANTAGES OF INCORPORATION
1) Limited Liability
Since a corporation is a separate person from the members, its members are not liable for its debts. In the absence of
any provisions to the contrary the members are completely free from any personal liability. In a company limited by
shares the members’ liability is limited to the amount unpaid on the shares whereas in a company limited by guarantee
the members’ liability is limited to the amount they guaranteed to pay. The relevant statutory provision is Section 213 of
the Companies Act.
It then follows that a corporation is a legal entity distinct from its members, capable of enjoying rights being subject to
duties which are not the same as those enjoyed or borne by the members. The full implications of corporate personality
were not fully understood till 1897 in the case of Salomon v. Salomon10.
Salomon was a prosperous lender/merchant. He sold his business to Salomon and Co. Limited which he formed for the
purpose at the price of £39,000 satisfied by £1000 in cash, £10,000 in debentures conferring a charge on the company’s
assets and £20,000 in fully paid up £1 shares. Salomon was both a creditor because he held a debenture and also a
shareholder because he held shares in the company. Seven shares were then subscribed for in cash by Salomon, his wife
and daughter and each of his 4 sons. Salomon therefore had 20,101 shares in the company and each member of the
family had 1 share as Salomon‘s nominees. Within one year of incorporation the company ran into financial problems
and consequently it was wound up. Its assets were not enough to satisfy the debenture holder (Salomon) and having done
so there was nothing left for the unsecured creditors. The court of first instance and the court of appeal held that the
9
Laibuta, K.I. Principles of Commercial Law, (2006)
10
[1897] A C 22

Page 24 of 166
company was a mere sham an alias, agents or nominees of Salomon and that Mr. Salomon should therefore indemnify the
company against its trade loss.
The House of Lords unanimously reversed this decision. In the words of Lord Halsbury “Either the limited company was
a legal entity or it was not. If it was, the business belonged to it and not to Salomon. If it was not, there was no person
and nothing at all and it is impossible to say at the same time that there is the company and there is not”
There were several other Law Lords who decided business in the House. The significance of the Salomon decision is
threefold.
1. The decision established the legality of the so called one man company;
2. It showed that incorporation was as readily available to the small private partnership and sole traders as to the
large private company.
3. It also revealed that it is possible for a trader not merely to limit his liability to the money invested in his
enterprise but even to avoid any serious risk to that capital by subscribing for debentures rather than shares.
Since the decision in Salomon’s case the complete separation of the company and its members has never been doubted.
Lee v Lee’s Air Farming Ltd. (1961) A.C. 12
Lee’s company was formed with capital of £3000 divided into 3000 £1 shares. Of these shares Mr. Lee held 2,999 and the
remaining one share was held by a third party as his nominee. In his capacity as controlling shareholder, Lee voted himself
as company director and Chief Pilot. In the course of his duty as a pilot he was involved in a crash in which he died. His
widow brought an action for compensation under the Workman’s Compensation Act and in this Act workman was defined
as “A person employed under a contract of service” so the issue was whether Mr. Lee was a workman under the Act? The
House of Lords Held:
“That it was the logical consequence of the decision in Salomon’s case that Lee and the company were two separate entities
capable of entering into contractual relations and the widow was therefore entitled to compensation.”
2) Holding Property
Corporate personality enables the property of the association to be distinguishable from that of the members. In an
incorporated association, the property of the association is the joint property of all the members although their rights
therein may differ from their rights to separate property because the joint property must be dealt with according to the
rules of the society and no individual member can claim any particular asset to that property.
3) Suing and Being Sued

As a legal person, a company can take action in its own name to enforce its legal rights. Conversely it may be sued for
breach of its legal duties. The only restriction on a company’s right to sue is that it must always be represented by a
lawyer in all its actions.
In East Africa Roofing Co. Ltd v Pandit11here the Plaintiff a limited liability company filed a suit against the defendant
claiming certain sums of money. The defendant entered appearance and filed a defence
admitting liability but praying for payment by installments. The company secretary set down the date on the suit for
hearing ex parte and without notice to the defendant. This was contrary to the rules because a defence had been filed.
11
(1954) 27 KLR 86

Page 25 of 166
On the hearing day the suit was called in court but no appearance was made by either party and the court therefore
ordered the action to be dismissed. The company thereafter applied to have the dismissal set aside. At the hearing of
that application, it was duly represented by an advocate. The only ground on which the company relied was that it had
intended all along to be represented at the hearing by its manager and that the manager in fact went to the law courts but
ended in the wrong court. It was held that a corporation such as a limited liability company cannot appear in person as
a legal entity without any visible person and having no physical existence it cannot at common law appear by its agent
but only by its lawyer. The Kenya Companies Act does not change this common law rule so as to enable a limited company
to appear in court by any of its officers.
4) Perpetual Succession
As an artificial person, the company has neither body mind nor soul. It has been said that a company is therefore invisible
immortal and thus exists only intendment consideration of the law. It can only cease to exist by the same process of law
which brought it into existence otherwise; it is not subject to the death of the natural body. Even though the members
may come and go, the company continues to exist.
5) Transferability of Shares
Section 75 of the Companies Act states as follows “The Shares or any other interests of a member in a company shall be
moveable property transferable in the manner provided by the Articles of Association of the Company.” In a company
therefore shares are really transferable and upon a transfer the assignee steps into the shoes of the assignor as a member
of the company with full rights as a member. Note however that this transferability only relates to public companies and
not private companies.
6) Borrowing Facilities
In practice companies can raise their capital by borrowing much more easily than the sole trader or partnership. This is
enabled by the device of the ‘floating charge’ a floating charge has been defined as a charge which floats like a cloud over
all the assets from time to time falling within a certain description but without preventing the company from disposing
of these assets in the ordinary course of its business until something happens to cause the charge to become crystallised
or fixed. The ease with which this is done is facilitated by the Chattels Transfer Act which exempts companies from
compiling an inventory on the particulars of such charges and also by the bankruptcy Act which exempts companies from
the application of the reputed ownership clause. As far as companies are concerned the goods in the possession of the
company do not fall within the reputed ownership clause.
The only disadvantages are three
(i) Too many formalities required in the formation of the company
(ii) There is maximum publicity of the company’s affairs;
(iii) There is expense incurred in the formation and in the management of a company.
IV. IGNORING THE CORPORATE ENTITY (LIFTING THE VEIL OF INCORPORATION)

Although Salomon’s case finally established that a company is a separate and distinct entity from the members, there are
circumstances in which this principle of corporate personality is itself disregarded. These situations must however be
regarded as exceptions because the Salomon decision still obtains as the general principle
Although a company is liable for its own debt which will be the logical consequence of the Salomon rule, the members
themselves are held liable which is therefore a departure from principle. The rights of creditors under this section are
subject to certain limitations namely (under statutory provision).

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1) Reduction in the Number of Members

Section 33 refers to membership that has fallen below the statutory minimum in a public company. The Act provides that
only those members who remain after the six month during which the company has fallen below the provided minimum
period can be sued; even these members are liable if they have knowledge of the fact and only in respect of debts
contracted after the expiration of the six months. Moreover the Section is worded in such a way as to suggest that the
remaining members will be liable only in respect of liquidated contractual obligations.
2) Fraudulent Trading
The provisions of Section 323 of the Companies Act come into operation here. It is provided that if in the course of the
winding up of the company it appears that any business has been carried on with the intent to defraud the creditors, or
for any fraudulent purpose, the courts on the application of the official receiver, the liquidator or member may declare
that any persons who are knowingly parties to the fraud shall be personally responsible without any limitation on liability
for all or any of the debts or other liabilities of the company to the extent that the court might direct the liability. This
Section does not define the term fraud nor have the courts defined it.
However, in Re William C. Leitch Ltd (1932) 2 Ch. 71 the company was incorporated to acquire William’s business as a
furniture manufacturer. The directors of the company were William and his wife and they appointed William as the
Managing Director at a Salary of £1000 per annum. Within the period of one month, the company was debited with an
amount which was £500 more than what was actually due to William. By that time the company had made a loss of £2500.
Within 2 years of formation, and while the company was still in financial problems, the directors paid to themselves the
dividends of £250. By the end of the 3 rd year since incorporation the company was in such serious difficulties such that
it could not pay debts as they fell due. In spite of this William ordered goods worth £6000 which became subject to a
charge contained in a debenture held by them.
At the same time he continued to repay himself a loan of £600 (six hundred pounds) which he had lent to the company
at the beginning of the 4th year the company with the knowledge of William owed £6500 for goods supplied. In the winding
up of the company the official receiver applied for a declaration that in no circumstances William had carried on the
company’s business with intent to defraud and therefore should be held responsible for the repayment of the company’s
debts. It was held that since that company continued to carry on business at a time when William knew that the company
could not comfortably pay its debts, then this was fraudulent trading within the meaning of Section 323 and William
should be responsible for repaying the debts.
These are the words of Justice Maugham J.
“if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors
no reasonable prospects of the creditors ever receiving payments of those debts, it is in general a proper inference that
the company is carrying on business with intent to defraud.”
The test is both subjective and objective. In the Case of Re Patrick Lyon Ltd (1933) Ch. 786 on facts which were similar
to the Williams case, the same Judge Maugham J. said as follows: “the words fraud and fraudulent purpose where they
appear in the Section in question are words which connote actual dishonesty involving according to the current notions of
fair trading among commercial men real moral blame. No judge has ever been willing to define fraud and I am attempting
no definition.”
3) Holding and Subsidiary Companies

One of the most important limitations imposed by the Companies Act on the recognition of the separate personality of
each individual company is in connection with associated companies within the same group enterprise. In practice it is

Page 27 of 166
common for a company to create an organisation of inter-related companies each of which is theoretically a separate
entity but in reality part of one concern represented by the group as a whole. Such is particularly the case when one
company is the parent or holding company and the rest are its subsidiaries.
Under Section 154 of the Companies Act Cap 486 a company is deemed to be a subsidiary of another if but only if that
other companies either
a) is a member of it and controls the composition of its board of directors or
b) Holds more than half in nominal value of its equity share capital or
c) The first mentioned company is a subsidiary of any company which is that other’s subsidiary.
Under Section 150 (1) where at the end of the financial year a company has subsidiaries, the accounts dealing with the
profit and loss of the company and subsidiaries should be laid before the company in general meeting when the company’s
own balance sheet and profit and loss account are also laid. This means that group accounts must be laid before the
general meeting.
The group accounts should consist of a consolidated balance sheet for the company and subsidiary and also of a
consolidated profit and loss account dealing with the profit and loss account of a company. Section 151(2) – it may be
observed that the treatment of these accounts in a consolidated form qualify an old rule that each company constitutes a
separate legal entity. The statute here recognizes enterprise entity rather than corporate entity i.e. the veil of
incorporation will be lifted so that they will not be regarded as separate legal entities but will be treated as a group.
4) Misdescription of Companies
Under Section 109 of the Companies Act it requires that a company’s name should appear whenever it does business on
its Seal and on all business documents. Under paragraph 4 of this Section, if an officer of a company or any person who
on its behalf signs or authorizes to be signed on behalf of the company any Bill of Exchange, Promissory Note, Cheque or
Order for Goods wherein the Company’s name is not mentioned as required by the Section, such officer shall be liable to
a fine and shall also be personally made liable to the holder of a Bill of Exchange Promissory Notes, Cheque or order for
the goods for the amount thereof unless it is paid by the company. The effect of this section is that it makes a company’s
officer incur personal liability even though they might be contracting as the company’s agents. Liability under this Section
normally arises in connection with cheques and company officers have been held liable where for instance the word
limited has been omitted or where the company has been described by a wrong name.
V. IGNORING THE CORPORATE ENTITY UNDER COMMON LAW
1) 1. Where There Is an Agency Relationship

Generally there is no reason why a company may not be an agent of its share holders. The decision in Salomon’s case
shows how difficult it is to convince the courts that a company is an agent of its members. In spite of this there have
been occasions in which the courts have held that registered companies were not carrying on in their own right but rather
were carrying on business as agents of their holding companies.
Reference may be made to the case of Smith Stone & Knight v. Birmingham Corporation (1939) 4 All E.R. 116. In this
case the Plaintiffs were paper manufacturers in Birmingham City. In the same city there was a partnership called
Birmingham Waste Company. This partnership did business as merchants and dealers in waste paper. The plaintiffs
bought the partnership as a going concern and the partnership business became part of the company’s property. The
plaintiffs then caused the partnership to be registered as a company in the name of Birmingham Waste Company Limited.
Its subscribed capital was 502 pounds divided into 502 shares. The Plaintiff holding 497 shares in their own name and
the remaining shares being registered in the name of each of the Directors. Thereafter the Directors executed a declaration
of trust stating that their shares were held by them on trust for the Plaintiff Company.

Page 28 of 166
The new company had its name placed upon the premises and on the note paper invoices etc. as though it was still the
old partnership carrying on business. There was no agreement of any sort between the two companies and the business
carried on by the new company was never assigned to it. The manager was appointed but there were no other staff. The
books and accounts of the new company were all kept by the plaintiff company and the manager of this company did not
know what was contained therein and had no access to those books. There was no doubt that the Plaintiff Company had
complete control over the waste company. There was no tenancy agreement between them and the waste company never
paid any rent. Apart from the name, it was as if the manager was managing a department of the plaintiff company.
The Birmingham Corporation compulsorily acquired the premises upon which the subsidiary company was carrying on
business and the Plaintiff Company claimed compensation for removal and disturbance. Birmingham Corporation replied
that the proper claimants were the subsidiary company and not the holding company since the subsidiary company was
a separate legal entity.
If this contention was correct the Birmingham Corporation would have escaped liability for paying compensation by virtue
of a local Act which empowered them to give tenants notice to terminate the tenancy.
The court held that occupation of the premises by a separate legal entity was not conclusive on a question of a right to
claim and as a subsidiary company it was not operating on its own behalf but on behalf of the parent company. The
subsidiary company was an agent.
Lord Atkinson had the following to say
“It is well settled that the mere fact that a man holds all the shares in a company does not mean the business carried on
by the company is his business nor does it make the company his agent, for the carrying on of that business. However, it
is also well settled that there maybe such an arrangement between the shareholders and the company as will constitute
the company. The shareholders agents for the purpose of carrying on the business and make the business that of the
shareholders. It seems to be a question of fact in each case and the question is whether the subsidiary is carrying on the
business as the parents business or as its own. In other words who is really carrying on the business?
His Lordship then stated that in order to answer the question six points must be taken into account.
1. Are the profits treated as the profits of the parent company?
2. Are the persons conducting the business appointed by the parent company?
3. Is the parent company the head and brain of the trading venture?
4. Does the parent company govern the venture decide what should be done and what capital should
be embarked on in the venture?
5. Does the company make the profits by its skill and direction?
6. Is the company in effectual and constant control?
If the answers are in the affirmative, then the subsidiary company is an agent of the parent company.
Reference may also be made to the case of Re F G Films Ltd [1953] 1 W.L.R.In this case a British company was formed
with a capital of 100 pounds of which 90 pounds was contributed by the president of an American Film Company. There
were 3 directors, the American and 2 Britons. By arrangement between the two companies, a film was shot in India
nominally by the British Company but all the finances and other facilities were provided by the American Company. The
British Board of Trade refused to recognize the Film as having been made by a British company and therefore refused to
register it as a British film.
The court held that insofar as the British company had acted at all it had done so as an agent or nominee of the American
company which was the true maker of the film.

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2) 2. Fraud & Improper Conduct

Where there is fraud or improper conduct, the courts will immediately disregard the corporate entity of the company.
Examples are found in those situations in which a company is formed for a fraudulent purpose or to facilitate the evasion
of legal obligations.
Re Bugle Press Limited [1961] Ch. 270
This was based on Section 210 of the Companies Act where an offer was made to purchase out a company if 90% of
shareholders agreed. There were 3 shareholders in the company A, B and C. A held 45% of the shares, B also held 45% of
the shares and C held the remaining 10% of the shares. A and B persuaded C to sell his shares to them but he declined.
Consequently A and B formed a new company call it AB Limited, which made an offer to ABC Limited to buy their shares
in the old company. A and B accepted the offer, but C refused. A and B sought to use provisions of Section 210 in order
to acquire C’s shares compulsorily.
The court held that this was a bare faced attempt to evade the fundamental principle of company law which forbids the
majority unless the articles provide to expropriate the minority shareholders.
Lord Justice Cohen said “the company was nothing but a legal hut. Built round the majority shareholders and the whole
scheme was nothing but a hollow shallow.” All the minority shareholder had to do was shouting and the walls of Jericho
came tumbling down.
3) 3. Group Enterprise
In exercise of their original jurisdiction, the courts have displayed a tendency to ignore the separate legal entities of
various companies in a group. By so doing, the courts give regard to the economic entity of the group as a whole.
The leading authority is the case of Holsworth& Co. v. Caddies [1955]1W.L.R. 352in which the Defendant Company had
employed Mr. Caddies as their Managing Director for 5 years. At the time of that contract the company had two
subsidiaries and Caddies was appointed Managing Director of one of those subsidiaries. He fell out of favour with the
other Directors consequent upon which the board of directors stated that Caddies should confine his attention to the
affairs of the subsidiary company only. He treated this as a breach of contract and sued the company for damages. It
was held that since all the companies form but one group, there was no breach of contract in directing Caddies to confine
his attention to the activities of the subsidiary company.
4) THE DOCTRINE OF ULTRA VIRES

A Company which is registered under the Company’s Act cannot effectively do anything beyond the powers which are
either expressly or by implication conferred upon in its Memorandum of Association. Any purported activity in excess of
those powers will be ineffective even if agreed to by the members unanimously. This is the doctrine of ultra vires in
company law.
The purpose of this doctrine is said to be twofold, in that, it is intended to protect the investors who thereby know the
objects in which their money is to be applied. It is also said to be intended for the protection of the creditors by ensuring
that the Company’s assets to which the creditors look for repayment of their debt are not wasted in unauthorized
activities.
The doctrine was first clearly articulated in 1875 in the case of Ashbury Railway Carriage v. Riche (1875) L.R. CH.L.)
653. In this case the Company’s Memorandum of Association gave it powers in its objects clause
1. To make sell or lend on hire railway carriages and wagons.
2. To carry on the business of mechanical engineers and general contractors
3. To purchase, lease work and sell mines, minerals, land and realty.

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The directors entered into a contract to purchase a concession for constructing a railway in Belgium. The issue was
whether this contract was valid and if not whether it could be ratified by the shareholders.
The court held that the contract was ultra vires the company and void so that not even the subsequent consent of the
whole body of shareholders could ratify it. Lord Cairns stated as follows:
“The words general contractors referred to the words which went immediately before and indicated such a
contract as mechanical engineers make for the purpose of carrying on a business. This contract was entirely beyond the
objects in the Memorandum of Association. If so, it was thereby placed beyond the powers of the company to make the
contract. If so, it was not a question whether the contract was ever ratified or not ratified. If the contract was going at
its beginning it was going because the company could not make it and by purporting to ratify it the shareholders were
attempting to do the very thing which by the act of parliament they were prohibited from doing.”
The courts construed the object clause very strictly and failed to give any regard to that part of the Objects clause which
empowered the company to do business as general contractors. This construction gave the doctrine of ultra vires a rigidity
which the times have not been able to uphold. At the present day, the doctrine is not as rigid as in Ashbury’s case and
consequently it has been eroded.
5) Loss of Substratum
Where the main object of a company has failed, a petitioner will be granted an order for the winding up of a company.
Such a petitioner must however be a member or shareholder in the company. The object of the ultra vires rule is to make
the members know how and to what their money is being applied. This is the rationale of members’ protection.
Re German Date Coffee Co. (1882) 20 Ch. 169
In this case the major object of the company was to acquire a German Patent for manufacturing coffee from dates. The
German patent was never granted but the company acquired a Swedish Patent for the same purpose. The company was
solvent and the majority of the members wished to continue in business. However, two of the shareholders petitioned
for winding up of the company on the grounds that the company’s object had entirely failed. The court held that upon
the failure to acquire the German patent, it was impossible to carry out the objects for which the company was formed.
Therefore the sub stratum had disappeared and therefore it was just inevitable that the company should be wound up.
Kay J. stated “where a company is formed for a primary purpose, then although the Memorandum may contain other
general words which include the doing of other objects, those general words must be read as being ancillary to that which
the Memorandum shows to be the main purpose and if the main purpose fails and fails altogether, then the sub-stratum
of the association fails.
VI. INCORPORATION OF COMPANIES

There are three kinds of corporate personalities:
 Companies,
 Chartered Corporations,
 Statutory Companies
Although they have corporate personalities, the procedure in forming them varies.
1) COMPANIES
Companies are incorporated under the Companies Act. Under section 4(2) therein can be classified into three:

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a. Companies limited by shares.
Section 4 (2) (a) of the Act provides that in such companies, the liabilities of members for the debts of the
company is limited to the amount (if any) unpaid on the shares respectively held by them.
Before registering a company the promoters must make up their minds as to which of the various types of registered
companies they wish to form.
If they decide upon a limited company, they must make up their minds whether it is to be limited by shares or by
guarantee. This will depend upon the purpose for which it is formed. If it is to be a non-profit concern, then a guarantee
company is the most suitable, but if it is intended to form a profit making company, then a company limited by shares is
preferable.
2) Company limited by Guarantee

Section 4 (2) (b) - The liability of members is limited by the memorandum to the amounts which the members have
respectively undertaken to contribute to the assets of the company, in the event of it being wound up during subsistence
of the membership.
3) Unlimited Companies
Under section 4(2) (c) makes provision to the extent that under such companies there is no limitation on liability of
members for the debts of the company. The disadvantage of an unlimited company is that its members will be personally
liable for the company’s debts. It is unlikely that promoters will wish to form an unlimited liability company if the
company is intended to trade. But if the company is merely for holding land or other investments the absence of limited
liability would not matter.
Promoters also have to choose between a private company and a public company. Section 30 of the Companies Act
defines a private company as one which by its articles restricts
 the rights to transfer shares;
 restricts the number of its members to fifty (50);
 Prohibits the invitation of members of the public to subscribe for any shares or debentures of the company.
A company which does not fall under this definition is described as a public company. In order to form a public company,
there must be at least seven (7) subscribers signing the Memorandum of Association whereas only two (2) persons need
to sign the Memorandum of Association in the case of a private company.
The procedure for registering a company is found in Part II of the Companies Act. Our interest is mainly with a private
company limited by shares which is the most popular form of company. The steps analyzed will therefore be with regard
to this form of a company.
4) NAME OF COMPANY
The promoters must then decide on a suitable name – 3 names. The same must be reserved at the Company registry.
This involves writing an application to the Registrar of Companies asking that the name be reserved for use as a company
name. The name should not be in initials and the registrar checks if the name proposed is desirable and once satisfied
that the name is desirable the reservation remains in force for a period of thirty days. This can be extended for 30 days.
During that period no other company may be registered in that name (see s 19).12
The word “limited” appears in the name of company as the last word (see s. 5(1) (a)). Howeverthe use of the word limited
can be dispensed with by the minister where the company to be formed is one to promote commerce, art, science, religion,
12
Search fee?

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charity or any other useful object and intends to apply its profits or other income in promoting its objects and prohibits
payment of any dividends to members (see s. 21).
Notably under s. 394 it is an offence to use the word “limited” improperly.
5) THE MEMORANDUM AND ARTICLES OF ASSOCIATION

The next step is to prepare the Memorandum and Articles for which the legislature has already provided model versions
(see s. 14). The founding document is the Memorandum and it provides the basis for the whole corporate structure. This
is the document in which they express inter alia their desire to be formed into a company with a specific name and objects.
The Memorandum of Association of a company is its primary document which sets up its constitution and objects.As the
founding document, the Memorandum determines the nature and scope of the company.
The articles, plays a subordinate role. This document contain rules and regulations by which its internal affairs are
governed, for example, how shares and share capital are to be allotted; how company’s meetings are to be conducted; how
directors appointed etc.13 In simple words, the articles provides for the internal regulations of a company.
Both the Memorandum and Articles of Associations must each be signed by seven persons in the case of a public company
or two persons if it is intended to form a private company. These signatures must be attested by a witness. If the company
has a share capital each subscriber to the share capital must write opposite his name the number of shares he takes and
he must not take less than one share.
Before preparing the Memorandum and Articles, the draftsman will need to obtain information from the promoters
regarding the following:
a. The Nature of the Business: This is necessary in connection with the objects clause of the Memorandum.
b. The amount of the nominal capital and the denomination of the shares into which it is to be divided: These
will need to be stated in the Memorandum and Articles. For the articles, the draftsman will also require to know
if the shares are to be all of one class and if not what special rights are to be attached to each class.
 No fractions of shares (see s 5(4)(b))
 Other statutory prescriptions on capital depending on nature of company
c. Any other special requirements which deviate from the normal as exemplified by the appropriate table: The most
likely matters are quorums and the minimum and maximum number of directors.
The Memorandum of the company should be in the English language printed and should provide for the following (see s.
5 (1));
 The name of the company with “limited” as the last word of the name.
 The registered office of the company is to be situated in Kenya
 The objects of the Company
 That the liability of its members is limited
 The share capital of the company and how the same is divided up.
The Memorandum of Association and Articles of Association must each be signed by seven people in the case of incorporation of a public
13
company, and by two people in the case of a private company. Their signatures must be attested by a witness. If the company has a share
capital each subscriber to the share capital must write opposite his name the number of shares he takes and he must not take less than
one share.

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Moreover, the memorandum should be dated and signed by each subscriber. Opposite the signatures of the subscribers
the memorandum should state the subscriber’s full name, his occupation, full address and for further clarity it is
important to indicate their national identity numbers andPIN numbers.
The signatures must be witnessed by at least one witness who should state his occupation and postal address (see section
6). - witnessing is best done by an advocate.
The article, which establishes the internal regulations of the company, may adopt all or any of the regulations contained
in Table A.
It should be written in the English language, printed, divided into paragraphs, numbered conclusively, dated andsigned
by each subscriber to the Memorandum of Association in the presence of at least one witness who should append his
signature and state his occupation and postal address (see s. 12). - witnessing is best done by an advocate.With the aid of
this information, the draftsman should have no difficulty in preparing drafts based on precedents, from his own
experience, reference books and the tables.
Section 9 of the Companies Act provides that a Company limited by guarantee or an unlimited company must register
with a Memorandum of Association Articles of Association describing regulations for the company. A company limited
by shares may or may not register articles of Association. A Company’s Articles of Association may adopt any of the
provisions which are set out in Schedule 1 Table A of the Companies Act Cap 486.
Table A is the model form of Articles of Association of a Company Limited by Shares. It is divided into two parts designed
for public companies in part A and for private companies in part B (II) thus a company has three options. It may either
a. Adopt Table A in full; or
b. Adopt Table A subject to modification or
c. Register its own set of Articles and thereby exclude Table A altogether.
In the case of a company limited by shares, if no articles are registered or if articles are registered insofar as they do not
modify or exclude Table A the regulations in Table A automatically become the Company’s Articles of Association.
As between the Memorandum and the Articles the Memorandum of Association is the dominant instrument so that if
there is any conflict between the provisions in the Memorandum and those in the Articles the Memorandum provisions
prevail. However if there is any ambiguity in the Memorandum one may always refer to the Articles for clarification but
this does not apply to those provisions which the Companies Act requires to be set out in the Memorandum as for instance
the Objects of the Company.
Whereas the Memorandum confers powers for the company, the Articles determine how such powers should be exercised.
The articles further provide a dividing line between the powers of share holders and those of the directors.

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a) A sample Memorandum and Articles of Association

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STATUTORY FORMS

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After preparing the Memorandum and Articles, there are forms that should accompany them. First is the Statement of
Nominal Capital,this is only required if the company has a share capital. It simply states that the company’s nominal
capital shall be xxx amount of shillings. The fees that one pays on registration will be determined by the share capital that
the company has stated. The higher the share capital, the more that the company will pay in terms of stamp duty.
It is important in computing the amount of stamp duty to be paid before the company is registered (see s. 39 of the Stamp
Duty Act Cap. 480). It is filled by an advocate- name, address and signature. It is lodged first before other forms to collector
of stamp duty.
b) Sample Form

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Second is Statutory Declaration by an advocate engaged in the formation of the company of compliance with the
requirements of the Companies Act (see s. 17(2) and form 208). It is Filled by an advocate and commissioned. This is a
statutory declaration made either by the advocates engaged in the formation of the company or by the person named in
the articles as the director or secretary to the effect that all the requirements of the companies Act have been complied
with. Where it is intended to register a public company, Section 182 (4) of the Companies Act also requires the
registration of a list of persons who have agreed to become directors and Section 182 (1) requires the written consents
of the Directors.

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c) Sample Form
Third is a Statement of Particulars of the Directors and Secretaries. With regard to directors, the statement should contain
particulars of Christian names and surname, nationality, postal address, business occupation, other directorships held by
him and date of birth if the company is subject to s. 186 – if not a private company directors should be between 21 & 70
years. With regard to the secretaries, the statement should contain particulars of Christian name and surname and postal
address and if a corporation, its corporate name and registered or principal office and postal address (see s. 201 and form
203). It is filled by an advocate and a CPS. The particulars of Directors and Secretary under Section 201 of the statute are
normally required within 14 days of the appointment of the directors and secretary.

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d) Sample Form

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Fourth is the Notice of Situation of Registered Office which under Section 108(1) of the statute should be filed within
14 days of incorporation; Any change to such situation and if it is discontinued should be notified to the registrar within
one month of opening of the office or change of office as the case may be. (see s. 121 (2) and form 207). It is filled by a
director.
e) Sample Form
Fifth is the approved Application for Reservation or if the name already existed as a business name then prepare the
Notice of Cessation of Business and Certificate of Registration (see s.15 of The Registration of Business Names Act Cap.
499 and BN 6). It is filled by proprietor or partners.

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f) Sample Form

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6) LODGEMENT OF DOCUMENTS
The final step is to lodge the documents at the Companies Registry. The Memo’ and Articles of Association should
be in three copies. The documents are delivered to the registrar for registration (see s. 15).Computation of registration
fee?
a) REGISTRATION AND CERTIFICATE OF INCORPORATION

If the registrar is satisfied that the requirements for registration are met and that the purpose for which the incorporators
are associated is lawful, he issues a certificate of incorporation signed by him or authenticated under his official seal.
Section 16 (1) provides that on the registration of the memorandum of a company the registrar shall certify under his
hand that the company is incorporated and, in the case of a limited company, that the company is limited. Section 16(2)on
the other hand provides that from the dates mentioned in a certificate of incorporation the subscribers to the
Memorandum of Association become a body corporate by the name mentioned in the Memorandum capable of exercising
all the functions of an incorporated company. It should be noted that the registered company is the most important
corporation.
Sample certificate
This ultimately means that the company is incorporated and in the case of a limited company that it is limited (see s. 16
(1)). It is in effect the company’s certificate of birth as a body corporate on the date mentioned in the certificate.
Section 17 (1) declares that the Certificate of Incorporation is conclusive evidence that all the requirements of the Act
have been complied with and that the association is a company authorized to be registered and is duly registered under
the Act.Advocates fee?

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b) MEMORUNDUM AND ARTICLES OF ASSOCIATION

A Company’s constitution is composed of two documents namely the Memorandum of Association and the Articles of
Association. The Memo is the charter which gives nationality, nature of the business and its capital while the Articles of
association are the regulations for the internal arrangements and the management of the company.
Articles deal with:
 Issues of shares
 Transfer of shares
 Alteration of share capital, general meetings, voting rights
 Directors, managing director, secretary, dividends, accounts and audits, winding up etc
In Re Duncan and co ltd 2 All ER 871: Between the memo and articles, the memo is the dominant instrument, where they
conflict, the memo prevails.
7) EFFECTS OF MEMO & ARTICLES

The articles form a contract binding the members of the company. Action to enforce a contract must be brought in the
name of the company, except where a personal right is infringed. Under Section 22 of the Companies Act it is provided
that subject to the provisions of the Act, when the Memorandum and Articles are registered, they bind the company and
the members as if they had been signed and sealed by each member and contained covenants for the part of each member
to observe all their provisions. This Section has been interpreted by the courts to mean that the Memorandum gives rise
to a contract between the Company and each Member.
Reference may be made to the case ofHickman v. Kent (1950) 1 Ch. D 881
Here the Articles of the Company provided that any dispute between any member and the company should be referred to
arbitration. A dispute arose between Hickman and the company and instead of referring the same to arbitration; he filed
an action against the company. The company applied for the action to be stayed pending reference to arbitration in
accordance with the company’s articles of association.
The court held that the company was entitled to have the action stayed since the articles amount to a contract between
the company and the Plaintiff one of the terms of which was to refer such matters to arbitration.
Justice Ashbury had the following to say: “That the law was clear and could be reduced to 3 propositions
1. That no Article can constitute a contract between the company and a third party;
2. No right merely purporting to be conferred by an article to any person whether a member or not in a
capacity other than that of a member for example solicitor, promoter or director can be enforced
against the company.
3. Articles regulating the right and obligation of the members generally as such do not create rights and
obligations between members and the company”.
Eley v. Positive Government Security Life Association Co. (1876) Ex 88
In this case, the company’s articles provided that Eley should become the company Solicitor and should transact all legal
affairs of the company for mutual fees and charges. He bought shares in the company and thereupon became a member
and continued to act as the company’s solicitor for some time. Ultimately the company ceased to employ him. He filed
an action against the company alleging breach of contract.
The court held: that the articles constitute a contract between the company and the members in their capacity as members
and as a solicitor Eley was therefore a third party to the contract and could not enforce it. The contract relates to members

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in their capacity as members and the company so its only a contract between the company and members of that company
and not in any other capacity such as solicitor. But note that there can be an intra member contract.
8) ALTERATION OF ARTICLES
Section 13 of the Companies Act gives the company power to alter the articles by special resolution. This is a statutory
power and a company cannot deprive itself of its exercise. Reference may be made to the case of Andrews v. Gas Meter
Co. (1897) 1 Ch. 361. The issue herein was whether a company which under its Memorandum and Articles had no power
to issue preference shares could alter its articles so as to authorize the issue of preference shares by way of increased
capital.
The court held that as long as the Constitution of a Company depends on the articles, it is clearly alterable by special
resolution under the powers conferred by the Act. Therefore it was proper for the company to alter those articles and
issue preference shares. Any regulation or article which purports to deprive the company of this power is therefore
invalid, on the ground that such an article or regulation will be contrary to the statute. The only limitation on a company’s
power to alter articles is that the alteration must be made in good faith and for the benefit of the company as a whole.
VII. PROMOTERS
One who undertakes to form a company and takes the necessary steps to accomplish the purpose. Company may have
several promoters and existing company may promote another. A lawyer, acting on instructions is not a promoter.
The Companies Act does not define the term promoter but Section 45(5) says
“A promoter is a promoter who was a party to the preparation of the prospectus. Apart from the fact that this
definition does not speak much, it nevertheless shows that the definition is only given for the purposes of that section.
1) Duties of a Promoter
His duty is to act bona fide towards the company. Though he may not strictly be an agent, or trustee for a company,
anyone who can be properly regarded as a promoter stands in a fiduciary relationship vis-à-vis the company. This carries
the duties of disclosure and proper accounting particularly a promoter must not make any profit out of promotion without
disclosing to the company the nature and extent of such a Promotion. Failure to do so may lead to the recovery of the
profits by the company.
The question which arises is – Since the company is a separate legal entity from members, how is this disclosure effected?
Erlanger v New Sombrero Phosphates Co. (1878) 3 A.C. 1218
The promoters of a company sold a lease to the company at twice the price paid for it without disclosing this fact to the
company. It was held that the promoters breached their duties and that they should have disclosed this fact to the
company’s board of directors.
Since a promoter owes his duty to a company, in the event of any non-disclosure, the primary remedy is for the company
to bring proceedings for
1. Either rescission of any contract with the promoter or
2. Recovery of any profits from the promoter.
VIII. MEMBERS OF A COMPANY

Members of a company are also called shareholders. Section 28(1) of the Companies Act, the subscribers to the
memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration
shall be entered as members in its register of members.

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And in section 28(2) every other person who agrees to become a member of a company, and whose name is entered in its
register of members, shall be a member of the company. They are either the subscribers of the memo or Directors who
have signed and delivered to the registrar an undertaking to take and pay for their shares are member and also all other
persons who have agreed to become members of the company and whose names are entered in the register. Those in the
register which every company must keep.
1) How do you become a member?

Subscribe to the memo
All directors who have signed and delivered to registrar to take and pay for shares
All persons who agree to become members
2) Subscribers to the Memo

These become members on registration
Entry into the member’s register not necessary for that purpose
Subscribers to a company limited by shares are liable, to pay up the amount of shares as and when called up.
3) Other members
One whose name has been entered into the register
The law makes the placement of a name in the register as a condition precedent to membership.
Who can be a member?
Minors: below 18 years
But contract to take shares is voidable before or within reasonable period after attaining the age of majority
Where the company winds up, the minor ceases his right to avoid unless the liquidator agrees.
4) Personal Representatives
A deceased members share is transmitted to his/her executors or administrators. They must produce a grant of probate
of the will or letters of administration. But this does not make the PR a member of the co. It is the deceased estate that is
a member for purposes of increase in shares.PR is Liable for calls on partly paid shares to the extent of the deceased
assets in their hands. PR are entitled to transfer the shares without being registered as members and to receive dividends,
bonuses, or other benefits from shares, but not to vote at general meetings. They are entitled to be given notice of meetings
even though they have no right to attend and vote.
Where they so chose, personal representatives are entitle to be registered as members. Where they are registered as
members, they become personally liable for calls, although they have a right of indemnity against the deceased estate.
5) Trustees in Bankruptcy
A bankrupt may be a member of a company. However, the beneficial interests in his shares will be vested in his trustee in
bankruptcy as from the time he is adjudged bankrupt.
The bankrupt person votes in accordance with the direction of the trustee. The position of the trustee in bankruptcy is
similar to PR.

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IX. Other Companies

Where authorized by memo of assoc., a company may take shares in and be a member of another co. That co. would
attend meetings thro’ a representative authorized by a resolution of directors. A company must not be a member of it nor
purchase its own shares. Why? Doing so would involve a reduction in capital.
If the above were to happen, it would be with the permission of the court. A subsidiary company must for the same
reasons become a member of the holding company subject to certain exceptions. However, an unlimited company may
purchase its own shares
X. Register of Members
Every company must keep a register of members. Names and address of members, a statement of the shares held by each
member, and distinguishing each share by its number. The date of entry of each person in the register and date at which
a person ceased to be a member of the company.
XI. Public Company

A public company must have a member’s register and an index (a card) of the names of its members. The index must be
altered within 14 days of any alteration in the register. Index must be kept at the same place as the register and must
contain sufficient information to enable the account of each member to be readily found.
XII. Inspection of the Register

The register should be kept in the company’s office or in another office or kept by an agent. Default of maintaining a
register renders every officer liable. Register and index are open for inspection during office hours on payment of a fee a
person inspecting the register has no right to take extracts from or make copies of the register.
1) Importance of the Register

It is a public representation of who the members are and what their liability is. A company has no right to create a lien
over the register, since that would deprive the public of their statutory right of access and inspection.The register is the
document of title and not the share certificate, which is simply an acknowledgement.
2) Power of the Court to Rectify the Register

The court may rectify the register where the name of a person is without sufficient cause, entered in or omitted from the
register. If default is made or unnecessary delay takes place entering on the register the fact of any person having ceased
to be a member.
Application to court for rectification may be made by the person aggrieved, or any member of the company or the
company. Application is made in a summary way by way of originating summons or notice of motion. A court may order
rectification as well as payment by the company of any damages sustained by the aggrieved party.

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XIII. CHARTERED COMPANIES

These are formed upon the grant of charter by the crown under the royal prerogative or under special statutory
power.14 In Kenya, it’s under the prerogative powers of the President. In Kenya, all public universities, some
private universities, charitable organizations, institutes and colleges are established by charter and thereby
acquire legal personality.
The procedure for an institution to be chartered hence acquires legal personality is as follows while considering
the example of a university:
An example of the procedure as to how chartered companies are formed and acquire legal personality can be
taken from that of a chartered university.
A person wishing to establish a private university shall make an application in writing to the Commissioner of
Higher Education for a grant of charter setting up the private university.15
The application for grant of charter shall be accompanied by a draft of the charter which contains:
a) Name of the private university
b) Aims and objectives for which the private university is to be established.
c) Membership and government of the private university
d) The extent to which and the form in which regulations may be made by such body of the private university
as may be specified for the better functioning of the institution.
e) Financial control and expenditure and the administrative control of other property of the university.16
The commission shall consider the application and submit to the Minister of Higher Education together with its
recommendations or observations and the Minister shall submit the application to the President together with
any recommendations or observations which he may wish to make thereon.17
The President will then consider the documents submitted to him and if he is of the opinion that the grant of
charter to the institution concerned may be of benefit to university education, he may grant a charter in the form
he considers appropriate.18
Upon granting of the charter, the Minister may by notice in gazette publish the charter and with effect from the
date of publication of the charter, chartered institution shall be a body corporate by the name cited in the charter
with perpetual succession and common seal and shall be capable of:
1. Suing or being sued
2. Borrowing and lending money
3. Entering into contracts.19
Is there any case laws that can show chartered organizations acquire legal personality.
14
Laibuta, K.I. Principles of Commercial Law, (2006)
15
S. 11(2) Universities Act
16
S. 13 Universities Act
17
S. 11(4) Universities Act
18
S. 12 Universities Act.
19
S. 14 Universities Act

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XIV. STATUTORY CORPORATIONS

The difference between a statutory corporation and a company registered under the companies Act is that a
statutory corporation is created directly by an Act of Parliament. The Companies Act does not create any
corporations at all. It only lays down a procedure by which any two or more persons who so desire can
themselves create a corporation by complying with the rules for registration which the Act prescribes.
As body corporate, they are in the eyes of the law their own masters answerable as fully as any other person or
corporations and have perpetual succession, common seal and power to hold property. 20 They are governed by
the Acts establishing them and neither does Companies Act nor the companies rules apply to them.
This mode of incorporation is especially common for those corporations established to provide essential social
and business services such as provision of health and education, supply of electricity, communication
information, air and railway line transport.
Their inception by an Act of Parliament does not by any means constitute them a servant or agent of the
government. When parliament intends that a new corporation should act on behalf of government as a rule, it
shall state so in the statute constructing the corporation. In the absence of such provision, it’s taken that it acts
on its own behalf though controlled by a government department. A statutory corporation has the same qualities
like a company incorporated under Cap 486.
Is there any case law that can be included?
XV. DIRECTORS AND SECRETARY
1) DIRECTORS
Every company other than a private should have at least two directors while a private company may have one director
(see s 177). Until such appointment all subscribers to Memorandum are deemed to be directors. (See par. 75 of Table A)
The functions of the directors are normally stipulated in the articles of association under the subheading of powers
and duties of directors. Normally they are charged with the overall powers and duties of managing the company including
being signatories of the company.
Such powers and duties may be delegated to a managing director or a manager by way of a written resolution.
A person can only be appointed a director if by himself or by his agent in writing, signed and delivered to the registrar
for registration a consent in writing to act as a director (see s 182 and s 201).
Directors are normally appointed at a general meeting of the company. At the meeting a motion should be moved for the
appointment of directors singularly/individually i.e. a single resolution should not be made for appointment of two or
more directors. This is so except for private companies (see s 184).
A company can by ordinary resolution remove a director before expiration of his period in office. However, for such a
resolution to be made a special notice will have to be issued and the Director in question must be given a copy of the
notice and a chance to be heard on the resolution at the meeting (see s 185 (1) and (2)). A special notice requires 28 days’
notice (see s 142).
A vacancy created by removal of a director as envisaged above if not filled at the meeting at which he is removed, may be
filled as a casual vacancy (see s 185 (4)). Accordingly, the person appointed must retire at the time when the director
20
Laibuta K.I Principles of Commercial Law, (2006)

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who had been removed would have retired. However, such a director so removed may be entitled to compensation or
damages payable to him in respect of the termination of his appointment.
Royal British Bank vs. Turquand (1856) 6 E & B 327
Moreover the acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered
in their appointment or disqualification (see s 181).
Disqualifications of directors are normally embodied in the articles of association (see par. 88 of table A).
Directors have specific rights and duties either prescribed under their contracts (if any) with the company, the statute,
company constitution (MOA & AOA) and the common law.
a) Statutory Duties
 S. 191 - Prohibition of loans to directors.
 S. 192 – Approval of company in a GM requisite for payment by it to director for loss of office (also see s 193).
 S. 194 – Duty of director to disclose payment for loss of office etc made in connection with transfer of shares in a
company.
 S. 196 – Register of directors’ shareholdings etc.
 S. 197 – Particulars in accounts of directors’ salaries, pensions etc.
 S. 198 – Particulars in accounts of loans to officers etc.
 S. 199 – General duty to make disclosures for purposes of ss 196, 197 & 198.
 S. 200 – Disclosure by directors of interests in contracts to BOD.
 S. 201 – Register of directors and Secretaries.
 S. 202 –Particulars with respect to directors in trade catalogues and circulars.
b) Common Law Duties
i. Duty to act with care and skill

A director’s duty has been laid down as requiring him to act with such care as is reasonably to be expected from him,
having regard to his knowledge and experience.
In Re City Equitable Fire Insurance Co. Ltd [1925] 1 Ch 407
Here the Directors of an insurance company left the management of the company’s affairs almost entirely to the Managing
Director. Owing to the managing Director’s fraud, a large amount of the company’s funds disappeared. Certain items
appeared in the balance sheet under the heading “loans at call or short notice and “Cash in Bank or in Hand”. The
Directors did not inquire how these items were made up. If they had inquired they would have found that the loans were
chiefly to the Managing Director himself. On the company’s winding up, an investigation of its affairs disclosed a shortage
in its funds of more than £1.2 million incurred mainly due to the delinquent fraud of the Managing Director for which he
was convicted and sentenced. The other Directors had all along acted in good faith and honestly but the liquidator sought
to make them liable for the damages.
It was held that the Directors were negligent. Justice Romer reduced the Directors duties of care and skill as follows
“A Director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected
from a person of his knowledge and experience.”

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This proposition prescribes the standard of skill to be exhibited in actions undertaken by directors. The test is partly
objective and also partly subjective because a reasonable man would be expected to have the knowledge of a director with
his experience.
Re Brazilian Rubber Plantations and Estates Ltd [1991] 1 Ch 425
In this case a company had five directors and one of them confessed that he was absolutely ignorant of business. A
second one was 75 years old and very deaf. A third one said he only agreed to become a director because he saw one of
his friends names on the list of directors. The other two were fairly able businessmen. The directors caused a contract
to be entered into between the company and a certain syndicate for purchase by that company of some rubber plantation
in Brazil. The prospectus issued by the company contained false statements about the acreage of the Plantation, the types
of trees and so forth. The information given therein was given to the Directors by a person who had an original option to
purchase that property. He had never been to Brazil and the data was based on his own imagination. The Directors
caused the company to purchase the property. The question arose, were they negligent in so doing?
The court held that their conduct did not amount to gross negligence. Neville J. had the following to say:
“It has been laid down that so long as they act honestly, Directors cannot be made responsible in damages unless they are
guilty of gross negligence. A Director’s duty requires him to act with such care as is reasonably expected from his having
regard to his knowledge and experience. He is not bound to bring any special qualifications to his office. He may
undertake the Management of a Rubber Company in complete ignorance of anything connected with Rubber without
incurring responsibility for the mistakes which may result from such ignorance. While if he is acquainted with the Rubber
business, he must give the company the advantage of his knowledge when transacting the company’s business. He is not
bound to take any definite part in the conduct of the company’s business but insofar as he undertakes it he must use
reasonable care. Such reasonable care must be measured by the care an ordinary man might be expected to take in the
same circumstances on his own behalf.”
ii. Fiduciary relationship between directors and the company

Directors’ fiduciary duties are owed to the company and not to individual shareholders. The paramount duty is to exercise
their powers bona fide in the best interests of the company. This duty gives rise to various other duties.
 Directors should not exceed their powers: They may not act illegally, dishonestly, ultra vires the company or
beyond their own powers.
The directors must always exercise their powers for the particular purpose for which they were conferred and not for
extraneous purposes even if the latter are considered being in the best interests of the company. For example the Directors
are invariably empowered to issue capital and this power should be exercised for only raising more funds when the
company requires it. Hence it will be a breach of the Directors’ duties to issue the company shares for the purpose of
entrenching themselves in the control of the company’s affairs.
In the case ofPunt v. Symons (1903) 2 Ch. 506 in this case the directors issued shares with the object of creating a
sufficient majority to enable them to pass a special resolution depriving the other shareholders of some special rights
conferred upon them by the company’s articles. It was held that a power of a kind exercised by the Directors in this case
was a power which must be exercised for the benefit of the company. Primarily this power is given to them for the purpose
of enabling them to raise capital for the purposes of the company. Therefore a limited issue of shares to persons who
are obviously meant and intended to secure the necessary statutory majority in a particular interest was not a fair and
bona fide exercise of the power.
Piercy v. Mills & Co. (1920) 1 Ch. 78
A company had two directors. They fell out of favour with the majority of the shareholders who were therefore threatened
with the election of 3 other directors to the Board. The directors issued shares with the object of creating a sufficient

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majority to enable them to resist the election of the 3 additional directors whose election would have put the two directors
in the minority on the Board.
The Court held that the Directors were not entitled to use their powers of issuing shares merely for the purpose of
maintaining their control or the control of themselves and their friends over the affairs of the company or even merely
for the purpose of defeating the wishes of the existing majority of shareholders. The Plaintiff and his friends held the
majority of shares in the company and as long as that majority remained, they were entitled to have their wishes prevail
in accordance with a company’s regulations. Therefore it was not open to the directors for the purpose of converting a
minority into a majority and purely for the purpose of defeating the wishes of the existing majority to issue the shares in
dispute.
 Directors must act with an unfettered discretion:
See: - Fulham Football Club Ltd –vs. - Cobra Estates PLC [1994] 1BCLC 363
 Directors should not allow their personal interests to interfere with their duties to the company
 A contract between a company and a director or with a company where director has interests is voidable at the
instance of the company.
See: Aberdeen Rly Co. –vs. - Blaikie Bros (1854) 1 Maeq 461
- North West Transportation Co. Ltd -vs. - Beatty (1887) 2 AC 589
In Aberdeen Railway v. Blaikie Brothers (1854) 1 Macc. 46the Defendant Company entered into a contract to purchase
a quantity of chairs from the Plaintiff partnership. At the time that the contract was entered into a Director of the
company was also one of the partners. The issue was, was the company entitled to avoid the contract? The court held
that the company was entitled to avoid the contract. The Judge said that as a body corporate can only act by agents and
it is the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting.
Such an agent has a duty of a fiduciary nature to discharge towards his principal. It is a rule of universal application that
no one having such duties to discharge shall be allowed to enter into or can have a personal interest conflicting or which
may possibly conflict with the interests of those whom he is bound to protect. This principle is strictly applied no question
is entertained as to the fairness or unfairness of the contract so entered into.
 A Director is accountable to the company for any secret profit made by virtue of his fiduciary position.
See: - Robinson-vs. - Randfontein Estates Gold Mining Co. Ltd 1921 AD
 A director is accountable for any secret profit made from appropriation of a corporate opportunity.
See: - Regal (Hastings) Ltd -vs. - Gulliver (1942) 1 AII ER 37.
-Industrial Development Consultants Ltd –vs. -Cooley [1972] 1 WLR 443
Regal Hastings Ltd v. Gulliver (1942) 1 All E.R. 378
Herein the company owned a cinema and the directors decided to acquire two other cinemas with a view to the sale of the
entire undertaking as a going concern. Therefore they formed a subsidiary company to invite the capital of 5000 pounds
divided into 5000 shares of 1 pound each. The owners of the two cinemas offered the directors a lease but required
personal guarantees from the Directors for the payment of rent unless the capital of the subsidiary company was fully
paid up. The directors did not wish to give personal guarantees. They made arrangements whereby the holding company
subscribed for 2000 shares and the remaining shares were taken up by the directors and their friends. The holding
company was unable to subscribe for more than 2000 shares. Eventually the company’s undertakings were sold by selling
all the shares in the company and subsidiary and on each share the Directors made a profit of slightly more than two
pounds. After ownership had changed the new shareholders brought an action against the directors for the recovery of
profits made by them during the sale.

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The court held that the company as it was then constituted was entitled to recover the profits made by the Directors.
Lord Macmillan had the following to say:
“The directors will be liable to account if it can be shown that what they did is so related to the affairs of the
company that it can properly be said to have been done in the course of their management and in utilization of the
opportunities and special knowledge and what they did resulted in a profit to themselves.”
Industrial Development Consultants vs. Cooley (1972) 2 All E.R. 16
The Defendant who was an architect was appointed the company’s Managing Director. The company’s business was to
offer design and construction services to industrial enterprises. One of the defendant’s duties was to obtain new business
for the company particularly from the gas companies where he had worked before joining the Plaintiff. While the
Defendant was still so employed by the Plaintiff a representative of one Gas Company came to seek his advice on some
personal matters. In the course of their conversation the Defendant learnt that the gas company in question had various
projects all requiring design and construction services of the type offered by the Plaintiff. Upon acquiring this information
and without disclosing it to the company, the Defendant feigned illness as a result of which he was relieved by the
company from his duties. Thereafter, he joined the gas company and got the contract to do the work. Two years
previously, the Plaintiff had unsuccessfully tried to obtain that work. After the Defendant acquiring the contract, the
company sued him alleging that he obtained the information as a fiduciary of the company and he should therefore
account to the company for all the remuneration fees and all dues obtained.
The court held that until the Defendant left the Plaintiff, he stood in a fiduciary relationship to them and by failing to
disclose the information to the company, his conduct was such as to put his personal interests as a potential contracting
party to the gas company in conflict with the existing and continuing duty as the Plaintiff’s Managing Director.
Roskill J.
“It is an overriding principle of equity that a man must not be allowed to put himself in a position where his fiduciary
duty and interest conflict. It was the defendant’s duty to disclose to the plaintiff the information he had obtained from
the Gas Board and he had to account to them for the profits he made and will continue to make as a result of allowing his
interests and duty to conflict. It makes no difference that a profit is one which the company itself could not have obtained.
The question being not whether the company could have acquired it but whether the defendant acquired it while acting
for the company.”
 A director may not compete with the company.
 A director may not misuse confidential information.
2) SECRETARIES
Every company is required to have a secretary. When such office is vacant, then the functions of the secretary may be
carried out by an assistant or deputy secretary. In the absence of both, they can be undertaken by an officer of the
company authorized as such by a resolution of the Board of Directors (see s 178).
The Law does not prohibit a director from undertaking the functions of the secretary. However, where the director is the
sole director of the company, he cannot be a secretary (see s 179). Moreover, where an act is required to be done by a
director and secretary, it cannot satisfactorily be done by one person who is both a director and a secretary of the
company.

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The functions of the secretary are extensive and numerous under the companies Act. Moreover, there are further functions
envisaged at common law and practice. However, the general functions of the secretary in addition to statutory functions
are:
1. To provide the board as a whole and directors individually with detailed guidance as to how their
responsibilities should be properly discharged in the best interests of the company
2. To induct new or inexperienced directors and assist the chairperson and chief executive officer in
determining the annual board plan and the administration of other issues of a strategic nature at the board
level.
3. To act as the central source of guidance and advice to the board and within the company on matters of
ethics and good governance
See: King Report on Corporate Governance for South Africa, 2002
XVI. ALLOTMENT AND TRANSFERS OF SHARES

A person who wishes to acquire shares can do so in one of two ways:
1) ALLOTMENT
He may acquire shares directly from the company, usually by directing an application to the company, which can then
allot and issue shares to him (see ss 49, 50, 50A, 51).
The Act does not prescribe a formal application as it is the preserve of the individual company. The contract by which a
subscriber agrees to take a number of shares and the company agrees is subject to ordinary rules of contract as modified
by Companies Act.
For a public company wishing to obtain share capital from the public, it directs a written invitation in the form of a
prospectus, accompanied by an application form. Such shares can only be with respect to the company’s unissued shares.
The Subscriber to shares uses the application form to apply for a certain number of shares and submits his application
with the issue price to the company.
In the process of public allotment, the company must also comply with specific provisions of s 49 which mainly are:
a) Allotment may not be made before the minimum subscription has been raised.
b) The amount payable on application should not be less than 5% of the nominal value of each share.
c) If the conditions above are not satisfied within 60 days after issue of prospectus all money received from
applicants should be refunded.
See: Sections 50, 51, 52, 53 & 54 for further provisions on public allotments.
The application constitutes an offer to subscribe to the shares of the company and the offer is accepted by a resolution
of the Board of Directors to allot the shares to the applicant.
This is followed by an issue of a share certificate within 60 days from the date of allotment (See s 82).
In accordance with the general principles of the Law of contract, the agreement is concluded when the acceptance
(allotment) comes to the notice of applicant – see: postal rule!
Moreover, with regard to public allotments the company must be privy to the provisions of the Capital Markets Act Cap
485Aand the rules made by the Capital Markets Authority (CMA) under the Act.
These rules are known as the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations 2002which
prescribes inter alia:

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a) Approvals for all public offers
b) Publication of a prospectus (Information Memorandum)
The company must file with the Registrar within 60 days from the date of allotment a return of the allotment (see s 54
and form no. 213).
The form is filled by Director or Secretary and must state:
1. Names, addresses and descriptions of allottees
2. Number of shares allotted to each.
3. Amount paid for the shares
See sample form
2) TRANSFER
He can acquire the shares from an existing shareholder usually by way of purchase and have them transferred to his
name. The transferability of shares of a company will depend on whether the company is private or a public company.
Private Vis -a’-Vis Public Company
One of the fundamental distinctions between the above types of companies is that a private company must by its articles
restrict the right to transfer its shares (see s 30).
In that regard, the articles may restrict transferability by requiring transfers in this manner:
 Be approved by Board of Directors
 Be made only to existing members
 Be first offered to other members of (right of pre-emption)
 Be made only to persons approved by all members
 Be made only to persons approved by a particular person
For a public company, shares are easily transferable, although the company may in its articles limit that right of members
to transfer shares. The transferability of shares enables members to dispose of their investments freely without
withdrawing them from the company.
The shares of a company are regarded as a moveable property transferable in a manner provided by the articles (see s
75).
However, a transfer of shares cannot be effected unless a proper instrument of transfer is delivered to the company. Such
transfer is then effected by registering it in the register of members (share register) (see s 77).The companies act does not
establish a prescribed form for share transfer. However, there exists a traditional form which is based on The Stock
Transfer Act of 1963 of the UK, which is ordinarily used for share transfers.
a) See sample form
Within 60 days from the date of lodgment of transfer of shares a certificate of shares should be issued to the transferee
(see s 82). A certificate under a common seal of the company shall be prima facie evidence of title of member to the shares
(see s 83).
The public company is permitted to offer shares to the public (though it doesn’t have to do so). If it offers shares to the
public, it must be privy to the rules governing the processes which are today set out in the Capital Markets Acts Cap
485A and the rules made by the CMA established under the Act.

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Once the Company is authorized by the CMA to offer shares to the public, it may also apply to be permitted to list and
deal with its shares in the stock exchange. This enables the shareholders to sell their shares with greater ease and the
rules of the stock exchange ensure sufficient disclosure of information.
The CMA accordingly has established rules known as the Capital Markets (Securities) (Public Offers, Listing and
Disclosures) Regulations 2002which inter alia provides for:
 Approval of the listing of securities in any securities exchange
 Publication of a prospectus (Information Memorandum)
Other than the approval of the CMA for listing of securities in any exchange, the company must comply with the listing
requirements of the exchange to which it is listed.
Currently, the company must comply with the requirements of the listing manual of the Nairobi Stock Exchange Limited
(NSE). The NSE is the only one that is licensed by the CMA to deal with securities.
Read about the immobilisation and dematerialisation of shares under the Central Depositories Act of 2000 and the rules
made there under.
XVII. SHARE CAPITAL AND DEBENTURES
1) Prospectus
The Companies Act under sections 39 to 48 explicitly states what a prospectus is all about for the benefit of investors.
According to section 43 of the Act, a copy of the prospectus must be delivered to the registrar of companies before it is
issued. Any prospectus with misleading info renders directors liable prima facie for damages to members of the public
who may have subscribed on the basis of their faith in the company21.
a) What is a prospectus?
It invites the public to subscribe to shares or debentures. It is therefore a document which sets out the advantages that
accrue from the investment in the company.
Basically when the public is asked to subscribe for shares or debentures in a company the invitation involves the issue of
documents which set out the advantages to accrue from an investment in the company. This document is called a
prospectus and may be issued either by the company itself or by a promoter. It is only in the case of a public company
that a prospectus may be issued.
A private company must always raise its capital privately as required by Section 30(1) (c) of the Companies Act Cap 486.
Section 2 of the Act defines Prospectus as “any prospectus notice, circular, advertisement or other invitation offering to
the public for subscription or purchase of any shares or debentures in the company.” Although the definition indicates
that the prospectus is the offer, it is submitted that the prospectus is rather the document that accompanies the offer,
which is usually in the form of an application attached to the prospectus22.
A prospectus is in some instances, an invitation to treat: invites public make offers for shares or debentures. In other
instances, it is an offer: in a rights issue (Jackson v. Turquad)23.
21
Sections 45 and 46 of cap 486
22
Section 40 (3) of the Companies Act
23
(1861) L.R. 4.H.L. 305.

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The general purpose of the prospectus regulating an offer for shares or debentures to the public is to provide the investor
with essential minimum information to enable him assess the merits of the offer.
This information relates to the company itself and to the shares or debentures being offered and is set out in a document
known as a prospectus.
The company law seeks to compel companies to provide the necessary info in the prospectus to enable investors make a
decision one way or another to subscribe for shares or debenture.
In principle no offer may be made to the public unless the company publishes a prospectus which must contain certain
information as prescribed by the statutes and any rules made under the statutes (see ss 39 and 40 of the Companies Act
and s 30A of the Capital Markets Act and the rules made under the Act).
The prospectus must be dated, and the date is deemed the date of publication of the prospectus (see s 39).
Specifically the prospectus must provide the following under the Companies Act24
a. Information or matters specified in Part I of the Third Schedule:
 Number of founders or management and their interests in the company
 Qualification shares for directors and their remuneration under the articles.
 Names, occupations and postal addresses of directors
 Minimum amount envisaged to be raised by the public offer.
 Time of opening of the subscription
 Amount payable on application and allotment
 Number, description and amount of any shares which the person is entitled to be given
 And so forth (see Part 1 of the Third Schedule)
b. Reports specified in Part II of the Third Schedule
 Report of auditors of the company
 Reports of accountants where the proceeds are to be used to purchase a business or acquisition of shares of
another company.
Moreover, it is unlawful to issue any application for shares or debentures of a company unless the form is accompanied
by a prospectus which complies with these requirements25.
Non-compliance with these requirements is a criminal offence.Experts’ consents to have their statements included in the
prospectus where such statements are in the prospectus must form part of the prospectus (see s 42 & 43(1) (a)).Annex
any such contracts anticipated in par. 14 of the Third Schedule (see s 43 (1) (b).
Every prospectus should state on its face that it has been delivered for registration and refer to statements which specify
documents required to be attached to the copy so delivered (experts’ consents, contracts etc) (see s 43(3).
Moreover, the above requirements have been reiterated and even expanded in the Capital Markets Act26 and the
regulations of the CMA made under the Act, with regard to information memorandum.
24
Section 40(1) of the Companies Act
25
Section 40(3)
26
Cap 485A

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The company must accordingly publish an information memorandum signed by the officers of the company and the
same must be filed with the CMA.
The information memorandum must comply with the requirements prescribed by the CMA (see s 30A of the CM Act).
Accordingly the Capital Markets (Securities) (Public offers, Listing and Disclosures) Regulations, 2002 (hereinafter
referred to as Public Offers Regulations 2002) embellish the requirements of the Companies Act by prescribing that (See
rule 6)
a. When a company wishes to offer shares to the public it shall publish an information memorandum by making it
available to the public.
b. The company shall before publication obtain approval of the CMA that the information memorandum complies
with the above regulations and then have it registered with the Registrar of Companies.
c. With respect to initial public offers the prospectus should include:
b. An accountant’s report confirming compliance by the company with financial disclosures under rule 10 (1)
c. Legal opinion regarding:
 Licences and consents for the particular business.
 Validity of evidence of ownership of land, plant equipment and other

assets
 Any contracts with respect to proposed issue of securities
 Any material litigation
d. Should be in black and white except for the company logo
e. See: Electronic issuance of a prospectus.
f. Allotment should be made on the basis of an allotment policy disclosed in the prospectus.
g. See: requirement for reservation of local investors.
h. Results should not be published without notifying the CMA 24 hours before publication.
Further note:
Moreover, the company cannot issue securities to the public or list at a securities exchange unless it complies with First
and Second Schedules of the Regulations depending on the market segment it intends to be listed in the Securities
Exchange (see rule 7).
The form and content of prospectus must also be informed by the market segment to which the company intends to list
in the securities exchange (see rule 10).It should contain the statement in rule 10(2) (a), - where CMA does not assume
responsibility for the correctness of statements in the prospectus. Should state allotment procedure to be applied in case
of an oversubscription (see rule 10(2) (b).
In addition, prospectus should contain such information as investors would reasonably require and reasonably expect
to find therein to facilitate the making of an informed decision (see rule 12(1)).
For instance:
d. Assets, liabilities, financial position profits and losses and prospects of the issuer securities
e. Rights attaching to the securities.
Read: rule 13 on supplementary prospectus
Availability of Prospectus to Investors

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It is unlawful to issue an application form for shares not accompanied by the prospectus (see s 40(3) of the Companies
Act. Before publication and issuance thereof, a prospectus must be delivered to the Registrar for registration (see s 43 of
the Companies Act).
This is to ensure compliance with the provisions and to ensure that a prospectus, as a public document, will be available
to the public. Subsequently, the information memorandum must be available to the public free of charge at an address in
Kenya (see rule 6(1) of the Public Offers Regulations 2002).
b) LIABILITY FOR UNTRUTHS

The persons responsible for misstatements in a prospectus are the following: (see s 45(1) of the Companies Act and rule
17 of the Public Offers Regulations).
1. Directors
2. Every person who has authorized himself to be named and has been named in the prospectus
as a director of the company
3. Promoters
4. Persons who have authorized issuance of prospectus
An expert does not take responsibility for untrue statements unless the expert statement is untrue. See s 45(2) for
exceptions to liability.
The liabilities can derive from the statute and from common law and in both they could be civil and criminal.
c) STATUTORY CIVIL AND CRIMINAL LIABILITY

Section 45 establishes civil liability against persons above-mentioned in favour of persons who subscribe for shares on
the basis of an untrue prospectus for any loss or damage suffered. Section 45(1) provides that the directors, promoters
and the other officers named therein shall be liable to pay compensation to all persons who subscribe for any shares or
debentures on the faith of the prospectus for the loss or damage they may have sustained by reason of any untrue
statement included in the prospectus. Section 45(2) provides exceptions/defences to liability. Accordinglysection 45(2)
provides that:
No person shall be liable under subsection (1) if he proves–
(a) That, having consented to become a director of the company, he withdrew his consent before the issue of the
prospectus, and that it was issued without his authority or consent; or
(b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue he forthwith
gave reasonable public notice that it was issued without his knowledge or consent; or
(c) that, after the issue of the prospectus and before allotment there under, he, on becoming aware of any untrue statement
therein, withdrew his consent thereto and gave reasonable public notice of the withdrawal and of the reason there for;
Section 46 establishes criminal liability for untrue statements and any person who authorized the issue of the prospectus
shall be guilty of an offence and can be imprisoned for 2 years or fined 10,000/= or to both.
d) Common law civil and criminal liability

The common law civil liability is based, depending on the circumstances, on the principles of the law of tort and of
contract in relation to negligence, misrepresentation and the remedies deriving there from.
Common Law criminal liability is based on principles of fraud which is today codified in the Penal Code.

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2) CONVERSION OF COMPANIES
The Companies Act does not in express terms provide for conversion of companies.27However, a company may be
converted from private to public company by altering its articles in such a manner as to dispense with the prescriptions
of s 30 which stipulates the features of a private company which distinguish it from a public company.
Section 30 provides for the meaning of a private company:
(1) For the purposes of this Act, “private company” means a company which by its articles
(a) Restricts the right to transfer its shares; and
(b) limits the number of its members to fifty, not including persons who are in the employment of the
company and persons who, having been formerly in the employment of the company, were while in
that employment, and have continued after the determination of that employment to be, members of
the company; and
(c) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
(2) Where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this section,
be treated as a single member.This can be affected by amending the articles with the consequence effect of:
a) Not restricting the right to transfer shares
b) Not limiting the number to fifty.
c) Not prohibiting any invitation to public
Accordingly, the company may alter its articles by a special resolution. Any alteration is as valid as if originally contained
therein (see s 13).
Once an alteration is made that effectively converts the private company to a public company the company, from the date
of alteration ceases to be a private company. Fourteen days from the date of alteration, the company should deliver to the
registrar a statement in lieu of prospectus.
The statement in lieu of prospectus should contain (see s 32).
f. Particulars set out in Part I of the second schedule.
g. Reports specified in Part II of the second schedule.
Untrue statements in the statement in lieu of prospectus attract similar liability to liability on mis-statements in a
prospectus.
NB: Look at the sample statement in lieu of prospectus in Part I of the second schedule. Also look at the effects of
alteration of the articles of association of companies. Also what is a special resolution? A resolution shall be a special
resolution when it has been passed by a majority of not less than three-fourths of such members as, being entitled so to
do.28
27
Compared with e.g. the more elaborate South African Scenario
28
Section 141 (1) of the Companies Act provides that , a resolution shall be a special resolution when it has been passed by a majority of
not less than three-fourths of such members as, being entitled so to do, vote in person or, where proxies are allowed, by proxy, at a general
meeting of which notice specifying the intention to propose the resolution as a special resolution has been duly given:
Provided that, if it is so agreed by a majority in number of the members having the right to attend and vote at any such meeting, being a
majority together holding not less than ninety-five per cent in nominal value of the shares giving that right, or, in the case of a company
not having a share capital, together representing not less than ninety-five per cent of the total voting rights at that meeting of all the
members, a resolution may be proposed and passed as a special resolution at a meeting of which less than twenty-one days’ notice has
been given.

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3) DEBENTURES AND DEBENTURE STOCKS

Debenture is long term borrowing by the company. Debenture stock is a funded loan so raised. Debenture is an item of
property, a normal chose in action, a debt, generally secured by mortgage.
Law of Personal Property Applies
Debentures, like share warrants, are negotiable instruments. Debenture agreement is normally constituted by a
prospectus followed by application, allotment, and letter of allotment, debenture stock certificate.
a) Advantages of Debenture Stock

Much more convenient and issues of it are much more common with public offers. Where there is a series of debentures
each will rank according to priority and date of issue to rank paripassu.
Trustees for Debenture Holders
Deeds made with trustees. A trust corporation is in reposed between the company and debenture holders. A charge will
be with the trustees who hold it on trust for the debenture holders.
b) Floating charges
Fixed charges are normal legal or equitable mortgages. Floating charges are inventions of English equity. Floating charges
are equitable charges on some or all of the present property and future property of the company.
i. Floating
The charge remains floating and property liquid until default is made and the debenture holder takes steps to enforce his
security, or until winding up commences.
ii. Realizing security

The charge then crystallizes and is converted into normal fixed charge on the assets of the company. Debenture holders
may appoint a receiver. Where a company is wound up, the charge crystallizes because the license is subject to the
company carrying on business.
iii. Registration of Charges

Particulars of the charges have to be recorded on the companies file at the registry. Only a charge created by a company
requires registration.
a. Method of Registration
Particulars should reach the registrar in 21 days following the creation. Particulars required include, the date of creation
or acquisition of property subject to the charge, the amount secured, a short description of the property, and the person
entitled to the charge.

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iv. Registrar’s duty

Enter the prescribed particulars in the register. The registrar is required to grant a certificate of registration.
v. Effect of Not Registering

Liability to fines. Non registration of charges at the company’s registry destroys the validity of the charge. The chargee,
who would suffer in the event of non registration, is the one authorized to deliver the particulars.
vi. Mitigation
Where the security becomes void, the money becomes payable immediately. Court has power to extend the time for
registration. InWatsons Duff Morgan & Vermont ltd (1974) 1 WLR 450, the court held that failure to register may vitally
affect the rules of priority.
vii. Effect of Registration

Certificate of registration does not cure any flaws in the charge itself save for confirmation of compliance. Where land is
involved, registration in the company’s registry does not obviate the need also to register a charge as per the RLA.
c) Enforcement of Debentures
Enforcement depends on the nature of security conferred. The first step is invariably, to secure the appointment of a
receiver. This could be done by the debenture holder or the court. One of the debenture holders is to commence a
debenture holders’ action.
viii. Costly
Debenture holders’ action is lamentably expansive and dilatory, the receiver who will be an officer of the court will work
under its closest supervision and constant applications will have to be made in chambers throughout the duration of
receivership.
ix. Functions of Receiver

 Get in the assets charged, collect rents and profits,
 Exercise debenture holders’ power of realization
 Pay net proceeds to the holders in reduction of their charge
x. Position of Receivers
Must not be confused with that of liquidators
But if a receiver manager is appointed, the board of directors will be functus officio

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XVIII. MANAGEMENT OF COMPANIES
1) Functionaries
Corporate functions must be performed by human functionaries. The General Meeting (GM) of shareholders is one
of the entities within the company that performs corporate functions.
Others include:
1. Board of Directors (BoD)
2. Committees of Directors
3. Managing Director (MD)
4. Secretary
5. Employees of the company and
6. Company agents – these need not be appointed from the ranks of the above-mentioned e.g. distributors,
suppliers etc.
The parties above have a peculiar relationship towards each other within the internal structure of the company. Some are
organs others are not. An organ is more than a mere functionary of the company. When an organ acts, it is for all practical
purpose the company itself which has acted – For certain purposes it is then the company. In the internal structure, the
BOD, GM and in certain instances the MD may be organs of the company, while the others are not.
2) DIVISION OF POWERS
d) Prominence of the GM
The most important relationship in the internal company structure is the relationship between the GM and the BoD. On
the authority of Isle of Wright Rly Co –Vs- Tahourdin (1883) 25 Ch D 320, it was contended that the meeting of members
was, as the personification of the company, in fact the company itself and the term ‘company’ was frequently used to
refer to the members as a body.
The above implies that, ultimately in a company, the final say in all matters vests with the shareholders.
- Mayor and others –Vs- Governor & Company of Bank of England (1888) QBD 160. (1969)1 All HR69
- Barron -Vs- Potter [1914] 1 Ch 895,
- Bramford-Vs-Bramford [1970] Ch 212
Barron v. Porter (1914) 1 Ch. 895
The articles of association vested the power to appoint additional directors in the Board of Directors. There were only
two directors namely, Barron and Porter and the conduct of the company’s business was at a standstill as Barron refused
to attend any Board meeting with Porter.
The court held that it was competent for the general meeting to appoint additional directors even if the power to do so
was by articles vested in the Board of Directors.
Importantly, however, the GM is only concerned with the major decisions regarding the company e.g.
 Alterations in the memorandum or articles
 Increases and reductions in capital
 Variation of shareholders’ rights

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 Disposal of major assets of the company
 Compromises, amalgamations and reconstruction
 Appointment and removal of directors
 Voluntary winding up of the company etc
The Gm undertakes its functions by passing resolutions in meetings that are properly convened.
3) MEETINGS OF SHAREHOLDERS
a) CONVENING OF GENERAL MEETINGS
i. Who can convene?

The General Meetings may be convened by the following persons:
ii. By the Directors:

The manner in which and the number of directors by which a general meeting is to be convened is governed by the articles
of the company concerned. General meetings are normally convened by the board of directors as it is customary and
logical for this duty to be undertaken by that organ in the articles. The directors must convene a general meeting by way
of a properly constituted meeting of the board. The power of the directors to call a general meeting is a fiduciary power
of a discretionary nature which must be exercised in good faith in the interests of the company as a whole.
iii. By Directors on requisition:

Under s 132(2) the directors of a company should on requisition of holders of not less than one-tenth of paid-up capital,
convene an extra ordinary general meeting of the company. The requisition must state the objects of the meeting, signed
and deposited at the registered office of the company. A meeting convened in this manner should as nearly as possible
be similar to that convened by Directors.
iv. By Members on requisition:

Under s 132(3), if the directors do not within twenty-one days from the date of requisition mentioned above convene a
meeting, the requisitionists may themselves convene the meeting. Such a meeting should not however be held after
expiration of three months from the date of requisition. Such a meeting should be convened in a manner as nearly as
possible as that convened by directors.
v. By the Court:
In addition to the common law power of the court to order the calling of a meeting, the court is specifically authorized by
s 135 to order that a meeting of a company be held. If it is impracticable to call or conduct a general meeting in the
prescribed manner or if the court for any other reason deems fit, it may issue an order with directions relating to the
calling, holding and conducting of the meeting of the company.
vi. By the Registrar:

Under s 131(2), the registrar has the power on application of any member of the company to call or direct the calling of
annual general meeting of the company where the company fails to do so.

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b) NOTICE OF MEETINGS
Under s 133 at least 21 days’ notice in writing must be given of any general meeting of the company. Any provision in the
articles that a meeting may be called on shorter notice than 21 days is void but there is nothing to prevent a company
from giving (or requiring in its articles) a longer period of notice than the minimum period laid down in the Act. See s 142
on special notices.
Such notices must be served on every member and must be served in the manner prescribed in the articles which must
be either personally, through the post or by advertisement. However, if all members approve, non-compliance with the
provisions can be condoned. See s 133(3). The notice of the meeting must at least contain the information required by the
articles. Such includes the place, the day and the hour of the meeting.
c) PROCEEDINGS AT MEETINGS
i. Introduction:
Matters relating to proceedings at general meetings are usually dealt with in some detail in the articles.
ii. Chairman:
The chairman of the board of directors chairs the general meetings of the company. Where the articles does not provide
for the above-mentioned, the members may elect any one of them as chairman.
iii. Quorum:
Under s 134 in so far as the articles do not make any other provision two or more members holding not less than one-
tenth of the issued share capital or if the company has no share capital, not less than five per cent of the members may
convene a meeting. No valid resolutions can be passed if a quorum is not present at the meeting.
iv. Adjournment:
The “adjournment” of a meeting refers to the continuation of the original meeting at a later stage either at the same or a
different place. The chairman may with the consent of members adjourn the meeting to another time and place. If an
adjournment is demanded, the chairman must put the demand to the vote of the meeting. A chairman must put the
demand to the vote of the meeting. A chairman is not entitled to adjourn or dismiss a meeting of his own accord since
this right vest subject to the statutory provisions in the meeting itself. Should he attempt to adjourn the meeting on his
own authority, the meeting may appoint a chairman in his place and proceed with its business.
v. Voting:
The articles of association invariably make provisions for voting. Additionally or where the articles is silent, s 134(e)
provides that every member shall have one vote in respect of one share. Read: exceptions to the equal voting rights. The
voting process may be conducted either by show of hands or a poll. On a show of hands every member has one vote while
on a poll every member has votes which are in proportion to the share capital represented by his shares.
At common law, a poll provides the only conclusive method whereby a meeting can pass a resolution. A show of hands is
merely a rough and inconclusive manner to gauge the opinion of a meeting and every member is entitled under s 137 to
demand a poll.
A poll must be conducted in accordance with the articles. On a poll every member or his proxy is entitled to exercise all
his voting rights but he is not obliged to use all his votes or even use his votes in the same way. See s 138.
Read:

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vi. Voting agreements
vii. Proxies:
Any member of a company may appoint a proxy who need not be a member, to attend, speak and vote in his stead at
meetings of the company. See s 136. A notice of a meeting should be clear on the right to participate in a meeting by
proxy.
viii. Resolutions:
A company resolution is the formal decision of a company in a general meeting to act in a certain way. Normally a company
resolution is passed by a simple majority of members present and entitled to vote and who constitute a quorum. A
resolution taken on a simple majority is generally known as an ordinary resolution and is required for all decisions of a
general meeting other than those requiring either a specified majority or special resolution. See s 141 on special resolution.
Special resolutions would be required for specific matters which are ordinarily provided for in the Act.
Read: Conduct by unanimous assent;Minutes and reports of meetings.
d) PROMINENCE OF ARTICLES OF ASSOCIATION

Having noted that the GM is concerned with the major decisions of the company, it is noteworthy that the day-to-day
management of the company vests in the BoD. The shareholders do not directly manage the company and the task is
delegated to the BoD vide the articles of the company. Moreover, whatever the earlier position may have been, company
law jurisprudence has accepted that where certain matters are assigned to the BoD by the articles only the board has the
power to deal with those matters.
See: - Automatic Self – Cleansing Filter Syndicate Co. Ltd -vs. - Cunningham [1906] 2 Ch 34 (CA).
Automatic Self-cleaning Filter Syndicate v. Cunningham (1906) A.C. 442
The company’s articles provided that subject to such regulations as might be made by extra ordinary resolution, the
Management of the company’s affairs should be vested in the Directors who might exercise all the powers of the company
which were not by statute or articles expressly required to be exercised by the company in general meeting. In particular
the articles gave the directors power to sell and deal with any property of the company on such terms as they must deem
fit. At a general meeting of the company, a Resolution was passed by a simple majority of the members for the sale of
the company’s assets on certain terms and instructing the directors to carry the sale into effect. The Directors were of
the opinion that a sale on those terms was not of any benefit to the company and therefore refused to carry it into effect.
The issue was, whether the directors were under an obligation to act in accordance with the directives.
The court held that the Articles constituted a contract by which the members had agreed that the Directors alone should
manage the affairs of the company unless and until the powers vested in the Directors was taken away by an alteration in
the Articles they could ignore the general meeting directives on matters of management. They were therefore entitled to
refuse to execute the sale.
The division of the power to manage the company’s affairs is embodied in Article 80 of Table A which states that the
business of the company shall be managed by the directors who may exercise all such powers of a company as are not by
the Act or by these regulations required to be exercised by the company in general meeting. Where this article is adopted
as it is invariably done in practice the general meeting cannot interfere with a decision of the directors unless they are
acting contrary to the provisions of the Companies Act or the particular company’s articles of association.
Consequently, within their managerial functions entrusted to them by the company constitution, the BoD as the company’s
‘controlling mind’ is autonomous, but under certain circumstances, the GM is the company’s supreme organ. The BoD
exercises their managerial functions by resolutions made in meetings properly convened.

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4) MEETINGS OF BOD
a) Formal meetings:
The general rule is that unless the articles provide to the contrary the board of directors can only act at a meeting properly
convened with notice to all members and at which quorum is present. The procedure at meetings of directors is regulated
by the articles and supplemented by provisions laid down by the board of directors in accordance with powers conferred
on them by the articles.
b) Written resolutions:
The most common way in which articles deviate from this general rule is by providing that a written resolution signed by
all directors is as valid as a resolution passed at a meeting of directors. Moreover, the board may delegate any of its
powers to a committee consisting of one or more of its members.
c) Unanimous assent:
A decision arrived at unanimously by all the directors in the full knowledge of what is involved cannot be impugned by
any of them.
d) Notice:
Sufficient notice must be given of meetings of board of directors. If this is not done the meeting is invalid and resolutions
passed there can be set aside.
e) Quorum:
The requirement for a quorum at meetings of the board of directors is laid down in the articles. A quorum must be a
disinterested quorum. Thus a director who has an interest in a matter may not vote on it and he may not be counted
towards the quorum unless the articles specifically provide to the contrary.
f) Minutes:
The directors must have the minutes of proceedings at their meetings entered in a minute book and such minutes should
be signed by the chairman at the meeting.
5) CONTROL OF DIRECTORS BY MEMBERS

Nowadays it is contended that the usual provision in the articles, that the managerial powers of the BoD are subject to
such regulations as may be prescribed by the company in GM is without effect. Commentators therefore allude to the
doctrine of supremacy of the AOA.
However, where powers are vested concurrently in the GM and BoD, the final say would vest with the GM. Moreover, the
Gm has final say over the BoD in that it can always resolve to remove the directors from office (see s 185 of the companies
Act) or decline to re-elect the board. The new BoD will possess the same independent powers as the previous BoD unless
the article is amended to the contrary.

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a) RESIDUAL AND DEFAULT POWERS OF GM

It can exercise powers not delegated to BoD. Irregular acts of directors which are not illegal, ultra-vires the company or in
fraud may be validated at the GM. Where there are no directors, or are incapacitated or unable to act the GM can act in
their stead.
b) EXCEPTIONAL POWERS OF GM
There are exceptions to the General rule that when certain matters are assigned to BoD by the articles, only the BoD has
powers to deal with the matters.
They are;
 When the BoD refuses or is unable to institute action on behalf of the company.
See: – Marshall’s Value Gear Co Ltd –vs. - Manning, Wardle & Co Ltd [1909] 1 Ch 267
- Danish Mercantile Co Ltd –vs. - Beaumont [1957] 1 All ER 925 (CA) 930
- Alexander Ward & Co Ltd –vs. - Samyang Navigation Co Ltd [1975] 2 All ER 424
 When the BoD cannot or will not exercise powers reserved for it – e.g. a deadlock among directors or quorum
cannot be obtained.
See: - Baron – vs. – Potter [1914] 1 Ch 895
- Foster –vs. - Foster [1916]1 Ch 532
 When powers are reserved for BoD, but the particular act is voidable because the BoD has exceeded or abused
its powers e.g. exceeding borrowing powers or an allotment of shares not bona fide for the benefit of the
company.
See: - Bamford –vs. - Bamford [1969] 1 All ER 969,
- - Hogg – vs. - Cramphorn [1966] 3 All ER 420 (Ch).
XIX. WINDING-UP OF COMPANIES

The principal source of law on winding up of companies is the Companies Act, the companies (winding up) rules and the
common law.
1) Modes of Winding up S. 212

1. By the court or
2. Voluntary, or
3. Subject to the supervision of the court

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2) Contributories
A contributory is every person who is liable to contribute to the assets of a company in the event of its being wound up
(see s. 214). A list of contributories should be prepared. Where a company is being wound up, every member present and
past shall be liable to contribute to the assets of the company to an amount sufficient for payment of its debts, liabilities,
and the costs, and charges of winding up (see s. 213).This will also include for adjustments of the rights of contributories
among themselves, subject to the some qualifications.
In the event of death Personal Representatives are liable (see s. 216) and in the event of bankruptcy the Trustee in
Bankruptcy is liable (see s. 217).
3) Qualifications
A past member is not liable if he had ceased to be a member over one year.
Past member not liable for debts contracted after he ceased to be a member.
Past member not liable unless court is shown that the existing members are unable to satisfy the contributions required
to be made by them.
Liability is however limited by member’s shares or guarantee if the company is limited by shares or guarantee respectively.
4) WINDING UP BY THE COURT

The high court shall have jurisdiction to wind up any company registered as such in Kenya (see s. 218). A company may
be compulsorily wound up by the court in the following instances (see s 219):
1) Company has by special resolution resolved that it be wound up by the court.
2) Where default is made on delivering the statutory report or holding of the statutory meeting (pursuant to s. 130).
3) Where the company does not commence its business within one year from its incorporation or suspends its
business for a whole year.
4) Number of members reduced below two or seven for private & others respectively.
5) Company is unable to pay its debts.
6) Court is of the opinion that it is just and equitable that the company be wound up.
7) For a company incorporated outside Kenya and carrying on business in Kenya winding up proceedings have been
commenced in the country of incorporation.
a) When is a company deemed unable to pay its debts? (See s 220)

 A creditor to whom the company owes more than Kshs: 1,000/- has served a written demand for payment on
the company by leaving it at the company’s registered office, and three weeks later, the company has neither
paid nor given the creditor a security which he finds acceptable.
 Execution issued on a court judgment in favour of a creditor of the company is returned unsatisfied in whole or
in part.
 It is proved to the satisfaction of the court that the company is unable to its debts as they fall due. The court
takes into the contingent and prospective liabilities of the company.

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b) What are the instances when the court can declare that it is just and equitable that the company
be wound up?
In considering whether it would be just and equitable to wind up a company, the court has enormous discretion. The
reason is that the position is purely a question of fact with each case depending upon its own circumstances.
Over the years the courts have wound up companies on the following grounds amongst others:
 That the substratum of the company has failed
 Where there is a deadlock in the management of a small company
 Where there is a justifiable lack of confidence in the management
 Where the company was formed for fraudulent purposes
c) Application to court for winding up (see s. 221)

An Application to court for winding up may be made by the company, creditor or creditors, contributory or contributories,
by all or of the above parties together or separately, others like the a-g (case under s. 170(2)) and the official receiver (if
petition is under groundsof s. 219) and official receiver and any person authorised in that behalf where a company is
‘wound up voluntarily’ or ‘subject to supervision
How?
Application shall be made by way of a petition accompanied by a verifying affidavit. Should be advertised in the Gazette
for 7 days before hearing. Advert should be in Form no. 6 or 7 (see rule 23). The heading of the petition and any other
documents in winding up proceedings should be in the Form no. 1 (see rule 8).The petition shall be in Form no. 3, 4 or 5
with such variations as circumstances may require (see rule 21) verifying affidavit shall be in Form no. 10 or 11 (see rule
25).
The petition shall be served upon the company and an affidavit of service filed. The affidavit should be in Form no. 8 or
9 (see rule 24).
d) Powers of court on hearing the petition (see s. 222)

The court on hearing the petition may:
a) Dismiss it
b) Adjourn the hearing conditionally or unconditionally
c) Make any interim order
d) Any other order that it thinks fit
e) Winding up order
e) Commencement of winding up (see s. 226)

For voluntary winding up it commences when a resolution is passed by the company before the presentation of a petition.
For winding up by court order it commences when the petition is presented.
f) Winding up order
The order shall be in Form no.17 (see rule 36).

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i. Effect of the order:

a) Any disposition of company’s property including things in action, transfer of shares, alteration of member’s
status made after the commencement of winding up is void unless the court orders otherwise (see s. 224).
b) Any attachment or execution against the company after commencement of winding up is void (see s. 225).
Consequences of the order
 A copy of the order is forwarded by the company to registrar for registration (see s. 227).
 No action shall be commenced against the company except by leave of the court (see s. 228).
 It operates in favour of all creditors and contributories as if made on a joint petition of both (see s. 229).
 See rule 37 on transmission and advertisement of winding up order which is largely the work of the official
receiver.
g) Official receiver (OR)

The court also appoints on official receiver for purposes of the winding-up (see s. 231). The OR is the officer attached to
the court for bankruptcy purposes but the court may in appropriate cases appoint another officer. (See s. 230).The director
and secretary to the company should after winding-up order is made submit a statement of affairs of the company in the
prescribed form (Form no. 21) to the OR,
It is verified by an affidavit, showing particulars of assets, debts and liabilities, names, postal addresses and occupations
of creditors, the securities held by them, dates when securities were given and any information that may be prescribed or
the official receiver may require (see s. 232).
After the statement of affairs, the official receiver should submit his report. The report shows the amount of capital
issued, subscribed and paid and the estimated amount of assets and liabilities and if the company has failed, the causes
of the failure and whether in his opinion further inquiry is desirable to any matter relating to the promotion, formation
or failure of the company or the conduct of the business thereof (see s. 233 (1)).
The OR may make a report where he thinks fraud was committed in the formation of the company. Such report must go
for public examination (see s. 233 (2) and rules 53-59).
h) Liquidator
The court may further appoint a liquidator and may appoint the official receiver to be the provisional liquidator after
presentation of a winding-up petition and before the making of a winding-up order (see s. 234 & 235).
The official receiver becomes the provisional liquidator when a winding up order is made (see s 236(a)).
He should summon separate meetings of creditors and contributories of the company to determine whether or not an
application is to be made to court to appoint a liquidator in place of official receiver (see s. 236(b)).
The order for appointment of a liquidator shall be in Form no. 22 (see rule 47(2)(a)).
The appointment has to be notified to the registrar in form no. 24 (see s. 237 and rule 47(5)).
See s. 241 for the vast powers of the liquidator which must be sanctioned by the court or committee of inspection.
The liquidator should summon a general meeting of creditors or contributories or committee of inspection for purpose
of ascertaining their wishes by resolution either at the meeting appointing liquidator or at other time. The liquidator
should have regard to the directions of creditors or contributories at any general meeting or by the committee of
inspection. However, if the directions conflict, the one of creditors and contributories should prevail (see s. 242).

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i) Committee of inspection (COI)

In the separate meetings of creditors and contributories under s. 236(b) summoned by OR to determine whether or not
an application should be made to court for appointing a liquidator in place of OR, they may determine whether or not an
application is to be made to court for appointment of a committee of inspection to act with the liquidator.
They also determine who shall be the members of the COI (see s. 248). See s. 249 on constitution and proceedings of the
COI.
See sections 251- 269 on the general powers of the court in a winding up by the court.
Appeals lie to the Court of Appeal (see s. 270)
5) VOLUNTARY WINDING UP
This can be either a members’ voluntary winding-up or a creditors’ voluntary winding-up.
a) Creditors’ voluntary winding-up

Although somewhat inappropriately termed a voluntary winding-up by creditors, this type of winding-up is initiated solely
by resolution of members. A creditors’ voluntary winding-up is initiated by a special resolution, just like the members’
voluntary winding-up (see s. 271)
The resolution should state whether it will be a voluntary winding-up by members or creditors. The company must give
notice of the voluntary winding-up resolution in the official gazette within fourteen days after the resolution (see s. 272).A
voluntary winding-up commences when the resolution for voluntary winding-up is passed (see s. 273).
i. Consequences of commencement of voluntary winding up

The company ceases to carry on its business, except for purposes of winding-up (see s. 274).
Any transfer of shares not sanctioned by the liquidator is void (see s. 275).
ii. Declaration of Solvency

Directors make a declaration of solvency in form no. 27 to the effect that the company will be able to pay its debts in full
within 12 months from commencement of winding up (see s. 276(1) and rule 50). It should be made within 30 days before
passing of resolution and should be filed with registrar for registration before that date.
The company should call a meeting of creditors on the day or the day following the day when the resolution for winding-
up is to be proposed and notice of meeting of creditors and that of company should be sent by post simultaneously. The
notice of creditors’ meeting should be put in the gazette (see s. 286(1) and (2)).
The directors should table a statement of the company’s affairs, together with a list of creditors and estimated amount
of their claims before the creditors (see s. 286 (3)).
The creditors and the company in their respective meetings appoint a liquidator. If they appoint a different person the
one appointed by the creditors prevails (see s. 287). Appointment should be notified to registrar in Form no. 29 (see rule
51(1)). The liquidator should put notice of his appointment in the Gazette in Form no. 108(8) (see rule 51 (2)).
The powers of directors cease on this appointment (see s. 290).
The creditors, either in that first meeting or any subsequent meeting, if they think appropriate, appoint not more than
five persons to be members of a committee of inspection (see s. 285).
If the winding-up exceeds one year, the liquidator should call a general meeting of the company and creditors every year
(see s. 293).

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Once the affairs of the company are fully wound-up the liquidator makes an account of the winding-up and calls a general
meeting of the company and creditors for purpose of laying the account before the meetings and giving any explanation.
Each meeting should be advertised in the gazette at least 30 days before the meeting.
Within 14 days after the date of the meetings or after the later meeting where they are not held together, the liquidator
should deliver a copy of the account to the registrar and make a return of the meetings and of their dates.
On receipt of the account and returns by the registrar, he registers them and the company is deemed dissolved three
months from the date of the registration (see s. 294).
b) Members’ Voluntary Winding-Up

A members’ voluntary winding-up is a procedure that precedes the dissolution of a company able to pay its debts. No
creditor suffers any loss and therefore creditors have no say in the winding-up procedure. The initiative remains with the
members’ meeting throughout the procedure; the procedure is simpler and faster than other types of winding-up and is
subject to less limitations. As the rights of creditors are sufficiently protected, no meetings of creditors are held. A
members’ voluntary winding-up is initiated by a special resolution, just like the creditors’ voluntary winding-up (see s.
271)
The resolution must state whether it will be a voluntary winding-up by members or creditors. The company must give
notice of the voluntary winding-up resolution in the official gazette within fourteen days (see s. 272). A voluntary winding-
up commences when the resolution for voluntary winding-up is passed (see s. 273).
i. Consequences of commencement of voluntary winding up

The company ceases to carry on its business, except for purposes of winding-up (see s. 274).
Any transfer of shares not sanctioned by the liquidator is void (see s. 275)
ii. Declaration of solvency

Directors make a declaration of solvency in form no. 27 to the effect that the company will be able to pay its debts in full
within 12 months from commencement of winding up (see s. 276(1) and rule 50).
Should be made within 30 days before passing of resolution and should be filed with registrar for registration before that
date.
The company in a general meeting appoints a liquidator for purposes of winding-up the affairs of the company.
Appointment should be notified to registrar in Form no. 28 (see s. 278 (1) and rule 51 (1)). The liquidator should put notice
of his appointment in the Gazette in Form no. 108(8) (see rule 51 (2)). Upon such appointment the powers of directors
cease (see s. 278 (2)).
If the liquidator is of the opinion that the company is insolvent he should notify the registrar and summon the meeting
of creditors. At the meeting he should lay a statement of assets and liabilities of the company in Form no. 30 (see s. 281
and rule 52).
If the winding-up exceeds one year, the liquidator should call a general meeting at the end of every year from the date of
commencement of winding-up.
At the meeting he should lay before it an account of his acts and dealings and the conduct of the winding up in the
preceding year (see s. 282).
Once the affairs of the company are fully wound-up, the liquidator makes an account of the winding-up and calls a final
general meeting by Gazette notice for purpose of laying before it the account and giving an explanation thereof (see s.
283 (1)).
The meeting should be advertised in the gazette at least 30 days before the meeting (see s. (283) (2)).
Within 14 days after the meeting the liquidator should deliver to the registrar a copy of the account and should make a
return to the registrar of the holding of the meeting and of its date (see s. 283 (4)).

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On receipt of the account and returns by registrar, he registers them and the company is deemed dissolved three months
from the date of the registration (see s. 283 (4)).
Read sections 295-303 on matters applicable to every voluntary winding up.
6) WINDING UP SUBJECT TO SUPERVISION OF THE COURT

Read sections 304-308 which provide for winding up subject to supervision of the court. Read sections 309-317 on matters
applicable to every mode of winding up.
S.304 Once a Company has passed a resolution for Voluntary Winding up, the court may make an order that the voluntary
winding up shall continue but subject to such supervision of the court on such condition as the court thinks just, with
liberty for any party to apply to court. When making such orders, the court may appoint an additional Liquidator(s).
Proceedings under the Act or the Rules shall NOT be invalid by reason of a formal defect or an irregularity, unless the
court is of the opinion that substantial injustice would be caused by the defect or irregularity and the injustice cannot be
remedied by any order of that court (see rule 202).
All the proceedings in court over which the court has jurisdiction under the Act or the Rules, where no other provision is
made by the Act or these Rules, the practice, procedure and regulations in such proceedings shall, unless the court
otherwise directs, be in accordance with the rules and practice of the court (see rule 203).
NB: Once again the students are urged to seriously read the companies (winding up) rules for the reason that the rules
have a lot of other procedural aspects that cannot be exhausted in the lectures.

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B. CHAPTER 2 - PARTNERSHIPS
I. DEED OF PARTNERSHIP
Although there is no need to have a formal partnership agreement, the vast majority of partnerships do draw such an
agreement up. It is important to recall that a partnership can be created informally and that people can be partners even
without realising it. Partnership is based on a contractual agreement and therefore a partnership is only created if all the
requirements of a contract are fulfilled.
There must be an offer, acceptance, an intention to create legal relations and consideration. The contract must not be void
for mistake or illegality and it might be rendered voidable by misrepresentation, duress or undue influence. The contract
might become frustrated if it becomes impossible to perform, or illegal to perform, or if it can be performed only in a
manner which is radically different from what the parties contemplated when they made it. Where the terms of the
agreement are not expressed by the partners they might either be implied by the Partnership Act or implied as a matter
of general construction of contracts {Law of Contact}. Formal partnership agreements are often known as articles of
partnership. Such agreements are commonly set out as a deed although there is no requirement that they should be.
There are 13 or so matters that should be dealt with by almost any formal partnership agreement. We therefore make a
brief consideration of these 13 ‘universal’ articles.
1) The parties to the agreement

The agreement should clearly set out who is partner and who is not. However, as we saw in Saywell vs. Popethe final
decision as to whether or not a person is a partner can only be made in the light of all the evidence.
2) The nature of the business

There are three fundamental reasons why it is important to clearly set out the nature of the partnership business. First,
partners are agents of the firm and of their fellow partners for the purposes of the firm’s business, but not for other
purposes. Second, there is a fiduciary duty preventing partners from carrying on a business which competes with the
business of the firm or is of the same nature as the business of the firm. Third, having been defined, the nature of the
partnership business can only be varied with by the consent of all the partners.
3) The name of the firm

The name of the firm should be clearly identified. Partners commonly choose to be known by their collective surnames,
although they can in general choose to be known by any other name.
There is no requirement to register the firm’s name. In the process of choosing and registering a name the name should
not be similar to other business names {NB: the register of company and business names is central}, should not use the
name ‘limited’ {under the Companies Act} or names which suggest connection with Government or with local authority.
The name should not be designed to deceive the public by causing confusion with another business. If that happens an
action for the tort of passing off might be brought. If successful an action could result in an injunction preventing further
use of the name and/or payment of damages.

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4) Dates of commencement and dissolution

A formal partnership will almost always state the date on which partnership is to commence. However, as we see in
Saywell vs. Popethis is not conclusive evidence as to whether or not the partnership did in fact commence on that date.
The date at which a partnership commenced is a matter of fact, which will be determined by examining all the evidence.
However, the fact that a partnership agreement states a date of commencement is likely to be very strong evidence of a
partnership having existed from that date.
A formal partnership agreement might or might not give a date on which the partnership is to end. If such a date is
specified then the partnership can only be ended in advance of that date by one of the matters specified in the Partnership
Act or by a court order.
So if a date for dissolution is fixed, no single partner will be able to dissolve the firm by giving notice before that date. If
no date for dissolution is fixed, the partnership is known as a partnership at will and any of the partners can dissolve the
firm by giving notice.
5) The capital of the firm and of the individual partners

All the partners are entitled to share equally in the capital and the profits of the business and must contribute equally
towards the losses, whether of capital or otherwise sustained by the firm.
This presumption that partners will contribute capital equally and be entitled to equal repayment of capital on dissolution
is very commonly varied. In many partnerships one partner provides the capital while the others provide business skills.
For the sake of certainty, the partnership agreement should spell out clearly the intentions of the parties.
As well as dealing with capital contributions the agreement should make it plain whether property which is used by the
firm is partnership property or remains the property of individual partners.
6) The salary and profit entitlement of the partners

Very commonly the partners do not share equally in the profits of the firm. We have already seen that profits and losses
are to be shared equally unless the partners agree otherwise.
The partnership agreement is the most appropriate place for unequal share in profits to be spelled out. Sometimes the
partnership agreement provides for the payment of a notional salary to a partner. This is really no more than a way of
distributing the profits amongst the partners and does not make the recipient an employee.
7) The management of the business

Every partner is entitled to take part in the management of the partnership business. This is applicable if no contrary
agreement is expressly or impliedly made. It is possible to have a dormant or sleeping partner who has no right to manage
the business.
The agreement should set out the duties of the various partners, how majority decisions should be taken and whether or
not some partners are excluded from the right to do certain things. It is commonly the case that partners do not have
equal voting or management rights.
If a partner is excluded from the management of the firm without having agreed to this, the courts will regard this as a
reason to dissolve the firm.
8) Banking arrangements and the right to draw cheques

The partnership agreement should name the firm’s bank and specify whether or not individual partners have the right to
draw cheques on the partnership account.

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It is commonly agreed that the signatures of two partners are required on cheques to the value of more than a specified
amount. The bank will not be bound by the partnership agreement but has duty to obey the mandate given by the
customer.
Therefore if the provisions of the partnership agreement are reproduced in the mandate given to the bank, the bank will
not be entitled to debit the firm’s account if the provisions of the partnership agreement are not observed.
9) The firm’s accounts

The agreement will generally arrange for the accounts to be drawn up on certain dates. By reference to these accounts the
partners will know how they stand as regards each other and the firm will know how it stands as regards outsiders.
10) Admission and expulsion of partners:

The agreement should set out the grounds on which a partner can be expelled from the partnership. It is also sensible to
set out the circumstances in which new partners can be admitted.
If there is no express or implied agreement to the contrary, a new partner can only be admitted by the consent of all the
existing partners. Very often the partnership agreement does provide otherwise, so that a new partner can be admitted
without the consent of all the existing partners.
11) Death or retirement of partners:

The Act provides that the death of a partner dissolves the firm unless the partners agree otherwise. It would be usual in
a commercial firm for the partnership agreement to provide that the firm should be carried on after the death of a partner,
and to provide a right for a partner to retire from the firm after giving a stated period of notice.
In addition, it is important to set out the financial arrangements to be applied when a partner dies or retires. The
partnership agreement might also contain a restraint of trade clause preventing a partner from competing with the firm
after retirement.
12) Valuation of the goodwill

The agreement should set out how the goodwill should be valued and the entitlement in respect of the goodwill of partners
who die or retire. See 15.9.5 of Ewan Macintyre Business Law text.
13) Arbitration
One of the most important provisions of a partnership agreement is that disputes should be referred to arbitration. If
there is no such provision then disputes between parties could become the subject of litigation. The publicity which this
might generate could be very damaging to the firm, and perhaps to the future prospects of the partners as individuals.

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14) Other important matters that should be considered are:
a) Variation of partnership agreement:
b) Numbers of partners:
c) Capacities of partners:
II. REGISTRATION
A partnership is normally easy to register as it is normally registered as a business under The Registration of Business
Names Act cap 499.The deed of partnership itself is not registered as it merely regulates the relationship between the
partners.
1) The registration is carried out as follows:

 The first step is to identify the name with which the business is to be registered.
 Then an application must be made to the registrar-general to have the name reserved and if the name is available
it is reserved for thirty days.
Once the name is reserved then the partners must file the statement of particulars which is in the prescribed form no.
BN/2 which stipulates inter alia:
 Business name
 Nature of business
 Date of commencement
 Address of the principal place of business (Plot No., Section and Name of Street or Road)
 Postal address
 Address of any other place of business
 Particulars of proprietor or partners
NB: if for some reason all the partners are unable to sign the statement, it can still be filed but it must be accompanied
by a statutory declaration provided under it.
III. CHANGE OF PARTNERS

The proprietorship of a partnership may change. This would happen where new partners are admitted or existing partners
exit or both events occurring. Where there is change of partners the proprietors are required to file a notice of change
under s.9 of The Registration of Business Names Act cap 499.
The notice of change should normally be in the prescribed form no. BN/4 and importantly the following must be observed:
 Where a business is transferred to a new partner taken in, full particulars of the new proprietor have to be shown.
 The original Certificate of Registration should accompany this notice.
 This notice must be signed by the proprietor or by all partners, as the case may be. A director or the secretary
can sign for a corporation which is the proprietor or a partner.

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IV. DISSOLUTION AND WINDING-UP

When a partnership is dissolved it comes to an end. Often this can be little more than a technicality.
A firm is dissolved each time there is a change in the membership, although in a commercial firm the remaining partners
are likely to carry on in very much the same way as before.
This will involve the firm’s assets being realised, creditors being paid off and any remaining surplus being divided amongst
the partners.
1) DISSOLUTION
A partnership may be dissolved in any one of the following ways:
a) Dissolution by partners
A partnership arises on account of a contract having been made by the partners. The general common law of contract
might allow one or more of the partners to terminate the contract. For instance, all the partners might make a new contract,
agreeing to end the partnership or a formal partnership agreement might set out the circumstances on which the
partnership can be ended.
In addition, a partner can rescind the contract if he made it in consequence of misrepresentation, and a partner may apply
to the court to terminate the contract if the other partners commit a repudiatory breach of contract.
Further, if a partner is expelled then the firm is dissolved. Although this might be little more than a technicality in a large
firm, if there are only two partners the expulsion would lead to winding up of the firm.
b) Dissolution under a provision of the Act

The Partnership Act proclaims that a partnership is dissolved in the following circumstances:
 Subject to any agreement to the contrary between the partners, a partnership is dissolved if: entered for a fixed
term, by the expiration of that term; if entered into for a single adventure, it dissolves upon accomplishment of
that adventure and if entered for an undefined time, any partner may give notice to the other partners of his
intention to dissolve the partnership (see s.36).
 Subject to any agreement between the partners every partnership is dissolved by the death or bankruptcy of any
partner (see s.37 (1)).
 At the option of the other partners, a partnership may be dissolved if any of the partners suffers his share of
partnership property or assets to be charged for his personal debts (see s.37 (2)).
 If an event happens which makes it unlawful for the business of the firm to be carried on or for the members of
the firm to carry it on in partnership (see s.38).
c) Dissolution by court order

Under s.39 on the application by a partner, the court may order dissolution of the partnership in any of the following
cases:
 Partner is adjudged lunatic or shown to be permanently of unsound mind.

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 Partner other than one making the application becomes permanently incapable of performing his part of
partnership agreement.
 Partner other than one making the application is guilty of such conduct in the opinion of the court which is
calculated to prejudice carrying on business of the firm.
 Partner other than one suing wilfully and persistently commits breach of partnership agreement or partner
conducts himself in such a manner as to make it not practicable to continue carrying on business with him.
 When it is proved that the business of that partnership may only be carried out at a loss.
 When circumstances have arisen which in the opinion of the court, render it just and equitable that the
partnership be dissolved.
NB: the court can dissolve a partnership under Mental Health Act. This is where the court is satisfied that that a partner
is, by reason of mental disorder, incapable of managing his property affairs.
2) WINDING UP
After the dissolution of a partnership the authority of each partner to bind the firm and the other rights and obligations
of the partners may continue. However, this authority continues only to the extent that it may be necessary in order to
wind up the affairs of the partnership and to complete the transactions that begun but are unfinished at the time of
dissolution (see s.42).
a) Realisation of the firm’s assets

Under s.43 upon dissolution of a partnership, the assets of the partnership must be applied in this order:
 To discharge debts and liabilities of the firm.
 The surplus assets should then be shared between the partners.
 Before sharing of surplus, what is due to a partner must be charged with what that partner owes to the firm e.g.
contribution to the deficiency of the capital.
b) Options available where a partner has died

Where before dissolution a partner has died, the partnership has got two options:
 The partnership may settle the accounts at that stage by calculating what is due to the estate of the deceased and
paying it out.
 If the accounts are not settled that way, until the partnership dissolves, the estate of the deceased or personal
representative will be entitled to share the profits of the partnership or surplus that remains after settlement of debts
and liabilities
Sometimes partners may enter into an agreement that in the event of death, the surviving partners will have the option
of purchasing interests of deceased partner. In that case the estate of the deceased will not be entitled to further claim
upon dissolution of the partnership.
c) Rules for final settlement of accounts

Under s.48, in settling accounts after dissolution of partnership the following rules shall subject to any agreement be
complied with;

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The losses including losses out of capital must be paid first out of profit. If the profits don’t satisfy losses, they may be
paid out of capital.
If losses are still unsettled every partner will be liable to contribute in proportion in which a partner was entitled to share
profits.
The assets of the firm including any contributions made by partners for settling losses as above shall be applied in the
following manner and order.
 To pay debts and liabilities owed by the firm to 3rd parties.
 If any partner may have made advancements to the firm, he will be paid at an interest of 6% p.a.
 Paying each partner whatever is due to him from the firm in respect of capital.
 If after the above payment there is any surplus, the same shall be shared out between partners in proportion in which
they were entitled to share profits.

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C. CHAPTER THREE - SALE OF GOODS AND AGENCY
I. INTRODUCTION TO COMMERCIAL LAW

Commercial law is the branch of law that is concerned with rights and duties arising from the supply of goods and
services in the way of trade. Its scope is not clearly defined and no two text books adopt the same approach as to the
spheres of commercial activity that ought to be properly included in a work on the subject. There is in fact doubt by some
as to whether commercial law is a subject at all, but rather an amalgamation of distinct subjects such as sale, negotiable
instruments, etc.
1) PRINCIPLE SOURCES OF COMMERCIAL LAW
a) CONTRACT
The foundation on which commercial law rests is the law of contract. Commercial transactions are specific forms of
contract. While each type of commercial contract is governed by rules peculiar to that type, all are subject to the general
principles of contract law except to the extent to which these have been displaced by statute or mercantile usage.
The general principle relate to the well-established rules relating to offer, acceptance, consideration, capacity to contract,
intention to create legally binding obligations, formalities, vitiating factors, breach and remedies etc.
b) EXPRESS AND IMPLIED TERMS GENERALLY

When considering the law making capacity of parties themselves one must avoid the assumption that they have necessarily
negotiated each individual term. Certain basic terms will of course be bargained in almost every transaction such as the
subject matter of the transaction and the price to be paid for it. Many commercial contracts are indeed hammered out by
the parties term by term, and can be truly said to represent their own creation, to which they may be assumed to have
addressed their minds. But a large number of commercial agreements are standard term contracts and are not individually
negotiated.
It would be impossible for business to cope with the enormous volume of bargains conducted daily if every term in every
agreement, no matter how consistent the pattern of business had to be negotiated step by step. The standard term contract
is thus an essential feature in business life, and depending on the scale of business the standard term contract may be
made by the businessman, his lawyer or trade associations etc
This however does not alter the fact that the parties to the contract in adopting the standard terms, are making their own
law, and such model contracts perform an increasingly valuable function as traders become familiar with them. Frequently
parties do not set out all the terms in the contract itself but find it convenient to incorporate terms by reference to a
variety of other documents e.g. standard contract terms published by an independent body or group of institutions, a
model code of practice or usage, a set of standard terms or definitions. Therefore the law extends what is considered to
constitute a consensual undertaking to embrace not only express terms, terms incorporated by reference and terms
implied in fact or from prior course of dealing, but also rights and duties implied by law or mercantile usage.
c) UNCODIFIED CUSTOM AND USAGE

Of great importance as a source of obligation in commercial contracts are the unwritten customs (a rule of a particular
locality) and usages (a settled practice of a particular trade or profession) of merchants. These have an impact on the
content and interpretation of contract terms. It is this feature that distinguishes commercial from other types of contracts.
This means that over time a practice that is accepted by businessmen but which the court has not recognized can become
binding and given force.

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In fact in some jurisdictions the binding force of mercantile usage does not depend on adoption by contract, but in theory
of English law a usage takes effect as an express or implied term of the contract between the parties. It is dependent for
its validity on satisfying certain external legal criteria:
 Certainty
 Consistency of practice
 Reasonableness
 Notoriety
 Conformity with mandatory law
 It must be observed from a sense of a legally binding obligation, not as a matter of mere courtesy or
convenience or a desire to accommodate a customer’s wishes
d) CODIFIED CUSTOM AND USAGE

It is in the nature of unwritten custom or usage that it’s meaning and content may be understood differently by different
people. Indeed the very existence of an alleged usage may be challenged. To address such concerns national and
international bodies and associations find it convenient to formulate the relevant usages in a published code or set of
rules which state or restate best practices. Members would then be required to adhere to them as a condition of
membership, and by incorporation into individual contracts. Codified customs and usage also depend on their operation
on express or implied adoption in the contract.
e) DOMESTIC AND INTERNATIONAL LEGISLATION

Increasingly the law has intervened in commercial activities and relations through legislation such as the Sale of Goods
Act. While there remains substantial scope for free bargaining between the parties to a commercial transaction, the
parameters within which they are at liberty to make their own law are steadily shrinking. It is therefore important to bear
in mind the diminishing role of the common law in defining contractual obligations and the growing impact of enacted
law and government intervention and international obligations( such as International Conventions(CISG) , transnational
commercial law and Model laws).
2) IMPORTANT PRACTICAL INDICATORS ON CONTRACT MAKING AND

INTERPRETATION
a) THE PROBLEM OF LANGUAGE

Much of the work of the courts is taken up with the construction of contracts and statutes. Those whose business it is to
work with words soon acquire an appreciation of the limitations of language. The meaning of a word depends on the
context in which it is used and the purposes it is to achieve. Contrary to popular belief words are not always made clear
by definitions and sometimes these can even obscure rather than clarify meaning.
Words should be construed in a manner as to give effect to the intention of the parties and that of the law (It is suggested
that further reading should be done by those who want to refresh knowledge in this area). Therefore in as far as is possible
one should use regular words that are understandable by both parties.
b) CONTRACT MAKING
It is advisable that contracts are made in writing, and the law requires that some types must be in writing to have capacity
to confer rights and obligations. Contract of sale of goods should specify the parties, item subject matter of contract,
quantity of goods, delivery dates, warranties or guarantees or lack thereof, arbitration and termination clauses amongst
other terms. Contracts must be properly negotiated and reviewed to ensure that it meets the intention of the parties, and
make expectations clear- define terms and ensure there is no ambiguity.

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Some types of business already have set language for contract making and these can be adopted or adapted. Contract of
sale of goods should specify the parties, item subject matter of contract, quantity of goods, delivery dates, warranties or
guarantees or lack thereof, arbitration and termination clauses amongst other terms.
Contracts must be properly negotiated and reviewed to ensure that it meets the intention of the parties, and make
expectations clear- define terms and ensure there is no ambiguity. Some types of business already have set language for
contract making and these can be adopted or adapted.
c) COMMERCIAL CONTRACTS
A Commercial contract is one entered into between merchants acting for business purposes, and also contracts entered
into by merchants and non-merchants. Repeat transactions between the same parties are a common feature of commercial
life so that contract terms not expressly stated will be readily implied from a prior and consistent course of dealing
between the parties. Commercial contracts are not homogenous, each type of commercial contract has rules peculiar to
that type which are superimposed on the principles and rules applicable to commercial contracts at large, and below them
on the general principles of contract law.
Contracts for sale of goods, for example, are subject to rules not applicable to other types of commercial contracts.
Likewise, contracts of insurance, carriage of goods, finance etc. each possess distinct rules tailored specifically to the
nature and purpose of the contract. In terms of contract type and structure, when two parties decide to transact they can
achieve their objective through a variety of contract types.
The legal nature of the relationship and structure to be adopted will depend upon the particular type of contract selected.
Examples:
B wishes to acquire goods from S without having to make a lump sum payment while S does not wish to give up all the
rights to the goods until he has received payment in full. There are several different ways in which these dual objectives
may be attained:
S could contract to sell the goods to B under a conditional sale agreement that is an agreement providing for payment of
the price by installments and the retention of the title by S until completion of payment. Alternatively S could sell the
goods to be outright under a contract providing for payment by installment and B charging the goods to S by way of
security for payment, or through hire purchase terms etc. Usually the factors which will influence the choice of contract
type and structure will usually be influenced by commercial necessity or convenience or legal considerations.
II. SALE OF GOODS
1) Specific Objectives under Sale of Good Are:

 Knowledge of relevant statues and common law.
 ability to draft contract documents such as sale agreement and agreement to sale
 knowledge and ability to apply principles of construction to specific agreements
 knowledge of international sale of goods termsand documentation such as CIF, FOB, insurance and taxation
 Knowledge on documentation relating to auction sales.
2) PRINCIPLES SOURCES OF SALE OF GOODS TRANSACTIONS

Sale of goods is covered in various pieces of legislation depending on the focus of the law, for example, consumer
protection, hire purchase etc. The focus of this topic will however be sale of goods as covered in the Sale of Goods Act
CAP 31 of the laws of Kenya. The principle sources are therefore:
1. National legislation -Sale of Goods Act Cap 31
2. Law of contract- general principles of contract law and case law except to the extent where these have been
displaced by statute or mercantile usage
3. Express and implied terms of contract generally

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4. Custom and usage codified and uncodified
5. International legislation
3) THE DEFINITION OF SALE OF GOODS CONTRACT

A contract of sale of goods is defined in Section 3 (1) of Cap 31 Laws of Kenya. “A Contract of sale of goods is a contract
whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called
the price.”
A sale implies that the transfer is immediate –“where the property in the goods is transferred from the seller to the buyer”
,whereas agreement to sale implies that transfer is delayed- “where the transfer of the property in the goods is to take
place at a future time , or subject to some condition thereafter fulfilled”. An agreement to sell becomes a sale when (a)
the time elapse or (b) the conditions are fulfilled subject to which the property in the goods is to be transferred.
4) Sale of Goods Act Cap 31 Laws of Kenya Section 3 (4)

“Where under a contract of sale the property in the goods is transferred from the seller to the buyer the contract is called
a sale; but, where the transfer of the property in the goods is to take place at a future time or subject to some condition
thereafter to be fulfilled, the contract is called an agreement to sell.”
a) Section 3(5)
“An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property
in the goods is to be transferred.”
The seller transfers or agrees to transfer the property in goods to the buyer. It should be noted here that what is
transferred is the general property in the goods, which is used by lawyers to signify title or ownership (however this issue
is to be dealt with in detail under the transfer of property).
The sale of goods law sees items from two different perspectives or goods composed of 2 major components. You have
property in goods i.e. the title in goods and the physical aspect which are two different things.
Goods are different from property. E.g. If you have borrowed a shirt, you have possession but not property or title.
Ownership could be with one person whereas control is with somebody else. When we talk of goods we are talking of the
tangible aspect and when we talk of property we are talking of ownership. In the definition it is said that it is a contract
by which the seller or the offeror transfers or agrees to transfer the property to the buyer or offeree. A contract of sale
of goods does not deal with the tangible, it deals with property. You do not transfer goods, you transfer property, and
you deliver goods and transfer property. Once the property has been transferred then the buyer must pay a consideration
in your ordinary contract and in this case the consideration must be in money. Money consideration is called the price.
In a sale of goods contract, the beacons are that the seller agrees to transfer the property for money consideration called
the price.
5) SALE DISTINGUISHED FROM OTHER CONTRACTS

Provisions of Cap 31 apply only to a Sale of Goods Contract. There are 8 transactions that resemble Sale of Goods contract
but are not a sale of goods contract.
1. Contract of Barter or Exchange.
2. Contract of Gifts
3. Contract of Bailment

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4. Contract of Hire Purchase
5. Contract of Loan on Security of goods
6. Contract of Supply of services
7. Contract of Agency
8. Contract of Licences of intellectual property such ‘sales’ of computer software and patents.
The distinction is important because the results are critical to the resolution of disputes if they do go to court. Remedies
available are different for different types of contracts. However it should be noted that a contract may be partly a contract
of sale and partly something else. For example a contract for the provision of a meal in a hotel and construction of
machinery are contracts of sale, but in some sense they also involve the provision of services. The law relating to the
goods and the law relating to the services aspects of such a contract may differ.
a) Distinction between sale and exchange:

Section 3(1) provides that goods are to be transferred to the buyer for a money consideration, called the price. This serves
to distinguish a sale from a contract of barter or exchange in the ordinary case. How about where on the one hand the
goods are exchanged for goods plus money on the other hand, as in the case when a used car is traded in part exchange
for a new one- is it a contract of a sale or of exchange?
It has been suggested that it depends, inter alia, upon whether the money or the goods are the substantial consideration;
the intention of the parties so long as they do not include provisions manifestly inconsistent with the intended nature of
the transaction, so that where the parties envisage the transaction as a sale and use terminology more appropriate to a
sale, the contract would be held to be such even if the substantial consideration is supplied in goods rather than money
etc
b) Distinction between sale and gift:

in the ordinary sense there is no difficulty in distinguishing between a sale and a gift. A gift is a transfer of property
without any consideration, and is thus not binding while it remains executor unless made by deed. How about the case
where a free gift is offered on condition of entering into some other transaction? For example a free gift of a special coin
to anyone buying four gallons of petrol? It was held that although the garage was contractually bound to supply the coin
to anyone buying the four gallons, it was not a sale of goods contract, but in substance a collateral contract, existing
alongside the contract for sale of petrol.
c) Distinction between sale and bailment:

A bailment is a transaction under which goods are delivered by one party (the bailor) to another (the bailee) on terms
which normally require the bailee to hold the goods and ultimately to redeliver them to the bailor or in accordance with
his directions. The property in the goods is not intended to and does not pass on delivery, though it may sometimes be
the intention of the parties that it should pass in due course, as in the case of the ordinary hire purchase contract. A
contract of hire is one species of bailment.
d) Distinction between sale and hire-purchase:

contracts of hire purchase resemble contracts of sale very closely and indeed in practically all the cases of hire –purchase
the ultimate sale of the goods is the real object of the transaction. A sale is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer, whereas a hire purchase is a bailment of goods coupled with an
option to purchase goods which may or may not be exercised. Only if and when the option is exercised will there be a
contract of sale.

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e) Distinction between sale and loan on security:

Parties sometimes enter into or go through the motions of entering into, a contract to sell goods with the intention of
using the goods as a security for a loan. If the owner of goods A wishes to borrow money on the security of the goods,
he may charge or mortgage them to B on the understanding that A will retain possession of the goods, A will repay B what
he or she has borrowed together with interest, and B will have a right to take the goods from A if and only if A fails to
repay the loan or interest at the agreed time.
Such a transaction differs from a hire purchase contract which is designed to enable someone to acquire goods on credit.
A loan on security is designed to enable someone who already owns goods to borrow money on the security of the goods.
f) Distinction between sale of goods and supply of services:

Traditionally, the law has distinguished between contracts for the supply of services and contracts for the sale of goods.
Contracts which are often sub-divided, for instance into contracts for labour and skill, or contracts for labour and
materials, according to whether the supplier was providing services only, or materials as well. The law in this area is quite
problematique and therefore to avoid too much debate it can be summarized as under the test for deciding whether a
contract falls into the one category or the other is to ask what is the substance of the contract. If the substance of the
contract is the skill and labour of the supplier, then the contract is one of services, whereas if the real substance of the
contract is the ultimate result, the goods to be provided, then the contract is one of sale of goods. Hence a contract for
the painting of a picture is a contract for services-the skill of the artist is clearly more important than the incidental fact
that the property in the completed picture will pass to the client. A contract for the construction of two ship’s propellers
is a contract of sale of goods. Similarly, a contract for the manufacture of a ship is a contract of sale of goods , but it is
not necessarily pure contract of sale: if the process of manufacture itself forms part of the contract, the contract in effect
consists of two sub parts(1)a contract under which the supplier is to make the ship-which is a contract for services, and
(2) a contract under which the supplier agrees to sell the completed ship-in effect, a contract of sale of goods.
Robinson V. Graves [1935] Vol. 1 KB P 579
The issue in this case was the distinction between sale of goods and supply of services. The contract here was one whereby
an artist agreed to paint a portrait of his client’s wife. It would appear that such a transaction should be regarded as one
of sale. In the event however this transaction was held as one for services and in reaching this conclusion, the court
sought to identify the prime purpose of the contract. In the often quoted words of LJ Greer: -
“If the substance of the contract … is that skill and labour have to be exercised for the production of the article and … it
is only ancillary to that that there will pass from the artist to his client or customer some material in addition to the skill
involved in the production of the portrait, that does not make any difference to the result, because the substance of the
contract is the skill and experience of the artist in producing the picture.”
This case lays down an elastic test of this nature for distinguishing contracts of sale from contracts for skill and labour,
and a similar approach may sometimes be justified here.
g) Distinction between sale and agency:

it is important to appreciate what seems like a clear distinction on the face of it because in certain types of cases
distinction may be a fine one by no means easy to draw. Where for example, A asks B, a commission agent, to obtain goods
for him from a supplier, or from any other source, and B complies by sending the goods to A, it may well be a fine point
whether this is a contract under which B sells the goods to A, or is a contract under which B acts as A’s agent to obtain
the required goods from other sources.

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h) Sale of contract distinguished from patents :

Items of intellectual property such as copyrights, patents and trademarks are not ‘personal chattels or corporeal movables
and so fall outside the definition of goods although goods may exist which embody these intellectual property rights. In
modern times, an important point, not yet wholly resolved, is whether computer software may constitute ‘goods’ within
the meaning of the Act. Software is normally embedded in some physical form, such as disks or as part of a package in
which it is sold along with computer hardware, that is computer or computer parts. It is protected as a literary work by
the law of copyright.
Usually only the medium in which the software is embedded, e.g. a disk is sold. The copyright in the software remains in
the software house which developed it. The software house licences the user to make working copies of the disks and to
load the software into a computer, acts which otherwise would be infringements of copyright. Software can also, of
course, be delivered on-line subject to licensing terms.
6) SUBJECT MATTER OF THE CONTRACT
a) MEANING OF GOODS
Goods are defined to “include all chattels personal other than things in action and money, and all emblements, industrial
growing crops and things attached to or forming part of the land which are agreed to be severed before sale or under a
contract of sale”. The definition is quite extensive and can potentially cover a lot of things, but nonetheless there are
things that do not fall within this definition. Definition covers most movables but doesn’t include land, shares, debts,
claims etc, which cannot be moved away. Money sold as curio or collector’s item qualifies but not when transferred as
currency.
Some of the things excluded are non–physical items such as company shares which are technically ‘things in action’ and
intellectual property such as copyrights patents and trademarks, although goods may exist which embody these
intellectual property rights.
b) THE POSITION OF COMPUTER SOFTWARE: DO THEY CONSTITUTE GOODS WITHIN THE

MEANING OF THE ACT?
Software is normally embedded in some physical form such as disks, or as part of a package in which it is sold along with
computer hardware that is computers or computer parts. It is protected as literary work by the law of copyright. Usually
only the medium in which the software is embedded e.g. disk is sold. The copyright in the software remains in the software
house which developed it. The software house licenses the user to make working copies of the disks and to load software
into a computer, acts which otherwise would be infringements of copyright. Software can also be delivered on line subject
to licensing terms.
The question as to whether or not a supply of computer software is a sale of goods, has to be answered by the English
Court of Appeal in Beta Computers (Europe) Ltd vs. Adobe Systems (Europe), where it was held that the supply of
proprietary software for a price was a single contracts sui generis though it contained elements of contracts such as sales
of goods and the grant of a license. It was an essential feature of such a contract that the supplier undertook to make
available to the purchaser both the medium on which the programme was recorded and the rights to access and use the
software.
In St. Albans City And District Council vs. International Computers Ltd, the Court of Appeal expressed the view that a
computer disk is within the definition of goods. A computer programme on the other hand is not goods. However when
a defective program is encoded and sold or hired on a disk, the seller or hirer of the disk will be in breach of the terms as
to quality and fitness implied by the Sale of Goods Act.
In Eurodynamics Systems Plc vs. General Autumation Ltd, 1988, Steyn, J expressed the view that the transfer of software
is a transfer of a product. He was emphasizing the fact that since the software is supplied on a physical medium, it should
be regarded as physical property like a book or a record. Lord Penrose criticized Lord Steyn approach on the basis that
the product was too complex to narrow the significant interests of parties to the simple matter of the medium by which
it was transmitted.

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Atiyah, P.S 2005, agrees and shares Lord Penrose view that rights should not depend on the medium of supply. However
he poses the question that in view of technological developments, original copyright works can be now delivered on line,
does that mean that the sale of goods laws will not apply and must be treated as sui generis? He illustrates using the
example of books, stating that we must distinguish the liability of the author from that of the shop and the publisher. If
the book is missing a page, or falls to pieces just after it is bought, the shop is clearly liable under the sale of goods act
quality warranties, and so is the publisher who sold it to the shop. On the other hand, neither is likely to be held liable in
respect of erroneous information in the reference book. He considers this to be useful starting point in considering the
liability of the various undertakings in the distribution chain of software.
Also Excluded: Distinction between the products of the soil or things attached to or forming part of the land and the land
itself or interests therein: the sale of sand from a quarry, for example, is not a sale of things attached to or forming part
of land, but a sale of an interest in the land itself such as a mining lease in so much as the tenant takes away things from
the ground.
c) CATEGORIES OF GOODS
i. Existing goods
These are goods that actually exist when the contract is entered into, these are goods that are owned or possessed by the
seller. Existing goods may be specific-meaning goods identified and agreed upon at the time a contract of sale is made,
for example this particular car or this particular load of potatoes or unascertained- which is not defined by the Act, but
they seem to fall into three main categories:
a) Goods to be manufactured or grown by the seller , which are necessarily future goods
b) Purely generic goods, for example, one thousand tonnes of wheat , which must be future goods, at least where
the seller does not already own sufficient goods of the description in question which can be appropriated to the
contract. It seems even where he has sufficient wheat but and such has been referred to in the generic sense,
until the wheat has been appropriated to the contract, the mere fact that the seller has sufficient goods for the
purpose seems to be irrelevant.
c) An unidentified part of a whole, for example, one thousand tonnes out of a particular load of two thousand
tonnes.
NB Atiyah comments that the distinction between these categories seems to be only a matter of degree, and in a particular
case it may be slight indeed. The failure of the Act to draw these distinctions has led to unfortunate results, such as, in
relation to b and c above, difficulties in connection with the passing of property, risk and in connection with the doctrine
of frustration.
ii. Future goods

These are goods yet to be produced or grown and don’t necessarily exist and are not in the possession of the seller. They
are basically:
a) Goods not yet in existence
(b) Goods in existence but not yet acquired by the seller
It is probably safe to say that future goods can never be specific goods within the meaning of the Act. Where by a contract
for sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods
sec7(3). The most important question in connection with future goods, the passing of property, will be dealt with later.

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a. Sale upon a Contigency

NB There may be a contract for the sale of goods the acquisition of which by the seller depends upon a contingency which
may or may not happen. If the contingency does not occur the contract will not become operative at all and neither party
is bound.
b. A Spes or Sale of a Chance

Sale of a spes, a chance must be distinguished from the contingent sale of future goods, though the distinction is not so
much as to the subject matter of the contract but as to its construction. It is thus possible for a person to agree to buy
future goods from a particular source and to take the chance or the risk of the goods never coming into existence. For
example a person may agree to buy whatever crop is produced from a particular field at a fixed price. Such a transactions
could be, as a matter of construction, amount to either (a) a contingent sale as above, or (b) an unconditional sale, where
the seller may absolutely undertake to deliver the goods, so that in effect he warrants that there will be a crop, in which
case, if there is no crop , he will be liable for non-delivery, or (c ) it may be a sale of a mere chance , that is the buyer may
take the risk of the crop failing completely, in which case the price is still payable.
An a spes arises where a potential buyer agrees to buy future goods from a particular source and agrees to take the risk
of the goods never coming into existence e.g. I agree to buy whatever crop is produced from plot ‘A’ of your land in Kitale
Town at a thousand shillings per bag. The buyer has offered to buy whatever crop is grown on that land and is taking a
chance because the crop might never get grown. It looks like a gamble and in a gamble one party stands to lose and one
party stands to gain. The buyer takes the risk and undertakes to pay the price of the non-existent goods. The seller
undertakes to produce and deliver the crop come rain come shine. So there is no winner and no loser. If the goods do
not get produced on that piece of land, the seller is bound to deliver and he might have to go out and buy the goods
elsewhere because he must deliver. The buyer by undertaking to pay 1000 still has to pay 1000 even if the crop price was
to drop to 200 per bag because he has undertaken to do the same. It is a risk by the parties, the seller undertaking the
risk that the goods might never be produced and the buyer taking the risk that the price might depreciate in the meantime.
d) KEY TYPES OF GOODS

There are two key types of goods
 Specific/ascertained
 Unascertained/future goods.
The crux of Sale of Goods Contract is the passing of the property in the goods from seller to buyer. This can only happen
where the goods are specific but where goods are unascertained, property cannot pass. Pursuant to Section 18 of the Sale
of Goods Act where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the
buyer unless and until the goods are ascertained. Specific goods are goods which have been identified, agreed upon and
set aside by the parties for the contract and the goods can be specific either at the time the contract is entered into or
they can be made specific in the course of dealing.
For instance when talking of a motor vehicle, you will be talking about the engine number and the chassis number being
what you specified so only that vehicle is the specific goods subject of the contract. Only the property in specific goods
will pass. No other goods will do. Pursuant to Section 19(1) of the Act where there is a contract for the sale of specific or
ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to
be transferred and for the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the
contract, the conduct of the parties and the circumstances of the case. 29
29
Section 19(2) of the Sale of Goods Act Cap 31 Laws of Kenya.

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With regards to an identified part of a specific whole, the case of Kursell V. Timber Operators & Contractors Ltd will
be important. The Plaintiff in this case sold to the defendant all the trees in a Latvian forest which conformed to certain
measurements namely 15 meters on the date of the contract. The Buyer would have 15 years on which to cut and remove
the timber. Almost immediately afterwards, the Latvian Parliament passed a law confiscating the forest. The matter went
to court and went to the House of Lords primarily on one issue. Had the property in the trees passed from the Seller to
the Buyer or as one of the Judges did “whose forest and therefore the trees was confiscated by Parliament? Remember
he who has the property bears the risk. The court held as follows:
“The property in the goods had not passed to the defendant the buyer as the goods were not sufficiently identified since
not all the trees were to pass to the buyer but only those conforming to the stipulated measurements namely 15 metres.”
7) TRANSFER OF PROPERTY
In this context, property means and includes title, ownership. Transfer of Property involves some action by the parties
themselves. If there is a contract to be signed for ownership to pass from seller to buyer, then you sign and transfer.
In passing of property, the parties need not do anything. Basically this is ownership moving from seller to buyer by
operation of the law. It is inactive there is no direct participation of the parties. Property in the goods means ownership
in these goods.
a) The Practical Consequences of Transferring Property

a) If property has passed to the buyer the buyer has a title to them and even when the seller becomes insolvent
after the transfer, the fact that the seller is still in possession does not entitle the receiver in bankruptcy to touch
the goods. Where there are two legislations in conflict, ordinary legislation could mean that they have seen some
loopholes that need to be addressed so the latter takes precedent.
b) If goods are delivered subject to a reservation of a title or property (ownership) by the seller, then the buyer may
have good title to the goods should the seller become insolvent
c) The right to sue a third party for loss or damage to the goods rests in the person who has the property. The
owner is the one who can sue.
d) The risk whether of damage or loss prima facie passes when property passes. He who has property bears the
risk.
e) Once property has passed the seller can only sue for price. The seller cannot file a suit seeking to rescind the
contract.
b) PASSING OF PROPERTY
Exactly when property passes depends on whether the goods are specific or unascertained. 30 Section 19 of the Sale of
Goods Act provide that 19(1)“Where there is a contract for the sale of specific or ascertained goods, the property in them is
transferred to the buyer at such time as the parties to the contract intend to it to be transferred. 19(2) For the purpose of
ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the
circumstances of the case.”
30
Section 2 (1) of Cap 31

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Where the sale involves specific goods, property passes when the parties intend for property to pass. Section 19 is the
only section in Cap 31 that addresses local circumstances. Section 19 (2) of the Act on the other hand raises issues of
what to consider when trying to ascertain intentions of the parties.
Under Section 20 of the Act unless a different intention appears, the following rules apply for ascertaining the intention
of the parties as to the time at which the property in the goods is to pass to the buyer:
a) where there is an unconditional contract for the sale of specific goods, in a deliverable state, the property in the
goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the
time of delivery or both be postponed;
b) where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for
the purpose of putting them into a deliverable state, the property does not pass until that thing be done, and
the buyer has notice thereof;
c) where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh,
measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price,
the property does not pass until that act or thing be done, and the buyer has notice thereof;
d) when goods are delivered to the buyer on approval or “on sale or return” or other similar terms, the property
therein passes to the buyer:
i) when he signifies his approval or acceptance to the seller or does any other act adopting the
transaction;
ii) if he does not signify his approval or acceptance to the seller but retains the goods without
giving notice of rejection, then, if a time has been fixed for the return of the goods, on the
expiration of that time, or, if not time has been fixed, on the expiration of a reasonable time;
Section 20 (a) to (d) deal with Sale of Goods Contract where the goods are specific and there are other things to be done.
In (b) where goods are specific and the seller has to put them in a deliverable state, until this has been done and the buyer
notified property does not pass.
Under Section 20 (e) (i) where there is a contract for the sale of unascertained or future goods by description, and
goods of that description, and in a deliverable state, are unconditionally appropriated to the contract, either by the seller
with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to
the buyer; and assent may be express or implied, and may be given either before or after the appropriation is made; (ii)
where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee or custodier
(whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of
disposal, he is deemed to have unconditionally appropriated the goods to the contract.
Section 20 (e) does not deal with specific goods ‘appropriation’ means selected and put aside. The action of appropriation
makes the goods specific. You still need to ascertain the intentions of the parties.
Section 20 (d) Illustration: if you go to buy a Matatu and you say you want such and such a Matatu and you are given one
to test drive and when you come back from the test drive you have already written words on the Matatu, that act is
inconsistent with the rights of the owner. Your action amounts to conversion. S. 20 (d) (2) the action of painting the
vehicle is taken to indicate that property has passed. The intention is that when the buyer does something inconsistent
with the rights of the seller. S. 20 (e) the intention of the parties is that property will pass. S. 20 (e) (ii) Property passes
upon delivery of goods in this Section.
c) Rules in Section 20
i) Quite often the parties have no clear intention or expressly stated intention as to when the property will pass
and therefore they don’t have the intention of deciding that actually you do not often get into that discussion
normally. The intentions of the parties which Section 20 deals with basically are imaginary.

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ii) Even if the parties have expressed certain intentions, it will be of no consequence if property has already passed
according to rules laid down in Section 20. Section 20 deals with intentions i.e. 20 (e) which says where …….
The property is meant to pass when the goods are either loaded or delivered to the agent of the buyer. This is
not the truth the truth being that the intentions were never discussed. It is the courts that will sit down and
apply the said rules after there has been a breach. The intention is only constructed by courts after the behaviour.
d) The case of Dennant vs. Skinner & Collom is Important for:

a) It shows when the term passing of property is appropriately used. The property will have passed irrespective of
intentions of the parties.
b) The decision in Dennant vs. Skinner raises a complication as to whether the Sale of Goods Law is a facilitative
or command law. These two rules are violated here and one is left wondering how to read
The plaintiff an auctioneer sold a car to Mr. X by auction. Mr. X was a swindler and gave a false name and address and he
asked the auctioneer to allow him to take the car (goods) away in return for his cheque. The Plaintiff allowed Mr. X to
take away the goods without paying and the auctioneer was left with a cheque but before the Swindler Mr. X took the
goods away, the Plaintiff required him to sign a document which stated that the title to the vehicle would not pass until
the cheque cleared. Mr. X upon receiving the goods sold the car to the Defendant and what went to court was the dispute
as between the auctioneer (plaintiff) and the defendant (buyer) as to who had the better title. The issue was whether the
property in the car had passed from the auctioneer to the fraudster since you cannot transfer that which you don’t own
and if X had no property in the car, (the intention of the parties was that the property would not pass until the cheque
was cleared). We can say that the intention was clear that property did not pass since the cheque didn’t clear.
The other argument was that in an auction sale under Section 58 property in the goods passes to the highest bidder on
the fall of the hammer. It was held that applying Section 58, property passed to the fraudster when the hammer fell and
by the time the parties signed the document, property had already passed. Document was signed after the hammer had
fallen and therefore X had property in the goods and could pass a good title to the buyer. If you apply Section 20 (a) you
arrive to the conclusion that property would pass after the payment was done.
In the case of auction when is a contract made? Is it at the fall of the hammer or at the agreed time. Read the case of
Kursell V. Timber Operators & Contractors ltd. Section 20 (a). You come across the term ‘deliverable state’ goods are in
a deliverable state if the buyer will be bound to take delivery of those goods. Does this mean that if the buyer is not bound
to take delivery of goods, then the goods are not in a deliverable state? When you talk of deliverable state, the buyer is
not bound to take delivery if the goods are not deliverable or do not conform to the contractual terms and the buyer
cannot be forced to take delivery.
Defects in the goods do not prevent the passing of property. The fact that goods do not conform to specifications does
not prevent the passing of property. That is why the buyer cannot be forced to take delivery of goods if they do not
conform to the contract. Can a person reject his/her own goods? The intention of the parties should have been that
property will not pass until one has examined the goods and the goods conform to all specifications of the contract. The
intention in S. 35 that the property will not pass in goods until they have been examined and that they conform to the
description and everything else in the contract.
e) Read concept of identification and setting aside.

Identification is most important though it does not conform to practice. In practice identification is usually for
specification and not amount.

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8) PRICE31
A Price in a contract of sale may be:
i. Fixed by the contract
ii. Left to be fixed in a manner thereby agreed
iii. Determined by the course of dealings between the parties
iv. A reasonable price as a question of fact

It has been noted that the wording of the section 10 on price gives rise to some difficulty that may not have been
anticipated in relation to price under (b) above. 32 It assumes that an agreement has been reached by the parties and then
proceeds to explain the methods by which the price can be ascertained. Theoretically, it should be noted that in the event
of an action on the sale , the first point which must be considered is whether in fact a contract was agreed upon by the
parties, and in the absence of agreement as to the price ,or even the mode in which the price is to be paid, may show that
the parties have not yet reached a concluded contract. Further complication arises from the provision that the price can
be left to be fixed in a manner agreed at some future date. Does this exclude the possibility that the manner may simply
require the parties to agree on the price?
One view is that the parties simply cannot make a binding contract for the sale of goods at prices to be agreed, and that
section 10 does not apply to such as case because under that section the buyer would have to pay a reasonable price, that
is a price fixed by a judge or arbitrator, which is not the same thing as a price agreed between the parties.
There is support for the above view in case law, such as May & Butcher vs. the King 33where the House of Lords held that
an agreement for the sale of goods at a price to be later fixed by the parties was not, in the circumstances of the case, a
concluded contract. Although some later decisions departed from the above case, modern decisions have reiterated the
old leaning that the law does not recognize an ‘agreement to agree’ as a binding contract,( although Atiyah does not
support this position). In an Australian case, Hall vs. Busst (1960) it was suggested that sec. 10 only applies where goods
have been delivered and accepted , and that it has no application to a purely executory contract( although this dicta have
not followed in even in Australia.
Atiyah is of the view that the above suggestion would be good sense, as it attempts to distinguish between executed and
executor contracts for this purpose. The reasoning is that if parties have already begun to carry out the contract, it is
more troublesome as well as more unjust to declare the transaction void altogether.
Subsequent cases since 1983, even where not directly related to sale of goods contracts, have in dicta indicated that where
an agreement has been partly performed, the courts will strain to find some way of enforcing the intended arrangement
even in the absence of agreement on a term which might have been fatal if the whole agreement remained purely executory.
It seems possible therefore that where the parties agree on a sale of goods at prices to be agreed in the future, and the
goods are actually delivered and accepted , or the agreement is otherwise partly performed, the courts may now be willing
to treat this as a binding contract to sell at reasonable prices , and to provide a machinery for the ascertainment of such
31
Section 10 of the Sale of Goods Act Chapter 31 Laws of Kenya
32
Under section 10(1) the of the Sale of Goods Act, a price in a contract of sale, may be fixed by the contract, or may be left to be fixed in
a manner thereby agreed, or may be determined by the course of dealing between the parties.
(2) Where the price is not determined in accordance with the foregoing provisions, the buyer must pay a reasonable price; and what is a
reasonable price is a question of fact dependent on the circumstances of each particular case.
33
1934 2kb 17

Page 99 of 166
reasonable prices, even in the absence of a provision such as an arbitration clause by which this could be done under the
contract itself.
Case law seems to stress that in commercial cases, it is the intention of the parties which is decisive. A failure to agree
even on relatively important terms is not necessarily fatal. Provided that the parties intended to be bound, and that the
agreement is sufficiently complete to be enforced as a contract, it is immaterial that they failed to agree on some term
which might appear, objectively speaking, to be important or even essential.
A more recent 1992 case Walford vs. Miles has followed the original position in Butcher vs. King, and similar decisions,
where the House of Lords held that an agreement to negotiate was not enforceable. This appears to be the position for
the time being in England and Wales, but clearly the matter is far from settled, and advocates have to be wary of the
pitfalls of opting for or including such provisions in a contract.
9) AGREEMENT TO SELL AT VALUATION34

Parties can agree to sell goods on terms that the price is to be fixed by valuation of a third party. Where the third party
cannot or does not make the valuation the agreement is avoided. Where the goods or part of the goods thereof have been
delivered to and appropriated by the buyer he must pay a reasonable price there for. 35 Where the third party is prevented
from making the valuation by the fault of the seller or buyer, the party not at fault may maintain an action for damages
against the party at fault.
The position of law is that an agreement for the sale of goods at a valuation made by a third party must be distinguished
from an agreement for sale at a valuation without naming any third party who is to make the valuation. Where third party
is named sec.11 applies and where the third party does not make the valuation the contract is avoided subject to
provisions of sec.11 (2) on damages.
In the latter situation, for example, sale of stock ‘at valuation’, the agreement is in effect a sale at a reasonable price, and
if no valuer is agreed and the parties otherwise fail to come to some arrangement for valuation, the contract will stand as
a contract for sale at a reasonable price under sec. 10(2) above. It may be difficult to envisage circumstances where parties
would deny appointed valuer access to the goods, particularly the buyer, but the drafters may have wanted to cover for
all possible contingencies. Where a sale at a valuation is agreed upon and a valuation is made by a third party agreed
upon, the parties are bound by the valuation. There are exceptions to the above, for example, in cases where:
 There is negligence by the valuer, for example where he has adopted a wholly incorrect basis for his valuation,
in which case he will be personally liable for negligence.
 Where there is fraud or collusion.
34
Section 11 of Cap 31
35
Section 11 of the Act under ss(1) Where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of
a third party, and the third party cannot or does not make a valuation, the agreement is avoided:
Provided that if the goods or any part thereof have been delivered to and appropriated by the buyer he must pay a reasonable price therefor
(2) Where the third party is prevented from making the valuation by the fault of the seller or buyer, the party not at fault may maintain an
action for damages against the party at fault.

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10) OBLIGATIONS CREATED UNDER SALE CONTRACT 36
a) STATUTORY IMPLIED TERMS

It should be noted that in the act the obligations that are stipulated fall into two broad categories, namely, conditions and
warranties, and that there are also stipulations as to time and sale by sample. However in the 1960’s it was suggested in
a number of decisions that the distinction between a condition and a warranty was not exhaustive. It was suggested that
there were terms more important even than conditions-fundamental terms, and there was a category of terms mid-way
between conditions and the warranties. This presentation will proceed on the basis that the obligations created are as
follows:
o Fundamental terms
o Conditions
o Innominate terms
o Warranties,
o Stipulation as to time
o Representations
i. A. FUNDAMENTAL TERMS
For practical purposes it matters little whether a term was called a condition or a fundamental term. In either event, a
breach of the term, however minor in itself, justified the innocent party in repudiating his own obligations under the
contract, and treating it as discharged. But the doctrine of the fundamental term was devised principally to deal with the
growing menace of the unfair and unreasonable exemption clause. It was held in a large number of decisions that an
exemption clause, no matter how sweeping and no matter how broadly drafted, its language could not protect a guilty
person from liability for breach of a fundamental term of the contract.
In the 1967 case of the SUISSE ATLANTIQUE, the House of Lords cut this doctrine down to nothing more than a mere
rule of construction, and not a rule of law. This meant that in the last resort, the parties must be free to make their own
contracts, however unfair or unpalatable the terms might be. So long as it was absolutely clear that the wording of the
exemption clause were designed to cover the circumstances that had occurred, no matter how fundamental, the courts
were obliged to apply the clause!
Although some inroads were made on this doctrine in subsequent decisions, it became clear in the case of Great Britain
that legislative intervention was called for. This was forthcoming in the form of the Supply of Goods (Implied Terms) Act
1973, and the Unfair Contract Terms Act, 1977 and Unfair Terms in Consumer Contracts Regulations, with its subsequent
amendments. These laws gave the British courts a substantial degree of control over unfair exemption clauses. Clauses
which are unreasonable can usually be struck down and it will be less necessary for parties to try and persuade the
courts to construe the exemption clause in a strict way so that it does not cover the breach of a fundamental term, and
increasingly the distinction between fundamental terms and conditions may cease to be of much significance. The
principal use of the expression fundamental term is in written contracts where the draftsmen sometimes use it in
preference to condition in an attempt to make it clear that any breach of such a term will enable the innocent party to
terminate. In Kenya the consumer protection law covers quality of goods and services, and provides that the supplier
warrants that these are of reasonably acceptable quality, and that anything in a consumer agreement that attempts to
negate the implied terms in the sale of goods act is void. The Constitution also provides for consumer protection in
similar wording, including the right to compensation for loss or injury arising from defects in goods and services.
36
Section 12-17 of the Sale of Goods Act Chapter 31 Laws of Kenya.

Page 101 of 166
ii. B. CONDITIONS37
The Act does not define the term condition but only explains the term by reference to its legal effect. It can be defined as
a term which , without being the fundamental obligation imposed by the contract, is still of such vital importance that it
goes to the root of the transaction, and its breach entitles the injured party the right to repudiate, e.g. reject the goods
or refuse to pay.
iii. IMPLIED CONDITIONS

 The seller has a right to sale the goods in the case of a sale
 The seller will have a right to the goods at the time when the property is to pass in the case of an agreement to
sale. Example: on Jan 5th a dealer agrees to sell a painting which he has himself has agreed to buy from a museum.
The contract states that the property is to pass from the dealer to the buyer on March 1. The dealer will not
breach the implied condition on right to sell merely because he cannot pass ownership to the buyer at the time
of the contract. The dealer will breach condition if he cannot pass ownership on March 1.
 That the goods shall correspond with the description
 That the goods( bulk) shall correspond with the sample
 Fitness for purpose in identified cases
iv. IMPLIED WARRANTIES

 Implied warranty that the buyer shall have and enjoy quiet possession of the goods
 That the goods shall be free from any charge or encumbrance in favour of third party not declared or known to
buyer before or at the time of the sell.
v. C. INNOMINATE TERMS
The practice for a long time has been to consider the seriousness of breach in relation to its classification of the term as
a condition or otherwise, and not relating to the consequences of breach. In reality this meant that it was possible to shut
out from consideration as irrelevant the actual consequences of the breach of contract, yet some breaches have relatively
trivial consequences and do not justify repudiation of the contract. Since the 1960’s there has been something of the
beginnings of a legal revolution in relation to this concern. The position is that when deciding whether or not a term is a
condition or a warranty the court considers whether the parties thought that the term went to the root of the contract at
the time when they made the contract.
Innominate terms adopt a different approach. The test to decide whether a breach of an innominate term allows
termination of the contract is to ask whether the breach which actually occurred deprived the injured of substantially the
whole intended benefit of the contract. If the breach did not do this, the only remedy is damages. If the breach did do
this, then both damages and termination of the contract is available.
vi. D. STIPULATIONS AS TO TIME

Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to
be of the essence of a contract of sale. Whether any other stipulation as to time is of essence in the contract or not depends
on the terms of the contract. However in commercial practice there is a strong tendency to treat stipulations as to time
as conditions, breach of which is thus a repudiation which can be instantly accepted, thereby terminating the contract
37
Ibid

Page 102 of 166
while leaving open a claim for damages. This tendency is noticeable especially in commercial contracts where a
contractual breach may create a situation in which the innocent party needs to know at once what his rights are, he may
need to know immediately whether he is entitled to make alternative arrangements, rather than wait and see what the
consequences of breach are.
It thus seems that in ordinary commercial contracts for the sale of goods, terms as to the shipment, delivery, payment
and the like, as well as to documents to be presented and other incidental matters to be performed by either party, will
still usually fall to be treated as conditions, any breach of which entitles the other party in repudiating the whole contract.
Lord Denning has cautioned that courts should not be too ready to interpret contractual clauses as conditions.
vii. E. REPRESENTATIONS
From the terms of the contract it is necessary to distinguish mere statements or representations, which are not part of
the contract but may have serious consequences nonetheless. Whether a statement is or is not a part of the contract is
said to depend upon the intention of the parties, but this is an elusive criterion since the courts have been prepared to
hold that an oral statement may override the written terms of the contract. The tendency these days frequently appears
to be for the courts to hold a statement to be a term of the contract when they think it reasonable to impose liability in
damages on the person making the statement, and vice versa. Thus to attempt to decide whether a statement is a term of
the contract or a mere representation without reference to the results is, in many cases, to put the cart before the horse.
11) THE TRANSFER OF TITLE

The Sale of Goods Act differentiates between the ‘Transfers of Title” and “Transfer of Property as between a buyer and a
seller”. The “Transfer of Property as between a buyer and a seller” dealt with under sections 18-22, does indeed have the
obvious meaning i.e. the process by which ownership passes fro one party to the other. In contrast under ‘Transfers of
Title’ the concern is with a number of situations in which a seller who is a non-owner, or a person with a defective title
can nevertheless confer a good title to the buyer and in doing so defeats the claims of the true owner or of a person with
a superior title. Of course these are exceptional situations under section 23 of the Act which sets out the basic rule in the
ancient maximnemo dat quod non habet.
i. NEMO DAT QUOD NON HABET PRINCIPLE

This principle deals with the transfer of title by a non-owner of the goods. A seller with no right to the goods may
nonetheless pass a good title to a third party. The question that arises is which of the two innocent people is to suffer
for the fraud of a third party. For instance a thief steals goods and sells them to someone who buys in good faith and for
value, a person hands goods to an agent to obtain offers and the agent sells them without authority and disposes of the
proceeds; In all of these cases the law has to choose between rigorously upholding the rights of the owner to his property,
on the one hand, and protecting the interests of the purchaser who buys in good faith and for value on the other hand.
As Lord Denning once put it:
“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.”
a. Cap 31 Section 23 (1):

It states as follows: -
“Subject to the provisions of this Act, where goods are sold by a person who is not the owner thereof, and who does not
sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the
seller had, unless the owner of the goods is by his conduct is precluded from denying the seller’s authority to sell.”

Page 103 of 166
This rule is frequently dignified by the use of Latin in the tag nemodat quod non habet, or for short nemo dat. The part
in Section 23 stating that a non-owner cannot pass title – is merely a re-enactment of the common law principle so it
would seem that that part of the subsection, or the common law in lieu, is of the subsection (beginning with the word
‘unless’) has the positive effect of enabling a non-owner to pass a good title, although this also appears to be merely a
restatement of the common law doctrine of estoppel. The only substantive question, therefore, is whether a person who
has merely agreed to buy the goods can rely upon the doctrine of estoppel.
When we look at nemodat as a topic, the take-off point is that a person who is not the owner of goods cannot sell or pass
a better title than the owner. Even though you are not the owner you can sell and pass a good title if you have the consent
of the owner. The problem with nemodat is that it was developed with the aim to do justice, we are not talking about
fairness, we are talking about justice. Fairness is substantive, justice is procedural. Nemodat rule balances justice or
the legal rules being followed and then fairness on the other hand i.e. are the social ethos endorsed as the right thing to
do?
In the nemodat rule, we are balancing between justice for 2 innocent parties each claiming ownership or title to the same
goods and asserting that he/she has a better claim on those goods than the other party. The problem can arise in any of
the following
1. Where a thief steals goods and sells those goods to someone else who buys in good faith, for value and
without notice;
2. Where a swindler buys goods and induces the seller to let him have possession of the goods on credit and
he promptly resells or pledges those goods for whatever he can get;
3. Where the person hands goods to an agent to obtain quotations for those goods and the agent sells those
goods without authority or disposes of the proceeds of the sale;
4. Where a person sells goods, transferring the property in the goods but retains the possession of the goods
and then fraudulently resells those goods to a third party.
In all these scenarios, the law has to choose between upholding the rights to private property of the owners to the goods
and this right is a constitutional right which is protected that one cannot lose property in their goods. Legal rights to
private property are protected while at the same time trying to promote national and international trade. You have 2
innocent persons claiming title to the goods and therefore you have to look at the nemodat rule and you are saying that
the basic rule is that a person cannot give that which he/she does not have. If you have no ownership of goods you cannot
pretend to sell those goods to another person. The court is now caught up in the exercise of protecting the owner of the
goods while the same time protecting buyers who buy in good faith and without notice.
The Rule of Estoppel or Exclusion is a rule of evidence and not a rule of law. A person can be precluded from giving
evidence if by his conduct he has led other persons to believe that the goods were his.
A non-owner cannot pass any good title to another person except where the owner is estopped from denying the authority
of the seller. Where a seller sees his goods being sold and he keeps quiet, he is estopped from giving evidence that the
goods were his. His conduct of omission precludes him from claiming the goods. What is the effect where the owner has
been estopped the person who has the goods keeps the goods. The effect of estoppel is to invest title to the 3rd party who
is an innocent buyer.
Eastern Distributors Ltd V. Goldring (1967) 2 QB
In pursuance of a plan to deceive a finance company, one M signed and delivered forms to C which enabled C to represent
that he had M’s authority to sell a car belonging to him, it was held by the court of Appeal that M was estopped from
setting up his title against the plaintiffs who had bought the car from C. It was also held that the estoppel in fact operated
to pass a good title to the plaintiffs not only against M himself, but also against a buyer in good faith from M.
The effect of estoppel in sale of goods is to pass title.

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b. EXCEPTIONS TO NEMO DAT

It is constitutional right of every person to private property and the need to promote international and national commerce
at the same time protecting individual rights to own property. All these issues are balanced in nemo dat. The basic rule
in nemodat is that a person who is not an owner of goods or who does not sell those goods under the authority or consent
of the owner cannot pass a better title than she/he had. The following are the exceptions to “nemodat” principle:
1. Estoppel- (s. 23(1)
2. Sale by a factor- a mercantile agent whose business is to sell or otherwise deal in goods (s. 23(2))
3. Sale under a voidable title not avoided at time of sale (s. 24)
4. Resale by a seller in possession (s. 26(1))
5. Sale by a buyer in possession (s. 26(2))
6. Sale under statutory power of sale (e.g. Disposal of Uncollected Goods Act )
7. Sale under common law power of sale- e.g. By agent of necessity
8. Sale under the order of a competent court
The first exception is provided by the doctrine of estoppel which is embodied in the concluding words of S. 23 “… unless
the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.” This provision takes us back
to the common law doctrine of estoppel for it gives no indication when the owner is precluded from denying the seller’s
authority to sell. However there are two distinct cases where the owner is so precluded:
a) Where he has by his words or conduct represented to the buyer that the seller is the true owner, or has the
owner’s authority to sell, this is called estoppel by representation.
b) Where the owner, by his negligent failure to act, allows the seller to appear as the owner or as having the owner’s
authority to sell. This is called estoppel by negligence.
However both types estoppel rest on some kind of representation or misrepresentation, which may be by words or conduct
of the true owner of the goods. The misrepresentation may also be by some negligent act or omission of the owner.
There are three requirements of estoppel.
 There must be a representation of facts
 This representation must be unambiguous
 The representation must be relied upon and acted upon by a third party.
A good illustration of estoppel by words is explained in the case of Henderson& Co vs.Williams.
ii. ESTOPPEL BY REPRESENTATION

The scope of this exception depends in part on the scope put on the dictum of Ashurst J in Lick barrow v Mason
“We may lay it down as a broad general principle that, wherever one of two innocent persons must suffer by the acts of a
third, he who has enabled such third party to occasion the loss must sustain it (emphasis added)”
Cases where no representation sufficient to found an estoppel could be found

Page 105 of 166
a. Giving employee authority to dispose of goods

Farquharson Bros v C King & Co38: the owners of goods, who were timber merchants, employed a clerk who was
authorised to sign delivery orders on the strength of which timber would be released to customers.
b. Allowing third party to have possession of goods and registration documents

Mercantile Bank of India Ltd v Central Bank of India Ltd [1938] AC 287: S pledged railway receipts (documents of title)
with the Central Bank in return for an advance. In accordance with usual practice, the bank returned them to S to enable
him to obtain clearance of the goods, but S fraudulently used them to pledge the goods with the Mercantile Bank.
c. Cases where a sufficient representation was made

Henderson & Co v Williams39 Goods were in a warehouse owned by D. On the owner’s instructions, the goods were
transferred into the name of F. D also supplied P with a written statement that held to P’s order. Both were estopped
from denying that F had authority to sell.
Eastern Distributors Ltd v Goldring40The O signed 4 hire purchase forms in blank (the proposal and agreement for a car
and van) and left them with S. Although the proposal for the car did not go through S carried on with the proposal for
the van (contrary to O’s instructions) and the P finance co bought the car from S. Held: S was armed by O with documents
which enabled him to represent to P that he was the owner of the van and had the right to sell.
Representation may be limited by the circumstances of the case
Motor Credits (Hire Finance) Ltd v Pacific Motor Auctions Pty Ltd (NB first instance decision went to PC on different
grounds). Representation was only that agent had authority to sell in the ordinary course of business.
iii. ESTOPPEL BY WORDS

A good example of estoppel by words is the decision of the Court of Appeal in Henderson & Co V Williamsin this case, G
& Co. were induced by the fraud of one F to sell him goods lying in certain warehouses of which the defendants were
warehousemen. The circumstances were such that the contract between G & Co and F was void for mistake. On the
instructions of G & Co, the defendants transferred the goods in their books to the order of F. F sold the goods to the
plaintiffs who, being suspicious of the bona fides of the seller, made inquiries of the defendants. The latter supplied the
plaintiffs with a written statement that they held the goods to the order of F, and when this did not satisfy them, they
endorsed it with a further statement that they now held the goods to the plaintiffs’ order. G & Co., not having been paid
by F, instructed the defendants not to deliver the goods to the plaintiffs but to themselves, and they gave them an
indemnity against so doing. It was held that both G & Co. and the defendants were estopped from denying the plaintiffs’
right to the goods, the former because they had represented that F was the owner by ordering the defendants to transfer
the goods into his name in their books, and the latter because they had atoned to the plaintiffs, that is represented to
them, that they held the goods to their order.
38
[1902] AC 325
39
[1895] 1 QB 521
40
[1957] 2 QB 600

Page 106 of 166
iv. ESTOPPEL BY CONDUCT

In the case of Commonwealth Trust Limited vs. Akotey the respondent Akotey who was a grower of cocoa in Ghana
consigned by railway 1050 bags of cotton to Laing and sent him the consignment notes. He had previously sold cocoa to
Laing, but on this occasion no agreement of sale had been concluded, Laing’s offer of $2.50 a tonne having been rejected
as too low. Before this difference as to price having g been settled Laing sold the cocoa to Commonwealth Trust Limited,
the appellant in this case, who bought in good faith. He handed the consignment notes to their agent who re-consigned
the cocoa to the appellants. The appellants bought in good faith and in full price. The respondents then sued the
appellants for damages for conversion. It was held that the respondents were by their conduct precluded form setting
up their title against the appellants and their action failed.
v. ESTOPPEL BY NEGLIGENCE
This is where the owner is under a duty of care to the subsequent innocent purchaser and he has by his negligence allowed
a third party to represent himself as the owner or having the owner’s authority to sell. The application of the estoppel by
negligence is severely limited because of the difficulty of establishing a duty of care. In Coventry Shepherd & Co v Great
Eastern Railway Co the rule of estoppel by negligence applied.
a. Duty of care
1. There is no general duty of care on the owner of goods to protect his own interest in those goods or to protect the
possible interest of third parties. For example, Moorgate Mercantile Co Ltd v Twitchings, no duty to register with
Hire Purchase Info Ltd (private body keeping register – 98 % vehicles on record). Applied in Industrial and Corporate
Finance Ltd v Wyder Group.
2. A rare case where a duty of care was found is Coventry Shepherd & Co v Great Eastern Railway CoDs negligently
issued two delivery orders in respect of the same goods. Person to whom they were issued was thereby able to pledge
and sell goods. Held estopped. Documents had a mercantile meaning attached to them and therefore owed a duty
to merchants and people likely to deal with those documents.
b. Breach and causation

3. Even if duty of care established, can be difficult to prove breach and causation. In Mercantile Credit Co Ltd v
Hamblin, held by CA under a duty of care re the preparation and custody of contractual documents (e.g. like Shepherd
and Eastern v Goldring) but not estopped because:
o On the facts not unreasonable to have trusted the dealer – well known and apparently reputable
o Even if had been negligent the proximate cause was the fraud of the dealer.
vi. SALE UNDER THE FACTORS ACT 1889 : SALE BY A MERCANTILE AGENT
The second exception of the nemo dat principle is somewhat controversial and is found in section 2 of the Factors Act of
1889 of England. Section 23(2) of the Sale of Goods Act carries a similar exception. This section says that:
(2) Nothing in this Act shall affect—
(a) The provisions of any enactment enabling the apparent owner of goods to dispose of them as if he were the true owner
thereof;
Section 2 of the Factors Act 1889 provides:
Where (a) a Mercantile Agent is, (b) with the consent of the owner, (c) in possession of goods or the documents of title to
goods, (d) any sale, pledge or other disposition of the goods made by him (e) when acting in the ordinary course of

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business as a mercantile agent, shall … be valid as if he were expressly authorised by the owner of goods to make the
same; provided that (f) the person taking under the disposition acts in good faith, and has not at the time of the disposition
notice that the person making the disposition has not authority of the same.
Section 26 (1) and (2) of the SGA reproduces section 1 of the Factors Act. Section 1 of the Factors Act uses the term
merchantile agent and define s it as follows:
For the purposes of this Act the expression “merchantile agent “shall mean a Merchantile agent having in he customary
course of his business as such agent authority either to sell goods or to cosign goods for he purposes of sale, or to buy
goods, or to raise money on the security of goods.
Section 2 of the Factors Act stipulates that a sale by a merchantile agent passes a good title to third parties despite the
fact that merchantile agent is not the owner of the goods. The case of Kapadia vs. Laxmidas held indirectly that the
Factors Act is a statute of general application to Kenya.
a. CONDITITONS TO BE FULFILLED BY THE MERCHANTILE AGENT

1. Must be a Merchantile Agent
Section 26(3) defines a merchantile agent. The person selling the goods must be a merchantile agent at the time he sold
the goods.
2. The Merchantile Agent must be in possession of the goods with the consent of the Owner
The merchantile agent must be in possession of the goods with the consent of the owner. The question of ownership was
addressed in the case of Lloyds bank limited vs. American National Trust and Savings Association. In this case the
plaintiff lent money to X who wasa merchantile agent on the security of certain documents (bill of lading). The bills of
lading had been pledge with them. The documents were then returned to X in order to enable him obtain the goods and
sell as a trustee for the bank. However X fraudulently pledged the same documents with the defendant for another
advance. The plaintiffs sued the defendant for the recovery of these goods documents. The defendant’s defence was that
they were protected by section 2 of the Factors Act of 1889. One of the issues to be determined was who the owner of the
goods was. It was held that X the merchantile agent as well as the plaintiff were the joint owners of the goods. Secondly,
that the defendants had acquired a good title under the Factors Act as against the plaintiff.
The question of consent with regards to ownership deals with three there categories if issues. A merchantile agent will
have consent of the owner to posses the goods:
1. If he obtains those good by larceny by trick
2. If he obtains those goods by larceny by bailee
3. If he obtains those goods by fraud or by false pretences
For purposes of the Factors Act however fraudulently the consent had been obtained by the merchantile agent from the
owner, the consent will be deemed to be proper consent to the agent having possession of the goods. The only situation
in which the merchantile agent is deemed not to have the consent of the owner is in situations where out rightly steals
the goods.
a. Larceny by Trick
In the case of Folks vs. Kings an owner of a car delivered it to a merchantile agent for purposes of sale. The owner specified
the price at which the car would be sold. However, the merchantile agent could sell it at a lower price only with the express
consent of the owner. The merchantile agent intended to sell the car immediately and pocket the proceeds. He obtained
the car and sold it to at third party who bought it in good faith and without notice if the fraud. The merchantile agent

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pocketed the proceeds and delivered the car to King. Upon discovery of the fraud the owner sued Mr. King for the return
of the car or alternatively the value thereof and damages for conversion. The defendant’s defence was that he had acquired
a good title under section 2 of the Factors Act of 1889. The court held that the defendant had indeed acquired a good title
under section 2 because under the Act a merchantile agent had obtained the goods with the owner’s consent. Although
thus was larceny by trick the court held that it could not read the mind of a merchantile agent.
b. Larceny by Bailee
A bailee tricks the owner of the goods and sells it to a third party. This is illustrated in the case of Jerome vs. Bentley. In
this case the plaintiff who was an owner of a diamond ring entrusted it to a certain Major Tatham. Major Tatham undertook
to sell it on behalf of the plaintiff. It was agreed that if he could not get a buyer within seven days he would return the
ring to the plaintiff. Seven days elapsed and there was no buyer but Major Tatham proceeded to sell the ring and pocketed
the proceeds. He was subsequently criminally convicted and the plaintiff sued the defendant for the return of the ring.
The court held that Major Tatham had not passed a good title to the defendant since he had sold the ring after the expiry
of seven days. However of the question of consent, it was held that Major was in possession of the ring with the consent
of the owner.
c. Obtaining Goods by Fraud or by False Pretences
In Pearson vs. Rose and Young41the plaintiff delivered his car to X a merchantile agent in order to obtain offers but he
did not give the merchantile agent authority to sell it. The agent obtained possession of the registration book by a trick
in circumstances that clearly showed that the owner had not consented to parting with possession of it. The merchantile
agent then promptly sold the car as he had intended from the very beginning. The plaintiff sought to recover the car from
the defendant to whom it had been sold. It was held that the question as to whether the agent had committed larceny by
trick was immaterial. The only question was whether the goods were in his possession with the consent of the owner. He
did not however have the consent of possession of the registration book with the consent of the owner. Further that a
sale without the registration book would not have been a sale in the ordinary course of business. The defendants were
therefore unprotected by the Factors Act.
d. The Agent must have acted or Sold in the Ordinary Course of Business
This is basically to say that he should have acted in the ordinary course of business as a merchantile agent. However, it is
not necessary that the act be a usual one. For instance, in the case of Oppenheiner vs. Attenborough42fraudulently
obtained possession of diamond from a diamond merchant and pledged those diamonds with pawn brokers. The agent
was a diamond broker and it was proved that diamond brokers do not usually pledge. It was held that the agent’s act was
nevertheless in the ordinary course of a merchantile agent and the pawn broker was therefore protected.
According to Lord Buckley acting in the ordinary course of business is acting within the hours of business at a proper
place of business and in other respect in the ordinary way in which a merchantile agent would act.
The fourth condition is that the buyer must prove that he took the goods in good faith and without notice that the sale
was made without the owner’s authority.
Finally the transaction effected by the merchantile agent and the innocent party must be a sale, pledge or other
disposition.
vii. SALE UNDER A SPECIAL POWER OF SALE

The third exception to the nemo dat principle is contained under section 23(2) (b) and is referred to a sale under a special
power of sale. The subsection is to the effect that nothing in this Act shall affectthe validity of any contract of sale under
any special common law or statutory power of sale or under the order of a court of competent jurisdiction. This therefore
qualifies the nemo dat principle contained in section 23(1).
41
(1951) 1KB 275
42
(1908) 1 KB 221

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There are several common law powers of sale which may be exercised by various persons.
First, pledges of goods or documents of title can sale those goods pledged to them and be able to pass a good title. A
pledge at common law carriers with it an implied power of sale.
Secondly, agents acting within the scope of their apparent authority are viewed in common law as having power to sale
goods and pass a good title. Furthermore agents of necessity who are disposing of goods belonging to the principal can
pass good title. However an agent relying on the principle of necessity must show that he had no opportunity of
communicating with the principal to obtain instructions. Secondly the agent must have acted in the interest of the
principle and not his own interest.
Thirdly auctioneers fall in another category of persons who are deemed to have a common law power of sale. Auctioneers
in possession are able to sell the goods and pass good title.
Lastly sale by executors or administrators of estates of deceased persons are sale on the basis of a common law power of
sale. When acting in their representative capacity, they can sell goods belonging to the estate and pass good title.
Apart from common law powers of sale there are also situations of statutory powers of sale. The first such power is
conferred upon the unpaid sellers within the meaning of section 40(c) and section 48(2). If a person has sold goods but
he has not been paid for those goods the sale of Goods Act gives him powers to resell the goods. In such circumstances
the original purchases cannot sue a third subsequent purchaser.
secondly under section 96(1) of the Land RegistrationAct, 2012 a statutory power of sale is given to a chargee where a
chargor is in default of the obligations under a charge and remains in default at the expiry of the time provided for the
rectification of that default.
Thirdly, under the Distress for Rent Act, a landlord can sell the property which he has seized from the tenants premises
for the non-payment of the rent and pass a good title. Similarly, a trustee in bankruptcy under the Bankruptcy Act is
entitled to sell the property of a bankrupt person and convey a good title. I the area of companies, the liquidators of a
company under the Company Act have powers to sell the property of the company in a liquidation of the company and
pass good title.
Finally, under an order of the court any of the orders issued by the courts for the disposal goods can be executed by a
court broker who then passes a good title to the purchaser within the meaning of section 44of the Civil Procedure Act 43.
The courts may also authorise Sale of Goods where a decree holder has sought to sell the goods because the party is
unable to clear the money owed. The decree holder applies to the court to attach the goods; neither the court nor the
auctioneers are owners of the goods but they can sell the goods.
viii. SALE UNDER A VOIDABLE TITLE

This is embodied under section 24 of the Sale of Goods Act, which states that “When the seller of goods has a voidable
title thereto but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided
he buys them in good faith and without notice of the seller’s defect of title.”this section declares the general rule that that
a party cannot avoid a voidable contract once a third party rights have been acquired. The commonest case in which a
seller will have a voidable title is where he has obtained the goods under a contract induced by misrepresentation (whether
fraudulent or innocent misrepresentation) but a contract can also be voidable on other grounds such as duress and undue
influence, mistake and drunkenness. It is important to distinguish between a contract of sale which is void ab initio and
one which is merely voidable because section 24 only protects the third party in the case of voidable contracts but not in
the case of void contracts.
43
Chapter 21 Laws of Kenya

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In Lewis vs. Averay, Lewis in Bristol, advertised his Austine Cooper car for sale in the newspaper and agreed to sell it at
$450 to a man calling himself Greene, who claimed to be a well known actor, Richard Greene, and showed a Pinewood
Studio pass as evidence of this identity. The rogue “Greene” was allowed to take way the car in exchange of a cheque
which was later proved to be worthless. Three days later the rogue sold the car to Averay, a music student living in London,
who bought in good faith. The Court of Appeal held that the first sale was voidable for fraud, but not void for mistake of
identity, with the result that Averay got a good title.
The third party will be protected if he buys the goods before the original contract has been avoided. As a general rule the
defrauded party can only rescind the contract by communicating with the other party to the contract notifying him of the
rescission. In other words the claims of the buyer who relies on the section 24 will be defeated if, before he makes his
purchase, the original owner has validly exercised his right to avoid the first transaction. This is normally done by giving
a notice to the other party, or by retaking possession of the goods. However this rule since to be modified in the case of
Car & Universal Finance Ltd v Caldwell44, in this case Caldwell was induced to sell his car to Norris by way of fraud. The
court noted that although the innocent party rescinding a voidable contract must normally communicate this to the other
party, this was not the case in this particular case. In this case the other party was a rogue who had acquired a voidable
title and then disappeared. Secondly it was held that the owner’s action in going to the police showed a clear intention to
avoid the contract. Therefore the rogue’s title had been effectively avoided before the sale to the defendant who thus
acquired no title.
ix. SALE BY SELLER IN POSSESSION

The fifth exception to thenemo dat rule is in section 26 (1) of the SGA. This section stipulates that
“Where a person having sold goods continues or is in possession of the goods, or of the documents of title to the goods,
the delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under
any sale, pledge or other disposition thereof, to any person receiving them in good faith and without notice of the previous
sale shall have the same effect as if the person making the delivery or transfer were expressly authorized by the owner of
the goods to make it.”
There are several conditions that must be fulfilled before this exception is invoked. The person must have sold the goods
but continues to be in possession of the goods and he must be in possession of the goods under a contract of sale wherein
the property has already passed. There must be no breach in the continuity of physical possession. If there is such a
breach the seller can pass title notwithstanding any transaction between him and the original purchaser which might alter
the legal title under which the possession was held.
It is not necessary that the possession be with the seller himself. Possession by an agent of the seller will be sufficient for
the purpose of this provision. This was the position in the case of City Fur Manufacturing Company vs. Furenbond45 .
x. SALE BY BUYER IN POSSESSION

Found in section 26(2) and is the opposite of section 26(1). It is to the effect that “Where a person having bought or agreed
to buy goods obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the
delivery or transfer by that person, or by a mercantile agent acting for him, of the goods or documents of title, under any
sale, pledge or other disposition thereof, to any person receiving them in good faith and without notice of any lien or
other right of the original seller in respect of the goods shall have the same effect as if the person making the delivery or
transfer were a mercantile agent in possession of the goods or documents of title with the consent of the owner.”
The conditions to be fulfilled in this respect are as follows:
44
[1965] 1 QB 525
45
(1937) ALL ER 799

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The buyer must have obtained the goods with the consent of the seller. It is immaterial how that consent is obtained. The
first buyer must have bought or agreed to buy the goods. This applies whether or not the property in the goods has passed
to the first buyer.
There must be a contract of sale within the meaning of the SGA. There must be a contract under which the seller transfers
or agrees to the property in the goods to the buyer. A mere option to sell is not a contract of sale until it has been
exercised.
The meaning of “consent” must be the meaning given to this word by the Factors Act. The possession must be actual
physical possession of the goods or documents of title to goods and it must be obtained by the buyer in his capacity as a
person who has bought or agreed to buy the goods.
Finally the third party must take the goods in good faith and without notice of any lien or other right of the original seller
in respect of those goods.
xi. SALE IN A MARKET OVERT

Section 22 of the SGA has another exception to the nemo dat rule which is to the effect that where goods are sold in a
market overt, that is according to the usage of the market, the buyer acquires a good title to the goods provided that he
buys them in good faith and without notice of the of any defect or want of title on part of the seller. Market overt is an
open public and a legally constituted market. Under English Law it could be by Royal Charter or by prescription or under
statutory powers. It id often said that every shop under the city of London is a marker overt as far as goods sold therein
are concerned. This exception is not under the Kenya SGA.
12) PERFORMANCE OF THE CONTRACT

When parties to a sale of goods contract enter into that contract there are certain expectations from both parties. The
seller has duties to perform and so does the buyer. These obligations unless discharged, neither can say that they have
met the obligations of the contract.
a) DUTIES OF THE SELLER
i. Pass a good title

The seller has the duty to transfer the property or title to the goods to the buyer. This is phrased in the Act as the seller
having the right to sale, even if not the power to confer title. Under Section 14 of Cap 31 the seller has a duty to pass a
good title and under the Act, there is an implied act that the seller shall pass a good title to the buyer. The seller has a
right to sell the goods whether he has the title or has authority to sell the goods. The seller is in effect under an obligation
to pass a good title to the buyer. A good title is a title without any encumbrances.
In a contract of sale there is an implied condition under 14 (a) that in the case of sale he has a right to sell the goods and
in the case of an agreement to sell he will have such a right at the time when property is to pass. This requirement does
not require that the seller to be the owner, only that he has authority to sell. If there is a breach of a condition, the innocent
party has a right to repudiate a contract or if he doesn’t choose to repudiate, he has a right to claim for damages (i.e. he
will be treating it as breach of a warranty) in the sale of goods the innocent party is allowed to recover monies paid if
there is failure to transfer ownership. The section thus covers the buyer from disturbance from the seller, in which case
the buyer has also a right of action in tort. It also protects the buyer from third parties where the disturbance has arisen
as a result out of the acts or defaults of the seller.
ii. Duty to deliver the goods

This duty is a somewhat ambiguous concept, for it covers three entirely different possibilities. Apart from this, generally
it is not the duty of the seller to deliver goods in the popular sense, but the duty of the buyer to take them.
DELIVERY: there may be a duty to deliver to the buyer goods in which the property has already passed, and he must
therefore deliver the particular goods and no other.

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DELIVERY: the seller duty to deliver may be to procure and supply to the buyer goods in accordance with the contract,
but without particular goods being designated to which the duty of delivery attaches, and therefore refers to sale of purely
generic goods, and seller is free to deliver any particular goods answering to the description.
DELIVERY: it may be that the seller has a personal duty to deliver a particular lot of goods although the property has not
passed to the buyer, in the case of agreement to sale specific goods, and the seller cannot resale without being in breach.
This is, for example, the effect of a notice of appropriation in the c.i.f contract which does not pass the property, but fixes
the goods to be delivered.
Similarly, in a f.o.b contract where the seller ships goods but retains the bill of lading as security, the seller will come
under an obligation to deliver to the buyer the actual goods shipped , though the property remains in the seller for the
moment. It should be noted that these three possibilities are not mutually exclusive, but are rather three stages in the
performance of a contract. Indeed the three stages may be merged as where goods are appropriated to the contract fixing
the duty to deliver and passing the property at the same time.
a. MEANING OF DELIVERY
The legal meaning of delivery is very different from the popular meaning. In law the delivery means the voluntary transfer
of possession which is a different thing from the dispatch of the goods. There is no general rule requiring the seller to
dispatch the goods to the buyer ( read rules on delivery sec 30).However in modern conditions of business, a contrary
intention will frequently be inferred from the circumstances of the case. For example where a buyer ordered certain goods
from the seller in the form “please supply us with the following goods”, an Australian court held that it was the seller’s
duty to send the goods to the buyer.
However it is the responsibility of the seller to see that the goods are in a deliverable state Delivery may take one of the
following forms:
a) There may be physical transfer of the actual goods themselves. This may be the most obvious case, although
difficult questions may arise in deciding whether the physical transfer is enough to transfer legal possession.
b) The seller may transfer possession to the buyer by handing over to him the means of control over the goods, for
example keys to the warehouse in which they are situated.
c) Through acknowledgement called attornment, where goods are in the custody of warehousemen. Where the
seller gives the buyer a delivery order or warrant for goods stored in warehouse, this does not transfer possession
or property until the warehouse keeper attorns by accepting the order or warrant, thereby acknowledging that
he hold the goods on his behalf.
d) Goods may be delivered by the delivery of documents of title such as bill of lading, or any other document in
the course of business as proof of the possession or control of goods, authorizing the possessor either by
endorsement or delivery of the documents to transfer goods thereby.
e) The parties may agree that the sellers should hold the goods as the buyer’s agent or bailee.
f) Delivery of the goods to the buyer’s agent transfers possession to the buyer himself.
b) PAYMENT AND DELIVERY

Unless otherwise agreed payment and delivery are concurrent conditions. It is not necessary for the seller actually to
tender delivery before being entitled to sue for the price or damages if it is clear that the buyer would have refused to
accept the goods, it is enough that he (seller) was ready and willing to do so.
c) Duties of the Parties

Seller: to deliver the goods (s. 28)
Buyer: accept and pay for the goods (s. 28)

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Unless otherwise stated, these are concurrent conditions (s. 29)
S. 31: delivery must be of agreed quantity- too much or too little entitles buyer to reject the whole
If quantities are stated as “more or less” a reasonable margin is allowed
S. 32: unless otherwise stated, buyer is not bound too accept delivery by installments.
d) Breach of Contract by buyer

Buyer is in breach if he wrongfully fails to accept or pay for the goods in accordance with the terms of the contract.
S. 39: a seller is deemed to be unpaid if:
a) When the whole of the price has not been paid or tendered;
(b) When payment is through a conditional a bill of exchange/negotiable instrument and the condition on which it was
received has not been fulfilled by reason of the dishonour of the instrument.
i. Remedies of unpaid seller
a. Action for the price-where property has already passed to buyer or a payment date has been agreed.
b. Action for damages – where buyer wrongfully refuses to accept goods
c. Right of lien-right to retain goods until price is paid
d. Stoppage in transit- right to resume possession of the goods as long as they are still in transit until payment is
made
e. Right of resale- e.g. where goods are perishable
e) Breach by Seller
Where he wrongfully neglects or refuses to deliver the goods to the buyer.
i. Remedies of buyer
a. Damages for non-delivery
b. Specific performance- in case of breach to deliver specific or ascertained goods.

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D. CHAPTER FOUR - THE LAW OF AGENCY
I. INTRODUCTION
Subject to some well-known exceptions, it is an established common law rule that whatever a person can do personally;
he can also do through another person, an agent. Secondly and as a necessary corollary, it is also a recognized rule that
he who does an act through another does it by himself. Thus the acts of an agent are deemed to be the acts of the person
who employs him, known as the principal.
An agent is a person appointed expressly or otherwise to bring his principal into contractual relationship with the 3 rd
party. Once the agent has brought his principal into the contractual relationship with the 3rd part he drops out and his
principal and 3rd part become liable to each other on the contract. It can be called a relationship between the principal and
the agent, where the principal expressly or impliedly authorizes the agent to work under the principal’s control and on
his behalf to negotiate on behalf of the principal, or to bring him and third parties into contractual relationship.
1) WHAT ARE THE ESSENTIALS OF A CONTRACT OF AGENCY

1. There must be an appointment of an agent by the principal.
2. The principal must confer the authority upon the agent to act for him.
3. The authority conferred should be such as will make the principal answerable to 3 rd parties.
4. The relationship of agency being based on confidence between the principal and agent, no consideration is necessary.
The essential or basic feature of agency is the power of one person (agent) to alter the legal position of another (principal)
by making contracts on his behalf or by of disposing of his property. Thus the agent must have capacity to bind the
principal and make him answerable to a third person by bringing the principal into legal relations with the third person
thereby establishing a privity of contract between the two, principal and third person. Primarily the power may arise:
a) By consent;
b) By operation of law; or
c) By the doctrine of apparent authority.
Under common law, as already stated, any person can act through an agent unless such person occupies a position
requiring personal performance or where such person is a party to a contract which impliedly or explicitly prohibits
delegation to an agent. Examples are, for example, a marriage or certain service such as that of a judge or magistrate.
2) SOURCES OF AGENCY LAW

Any contractual relationship is governed by the terms of the contract and general contract law, and by particular principles
of the common law, including equity, relating to agency, and any statutory provisions applicable to that type of contract
in question.
3) THE LEGAL USE OF THE TERM “AGENT”

The word “agent” is very “commonly and constantly abused.” Many business people for some or no reason choose to call
themselves agents when in fact they are the principals.
The law of agency does not come into play every time a person represents another. A wife, for example, who represents
her husband at a social function such as a harambee does not thereby become his agent. On the other hand, a father

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who sends his son to the nearby kiosk to buy him milk makes an agent of the son and will be liable to the kiosk operator
for the price of such milk. This is because agency implies authority to affect another’s legal position.
4) AUTHORITY AND POWER OF AGENT

Agency may be therefore regarded as a particular form of authority, namely, to create or effect legal relations between P
and T. Authority to do acts which are not intended to produce this result does not give rise to an agency relationship
 Agency law deals with three distinct relationships, between P and A, between P and T and between A and T
 The authority of an agent must be distinguished from his power.
 A transaction entered into by A within the scope of his actual authority from P will, of course bind P. but P will also
be bound if A acts within his apparent authority. In such a case, though A does not have the right to enter into the
transaction on behalf of P, the law invests him with the power to commit his principal to the transaction
A’s power normally derives from some authority conferred by P, but this is not necessarily so. In extreme cases, such as
where the P’s property is at imminent risk and has to take urgent action to save it and is unable to communicate with P
or to obtain an adequate response to his request for instructions, the law treats A as an agent of necessity to take the
necessary remedial action, as where the master of a ship enters into a salvage agreement with T, on behalf of P to save
P’s cargo, or where A is in possession of perishables belonging to P and sells them for P’s benefit before they become
rotten.
II. CLASSES OF AGENTS

Agents may be classified as to: -
(a) The extent of their authority and,
(b) The nature of the work they perform.
1) THE EXTENT OF AUTHORITY
a) UNIVERSAL
A person whose authority to act for another is unlimited may be referred to as a universal agent. This is a rare kind of
agency in which the principal appoints an agent to handle all his affairs. The agent has authority to bind his principal by
any lawful act that he does on behalf of the latter. It is referred to as universal. It is a form of general power of attorney
which must be in writing

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b) SPECIAL AGENTS
A special agent is one who is employed to make only a particular contract or has authority to act for some special occasion
or purpose which is not within the ordinary course of his business or profession6. Where a person (agent) is appointed
by another to handle a transaction which does not form the agent’s normal business activities, this is a special agent e.g.
an estate agent asked by a friend to sell a car or a bank manager asked to sell a house on behalf of his friend or an agent
employed to dib an auction. The authority of the agent is therefore very limited and ends as soon as the specific act is
performed.
c) GENERAL AGENTS
A general agent is one who has authority, arising out of and in the ordinary course of his particular trade, business or
profession, to do some act or all acts on behalf of his principal in relation thereto, or one who is authorized to act on
behalf of the principal generally in transactions of a particular kind or incidental to a particular business7. This is an
agent who is appointed to act in transactions of a designated class or generally, so as to be within the ordinary course of
his business.
A branch manager of a company is usually deemed to havegeneral authority to represent and bind his principal in all
business of the kind that the company carries on. The manager as agent thus has implied authority to represent and
bind his principal in all matters incidental to or which fall within the ordinary scope of the business in question; e.g. a
bank branch manager.
A third party dealing with such agent is not affected by any secret restrictions on the agent’s usual or apparent authority.
The principal is bound by all the agent’s acts done within the scope of his authority, regardless of any secret instructions
limiting such authority unless such entailment is notified to third parties dealing with the agent.
An undisclosed principal, it has also been stated, must not be allowed “to absorb the profits and then when the pinch
comes to escape responsibility on the ground of orders to his agent” restricting the agent’s authority as this would be “a
plain fraud on the public”8. In the leading case9the manager of a public house was forbidden to order tobaccos by his
principal, but did so. The seller of the tobacco had not even heard of the principal and in fact thought he was contracting
with the manager (agent). It was held that the principal was liable to pay the seller, since a manager of a public house
would usually have authority to make orders of this kind, and the seller could therefore rely on the agent’s ostensible
authority in the absence of express knowledge of the limitation imposed by the principal.
2) NATURE OF WORK PERFORMED

According to the nature of work performed by agents the following more common types of general agents are briefly
discussed below.
6
Lowther -v- Harris (1927) 1 KB 393 See also Halsbury’s, op.cit - para 711.
7
Weiner -v- Harris (1910) 1 KB 285, CA. See also Halsbury’s Laws of England, 4 ed. para. 711.
8.
See DrStoljar’s on Agency.
9
Watteau v Fenwick,1893 1 Q B 346
COMMERCIAL TRANSACTIONS: KSL-CLE

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a) MERCANTILE AGENT
Both under common and statute a mercantile agent is one who has, in the customary course of his business as such agent,
authority either to sell or to consign goods for the purpose of sale, or to buy goods or to raise money on the security of
good10 . Thus it may be inferred from this definition that a mercantile agent must be a person who has a business, and
who, in the course of that business, buys and sells goods for other people. An agent may be a mercantile agent although
he has no general occupation as an agent; or has only one customer. He may be such agent even though his general
occupation is that of an independent dealer in the commodity entrusted to him. But in each case he should be acting in
his capacity as a mercantile agent and must not be a mere servant or shopman 11. The above definition does not however
cover all kinds of mercantile agents, such as broker, auctioneer, commission agent, Del credere agent, and banker and so
on.(can also be referred to as role of agents)
b) FACTORS AGENTS
A Factor is a person in possession of goods belonging to his principal to be sold for the benefit of the P.
It is customary for factors to sell goods in his own name without disclosing the identity of the P. However if he does
disclose the name of the P, that fact alone does not mean that he would cease to be a Factor. A Factor, who in the
customary course of his business has authority to sell goods, or to consign goods for sale, or to buy goods or to raise
money on the security of goods, is termed a mercantile agent.
Where a mercantile agent, with the consent of the P, is in possession of goods or documents of title to the goods, any
sale or other disposition transacted by him in the ordinary course of business in respect of those goods is as valid as if
they were expressly authorized by the principal, provided that the third party did not know of the agent’s lack of
authority.
c) CONSIGNMENT
The enterprise delivers goods to the consignee to hold in the first instance as the bailee, but on terms that the consignee
is to buy the goods if he notifies his of intention to do so, and he is deemed to have elected to buy them if he fails to
return the goods within a given time or otherwise adopts the prospective purchase transaction, typically by selling the
goods.
d) DISTRIBUTORSHIP
 An agent can be appointed to buy goods and resell them in his own account
 A business may use a single distributor or a complex network of distributors to market its goods
 A supplier may favour a distribution agreement where it is trying to break into a new market, hence taking
advantage of the distributor’s local knowledge; or the nature of the products require little or no direct contact
with the end user or customer
10
See section 26(3), Sale of Goods Act, Chapter 31, and also section 1 (1) Factors Act,
1889, UK
11
Lowther -v- Harris 1927) 1 KB 393

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 In contrast, to agency relations, strictly speaking, the distributor is an independent party who bears risks in all
transactions to third parties subject to supplier’s liability for defective goods
 Distribution agreements fall into a number of categories:
ii. SOLE DISTRIBUTION AGREEMENT

 Where the supplier undertakes not to appoint another distributor for his goods in the territory, but is free to
sell his goods directly to the customers in competition with the distributor.
 A supplier who wishes to develop or protect his corporate image may choose sole agreement. Such agreement
may also be suitable where the nature of the goods requires an enhanced level of service or advice at the point
of sale to customers, or where the supplier will be required to provide after sale support.
iii. EXCLUSIVE DISTRIBUTION AGREEMENT

 Which gives the distributor the exclusive rights to sell the product in a specified territory
iv. SELECTIVE DISTRIBUTION AGREEMENT

 Where supplier appoints a certain number of distributors to promote his goods in a territory based on certain
qualitative criteria which effectively limited the number of distributors that can be appointed
 A selective distribution agreement may not encourage as much intra- brand competition as exclusive
agreements, and so are more likely to raise questions of anti competition. Such concerns may be off- set where
goods are cheaper to the customer due to a reduction in logistical costs brought about by a selective agreement.
v. NON-EXCLUSIVE DISTRIBUTION AGREEMENT

The distributor agrees to take the suppliers goods but in knowledge that he will be competing with other distributors
and the supplier. The terms of such agreement distributor than exclusive or sole distribution agreements
a. BROKER
A broker is a mercantile agent who in the ordinary course of his business is employed to make contracts for the purpose
or sale of property or goods of which he is not entrusted with the possession or documents of title. He is employed to
buy and sell goods on behalf of another, but no possession and therefore no right of lien.
b. AUCTIONEER
An auctioneer is an agent who is employed to sell at a public auction. He may or may not be entrusted with possession
of goods or property to be sold or of the documents of title thereto. An auctioneer may act as agent for both seller and
buyer12
12
See Hinde v. Whitehouse (1806) 7 East 558.

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c. COMMISSION AGENT
A commission agent is one employed to buy and sell goods, or transact business generally for other persons. In return,
he receives a money remuneration which is referred to as a commission.
d. BANKER
There is a complex implied contract between a bank and its customers, which imposes many duties on the bank similar
to those of an ordinary agent as we have seen above. But the relationship is mainly that of debtor and creditor. Where
the customer’s account is in credit the bank is the debtor. In so far as a banker has a legal obligation to make payments
on behalf of his customer directs the banker to pay by either draft or order (e.g. by cheque) of the customer.
e. DEL CREDERE
A delcredere agent is one employed to sell goods and who promises to make sure that clients introduced by him to his
principal will pay for the goods sold. It is also applied to an agent who becomes surety for the solvency of persons to
whom he sells (Italian–del+of the; credere= to believe or trust)13.
 The Del credere agent takes on additional risks. He is prepared, upon the payment of a satisfactory
commission, to indemnify the principal if the transaction falls through and the principle suffers loss
as result
 The terms of a del cerdere agency are such that the agent only agrees to indemnify the principal in the
event of the buyer not taking delivery of the goods or becoming insolvent and unable to settle the
purchase price
 The del credere remains an agent throughout , and he is therefore not to be held liable for the non-
performance of the contract by his principal
 There are no formal requirements for the formation or creation of a delcredere agency. Its existence
can be implied from the parties conduct
 The Del credere’s primary appeal is in the comfort for principal’s that the transaction will be
performed. That attraction is now covered, in the case of international sales, by modern mechanisms,
including documentary credit system etc
3) OTHER NON-MERCANTILE TYPES OF AGENT
a) ADVOCATES/COUNSEL/SOLICITORS
They are agents of their clients when, inter alia, they effect compromise on matters connected with, but not merely
collateral, to the litigation in question. In Lawrence Musyoka Wambua vs. LM Wambua and Company Advocates v
13C
hambers 20th Century Dictionary – p 329

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United Insurance Company Limited 15 it was clarified that a counsel duly appointed by a party to act on his behalf is a
recognized agent of the party by whom appearances, applications and acts may be made or done as mandated by Order
III, rule 2, of the Civil Procedure Rules.
b) INSURANCE AGENT
An insurance agent or insurance broker is employed to negotiate and effect policies of insurance. By established
insurance practice, such person is deemed to be agent for the insured and not for the insurance company. The insurance
conducts, say, a running down or road accident case on behalf of a defendant or defendants. In such a case the Defendant
is bound by the action of the insurance company. The insurance company itself may be deemed to be an agent, too. For
example, where the company conducts, say, a running down or road accident case on behalf of a defendant or defendants.
In such a case the defendant is bound by the action of the insurance company.
c) CLEARING AND FORWARDING AGENT

A Clearing and forwarding agent is one who undertakes the shipment or transmission of goods. Such agent incurs
personal liability for freight charges whether transmission is by sea or by air, according to custom of the trade. He should
facilitate the safe arrival of goods.
d) ESTATE AGENT
An estate agent is a person who, in connection with the acquisition or disposal of any land or other premises, brings
together or takes steps to bring together the person wishing to dispose thereof and a person prepared to acquire it. He
may also undertake to negotiate the terms of a proposed transaction on behalf of either party. His powers are extremely
limited. Unless specifically authorised to do so, he has no power to make a contract between their client and prospective
purchaser. But he usually has powers to make representations about the property: In Spiro v. Lintern17 there was a power
to make a contract.
e) DIRECTORS
Directors are in law agents of the company when they act as board of directors. A company is an artificial person and is
taken to act through its appointed or elected representatives of the shareholders, who are the directors.
f) PARTNERS
A partner is an agent of the firm and his other partners for purpose of business of the firm.
g) WIFE
A wife whether living with her husband or not is in certain well-defined cases, an agent of the latter
17
(1973) 1 WLR 1002

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III. AGENCY DISTINGUISHED FROM OTHER RELATIONSHIPS

It is important to distinguish an agent from other persons who may perform functions similar to his.
1) TRUSTEES
Like trustees agents stand in a fiduciary relationship to their principals and must not make secret profits and must not
allow their interests to conflict with their duties. However the main differences are:
a) a trustee has legal ownership of property, but an agent, at best, has only the legal power to dispose of property;
b) An agent is a representative of his principal; a trustee usually is not.
2) SERVANTS AND INDEPENDENT CONTRACTORS

The distinction between agents, on the one hand, and servants and independent contractors, on the other, is essentially
one of function. An agent is employed to make contracts and to dispose of property. Servants and independent
contractors do not ordinarily create legal relationship between the employer and third parties and are usually employed
for other tasks and the master has a right to control how the work is to be done in the case of servants. An agent is
bound to follow all the lawful instructions of the principal but it is not subject to the direct control and supervision of
the latter. However he has a widen latitude of discretion and usually enjoys greater independence and freedom from
control than a servant.
Another distinction is that an agent may work for several principals at the same time. This rarely applies to a servant
who usually serves one master only. In Haji KhamishaJumaEssak v. High Commissioner for Transport 18 it was submitter
on behalf of the Plaintiff that two persons who were working on his behalf as clearing agents were not in law acting as
the Plaintiff’s agents but as independent contractors because they did this kind of work for others as well. The Court
found that the two worked on behalf of the Plaintiff, who put them in funds to pay charges, the two were paid for their
duties. It held that they were agents of the Plaintiff and not independent contractors.
In practice, there is really no absolute distinction because it is possible for a person to be both servant and agent (e.g. a
sales representative) or an independent contractor and agent (e.g. a free-lance commercial traveler, that’s a person who
travels over a large area visiting shops, institutions, offices etc. with samples of goods, trying to obtain orders).Here the
concepts overlap. But a person may be a servant only e.g. a labourer or an independent contractor only e.g. an electrician.
Partners and Company directors may be said to be agents without at the same time being either servants or independent
contractors.
3) BAILEE
A bailee is a person who receives possession of goods from (or for) the owner (bailor) for a specific purpose. Where
e.g. a person (bailor) deposits goods in a railway luggage office or pawns his goods, the bailee is under a duty to take
18
(1914) 20 KLR 1

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reasonable care of the goods and to return them in accordance with the contract of bailment. Bailment overlaps with
agency where the agent receives possession e g. factors (i.e. agents entrusted with possession of goods for the purpose
of selling them for his principal) and other mercantile agents.
IV. THE FORMATION OR CREATION OF AGENCY

The law of agency is a special branch of the law of contract, as we have already seen above. Agency may be created by:
a) express agreement/appointment/consent;
b) implication or conduct under the doctrine of apparent authority;
c) operation of law; or
d) ratification
e) estoppel
1) EXPRESS AGREEMENT/APPOINTMENT
In its simplest form a business transaction involves only two persons, namely: - the seller and the buyer. Very often,
though, one or both of the two are acting for another or others. The one or both will have either been asked or appointed
expressly to act as buyer or seller for the person asking or appointing.
An agent may be expressly appointed either verbally or in writing. Here the principal authorizes the agent to carry out
an assignment on his behalf and the agent does as instructed. The appointment need not be in any particular form and
a verbal appointment is sufficient even though the contract the agent is required to make must be in writing. In other
words, it may be expressed orally, in writing or by deed (usually called a “power of attorney” If the agent is required to
make a contract under seal, however, he must be given authority under seal; that is, given a power of attorney.
Agency by express agreement will, of course be consensual but it need not be contractual. In other words, agency depends
on agreement and not necessarily on contract. This is because agency may be gratuitous, too. A purely consensual agency
lacks consideration whereas a contractual agency imposes an obligation on the agent to carry out his functions in return
for remuneration.
2) IMPLIED AGENCY
Implied agency arises from the conduct or situation of the parties, and is used in contradistinction to the expression
“express agency”19. A person who holds out another, by words or conduct, as having authority to enter into contracts on
his behalf, will be bound by such contracts. He will be estopped from denying the agency created thereby. Where, for
example, A usually pays for goods ordered by B, the latter becomes the former’s agent. A will be bound to settle debts
incurred in the same way as if he had expressly authorized them: Summers -v- Solomon20
19
. See Halsbury’s, op. cit. para. 715 & footnote.
20
(1857) 7E &B. 879.

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In Ryan v Pilkington21, an estate agent was instructed by the owner to find a purchaser for a private hotel. He did so and
accepted from the prospective purchaser a small deposit “as agent” of the owners. The estate agent was not expressly
given authority to accept deposits. It was held that the agent had acted within the ostensible scope of his authority. In
other words, whether he has authority to make a contract or not, the estate agent has implied authority to accept a
deposit from a potential purchaser.
3) OPERATION OF LAW
There are situations where the law, for reasons of policy, presumes an agency relationship between parties who have not
agreed to create such relationship and have not represented to third parties dealing with them that one is acting as agent
for the other. Here may be considered agency arising by necessity, cohabitation and statute.
a) NECESSITY
Agency of necessity occurs when a person is entrusted with another’s property and it becomes necessary to do something
to preserve that property. In such a case, although the person who is entrusted with the property has no express authority
to do the act necessary to preserve it, because of the necessity such authority is implied.22.
Put in another way such agency arises by operation of law where for example, a person is faced with an emergency and
it becomes necessary in order to preserve the property or interests of another person which are entrusted to him and
which are in imminent jeopardy, to act for that person without his authority23 (quoted in B.S Markesinis& RJC Munday)24.
In Great Northern Railway v. Swaffield25horse was sent by train, but when it arrived at the station of destination, nobody
took its delivery. The railway Company was obligated to feed the horse. It was held that the railway company was an
agent of necessity and could recover the amount spent on feeding the horse. Later Sims & Co. v. Midland Rail Co26as it
was held that a sale of butter consigned though a railway company by the company, when, due to a strike, transit was
delayed was held to be binding on the consignor. By the word “necessity” is meant “the force of circumstances which
determines the course a man ought to take”, that is, a course “which, to the judgment of a wise and prudent man, is
apparently the best for the interests of the persons for whom he acts in a given emergency” 27.
Four conditions must be satisfied before any agency can be created by necessity:
21
(1959) 1 WLR 403
23
See Bowstead on Agency 14 ed. p. 63
24
An Outline of the Law of Agency, p. 40
25
(1874) L.R. 9 Ex 132]
26
. (1913) 1 KB 103
27
per Sir Montague Smith in Australian Steam Navigation Co. -v- Morse (1872) L.R. 4 PC 222 at 230.

Page 124 of 166
i. There must be an actual and definite commercial necessity for the creation of the agency, i.e. there must be a
genuine emergency.
There is no agency of necessity unless there is a real emergency, such as may arise out of the possession of perishable
goods or of livestock requiring to be fed. In Prager v Blatspiel Stamp &Heacock Ltd28 it was held that as skins were not
likely to deteriorate in value if properly stored, there was no necessity for their sale by an agent for a fur merchant who
could not send them to the latter in Bucharest on account of the occupation of Rumania by German forces. Neither could
the agent communicate with the merchant. The agent was found liable in damages.
ii. It must be impossible to get the principal’s instructions

In Springer -v- Great Western Railway Company29, tomatoes were consigned by S from Jersey to London. The ship
delivered them to Weymouth three days late and, owing to a railway strike, the tomatoes could not be unloaded until two
days later. When unloaded they were found to be bad and the railway company decided to sell them locally. No
communication was made to S. It was held that the railway company was liable in damages to S., as they should have
communicated with him and asked for his instructions as soon as the ship arrived. Modern communications facilities of
today such as telegrams, fax, telephones, e-mail, tend to make it difficult to meet this condition today.
iii. The agent of necessity must act bona fide in the interests of all parties concerned.
iv. The act must be done for the benefit of the owner and not merely for the convenience of the agent: Sachs -v-
Miklos30.
b) COHABITATION
There is a rebuttable presumption at common law that a wife living together with her husband has her husband’s authority
to pledge his credit for necessaries. What are necessaries will depend on their style and standard of living. The
husband may disprove such presumption if:
a) he expressly forbade his wife to pledge his credit; or
b) he expressly warned the supplier not to supply his wife with goods on credit; or
c) his wife was already sufficiently supplied with goods of the kind in question; or
d) his wife was supplied with a sufficient allowance or sufficient means for the purpose of buying such goods
without pledging the husband’s credit; or
e) The order, though for necessaries, was excessive in extent or, having regard to the husband’s income,
extravagant31.
28
(1924) 1 KB 566
29
(1921) 1 KB 257
30
(1948) 2 KB. 23
31
. See Charlesworth’sMercantile Law, 14 ed., p. 229.

Page 125 of 166
The application of these common law principles in the present Kenyan situation requires care and might differ from one
social or economic community to another.
“If the husband has been in the habit of paying his wife’s bills with a particular supplier, his wife’s agency will be implied
by his conduct, and he can only escape liability by expressly informing the supplier that his wife’s authority is revoked.
If the supplier gave credit to the wife personally and not to the wife as her husband’s agent, the husband is not liable” 32.
In Chahaganlal P.Jani v. RanchoddasKalvanji&Another33 although the wife was no longer maintained by her husband
she continued to live in his house and the local grocer kept separate accounts for them. However when her bill was not
paid the grocer sued her husband. The Chief Justice approved of the following statement by the trial magistrate: “The
husband, being bound in law to maintain his wife, she can, if he fails to support her in a manner suitable to her station,
bind him as his agent for necessaries. The husband cannot deprive the wife of this authority unless the wife voluntarily
leaves the husband’s house and lives apart”. This authority was, however, no more than a presumption in favour of his
implied authority to her to pledge his credit in respect of the necessaries, which might be rebutted by evidence negativing
it.
Where a husband put up an advertisement in the newspaper and forbade persons to supply his wife, who was living apart
from him, on his credit the court was reluctant to deprive the wife of her reasonable express, in Harris v. Morris34of the
advertisement the court said that “that cannot avail him, for if he put her out of doors, … for the law has said, that were
a man turns his wife out of doors, he sends with her credit for her reasonable expenses”. It is immaterial that he even
gave particular notice to individuals not to give her credit.
c) STATUTE
A number of statutes stipulate that certain persons shall be deemed to be agents in certain situations. Partners for
example are each other’s agents for making contracts in the ordinary course of business35.
d) RATIFICATION
This is the granting of authority by a principal to an agent after initially an unauthorized act is caused by the agent. If an
agent has no authority to contract or exceeds the authority he has, the contract is not binding on the Principal. However,
the principal may confirm or adopt the contract made by the agent without authority or in excess of his authority. That
confirmation of adoption is referred to as ratification and makes the contracts binding on the principal.
32
See Charlesworth’sMercantile Law, pp. 229-230.
33
(1956) 8ZLR 95
34
(801) 4 Esp. 41
35
See Partnership Act, Cap. 29.Laws of Kenya.

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e) ESTOPPEL
Agency by estoppel means that a person by his words or conduct has made a 3rd party to believe that the person with
whom he is contracting is an agent of the first mentioned person. The 1 st mentioned person is estopped from denying
the face that the person with whom the 3rd party contracted is the agent.
V. THE AUTHORITY OF THE AGENT

The power of the agent to affect the relations between his principal and third parties is the central feature of agency. As
we have seen above (formation of agency), this power may broadly arise from:-
 ·express authorisation by the principal;
 Conduct of the principal which creates appearance of authority even though no such authority exists; or
 ·the law
 Ratification
Broadly two types of authority are discernible from these:
 Actual or real authority; and
 Authority which arises from the conduct of the principal but does not in fact exist, i.e. ostensible
authority, which is merely a form of estoppel.
1) TERMINOLOGY
From the outset it is important to note that types or a kind of authority of the agent is bedeviled by terminological
befuddlement. Scholars, judges and lawyers in general have manifested considerable differences in their understanding
and classifications of the various types of authority of the agent. For example there appears to be much difficulty in
distinguishing between actual, implied and apparent authority. But in the end some of the distinctions are of no
consequence in practical terms. We shall attempt to classify the authority of the agent under the following subheadings:
 express actual authority including authority conferred by law;
 implied actual authority;
 usual or customary authority;
 ratification;
 authority by operation of law; and
 apparent (ostensible) authority;
2) EXPRESS ACTUAL AUTHORITY

“Actual” authority has been defined as “a legal relationship between principal and agent created by a consensual
agreement to which they alone are parties”, per Diplock LJ in Freeman and Lockyer -v- Buckhurst Park Properties (Mangal)

Page 127 of 166
Ltd36. It is the authority, which the agent actually has according to the agreement. It is real authority. “It is express
when given by express words, such as when a board of directors passes a resolution which authorises two of their number
to sign cheques”37.
Express authority may be conferred on an agent either in writing or orally. Express authority given in writing may be
under hand or under seal. Authority given under seal is known as a power of attorney. The extent of such authority is
dependent upon the true construction of the words used. The scope of a written agency agreement should be ascertained
by applying ordinary principles of construction of contracts including any proper implication from express words used,
usages of trade or the course of business between the parties. The precise limits of an oral agreement are a matter of
evidence. An appointment by deed will be strictly construed and the authority limited to the purpose for which it was
given.
Instructions to the agent must be explicit; otherwise the agent cannot be held liable (and the principal will be bound) if
he acts according to a reasonable construction of such instructions. In Ireland -v- Livingston 38, Lord Chelmsford said: “....
if a principal gives an order to an agent in such uncertain terms as to be susceptible of two different meanings, and the
agent bona fide adopts one of them and acts upon it, it is not competent to the principal to repudiate the act as
unauthorised because he meant the order to be read in the other sense of which it is equally capable. It is a fair answer
... to tell the principal that the departure from his intention was occasioned by his own fault, and that he should have
given his order in clear and unambiguous terms.”
Quaere: Should the agent not seek clarification if he is aware of the ambiguity? (Yes, if it is commercially practicable to
seek and obtain such clarification).
3) IMPLIED ACTUAL AUTHORITY

We have seen that actual authority may be conferred on an agent by express words (oral or written). Such authority may
also be conferred by implication, i.e. “inferred from the conduct of the parties and the circumstances of the case, such as
when the board of directors appoints one of their number to be managing director. They thereby impliedly authorise
him to do all such things as fall within the usual scope of that office “, per Lord Denning MR in Hely - Hutchinson -v-
Brayhead Ltd & Another39
In practice the agent is sometimes obliged to perform acts beyond or in addition to those contained in his express
appointment. Such powers as may be necessary for or incidental to, the performance of his express authority are known
as implied authority. The expression is here used to describe “an extension of an express authority which is necessary
to give the express authority full business efficacy” 40 .For example, an agent employed to “sell” a house has authority to
sign the relevant memorandum of contract. But authority to make a contract containing special conditions is not lightly
36
(1964) 2QB 480 at p. 502
37
Per Lord Denning Mr. in Hely-Hutchinson Ltd -v- Brayhead and Another (1967) 3 All E.R. 98 (1968) 1Q B. 549
38
(1872) L.R. 5 H.L. 395
39
(1968) Q B 549, at 583
40
See Halsbury’sop.cit. para. 715, footnote.

Page 128 of 166
to be inferred and every case must be examined on its own merit 41. When such implied authority arises from logical
construction of express authority it is indeed real authority.
4) USUAL OR CUSTOMARY AUTHORITY

Usual or customary authority arises from settled and well-understood trade, business or professional usages and
customs. Agents who practice a particular trade business or profession are normally authorised to do everything, which
is usually, or ordinarily done in such trade, business or profession. It is a concept within implied authority, which derives
from trade, business or professional practices. The usual authority of an agent forms part of the implied authority,
unless it is restricted.
(i) General rules: An agent has implied authority to perform such acts as are usual in the trade, profession or
business he carries e.g. auctions, stock broking and estate agency. An agent has implied authority to act in
accordance with such customs as prevail where he is employed, so long as such customs are reasonable and
lawful. In Howard -v- Sheward42, it was held that an agent for a house dealer had implied authority to warrant
the soundness of the houses he was selling and if the houses turned out not to be sound, the principal, and not
the agent, will be liable to the purchaser. But a custom that is fundamentally inconsistent with the agency
relationship will not bind the principal.
(ii) Restriction of usual authority: A third party without notice of a restriction on an agent’s usual authority is not
affected by such restrictions.
(iii) Note: Specific cases falling under this such as auctioneers, brokers, estate agents,Delcredere agents and
confirming houses.
5) AUTHORITY BY RATIFICATION
Ratification occurs where an initially unauthorised act is subsequently affirmed (or ratified) by the principal and
thereupon becomes binding. It is a case of real authority given after the event has taken place. A person’s action does
not bind another (principal) where:-
(a) Having been duly appointed as an agent (i.e. with actual authority) he exceeds his authority as
specified by his principal; or
(b) Having no authority at all he purports to act as an agent.
But in each case if subsequently the other (principal) expressly or by implication validates or otherwise approves such
action, he (the principal) will have assumed liability by ratification. In other words, “a person ratifying the act of another,
who, without authority, had made a contract openly and avowedly on his behalf, is deemed to be, though in fact he was
not, a party to the contract” per Lord McNaughton in Keighley Maxsted& Co. -v- Durant43.
Ratification is conditional on the following:-
41
See Wragg v. Lovett (1948) 2 All E.R. 989.
42
(1866) L.R. 2 CP 148
43
(1901) AC. 240, 247

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(a) The agent must expressly have contracted as agent. If he merely intended to contract as agent but had no
authority but purported to act for an undisclosed authority, there can be no ratification 44.
An agent was authorised by the appellants (principal) to purchase a quantity of wheat at a certain price on joint account
for himself and the appellants. He was unable to buy at the agreed price but concluded a contract with the respondents
at a slightly higher price without revealing that he was also acting for the appellant. The following day the appellants
purported to ratify the agreement but later failed to take delivery. The seller sued them (principal). It was held by the
House of Lords that a contract on behalf of a third party, but without his authority, cannot be ratified by him so as to
enable him to sue or be sued on the contract if the person who made the contract did not make it clear at the time of its
making that he was acting for another party.
The agent’s act was unauthorised and since the principal was not disclosed the principal could not ratify neither
was he liable. The case of an agent “who may intend to act for another, but at the same time keeps his intention locked
up in his own breast” is thus excluded.
(b) There must be a principal in existence on behalf of whom the agent claims to be contracting. Thus a newly
incorporated company cannot ratify a contract made by an agent before the company’s formation 45
(c) The principal must be ascertainable or must have been named. In Re Tiedemann and Lederman Freres46 the
facts here were the exact converse of those in the Keighley case. Here A sold wheat on behalf of P. The market
rose and A then re bought the wheat and sold it to T at a profit. This purchase and sale was made by A on his
own behalf but in his dealing with T he used the name of P for financial reasons. Later P purported to ratify
the contract. It was held that he could do so47.
(d) The principal must have had full contractual capacity at the date of the contract and at the date of ratification.
If, at the time of the contract the principal was an enemy there can be no valid ratification: Boston Deep Sea
Fishing and Ice Co. Ltd. -v- Farnham (1957) 1 WLR 1051.
(e) The act in question must be one capable of being ratified; ultra vires act or a forgery cannot be ratified.
(f) At the time of ratification the principal must have full knowledge of all material facts or must have agreed
to48. The effect of ratification is to retrospectively validate a contract made by an agent without authority.
6) AUTHORITY (AGENCY) BY OPERATION OF LAW

As we have seen above, agency by operation of law refers to cases where the parties have neither agreed to create an
agency relationship nor have they represented, to third parties dealing with them that one of them is acting as an agent
44
See Keighley, Maxsted& Co. -v- Durant (1901) AC 240:
45
See Kelner v Baxter (1866) LR 2 CP 174.
46
(1899) 2 Q. B. 66
47
. (See Commercial Law by Robert Lowe, 3 ed., p. 35)
48
See Marsh v. Joseph (1897) 1 Ch 213, and Freeman v Roster (1849) 18 L.J.Q.B. 340.

Page 130 of 166
for the other. In these, the agency relationship arises because the law, for a number of reasons of policy, provides that
the relationship shall be one of agency.
There is a type of agency loosely referred to as agency of necessity i.e. agency which arises due to the necessity of
circumstances such as where a person (whether already duly appointed as an agent or not) is compelled to exceed his
instructions in an emergency. In certain limited circumstances, the law may presume agency in favour of e.g. a deserted
wife lacking means of support for herself and children.
An agency may also be expressly created by statute. For example, a statutory agency arises in respect of the unpaid seller
of goods exercising his right to re-sell24. Again, a person who is obliged to supply food and water to impounded animals
becomes an agent by operation of law and may recover the cost of such provisions.
Quaere: Are most, if not all, cases of agency not as a result of operation of law in the sense that the parties are the ones
who create certain factual situations to which the law ascribes legal consequences? Note: Some authors treat agency by
operation of law as part of implied authority.49This comes out more so in cases where a wife or even a mistress cohabiting
with her lover, pledges the man’s credit in certain cases.
7) APPARENT (OSTENSIBLE) AUTHORITY

In Rama Corporation v Proved Tin and General Investments Ltd Slade J. said that “ostensible or apparent authority
which negatives the existence of actual authority is merely a form of estoppel”. In other words, it is simply a form of
holding out by the principal to a third party that an agent has appropriate authority although in fact such authority does
not exist.
Thus where the chairman/director of a company signs a letter of appointment of a staff member, the company will be
bound by his action even though no resolution of the board of directors exists supporting such appointment on the terms
specified in the letter51, where several acts of the chairman/director suggested that the appellant company knew that he
held himself out as acting on the company’s behalf “thus impliedly representing that he had authority to do so”, 52. “In
my view, it is immaterial whether [the director] has authority to enter into the contract. The appellant company cannot
repudiate the actions of the chairman/director done within the scope of this ostensible authority”, ibid.
As a form of estoppels it is clear then that a party cannot invoke this in his aid unless:-
(a) A representation was made to him by the principal;
(b) He relied on such representation; and
(c) His position altered as a result of reliance on such representation,
Such representation may be by words or conduct, to the aggrieved party whether made negligently or intentionally. It
must such representation as affirms the agent’s authority to act on behalf of the principale.g.
24
See s. 48(3) Sale of Goods Act, Cap. 31
51
See EmcoPlastica International Ltd v Freeberne (1971) E.A. 432
52
per Lutta J.A, p. 435

Page 131 of 166
 A principal who writes to his bank to the effect that the agent has authority to draw cheques affirms, by words, the
agent’s authority to so act on his behalf.
 A husband who pays for goods supplied to his wife by a trader similarly creates the appearance of the wife’s authority
to pledge his credit. He will be held liable to pay for more goods supplied by the trader in reliance of such holding
out, until the trader receives actual notice that the wife’s authority has ceased53
But, where the third party had actual or constructive notice or if the facts should have put him on inquiry or aroused
suspicion, the principal cannot be held liable. For example, where an agent purports to have unlimited or unrestricted
power to draw cheques on behalf of the principal.54Likewise, where an agent isknown to act pursuant to a written power
such as a power of attorney, third parties are expected to examine the document, as the principal cannot be held liable
for unauthorised acts of the agent which are apparent from the document.
VI. PRINCIPAL AND AGENT
1) FORMALITIES
Most agency relationships are based on consent, whereby the principal authorises the agent to enter into contractual
relation on his behalf with third parties. No formalities are required for the appointment of an agent. He may so authorise
the agent by express appointment or by implication. Where authority is subsequent to the act of the agent this is referred
to as ratification. Ratification arises where a duly appointed agent exceeds his authority but the principal expressly or
impliedly ratifies the transaction and accepts liability.
Powers of attorney fall under express appointments, which must be done in writing (by deed); but in most other cases
the authority can take any form. Indeed an 1833 English authority suggests that even in cases which require writing, a
person (agent) can bind another (principal) if he executes a document in the latter’s presence and by his authority even
where the agent is not validly appointed in writing: R v Longnor (Inhabitants)55. Agency may also be inferred even though
no words indicate agency relationship in a written contract: Victory Shipchandlers -v- Leslie & Anderson Ltd56.
Under the Law of Contract Act although an interest in land cannot, subject to certain exceptions, be given or disposed of
except in writing signed by the party creating or disposing of it or by “some person authorized by him to sign it”, an
agent does not in fact require to be authorized by his principal in writing to dispose of an interest in land!
2) CAPACITY
The principal must have full contractual capacity to make the contract to be entered into by the agent but the agent need
not have full capacity. This is because the agent does not contract on his own behalf. He is a mere link between two
contracting parties. Thus an infant may be an agent.
53
See Draw v. Nunn (1897) 4 Q.B.D. 661.
55
1883 4B.&A 647.
56
(1972) E A 42, per Kneller J.

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The insanity of a principal for example terminates his agent’s authority even though the agent may be unaware of the
insanity at the material time57 . So long as there is no conflict or breach of his duties to either principal an agent may act
for the other party (principal) in the same transaction. For example, an advocate acts for both vendor and purchaser in
a contract of sale of land, and an auctioneer signing a memorandum for both vendor and purchaser.
3) CONSIDERATION
Agency may exist on a voluntary basis and free of charge but in a majority of cases remuneration is an implied or express
component. A gratuitous agency is created where e.g. a daughter agrees to do her mother’s shopping or where a son
attends to the family’s provision kiosk.
VII. DUTIES AND RIGHTS OF AGENT AND PRINCIPAL

The duties and rights of the principal and agent may derive either from the agreement between them or merely from the
fiduciary nature of their relationship.
1) DUTIES OF AGENT TO HIS PRINCIPAL
a) Due care, skill and diligence

An agent is bound to exercise his duty with care and diligence and should apply such skill as he possesses. A sales agent
for example must obtain the best price reasonably obtainable. If he has procured a better offer, which has been
conditionally accepted, he has a further duty to communicate this to his principal58. And he must disclose to him any
information, which he has which might influence the principal in making the contract. In Heath -v- Parkinson 59,H was
employed by P to sell the lease of P’s premises. P had reason to believe that his superior landlord would not consent to
the premises being used for a tailoring business. Several tailors were anxious to buy the lease, and H obtained from the
landlords an assurance that they would consent to a tailoring business being carried on. He concealed this from P. And
so induced him to sell for a lower figure than he otherwise would have done. It was held that H was not entitled to his
commission as he had not properly carried out his duty. The basic principle here is that a person professing a particular
calling must show the degree of skill appropriate thereto (spondesperiatimartis). In other words whether or not he has
the necessary qualities, skills or knowledge is not material in such a situation.
Quaere: Whether there is a distinction between a paid agent and a gratuitous one: Whether an advocate owes a higher
duty to his client who pays his full fees than to a client whom he appears for gratis or on the basis of a pauper brief.
b) Personal performance
The relation between the principal and the agent is a personal one. Save for a few exceptions, an agent must not delegate
the performance of his duties; delegates non potest delegare. This is because personal quality and skill of the agent is
central in the relationship.
57
See Yonge v Toynbee (1910) 1 KB 215
58
See Keppel -v- Wheeler (1927) 1 KB 577
59
(1926) 42 T.L.R. 693

Page 133 of 166
i. Exceptions:
 In case of necessity or where it is customary to delegate60.
 But an estate agent who has been appointed “Sole agent” has no implied authority to appoint a sub-agent: John
McCann & Co -v- Pow.61
 Where the principal expressly authorises the agent to delegate;
 Where a power to delegate can be inferred from the circumstances of the case;
 Administrative routine acts such as signatures can be delegated by the agent, once he has carried out the
required performance, to, say, other assistants and clerks.
Where an agent delegates, there is no privy between the principal and the delegatee. Consequently the delegatee cannot
sue the principal for payment nor can the principal sue the delegatee for not having adhered to the original terms of the
agency.
c) Good faith
Under the agent’s general duty of good faith there are the following.
(i) The agent must promptly disclose to the principal any material information he may receive in the course
of carrying out his duties.
(ii) He must not disclose to a third party any confidential information entrusted to him by his principal. See
Weld Blundellv Stephens62; L.S. Harris Trustees Ltd v Power Packing Services (Hermit Road) Ltd63. An ex parte
injunction known as Anton Piller injunction may be granted in exceptional circumstances to a principal
who fears that he may suffer damage if the agent destroys or disposes of confidential information 64.
(iii) He must not let personal interests conflict with his duties: Armstrong v. Jackson65.
(iv) He must not make any secret profit (including bribe) from his agency, which would obviously lead to a
conflict between his duty and personal interests.
An agent must account to his principal for any profit which he makes, without the principal’s consent in the following
situations:
 Profit made out of any property with which he has been entrusted by his principal: Shallcross -v- Oldham (1862)
60
See De Bussche -v- Alt (1878) 8 Ch.D.286
61
(1974) 1 W.L.R. 1643
62
(1920) AC 956
63
(1970) 2 Lloyd’s Rep. 65
64
See Anton Piller K.G. -v- Manufacturing Processes Ltd (1976) Ch. 55
65
(1917) 2 KB 822

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 Money or profit received by the agent on account of the position of authority to which he has been appointed
by the principal: In Reading -v- Attorney-General 66.a sergeant in the Army, received large sums of money from
M. for sitting in uniform in the front of loaded lorries as they went through to Cairo, so that the lorries were not
inspected. It was held that the Crown as his employer was entitled to the money because R had obtained it by
the use of his uniform and the opportunities and facilities attached to it.
 Profit made out of any information or knowledge, which the agent has been employed to collect or discover, or
which he has otherwise acquired for the use of his principal67
Note, however, that the agent is not accountable when the information or knowledge is not of special or secret nature
and he is not dealing with the property of his principal: Nordisk Insulin laboratorium -v- C.L. Bencard68. An agent cannot
be prevented from taking advantage of an opportunity of earning money, even if such opportunity comes his way because
of his employment as agent, so long as he does not use his principal’s property or break his contract by so doing: Aas -
v- Benham69.
The duty of good faith does not as a general rule automatically end on the termination of the agency. The nature of the
agency itself will often determine the duration. But where he has committed a breach of his duty (e.g. by taking secret
commission) the agent owes no duty to disclose this to his principal.
d) Duty to account
An agent must pay over to his principal all sums received by him which are due to the principal, whether or not such
payment was so received illegally. To buttress this principle, an agent must
 keep the principal’s property distinct from his own;,
 keep an account of all transactions entered into on behalf of the principal; and,
 Be able to produce this account to the principal or his appointee.
Besides the general rules a number of statutes and regulations specify the types of accounts to be kept by certain agents
who receive property on behalf of their principals, such as the Advocates (Accounts) Rules and the Advocates (Deposit
Interest) Rules.
e) Obedience
Agents must keep within his express or implied authority. He disregards at his peril any clear and lawful instructions
given to him. Where the instructions are uncertain the agent should ensure he acts reasonably and in the interests of his
principal.
66
(1951) AC 507
67
See Lamb -v- Evans 1 Ch. 218 and Regal (Hastings) Ltd -v- Gulliver (1942) 1 All E.R 378, H.L
68
(1934) Ltd (1953) Ch. 430
69
(1891) 2 Ch. 244, CA

Page 135 of 166
VIII. GENERAL REMEDIES AVAILABLE TO PRINCIPAL FOR BREACH OF DUTIES BY AGENT

a) Damages for breach of contract;
b) Damages in tort e.g. where the agent has refused to return the principal’s property (detinue) or conspiracy with
a third party;
c) Suit for money had and received, in case of secret profits or for an account. Application for an order for account
is also available where the agent fails to keep proper account70.
d) Dismissal for breach of duty without notice: Boston Deep Sea Fishing and Ice Co. -v- Ansell 71.
e) Refusal to indemnify or to pay commission or other remuneration to the agent: In Andrews -v- Ramsay & Co72,
A instructed R to sell property and agreed to pay him £50 commission. R sold and received £100 from purchaser
as deposit, of which he paid £50 to A, retaining the other £50 in payment of his commission, with A’s consent.
A learnt that R had also received £20 as commission from the purchaser and sued to recover this £20 and also
the £50 he had paid to R. It was held that he was entitled to recover both sums.
f) As against both the briber and the agent bribed the principal has alternative remedies. He may sue for money
had and received under which he can recover the amount of the bribe. He may also sue for damages for fraud,
under which he can recover the amount of the actual loss arising from his entering into the transaction in
respect of which the bribe was given. He cannot, however, recover both: Mahesan s/o Thambiah -v - Malaysia
Government Officers’ Cooperative Housing Society Ltd.73
g) The Principal can repudiate the contract, whether or not the secret payment had any effect on the agent: Shipway
-v- Broadwood.74
h) As bribery is a criminal offence, the principal may also prefer prosecution against the agent.
2) DUTIES OF THE PRINCIPAL

The principal has two main duties towards his agent. These are the duty to pay the agent his commission or other
remuneration agreed and the duty to indemnify the agent for acts lawfully done and liabilities incurred in the
execution of his authority.
a) Commission or other remuneration

The amount of the commission and the terms under which it is payable depend wholly on the agreement terms. There
is no general rule.
Examples:
70
See Order LII rule 4, Civil Procedure Rules.
71
(1888) 39 Ch.D. 339
72
(1903) 2 KB 635
73
(1979) A.C. 374

Page 136 of 166
1. If a commission is payable on the sale of a particular thing the agent is entitled to his commission if the thing
is sold to a buyer whom he has introduced, even though he may not have negotiated the terms of the sale and
even though the terms were accepted contrary to his advice: Burchell -v- Gowrie and Blockhouse Collieries Ltd75.
But he must have been the effective cause of the sale.
2. If an agent introduces a person “willing and able to purchase” he is not entitled to commission if the person he
introduces can only buy subject to contract or subject to satisfactory survey: Graham & Scott (Southgate) Ltd -
v- Oxlade76.
3. The agent is due his commission where he finds a “prospective purchaser” who in good faith seriously
contemplates the purchase and makes an offer, even if, in the end, he might not be ready, willing and able to
purchase: Drewery and Drewery -v- Ware-Lane77.
4. When property is entrusted to an agent to sell there is, in the absence of any provision to the contrary, an
implied term that the owner himself may sell or employ other agents to sell the property: Brinson v Davies 78.
However, no other agent may be so employed where an agent is the “sole agent”, although the owner may still
sell the property and pay no commission: Bentall, Horsely and Baldry v Vicary79.
Note: A merchant appointed as “sole selling agent” by a manufacturer is not an agent if the former buys the goods from
the latter and markets them. The merchant is simply a distributor whose profit is the difference between the buying and
selling price. In this case, the manufacturer, having given exclusive distribution rights to the merchant, cannot sell his
goods to anyone else: Lamb & Sons -v- Goring Brick Co.80.
5. An agency created for a fixed time will, if revoked before expiration of such time, entitle the agent to damages
because the agent is thereby prevented from earning his commission.
6. In exceptional cases, commission may be payable even after termination of agency.
7. An agent who receives an advance on his commission from his principal will be bound to account for any excess
on termination of his contract: Bronester -v- Priddle81.
b) Indemnity
For acts lawfully done and liabilities incurred in the course of the agency the principal must indemnify the agent:
Christoforides -v- Terry82. The right to indemnity will be lost where the agent acts beyond his authority or performs his
duty negligently. In Davison -v- Fernandes83, F asked D, his stockbroker, the price of some stock ex dividend. D quoted
75
(1910) AC 614
76
(1950) 2 KB 257
77
(1960) 1 WLR 1204.
78
(1911) L.T. 134
79
(1931) 1 K.B 253
80
(1932) 1 KB 710
81
(1961) 1 WLR 1294
82
(1924) AC 566
83
(1889) 6 TLR 73

Page 137 of 166
the price, which was cum dividend, but negligently omitted to tell this to F. So, F, thinking that the price was ex dividend,
authorised D to sell. D sold and, in due course under rules of the London Stock Exchange, had to pay the dividend to the
purchaser. It was held that D was not entitled to be indemnified by F.
3) RIGHTS OF THE AGENT

“The rights of an agent against his principal flow from the principles:
a) that an agent, as the representative of his principal and acting wholly on his behalf, is entitled to be indemnified for
such liabilities incurred and losses suffered as were in contemplation when the agency was undertaken, or as were
stipulated by the contract of agency, and
b) That, where he is an agent for reward, his principal must not wrongfully hinder his opportunity of earning the
reward.... [His] rights are to be discovered by reference to the terms, express or implied, of the contract between him
and his principal”84.
a) Indemnity
An agent who incurs or is forced to expend money in the performance of his agency is entitled to indemnity from his
principal unless this right is excluded under contract. Example: Where a principal instructs an auctioneer to sell by
auction goods that do not belong to him (principal) and the agent is compelled to pay damages for conversion to the
owner, the principal is liable to indemnify the agent: See Adamson v Jarvis85.But there are exceptions:
 The agents’ acts must be authorised or ratified.
 the agent must not be in breach of his duties to the principal
 The act of the agent must not be an illegal act.
b) Lien
A lien on or upon something is the right to keep somebody’s property until a debt owed in connection with it (for repair,
transport etc.) is paid86. It is the right to hold and retain another’s property until a claim is satisfied. But the lien must
not be inconsistent with the contract between the parties or with the special purpose for which the goods or chattels
were entrusted to the agent. The inconsistency must be clear. In respect of all claims against his principal arising out of
his employment, an agent has a lien on the goods and chattels of the principal, whether for remuneration earned or for
expenses or liabilities incurred.
(Note: Possessory Lien is the right to retain until a claim is met; possession musts be continuous, rightful and not for a
particular purpose. Maritime lien is a right specifically binding a ship or cargo for payment of claim arising under
Maritime law; it is not founded on possession Equitable lien is a charge on property conferred by law until claims have
been satisfied; it is attached independently of possession and binds all who acquire the property with notice of the lien.
Unpaid seller’s lien is the right of an unpaid seller to retain possession of them until payment or tender of the price
where e.g. the buyer becomes insolvent87.
84
Halsbury’s Laws of England, 4 ed. Vol. 1, p.476.
85
(1827).
86
(Oxford Advanced Learner’s Dictionary p. 719)
87
See A Dictionary of Law by L. B. Curzon, 2nd ed., p. 219)

Page 138 of 166
c) Remuneration or commission
An agent is entitled to be paid an agreed remuneration or commission. There must however be an express or implied
agreement to pay remuneration or commission. With respect to the latter, there is a presumption of payment due to the
agent wherever the agent is employed to act in circumstances which, to the knowledge of the principal, would raise such
presumption, e.g. where a person is engaged to sell goods or land or in some other normal commercial activity, his
commission or remuneration becomes payable. The amount payable will depend on the express terms of the contract
and on any relevant trade usage.
d) Account
e) An agent has a right to have an account taken.
f) Stoppage in Transit
Where an agent has bought goods on behalf of his principal with his own money or under such circumstances as to incur
personal liability towards the seller for the price, he stands towards his principal in the position of an unpaid seller.
Consequently he possesses the same rights of stoppage in transit where he has delivered the goods to a carrier for
transmission to the principal.
g) Right to interpleader
Subject to certain exceptions, an agent who is in possession of any money, goods or chattels to which conflicting claims
are made by his principal and a third party may interplead notwithstanding his agency. He must be completely impartial
in this, and he must not claim any interest for himself in the subject matter except for his costs and charges.
IX. RELATIONSHIP BETWEEN PRINCIPAL AND THIRD PARTY

The principal is responsible for all contractual or tortious acts of his agent within the authority (of all types) of the agent.
In exceptional cases, the principal may be criminally liable even where he took no part in, authorised or connived at the
act or default of the agent88. The principal’s relations with third parties may be considered under the following:
 Contractual Relations
 Tort liability
 Criminal Liability
88
See Lloyd -v- Grace Smith & Co (1912) AC 716, H.L.

Page 139 of 166
 Dispositions of Property
1) CONTRACTUAL RELATIONS
a) Doctrine of privity & Limitations
i. Privity
It may be recalled that according to the doctrine of privity of contract no person other than the parties to a contract may
acquire or incur liabilities under it. In agency, once an agent has made a contract on behalf of his principal he virtually
moves out of the scene. Privity of contract then exists between the principal and the third party. But the results of an
agent’s contract differ and depend on whether the principal was named, disclosed whether (named or unnamed) or
undisclosed.
An agent for a named principal acquires or incurs neither rights nor liabilities under the contract and drops out as soon
as it is made (seeGadd v. Houghton (1876) 1 Ex. D. 357) except where the agent agrees to assume personal responsibility
or signs a bill of exchange in his own name or where there is some trade custom which makes him personally liable. In
the last case where for example an agent is contracting on behalf of an overseas principal he will be held liable 89. Where
an agent informs the third party he is contracting with that he is acting on behalf of a principal whose identity he does
not reveal the principal is unnamed but is said to be disclosed. The legal rights and liabilities of the principal and the
third party are the same as if the principal is named.
Where the agent has acted within his express, implied or usual authority, the general rule is that the principal can sue
and be sued on the contract except in the following cases:
 Where the contract expressly provides that the agent is the sole principal;
 Where the terms of the contract are inconsistent with agency; and
 Where the identity of the principal is material to the third party e.g. contract for personal service or of
marriage90
The principal is undisclosed when the agent does not disclose his existence to the third party. In this case the agent
incurs personal liability and may be sued directly by the third party. And the position is not altered by the fact that the
third party knows of the existence of a principal so long as he relies only on the transaction between him and the agent91.
The third party does, however, have the option to enforce the contract against the principal as soon as he establishes his
(principal’s) identity. He cannot sue both principal and agent and he must act with reasonable dispatch against the
principal after his identity is revealed.
89
See Miller, Gibb & Co v. Smith &Tyrer (1917)
90
(See U.K. Mutual Steamship Assurance Association v. Nevill(1887) 19 Q.B.D.110; Humble v. Hunter (1848) 12 QBD 310; and Said
v Butt (1920) 3 KB 497 to illustrate the 3 exceptions above)
91
See Victory Shipchandlers v Leslie & Anderson Ltd (1972) EA 42.

Page 140 of 166
ii. Limitations
a. Deed executed in the name of agent:

At common law, a contract under seal executed by an agent in his own name cannot be enforced by or against the
principal, even though it is expressly stated that the agent is contracting on behalf of the principal. But if he executes a
deed as trustee for his principal of the rights conferred by the deed, the principal may enforce the contract.
b. Bills of exchange:
A principal is not liable upon any bill of exchange, cheque or promissory note unless his name appears thereon 92. But his
signature may be written by the hand of the agent.93
c. Foreign principal:
Where the agent acts for a foreign principal there is no presumption that the agent necessarily incurs personal liability,
but the fact that the principal is a foreigner is a factor to be taken into account in establishing whether in the
circumstances the contract is enforceable by or against the foreign principal or against the agent personally: Victory
Shipchandlers -v- Leslie & Anderson Ltd94.
d. Third party election:

If a third party after entering into a contractual relationship with a person finds that the latter was actually an agent of a
principal who has suddenly entered the scene, he may chose to sue the principal on the contract. His right to sue the
agent cannot be brought to an end by the mere appearance of the principal on the scene. But once he elects to sue the
agent the principal is discharged and vice versa. The election to pursue his rights against the agent must be unequivocal.
Demand for payment from and threats to sue the agent do not automatically amount to a clear exercise of this option:
Calder v. Dobell95. Likewise proving in an agent’s bankruptcy has been held inadequate to show the fact of such
unequivocal choice: Anderson v. Gandossequi96. But election is conclusively proved where the third party obtains
judgement against the agent.
e. Settlement with agent

If a principal who owes a debt to a third party pays his own agent but the agent fails to account to the third party, the
principal will be made to pay again to the third party. There are numerous cases where a borrower from a financial
institution is instructed to repay through an advocate who fails to remit the money thus received by him. It would appear
that the borrower would still have to pay the lending institution (and possibly sue the advocate). A “debtor must seek
out his creditor and pay him” 97 . However there are cases which show that there are many exceptions to this general rule,
especially where the principal is undisclosed. The third party is not discharged from his liability to the principal by any
payment to or settlement with the agent, unless such payment or settlement is ratified by the principal or is made in the
ordinary course of business or in accordance with the agent’s authority, express, implied or apparent. Nor is he, in the
absence of express authority, discharged by payment by a negotiable instrument (Williams -v- Evans98unless justified by
usage.
f. Set-off
Where the principal is disclosed, a third party who is creditor to the agent cannot set off the debt due to the agent against
a debt due from the third party to the principal. Set-off is not allowed unless authorised by the principal. But where the
92
See s. 23 Bills of Exchange Act, Cap 27
94
(1972) EA 72
95
(1871) L.R. 6 C.P. 486
96
(1812).
97
See Heald v. Kenworthy (1855) 10 Ex. 739
98
(1866) L.R. 1 QB 352)

Page 141 of 166
principal is undisclosed the principal will be bound by the third party’s right of set-off against the agent. This is because
the third party would have contracted with the agent believing him to be the principal.
g. Fraud, Misrepresentation & Concealment

As a general rule, if while negotiating a contract, an agent acting within the scope of his authority is guilty of fraud or
innocent misrepresentation or of concealment of essential facts, which ought to be disclosed to the third party, the
contract is voidable. The third party may rescind it and recover any benefit which has passed there under to the principal,
whether or not the principal was privy to the fraud, misrepresentation or concealment.
h. Corruption
If in a transaction the principal later discovers that a third party had paid or promised a bribe to the agent the principal
may:
i) Repudiate the contract and have it set aside or,
(ii) Affirm it and obtain such relief as the court may think fit to give him. There is an irrefutable presumption that
the payment in the nature of a bribe was made with the intention that the agent should be influenced by it. It is therefore
immaterial to inquire whether or not the agent was in fact influenced by the bribe.
2) TORT LIABILITY
Where a principal gives his agent express authority to do a particular act which is wrongful in itself, or which necessarily
results in a wrongful act, the principal is responsible, jointly and severally with the agent, to third parties for any loss or
damage occasioned thereby.
The principal is also jointly and severally responsible with the agent for acts of the latter done within the scope of his
apparent or ostensible authority or his implied authority. Selle& Another -v- Associated Motor Boat Company Ltd and
others99. Likewise, in motor-car cases, the owner of a motor-car (principal) is considered to be liable for the driver’s
negligence if the latter (agent) drives it wholly or partly for the owner’s purposes. It is immaterial that the authority was
carried out in an imperfect or improper manner. It is also immaterial that actual malice is an essential ingredient of the
wrongful act: Cornford -v- Carlton Bank100 . Nor does it matter that the wrongful act is a crime101 (Moris -v- C.W. Martin &
Sons Ltd 102 and the agent has been convicted Dyer -v- Munday103. A forgery if committed within the ostensible scope of
the agents authority, imposes liability on the principal: Uxbridge Permanent Benefit Building Society -v- Pickard104. The
position remains the same even where the act in question has been expressly prohibited by the principal.
If however the act of the agent falls entirely outside the scope of his authority the principal cannot be held responsible:
Sanderson -v- Collins105.
a) Fraudulent misrepresentation
Where an agent is personally guilty of fraudulent misrepresentation and has apparent authority to make the
representation, the principal is responsible. An action of deceit lies against him. But this does not apply where the fraud
99
(1968) EA 123 CA, (Zanzibar).
100
(1900) 1 QB 22, CA
101
(1966) 1 AB 716
102
(1966) 1 Q B 716; (1965) 2 All ER-725, CA)
103
(1895) 1 QB 742,CA)
104
(1939) 2 KB 248; (1939) 2 All ER 344-CA
105
(1904 1 KB 628, CA

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is primarily practiced on the principal: KweiTek Chao -v- British Traders and Shippers Ltd106. Once the third party acts on
the misrepresentation it is irrelevant that the fraudulent misrepresentation was made before the agent’s authority was
granted: Briess v Woolley107. The principal will be responsible for any fraudulent misrepresentation as if there was actual
fraud and dishonesty on his part if he knew to be false a representation made by the agent in the honest belief that it is
true: Armstrong -v- Strain108. But he will not be so liable where the agent makes the representation innocently without his
knowledge although he knew the facts, which rendered the representation false: Armstrong v Strain109.
b) Negligent misrepresentation
The principal may be vicariously liable in negligence for the negligent misrepresentation of the agent. He may also be
liable in respect of the supply of false information to the agent which results in misrepresentation by the agent to persons
to whom the principal owes a duty of care: W.B Anderson & Sons Ltd v Rhodes (Liverpool) Ltd110.
c) Representation as to credit
The principal is not liable in an action for deceit for any representation as to the character or credit of another person
made by his agent, unless such representation is in writing signed by the principal himself. A signature by the agent is
not enough even though expressly authorised or adopted by the principal: William -v- Mason111.
3) CRIMINAL LIABILITY
As a general rule no act or default on the part of an agent imposes any criminal liability on the principal in respect thereof,
except if he (principal) takes part in, authorises, or connives at the commission of such a default.
a) Exceptions:
The principal may however be criminally liable at common law for a public nuisance committed by him through the
instrumentality of the agent. He may also be liable if a statute imposes criminal liability upon the principal in respect of
specific acts or defaults of the agent. E.g. under certain foods and drug legislation such liability would normally exist
without proof of criminal intent. These exceptions do not apply where negligence is an essential ingredient in the offence.
4) PROPERTY
Fraudulent action of an agent in the disposition of a principal’s property does not affect the position as between the
principal and a third party even if the agent had express, implied, usual or apparent authority. The agent is here in a
fiduciary position where he is entrusted with property to be applied for the benefit of the principal and to be accounted
for in that regard. A third party taking such property with due notice must account to the principal.
106
(1954) 2 QB 459; (1954) 1 All ER 779
107
(1954) 1 All ER 909, HL
108
(1952) 1 All ER 139, CA
109
op. cit.
110
(1967) 2 All ER 850
111
(1873) 28 LT 232

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X. RELATIONS BETWEEN AGENT AND THIRD PARTIES.
1) LIABILITIES OF THE AGENT
a) Disclosure or non-disclosure of Principal
i. Agency not disclosed:

An agent who contracts in his own name without disclosing either the name or existence of his principal is personally
liable on the contract to the third party. This is so even if he actually is acting on behalf of the principal. And unless the
third party elects to look for the principal alone, the agent will remain liable even after the third party discovers that he
is a mere agent: Dramburg -v- Pollitzer112.
However, the third party has a choice, on discovering the principal or the agent, or both. This is referred to as third party’s
election. Once he has made an unequivocal choice to sue the agent, to sue either the principal or the agent, or both but
only in the alternative, because he would have made a contract with only one person giving rise to only a single obligation.
Thus where the principal pays money to his agent for the benefit of a third party that does not discharge the principal’s
liability to the third party if the agent fails to pass the money to the third party. The general rule is that a debtor must
seek out his creditor and pay him. It makes no difference whether the agency was disclosed or not at the time of the
transaction: Irvince v. Watson113. Nor does it matter that the third party was unaware of the agency: Heald v. Kenworthy114.
ii. Existence known but Identity of Principal not disclosed:

Except in certain trade usage which many require the principal to be named, an agent will not be made liable on the
contract just because he does not disclose the name of his principal so long he has disclosed his existence. It must be
clear from the construction of the contract as a whole that he contracted as agent only and that he undertook no personal
liability. Describing himself as agent does not by itself exonerate the agent and the contract and surrounding,
circumstances may reveal otherwise.
The following words may negative responsibility of the agent: “as agents”, “on account of”, “on behalf of”, “for”. They
are conclusive when qualifying signature. But the word “agent” alone does not necessarily have the same qualifying
effect. It may be used as a description or as a qualification 115.
Similarly the addition of the words “secretary” or “director” to the signature of a company’s agent will not be sufficient
to avoid his personal responsibility.
112
(1873) 28 LT 470
113
(1880) 5 QBD 414, CA
114
(1855) 10 EX 739
115.
See Universal Steam Navigation & Co Ltd -v- James McKelvie& Co (1923) AC 492, HL, per Lord Shaw at 499

Page 144 of 166
iii. Principal disclosed:

an agent, who discloses both the existence and name of the principal will as a general rule, not be liable on the contract
to a third party. Whether or not he had authority to make the contract will be immaterial.
2) Exceptions are
 where personality is imposed by express terms of the contract;
 where ordinary course of business necessitates personal liability;
 where usage imposes personal liability;
 Where he is the real principal.
The agent may however be liable for breach of warranty in cases where he is found to have had no authority.
a) Documents signed in agent’s name:

An agent who executes a deed in his own name is personally liable upon it, whether he discloses the name and existence
of the principal or not. However, unless he signs his own name the agent is not liable in respect of bills of exchange,
cheques, and promissory notes which he signs on his principal’s behalf.116 Where the principal is a company registered
under the Companies Act, Cap 486, and an agent signing a contract on its behalf must add the name of the company.
The word “Limited” or the contraction “Ltd” must also be included in the contract in the case of a limited liability
company: Stacey Co Ltd -v- Wallis117.
b) Warranty of Authority
Implied Warranty: A person who purports to do any act or make any contract as agent on behalf of a principal is deemed
to warrant that he has in fact authority from such principal to do the act or make the contract in question. If he has no
such authority he is liable to be sued for breach of warranty of authority by any third party who was induced by his
conduct to believe that he had such authority, and who, by acting upon such belief, has suffered loss in consequence of
the absence of authority: Starkey -v- Bank of England 118. In this case,
One of two trustees of stock standing in the joint names in the books of the Bank of England sold it under a power of
attorney, to which the signature of the co-trustee was forged. Starkey, a stockbroker, bona fide acting upon this power
of attorney induced the bank to transfer the stock to the buyer. It was held that Starkey had impliedly warranted his
authority to the bank, and was therefore liable to indemnify the bank against co-trustee’s claim for restitution. Whether
or not the agent himself believed in the existence of his authority does not matter: Starkey -v- Bank of England119. It is
immaterial also that the agent’s belief in his authority extends to an authority which he believed that he had but in fact
116
See Bills of Exchange Act, ss. 23 and 29.
117
(1912) 106 LT. 544
118
(1903) AC 114, HL
119
(1903).

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never had, or to an authority which he originally had but which has ceased without his knowledge or means of knowledge:
In Yonge v Toynbee120.
Solicitors were instructed by T to defend threatened proceedings on his behalf. Before the proceedings started, T., without
the solicitors’ knowledge, became insane. This revoked their authority. (See chapter on Termination of Agency) The
solicitors delivered a defence and then learned that T was insane. The plaintiffs asked for the defence to be struck off
and for the solicitors to pay costs. It was held that the solicitors, by acting for T, had impliedly warranted that they had
authority to do so, and therefore they were liable for costs.
Buckley L.J. said: “It has been pressed upon us that a solicitor is an agent of a special kind with an obligation towards his
client to continue to take on his behalf all proper steps in the action. The particular nature of his agency is not, I think,
very material. [During the material period] the solicitors had the means of knowing and did not in fact ascertain that the
defendant had become of unsound mind. In the interval they did acts which amounted to representations on their part
that they were continuing to stand in a position in which they were competent to bind the defendant. This was not the
case. They are liable, in my judgement, upon an implied warranty or contract that they had an authority which they had
not”121.If the agent expressly disclaims any present authority at the material time then he will not be liable for breach of
warranty. Again, he will not be liable if the other party knows he has no authority: Halbot -v- Lens122; also Lilly, Wilson &
Co -v- Smales, Ecles& Co123. In the Lilly case,
S signed a charterparty45 “by telegraphic authority as agents”. Owing to a mistake in the telegram the rate of freight
offered was wrong, and S was sued in breach of warranty of authority. It was held, on its being proved that by mercantile
usage the form of signature negative liability, S was not liable.
Also where the other party is fully acquainted with the facts from which the inference of authority is drawn, the agent
will not be liable for breach of warranty. Similarly when the evidence of the agency is an inference of law, the agent is
not liable, provided that the facts are equally known to both parties: Eagles field -v- Marquis of Londonderry (1878) 38 LT.
303.
3) Summary
It should be noted that action for breach of implied warranty of authority is based, not on the original contract, but on
the implied representation by the agent that he had authority to make the original contract.
1. The action can only be brought by the third party, not by the principal.
2. The agent is liable whether he has acted fraudulently or innocently, and even if his authority has been
terminated, without his knowledge, by death or mental disorder of the principal. Yonge -v- Toynbee (1910) 1 KB
215.
120
(1910) 1 KB 215.
122
(1901) 1 Ch. 344
123
(1892) 1 QB 456

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3. The agent is not liable if his lack of authority was known to the third party, or if it was known that he did not
warrant his authority or if the contract excludes his liability.
4. If the principal gives ambiguous instructions and the agent acts on them bona fide and in a reasonable way, he
will not be liable in action for breach of warranty even if he has interpreted them wrongly: Weigall& Co -v-
Runciman& Co (1916) 85 LJ KB 1187.
5. The agent warrants his authority not only when he purports to contract on behalf of another but also when,
purporting to act as an agent he induces a third party to enter into any transaction with him on the faith of such
agency: Starkey -v- Bank of England (1903) AC 114.
6. The measure of damages for breach of warranty of authority is the actual loss sustained47
4) Liability to Repay Money:

Generally, an agent is not personally liable to repay money he received from a third party on behalf of his principal when
the third party becomes entitled to repayment, whether the money remains in the agent’s hands or not. Exception: The
agent may however be held personally liable to repay the money to the third party in the following circumstances:
 where the third party pays money to the agent under a mistake of fact; or
 where the agent receives the money in consequence of some wrongful act;
 Where the agent has acted as a principal in the transaction in consequence of which the
money was paid to him.
In the first two cases if the agent is not party to the wrongful act and he has paid over money to his principal or his
principal is a foreign sovereign immune from suit, he will not be liable to repay the money.
Direction by Principal to pay Third Party: The agent who assents to his principal’s direction to pay a third party any
money he has or is about to receive renders himself personally liable to the third party with notice of such assent. He
will also be liable if he enters into an unconditional undertaking to pay the third party or to hold it on his behalf: Crowfoot
-v- Gurney (1832) 9 Bing 372.
5) Tort Liability & Breach of Trust
a) Tort Liability:
Any agent who commits a wrongful act in the course of his employment is personally liable to a third party who suffers
loss or damage thereby, whether or not the act was expressly authorised or ratified by the principal. Whether or not the
agent did the act innocently or without knowledge that it was wrongful is immaterial, except in cases where actual malice
is essential to constitute the wrong.
b) Conversion:
An agent will be guilty of conversion and liable to the true owner of goods or securities which he acquires, actually or
constructively, but which do not belong to his principal if he deals with them in any wrongful manner e.g. by selling them,
47
(See Charlesworth’s Mercantile Law, supra, pp.240-241)

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delivering them to a stranger or otherwise disposing of the property in them. It is immaterial that he believed the goods
or securities to be those of his principal and dealt with them according to the principal’s instructions.
The following situations would constitute defenses to a charge of conversion against the agent:
 Where the true owner is stopped from denying the principal’s authority to dispose of them e.g. where the
principal is a mercantile agent, or buyer or seller in possession of goods or the documents of title thereto with
the consent of the true owner48 here the agent is a banker receiving payment of a cheque on behalf of a customer49
 Where the agent who is not in possession of the goods or securities merely negotiates a contract of sale between
his principal and the third party
 Where the agent with possession does not purport to dispose of the property in the goods or securities and
merely deals with the possession of them as directed by the principal. But such dealing must not constitute
obvious wrong.
c) Breach of Trust:
An agent in possession of property, held in trust for another by his principal, who makes a disposition of such property
which is inconsistent with the trust will not be guilty of a breach of trust if he acted according to instructions of his
principal. But if he had notice of the trust at the material time and was aware that the disposition was in breach of the
trust them he will be found guilty: Magrus -v- Queensland National Bank.
6) RIGHTS OF THE AGENT
a) RIGHT TO ENFORCE CONTRACT

As we have seen an agent who names his principal and makes a contract expressly as agent on his principal’s behalf,
cannot enforce the contract. This is so even if he is the real principal (Bickerton v Burrel (1816) 5 M & S 383) unless the
other party has affirmed the contact with knowledge of the fact that “the agent” is the principal.
The agent can however enforce the contract in the following instances:
 Where he makes a contract in his own name without disclosing the existence of a principal
 Where he renders himself personally liable on the contract
 Where he purports to act for an unnamed principal who is non-existent;
48
See Sale of Goods Act.
49
See s. 3(2), Cheques Act, cap 35.

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 Where he is the real principal even though he has named another person as principal and makes the
contract as agent and the third party has affirmed the contract with knowledge of this fact.
b) RECOVERY OF MONEY PAID

An agent who has paid money on behalf of his principal to a third party under such circumstances that the principal, if
he had paid the money himself, would be entitled to recover the money, may bring an action in his own name for money
had and received against the third party.
7) PARTNERSHIPS AND LIMITED COMPANIES
a) A PARTNER’S SCOPE OF AUTHORITY

A partner is an agent of the firm and his other partners for the purpose of the business of the partnership. Consequently
the acts of every partner bind the firm and his other partner if such acts are done “for the carrying on in the usual way
business of the kind carried on by the firm.” 50 The relationship between partners and persons dealing with them are
based on the usual agency rules. It is stipulated that 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 under the age of majority, although he
may be admitted to benefits of partnership, “cannot be made personally liable for any obligation of the firm”. But his
share in the firm’s property is liable for the obligations of the firm.
b) COMPANY DIRECTORS AND AGENTS

A limited company is liable for the acts of an agent with actual authority or if it ratifies such acts. The Company will also
be liable for the acts of a person held out (say by the directors) as managing director. A third party cannot plead apparent
authority against the company if the transaction in question is clearly inconsistent with the memorandum and articles of
association of the company or other public documents which can be inspected at the Companies Registry. In EmcoPlastica
Int’l Ltd v. Freeberne (1971) EA 432 an argument by the appellant company that the respondent, the company secretary
was an insider and therefore was put on inquiry in regard to the powers of directors and in particular should have known
that the managing director did not have powers to offer certain terms in his (Secretary’s) contract of service was rejected.
There was no provision in the Articles of Association that was clearly inconsistent with the functions of a managing
director. The Secretary, it was held, was not placed in a position different from that of an outsider who is entitled to
assume in the absence of knowledge to the contrary that a director signing a contract has the authority to do so,” Per
Lutta J.A, at p. 436.” There was no evidence adduced to indicate that the respondent knew or ought to have known that
he was not entitled to rely on the contract of service offered to him” by the company’s managing director, per Mustafa
J.A. at p. 437.Any defect in the internal management of the company into which a third party cannot inquire will not
defeat his claim unless he knew of it or the surrounding circumstances should have made him suspicious.
XI. TERMINATION OF AGENCY

An agency may be terminated by the conscious or deliberate act of the parties or, by operation of law.
50
See section 7, Partnership Act, Chapter 29, Laws of Kenya

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1) ACT OF THE PARTIES

An agency relationship may come to an end prematurely when the parties to an agreement have mutually agreed to a
discharge of such relationship. In other cases the agency will terminate when the agent has fulfilled his mandate. Where
an agent is employed for a fixed term his agency ends when the period of time has expired. Again, the principal is
generally free to revoke and the agent is free to renounce his agency. In other words an agency may be terminated by
the act of the parties through mutual agreement, performance or revocation.
2) Mutual agreement
Like any other contract an agency may be brought to an end through mutual agreement of the parties, the principal and
the agent.
3) Performance
Performance of the contract in question terminates the agency, i.e. where the agent has accomplished his mission.
4) Revocation
The power of the principal to revoke the agent’s authority at any time is subject to certain important limitations. If he
exercises his power in breach of his contract with the agent in certain cases he may be liable in damages.
Certain classes of agency agreement are held to be irrevocable as the law seeks to protect the interests of the agent or
third parties.
a) Authority coupled with an interest.

An authority coupled with an interest has been defined as “where an agreement is entered into on a sufficient
consideration, whereby an authority is given for the purpose of securing some benefit to the donee of the authority”, per
Williams J. in Clerk -v- Laurie (1857) 2 H & N 199 at p. 200. In Gaussen -v- Morton (1830) 10 B & C 731, A principal who
owed a large sum of money to William Forster, conferred upon the latter a power of attorney to sell certain lands and to
discharge the debt out of the proceeds of the sale. He later sought to revoke his agent’s authority. It was held that the
agency created was irrevocable as it constituted an authority coupled with an interest. The object of the agent’s mandate
here was to secure the debt owed to him by the principal.
For an agency to be treated as irrevocable, therefore, its explicit object must be to secure some particular interest or to
confer some particular benefit upon the agent. The mere fact that revocation of the agent’s mandate will prevent his
earning commission, for example, is not considered as a sufficient interest to make the agency irrevocable: Frith -v-
Frith(1906) 94L.T.38351
51
See B.S Markesinis& R J.C. Munday, An Outline of the Law of Agency, (1979) p. 173.

Page 150 of 166
b) Executed authority
Where the agent has commenced performance of his mandate and incurred liabilities for which the principal must
indemnify him, the courts will treat such agency as irrevocable. In Read -v- Anderson (1884) 13 QBD 779, an agent was
employed to lay bets on his principal’s behalf and to settle them if they were lost. The agent incurred liabilities in
performance of his duties. It was held that the principal could not unilaterally revoke his agent’s authority. An authority
cannot be revoked if it has passed an interest and has been executed.
c) Statutory authority
Certain statutes provide protection to parties against the effects of revocation of an agent’s authority. For example,
under the Bankruptcy Act, Cap 53, certain transactions which would otherwise be invalidated by the bankruptcy of a
person are protected where some conditions are complied with: s. 50, ibid.
5) OPERATION OF LAW
An agency is automatically terminated by the following circumstances.
a) By death of the principal or agent;

The death of either the principle or the agent brings the agency relationship to an immediate end, unless the agency is
an irrevocable one. The contract of agency is considered to be a personal one in which the identify of the parties is of
central importance. When the agent dies his obligations do not pass to his executors. In Companari -v- Woodburn (1854)
is CB 400. An agent was employed to sell a picture on the understanding that he would be paid £100 only if he succeeded
in selling it. Before affecting a sale his principal died, thus revoking his authority. Knowing nothing of the death the
agent proceeded to sell the picture. He then sought to recover his commission from the principal’s personal
representative. It was held that he could not recover commission under the contract which had been automatically
terminated by the principal’s death.
(It should be noted however that the court granted the agent compensation on a quantum meruit for the services he had
rendered). Upon the principal’s death, any acts, which the agent purports to perform in the principal’s name, are no
longer binding. Nevertheless, any rights against the principal, which had already vested in the agent prior to death, may
still be exercised against the estate of the principal.
b) By bankruptcy of principal, or agent,

If in the case of the agent, it makes him unfit to carry out his duties. In general, bankruptcy amounts to legal incapacity
but those rules are subject to important qualifications.
c) By insanity of principal or agent,

if the insanity is such as to prevent them from contracting. Although the mental disorder of the principal revokes the
authority of the agent, the principal will be bound by contracts made with third parties who have no notice of that
incapacity. In Drew -v- Nunn ; (1879) 4 Q BD 661 .The defendant had appointed his wife as his agent and given her
authority to deal with the plaintiff, D. He later became insane, but his wife continued to order goods from D who was
unaware of D’s insanity. When D recovered his health he refused to pay for the goods and was sued for the price. It was
held that D was liable to pay for the goods.

Page 151 of 166
Note however that in Yonge v Toynbee (already cited above, chapter 8) the Court of Appeal seems to hold that the third
party (in this case of wife of D) may alternatively be held liable as agent.
d) By intervening illegality
(e.g. where the principal being a foreigner in this country becomes an enemy in status on account of outbreak of war
between Kenya and his country): See Stevenson & Sons Ltd -v- Akt-fiirCartonnagen –Industries (1917).
e) By effluxion of time
(where agency was created for a limited time)
f) By frustration,
(e.g. the basis of the contract has been destroyed, or an essential event has failed to occur, or the Government has
interfered or there is a change in the law or method of performance has become impossible.
6) EFFECT OF TERMINATION
Termination of an agency is usually effective as between the principal and the agent; but vested rights do not necessarily
cease thereby. In the case of the third parties, for example, an agent stripped of actual authority may still have apparent
authority.

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E. CHAPTER 5 - HIRE PURCHASE AGREEMENTS
I. INTRODUCTION
A hire-purchase agreement may be defined as a system for purchasing merchandise, such as Motor Vehicles, Furniture or
Machinery where the buyer, upon payment of an initial deposit, takes immediate possession of the item(s) and completes
the purchase by paying a series of regular agreed instalments. During this period, the seller retains ownership of the item
until the final instalment is paid. This definition is in line with Section 2 (1) of the Hire Purchase Act43.
It may also be defined as a contract where the owner of goods hires them out to another person for an agreed periodic
rent payable by installments and gives him the option to purchase 44. The process involves the drafting and signing of an
agreement between the hirer (the consumer) and the owner (the lending institution).The primary statute is the Hire
Purchase Act Cap 507 of the Laws of Kenya. The Sale of Goods Act45, Stamp Duty Act46, Bankruptcy Act47among other
statutes, including statutes of General application48 are also relevant to Hire purchase type of agreements. At common
law a hire purchase agreement would appear to be a contract for the delivery of goods one of whose terms is that the
Hirer is granted an option to purchase the goods.
1) ESSENTIAL OF HIRE PURCHASE AGREEMENTS

An HPA is just like any other contract.
a) Offer
b) Acceptance
c) Consideration
d) capacity of parties
e) Legality
f) Intention to create legal obligations
2) CAPACITY TO ENTER INTO HIRE-PURCHASE AGREEMENTS

The question of capacity to enter into a Hire purchase agreement is governed by the normal rules of contract law 49. Since
Hire purchase agreements are in their very essence contractual the principles of contract law where statute law is silent
would apply. It follows that in order to be obligated under a Hire purchase agreement the parties must be competent to
create legally binding relations. Such capacity is determined by looking at age, legal status or mental condition of the
parties. A party must be a recognized ‘person’ at law with the exception of Corporations every legal person is at law
presumed to be competent to enter into a Hire purchase contract. The exceptions are due to age, mental infirmity or legal
incapacitation such as bankruptcy.
43
Definition as per the Hire Purchase Act Cap 507 herein after referred to as the Act
44
KI Laibuta principles of commercial law at pg 179
45
Cap 31 Laws of Kenya
46
47
48
Those which were in force in England on the 12 th August 1887 as per Section3 of the Judicature Act, Cap 8 Laws of Kenya
49
Cap 507 is silent on the question of capacity save for limiting protection to non-incorporated bodies and persons at its Section 3

Page 153 of 166
a) Children
A Hire purchase agreement entered into by a child or a mental incapacitated person would then be void or voidable at the
instance of the party that lacks capacity. As regards age, the Age of Majority (Amendment) Act of 1974 fixes the age of
majority at 18 years below which a person would ordinarily lack the capacity to enter into a contract. The exception to
this rule is that the contract would be binding if it is for necessaries.
Under the Sale of Goods Act50 ‘necessaries’ mean goods suitable to the condition in life of the infant or minor or other
person, and to his actual requirements at the time of the sale and delivery.’ Alderson B in the case of Chapple vs.
Cooper51defined necessaries as :
…things without which an individual cannot reasonably exist…they include among other things food, raiment [clothing],
lodging,…instructions in art or trade, intellectual, moral and religious information, the assistance and attendance of
others..52
Laibuta in his Principles of Commercial Law53argues that the subject matter and extent of the contract may vary according
to the state and condition of the infant in question. According to him
Whether or not specific goods or services satisfy the definition of necessaries is a question of both fact and lawn and
depends on the facts and the circumstances of the case. The nature and extent will invariably depend on his position in
society. In every case, the class itself is one in which the things furnished are essential to the existence to the existence
and reasonable advantage and comfort of the infant contractor...
He comes up with the following definition for necessaries;
a) Good that are suitable for his (sic) station in life
b) His (sic) actual requirement and to his interest and benefit, at the time of the sale and delivery
However not all contracts for the benefit or interest of the child will be binding. For example in the case of Mercantile
Union Guarantee Corporation Ltd vs. Ball54an infant who carried on business ah a haulage contractor entered into a Hire
purchase agreement for the purchase of a lorry to be used in his business. When sued for installment arrears he pleaded
infancy. It was held that the infant was not liable irrespective of the fact that the business sustained his livelihood. The
court pointed out that a contract for a large and expensive lorry on onerous Hire purchase terms was not a contract for
the benefit of the infant. Finlay J. stated that;
An infant may bind himself to pay for his necessary meat, drink, apparel, necessary physique, and such other necessaries
and likewise for his good teaching or instruction, whereby he may profit himself afterwards 55.
50
Section 4 of Cap 31 Laws of Kenya
51
Chapple vs. Cooper [1844] 13 M and W 252 at 258
52
Phillimore takes this a level higher to state in Cowern vs. Nield [1912] 2KB 419 at 2 that the only contract which if for the infants benefits
are enforceable against him (sic) are contracts relating to the infant’s person such as contracts for necessaries, food, clothing, and
lodging…..
53
Laibuta K., Principles of Commercial Law (2006), P.56
54
Mercantile Union Guarantee Corporation Ltd vs. Ball [1937] 2 KB 498
55
As per Finlay J at 502 ibid

Page 154 of 166
Hire purchase Contracts entered into by children in Kenya would also be governed by the Infants Relief Act (1874) of
England, which is a statute of general Application.56 The Act also declares absolutely void contracts for goods other than
necessaries for which the minor or person of unsound mind is bound to pay a reasonable price.
b) Mentally Retarded and Drunken Persons

The test of capacity in relation to insane or drunken persons is whether at the time of contracting, the party was under
such degree of mental disability that he was incapable of understanding the nature of the contract. It must be proved
however that the fact of mental incapacity was or ought to have been known to the other party. A contract made during
lucid moments is binding notwithstanding knowledge or lack of it of the other contracting party. Under the Sale of Goods
Act, a mentally retarded person is liable for necessaries supplied to him or to his wife [sic]57
An undischarged bankrupt is also incapacited from entering Hire-purchase Agreements. Section 139 of the Bankruptcy
Act 58provides that
Where a person who has been adjudged bankrupt or insolvent in Kenya or any reciprocating territory and has not obtained
his discharge— either alone or jointly with any other person obtains credit to the extent of one hundred shillings or
upwards from any person without informing that person that he is an undischarged bankrupt;
c) The Bankrupt
The Bankruptcy Act, the Sale of Goods Act as well as the Sale of Goods Act do not define ‘credit’ or what it entails. In
absence of such definition we rely on the definition of for example the Black’s Law Dictionary which defines ‘credit trade’
to include any deferred payment form of trade. Since the actual payment of the purchase price of the Hired goods is paid
later it would be possible to surmise that Hire purchase is a technical form of Credit trade. 59 In that case the incapacitation
of undischarged bankrupts would apply. However Section 50 (d) (ii) gives an exception where the dealing is without notice
of the Bankrupt’s acts of Bankruptcy at the time of entry into the transaction60.
d) Corporations
While corporations may enter into credit arrangements in the form of Hire purchase, such transaction would not be
governed by Cap 507 by virtue of Section 3. The section provides that the Act applies to Hire purchase agreements ‘other
than a hire-purchase agreement in which the hirer is a body corporate, wherever incorporated;’ 61 The Court of Appeal in
Diamond Trust Bank vs. Jaswinder Singh Enterprises 62upheld this position stating;
56
These are statutes which as per section 3 (1) (c) of the Judicature Act Cap 8 were in force in England on the 12th August,1897
57
Section 4(1) thereof
58
59
The semblance is however a loose one since in Hire purchase the property in the goods does not pass until the purchase price is eventually
fully paid. In the ordinary credit trade property passes immediately.
The section provides that the Act does not invalidate any contract, dealing or transaction by or with the bankrupt for valuab le
60
consideration, if both the following conditions are complied with, namely—
(i) the payment, delivery, conveyance, assignment, contract, dealing or transaction, as the case may be, takes place before
the date of the receiving order; and
(ii) the person (other than the debtor) to, by or with whom the payment, delivery, conveyance, assignment, contract,
dealing or transaction was made,
executed or entered into has not at the time of the payment, delivery, conveyance, assignment, contract, dealing or
transaction notice of any available act of bankruptcy committed by the bankrupt before that time.
Our Act is drawn from the English Statute of 1965. The English Act expressly provides that it does not apply to agreements where the
61
hirer is a body corporate.

62
The Court of Appeal in Diamond Trust Bank vs. Jaswinder Singh Enterprises CA NO 285 OF 1998, 2nd
July 1999 (Unreported)

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To my mind to understand section 3(1) of the Act it should be read as follows:- "3(1) The Act applies to and in respect of
all Hire purchase agreement ... other than a hire-purchase agreement in which the hirer is a body corporate whichever
incorporated". The words "other than" should be read to mean `except'. The section therefore excludes all the agreements
where the hirer is a body corporate from the protection of the Act.
The exclusion of Corporations from the protection of the Act alongside the monetary limitation at Kshs 300, 000 can be
interpreted to make a statement that Hire-purchase is an arrangement for the low incomer earner who is vulnerable in a
harsh capitalist society hence deserves statutory protection. Indeed the court in Diamond Trust above proceeded to point
out that.
The reason for this is that body corporates are deemed to be sophisticated enough when entering into commercial
transactions and therefore with more bargaining power. The Act is instead meant to provide statutory protection to hirers
who are individual traders from exploitation by hire-purchase companies. In the Kenyan situation the Act was meant to
protect, as it should, the small man or woman who goes to buy the common households goods e.g. a bicycle, television
etc. Indeed that is why a monetary limitation was placed on the applicability of the Act.
This must also explain why for the most of its part the Act discloses open bias in favor of the Hirer. 63
II. FORMAL REQUIREMENTS OF HIRE PURCHASE CONTRACTS
a) It must be in writing. Section 5(1).

Section 6(2) (a), it must be duly executed.
b) It contains pre-contractual statements showing:

 hirer
 cost price
This condition (of showing the hirer and cost price) will be satisfied if hirer had inspected goods before entering into
agreement and goods were tagged or catalogued or advertised. Pre-contractual statement, except:
 Where the cash price of the goods was stated in writing to the hirer by the owner otherwise than in the
agreement; see Form HP 4 or
 If the hirer inspected the goods at a time when their prices were attached to them or;
 The hirer selected the goods by reference to a catalogue.
c) The Agreement must be signed by the hirer S.6 (2).
d) It must contain mandatory statements:

 Cash price and hire purchase price
 Installment to be paid, date and the date upon which it is payable.
 Full description of goods
63
This will be apparent in the discussion on the various provisions of the Act.

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e) Notice of Right of Hirer in a statutory form.

 Right to terminate
 Right to complete purchase taking certain steps
 Consequence of damaged goods
 Where to return goods
 Owner to supply hirer a copy of agreement within 21 days of hiring.
Section 7, seller’s right to enter premises and take possession.
NOTE:
 Owner cannot incur higher liability than set out in the Act.
 Provisions that constitute owner’s agent as hirer is not acceptable.
 Provisions that owner’s agent is immune to liability is void
III. IMPLIED TERMS BY THE COURT-SECTION 8

 Owner has right to sell goods
 Warranty that hirer shall enjoy quiet possession of the goods this means that no one will interfere with the
hirer's possession during the term of the contract.
 Goods are free from any encumbrance and charge to 3 rd party.
 Goods are of merchantable quality unless they are second hand.
 Legal ownership shall pass to hirer upon payment of Hire Purchase Price.
 Goods are fit for the purpose for which they are to be used (owner earlier notified). Where the goods are hired
by reference to a description or to a sample, the goods supplied must correspond with the description and the
sample.
The Hire-Purchase Act requires that Hire-purchase agreements be in writing by virtue of requiring that the Agreements be
registered upon execution64. The Act makes provisions for and regulates registration of all Hire-purchase that fall within
its jurisdictions as specified by section 3. Section 4 establishes the Registry of Hire-purchase Agreements and the officers
thereto. In mandatory terms the Act proceeds to prescribe that the Agreements are to be in English.
The Agreement must also be stamped on payment of the prescribed duty, failing which Section 19 (1) read together with
Schedule 1 of the Stamp Duty Act65 render it inadmissible in evidence. Courts have however in the past held that this is a
curable defect in a document required to be registered and stamped. For example in the case of Diamond Trust Bank of
Kenya vs. Mohammed Noor Ahmed66 the court stated that ‘failure to stamp a document is not, per se, fatal. It is curable
by allowing the party seeking to rely on the unstamped document an opportunity to have it stamped.’ It is also noteworthy
that Section 19 of Cap 480 confers discretionary powers to the court to allow time for curative stamping.
In default of registration however, Section 5(4) of the Hire-purchase Act stipulates that the Agreement is not enforceable
against the hirer. Neither is any contract of guarantee relating to the agreement. Further no security given by the hirer
64
See section 5 of the Act
65
66
[2005] eKLR

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under a related guarantee contract67 shall be enforceable. The court in Fidelity Commercial Bank vs. Agritools & 3 others68
reiterated this position. In this case, The Hire Purchase Agreement the subject of the application before court was executed
on 7th August 2003 and it was not denied that it had not been registered. Such a document under Section 5 (2) shall not
be registered unless, it is liable for payment of stamp duty, and stamp duty is duly paid.
The 2nd objector’s counsel did not deny that the Hire Purchase Agreement was subject to the Stamp Act and nor did he
deny that such duty had not been paid. Counsel argued that that the fact the agreement was not registered nor stamp
duty paid, did not detract the agreement from being a contract and he emphasized that the logbook reflected the 2nd
objector’s joint ownership and that interest reflected in the log book came first before the judgment creditors interest.
The court held that Section 5 (4) of the Hire Purchase Act to be very specific that an agreement which is not registered is
not enforceable against the hirer. As a result, the 2 nd objector had no right to recover the subject motor vehicle from the
2nd judgment debtor. This is an occasion whereby the Act has demonstrates bias in favor of the Hirer clearly for reason
discussed above i.e. the Hirer is more vulnerable than the owner, financier or guarantor.
Cap 507 also imposes another condition that before making the Hire-purchase Agreement, the seller must inform the
hirer in writing the cash price of the good. 69This may be done by displaying the cash price on a ticket or label, tag, price
list, catalogue or advertisement exhibited for inspection by the Hirer. Under Section 6(2) non-compliance with the
provision deprives the owner of the right to enforce the Agreement or any contract of guarantee related thereto. This
serves a protective role of ensuring that the Hirer freely elects either to purchase by cash or proceed on Hire-purchase
terms. It therefore enables the court to ascertain the intention of the parties.
The parties to the agreement must reach consensus ad idem. Section 6 also stipulates some standard terms of the
Agreement by requiring that for it to be enforceable; the Agreement must contain some information that favor the Hirer’s
position70.
Other safeguards in favor of the Hirer are prohibition of any unilateral term purporting to restrict the owner’s liability or
to relieve the owner from liability for wrongful entry upon any premises with the intent to repossess the goods [or] to
restrict the right of the Hirer to terminate the agreement…[or] to increase the Hire’s liability there under.’ The Hirer’s right
to terminate is therefore indefeasible. 71
Section 8 further reinforces the position of the Hirer by creating implied warranties and conditions (similar to those under
the Sale of Goods Act), Cap 31 Laws of Kenya) in any Hire purchase Agreements. The statutory warranties and conditions
apply and bind the parties notwithstanding any agreement to the contrary. According to Laibuta KI, (2006) the warranties
and conditions are considered not only necessary in protecting the rights and interests of the hirer but also ‘to lend
meaning and efficacy to contracts for hire-purchase.’ He argues that while respecting party autonomy, it must be
appreciated that no useful purpose would b allowed to incorporate every conceivable term including those terms that
would substantially erode the very purpose of the contract. In every case for example it is an implied term that the goods
will be in the condition as they were when the offer was made. This condition protects the Hirer from paying for goods
modified or altered in quality, or even reduced in quantity after the contract has been made.
IV. THE HIRER'S RIGHTS

The hirer usually has the following rights:
1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less any rebate
(each jurisdiction has a different formula for calculating the amount of this rebate).
67
‘contract of guarantee’, in relation to a hire-purchase agreement, is defined by Section 2(1) of the Act to mean a contract, made at the
express or implied request of the hirer, to guarantee the performance of the hirer's obligations under the hire-purchase agreement,
68
Fidelity Commercial Bank vs. Agritools & 3 others[2004] eKLR
69
Section 6 of the Act
The Act provides that the agreement shall contain among others a statement of— the hire-purchase price and the cash price of the goods
70
to which the agreement relates; and the amount of each of the installments by which the hire-purchase price is to be paid and the date (or
the mode of determining the date) upon which each installment is payable; and a description of the goods sufficient to ident ify them;
71
Section 12 (1) entitles the hirer to terminate the Agreement by returning the goods and giving a written notice at anytime before the final
payment. In that event, the Hirer is bound to pay such minimum amount not exceeding one half of the Hire-purchase price

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2. To return the goods to the owner. This is subject to the payment of a penalty to reflect the owner's loss of profit but
subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to
minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value.
3. To assign both the benefit and the burden of the contract to a third person with the consent of the owner. The owner
cannot unreasonably refuse consent where the nominated third party has good credit rating.
Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession
or for damages representing the value of the goods lost, the hirer has the following rights:
 Right of protection.
 Right of notice.
 Right of repossession.
 Right of statement.
 Right of excess amount.
The hirer however does not have absolute right with the hired goods. They usually have the following obligations among
others:
a) To pay the hire installments72
b) To take reasonable care of the goods (if the hirer damages the goods by using them in a non-standard way, he
or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset
value)73
c) To inform the owner where the goods will be kept.74
V. Owner’s rights
These obligations translate into the owner's rights, albeit by implication, since the Kenyan Act does not expressly
secure the Owner’s rights. The owner usually has the right to terminate the agreement where the hirer defaults in paying
the installments or breaches any of the other terms in the agreement. This entitles the owner:
a) To retain the deposit and installments paid so far
b) To retain the installments already paid and recover the balance due
c) To repossess the goods (which may have to be by application to a Court depending on the nature of the goods
and the percentage of the total price paid)
d) To claim damages for any loss suffered.
VI. THE PASSING OF PROPERTY/TITLE IN THE GOODS

InHire purchase property which essentially means ownership of the goods does not pass to the hirer till the option to
purchase has been exercised. Thus the hirer has the right to return the goods and terminate his liability at any time 75.
72
The Kenyan Act does not expressly state this obligation. However a reading of Section 6 (2) (b) iii and Section 7 (4) makes it imperative.
73
Taken care of by Section 12 (2) of the Kenyan Act which stipulates that where a hire-purchase agreement has been terminated….the hirer
shall, if he has failed to take reasonable care of the goods, be liable to pay damages for the failure. The futility of this provision is that the
wording appears to place the burden of proving reasonableness of care on the owner.
74
In the Kenyan Act it is upon the Owner to stipulate, if he so wishes, that the hirer records his address and inform, the Owner of any
subsequent changes in address. See Section 9 (1) of the Act
75
Section 12 of the Act

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Under Section 2 of the Factors Act of England 1889 which is a statute of general application to Kenya76 if a mercantile agent
disposes of the goods in his possession with the consent of the owner he passes a good title to a bona fide purchaser for
value without notice. If then goods are lent to a hirer who is a mercantile agent he cannot pass a good title to a 3 rd party
since the goods are lent to him in his personal capacity and not in the capacity of a mercantile agent.
Section 22 of the English Sale of Goods Act of 1893 provides that a sale to a bona fide purchaser in market overt according
to the usage of the market passes a good title even if the seller had no title. This therefore operates as an exception to
the nemo dat77 principle under Hire Purchase. This exception may be inferred from the definition of Hirer under Section
2 of Cap 507 which recognizes a person to whom the goods has passed by assignment. Sometimes the owner of the goods
hired to the hirer who has resold them may voluntarily relinquish his title to them after being paid and hence good title
passes to subsequent purchasers. This is not quite an exception to nemo dat but a modification of it. The hirer under a
hire purchase agreement possesses a contractual right to acquire ownership of the goods upon payment of all installments
due and the exercise of the option to purchase. The question that therefore arises is; can the hirer therefore assign the
benefit of the Agreement? At common law if a contract is silent on assignment then the hirer can assign but if it specifically
prohibits assignment then he should not assign.The Act itself appears to acknowledge the fact that a hirer possesses a
contractual right to ultimately acquire ownership of the goods upon payment of all the installments due under the
agreement, and on exercising the option to purchase. It therefore expressly recognizes the right to assign as contemplated
by section 2(1) which defines a hirer as
… a person who takes or has taken goods from an owner under a Hire purchase agreement and includes a person to whom
the hirer’s rights or liabilities under the agreement have passed by assignment or by operation of law
It then follows that by definition a hirer can assign any of his rights under a Hire purchase agreement including the option
to purchase. According to Laibuta (2006) an option is in general terms exercisable by the owner or other person by whom
it may be acquired by assignment. 78 In United Dominions Trust vs. Parkways Motors 79the court held that an express term
that the option to purchase shall not be assigned will always be upheld. It then follows that where the right of assignment
is specifically excluded by contract, the hirer loses the right to assign.
VII. REPOSSESSION BY THE OWNER

At common law an owner of goods is entitled to repossess them once the bailment ceases or terminates. A hire purchase
contract may provide that if the hirer commits a specified breach then the agreement terminates whereupon the owner is
entitled to possession of the goods. In cases of resale of the goods by the hirer the hirer cannot pass a good title hence
the owner can repossess the goods from the innocent purchaser. The owner’s claim to damages will be limited to the
unpaid balance of the hire purchase price. Should judgment be entered against the hirer, the judgment creditor is not
permitted to seize goods the subject matter of a hire purchase agreement.
Repossession is however closely guarded by the Act. 80Where goods have been let under a hire-purchase agreement and
two-thirds of the hire-purchase price has been paid, whether in pursuance of the agreement or of a judgment or otherwise,
or has been tendered by or on behalf of the hirer or a guarantor, the owner shall not enforce any right to recover possession
of the goods from the hirer otherwise than by suit. If an owner retakes possession of goods in contravention of the Act
the hire-purchase agreement, if not previously terminated, shall terminate and -
76
By the meaning under section 3 of The Judicature Act Cap 8, Laws of Kenya an Act of England in force on 12 th of August 1897
Nemo dat quo anon Habet that one cannot pass that which he doea not have. Since a Hirer has not acquired a good title he cannot purpot
77
to pass one to a third party.

78
See Laibuta supra p. 189
79
United Dominions Trust vs. Parkways Motors [1955] 2 All ER 557
80
See Section 15 (1) of the Act

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(a) the hirer shall be released from all liability under the agreement and shall be entitled to recover from the owner by
suit all sums paid by the hirer under the agreement or under any security given by him in respect thereof; and
(b) A guarantor shall be entitled to recover from the owner by suit all sums paid by him under the contract of guarantee
or under any security given by him in respect thereof.
If the hirer does release the goods and they are seized and sold the owner cannot maintain an action for conversion
against an innocent purchaser but he can recover the price for which the goods were sold in an action for money had and
received. If the goods have not yet been sold then the owner is entitled to possession of them from the judgment creditor.
Further;
Where an owner institutes a suit to enforce a right to recover possession of goods from a hirer and proves that, before
the institution of the suit and after the right to recover possession of the goods accrued, he made a request in writing to
the hirer to surrender the goods, the hirer's possession of the goods shall, for the purpose of the owner's claim to recover
possession thereof, be deemed to be adverse to the owner81
In cases where the hirer is a tenant of leasehold premises and he fails to pay rent, the landlord may re-enter the premises
and seize all goods therein whether they belong to the tenant or not. For the owner of the goods hired to be protected,
he must serve notice to the landlord that those goods belong to him. Only then can he repossess them. Where the hirer
is adjudged bankrupt all his property vests in the trustee in bankruptcy for distribution among creditors82. But this does
not apply to goods let on hire purchase when the owner serves a notice to the hirer withdrawing his consent to possession
of the hired goods83. The owner must do this before the hirer is adjudged bankrupt.
Finally if hired goods are delivered to a bailee for repair the bailee has a particular lien on the goods till his charges are
paid by the hirer. If the owner is entitled to terminate the hiring, the repairer can still claim a lien as against the owner.
In all the foregoing circumstances of the owner of the goods repossess them, prima facie the hirer cannot claim relief
against forfeiture of the goods or the payments already made.
VIII. THE MINIMUM PAY CLAUSE AND DAMAGES

In addition to the owner’s common law right of repossession of the hired goods the owner may seek damages. Goods let
on hire purchase depreciate in value because of user. The owner seeks to pass the risk of depreciation on to the hirer by
providing in the Agreement that the hirer shall make a minimum payment for the period the hirer has used the goods.
This is normally labeled ‘compensation for depreciation’84.
The question then is, can the owner sue the hirer for the sums stated in the minimum payment clause or can the hirer
refuse to pay because the amount is a penalty and not liquidated damages? Common law courts took the position that it
is for them to determine the measure of damages payable in the event of breach of contract. If the damages agreed
between the parties is not a genuine pre-estimate of the loss likely to be incurred upon breach the courts will strike it
down as a penalty.There are 3 circumstances under hire purchase which invite the operation of the minimum payment
clause.
a) In the case of the hirer’s breach of contract, the minimum payment clause will be regarded as a
penalty and hence be struck out whereupon the court will assess the amount of damages payable.
81
See Section 14 of the Act
82
See Section 31 which provides that If a hirer is adjudged bankrupt, the rights and duties which are the subject of the hire-purchase
agreement entered into the by the hirer shall vest in his trustee, notwithstanding the terms of the agreement, but without prejudice to the
trustee's right to disclaim
83
Proviso to the Section
84
See Dobson P. , Sale of Goods and Consumer Credit (6th edn, 1998) 124

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b) In the case of voluntary termination of the contract by the hirer by returning the goods the minimum
payment clause will be enforced.
c) The minimum payment clause will be enforced in the case of involuntary termination of the contract
where either the hirer dies or becomes bankrupt85.
IX. DAMAGES FOR BREACH OF CONTRACT

If the hirer commits a breach of any of the terms of hire purchase agreement the owner may claim damages. The hirer
has several obligations the breach of which gives rise to damages namely
a) The obligation to take delivery of the goods,
b) The duty to take care of the goods,
c) The obligation to pay the installments and
d) The obligation to continue the hiring for the agreed period.
Here the owner’s rights upon the hirer’s breach are termination of the agreement, and a claim for damages. Interestingly
these provisions in the Kenyan Act are in several ways similar to those of other jurisdictions. However there are some
differences which warrant analysis in the next chapter with a view to guide my proposals on reforms necessary to improve
Hire purchase regime in the country.
X. HIRE PURCHASE AS DISTINGUISHED FROM OTHER COMMERCIAL TRANSACTIONS
1) HIRE PURCHASE AND CONTRACT OF SALE

 In HPA, hirer is not bound to purchase the goods comprised in the agreement. The hirer only exercises an option
and is not bound to buy.
 A contract of sale of goods, on the other hand, entails a binding obligation on the buyer to buy and a similar
obligation on the seller to sell.
The classical Hire-purchase case of Helby vs. Mathews86 was particular about this point. A piano was handed over to a
hirer who agreed to pay stated installment. He could become the owner by paying up to the last installment or could
return the instrument at his choice. Property was to remain in the owner until the payment of the very last installment.
The Hirer paid only a few installments then proceeded to pledge the Piano to a third party who actually acted in good
faith and without knowledge of the owner’s rights. The owner was allowed by court to recover his piano from the third
party.
The Court in Helby vs. Mathew87emphasized the fact that a hirer does not have ownership. He cannot therefore purport
to create ownership by transfer or pledge to another person. This feature of Hire-purchase makes it fundamentally
different from other consumer-credit transactions and ordinary agreements to sale. For example the House of Lords in
the above case was unanimous that the position would have been different if the goods had been delivered under an
agreement to sale; that in that case the buyer could have been compelled to buy the goods and pay the price. Such
transaction confers on the buyer the right to deal with the goods.
85
Ibid par. 27-02
86
Helby vs. Mathews [1895] AC 471
87
ibid

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2) HIRE PURCHASE AND MONEY LENDING

A HPA is not a money lending transaction and a credit or finance charge does not constitute interest on a loan. All that
the owner of the goods is doing is giving hirer a right to purchase the goods at a rather higher figure than if he were
paying in cash on the spot.
3) HPA AND AGREEMENT FOR SIMPLE HIRING

In a simple agreement for hiring, the hirer is obliged to return the goods to the owner at the end of the period of hire and
the agreement does not confer on him an option to purchase the goods.
XI. STATUTORY CONTROLS

 Where the hirer is an individual, the HP price is limited to Kshs.4,000,000
 There is no limit of the HP price where the hirer is a body corporate
 HPA does not apply to schemes by which the government provides loans to any persons for the purchase of
motor vehicle.
1) STEPS IN THE TRANSACTION

a) Completion
b) Termination (Form HP8)
c) Completion (Form HP9)
d) When right to complete exercised
 At any time during the continuance of the agreement
 If the owner had reposed the goods, the hirer can only benefit from this right if he approaches the owner
and pays him of the net balance due as well as the costs and expenses incurred in the process of
repossessing the goods.
2) LICENSES
 You must get a license if you intend to be a hirer.
 Licenses are issued by licensing officer appointed by minister in charge of commerce by filing form No. 10.
 Licensing officer grants license, he is not supposed to give a reason if he refuses.
 Licenses are valid for a year and must always be displayed in premises (business)
 Appeals are to the minister within 30 days.
3) CONSEQUENCES OF DEFAULT BY HIRER

 Owner may recall goods except where hirer has paid two thirds of the price. He cannot recall them except by a
court action.
 Release hirer from liability and he receives all sums he paid,
 Risks having the guarantors released and guarantors right to claim payments made by them.

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 Where owner files for termination, he can’t recover dues under the contract.
 In the above, the owner must always sue the guarantors and people who gave security as a remedial measure.
 Court may issue order to repossess goods or partial transfer of goods.
4) REGISTRATION OF HPAs
All HPAs must be registered within 30 days from the day they are signed. The registrar of HPAs or his deputies or
assistants may extend this time if good reason is shown for doing so.
What happens is that the HPA document is send to the registry of HPAs and delivered to the registrar who registers it and
issues a certificate of registration. This certificate is in form HP2.
XII. ADVANTAGES OF HIRE PURCHASE AGREEMENTS

1. The transactions allow the buyer to pay for items without cashing in investments or savings, and to spread the
cost of expensive items over an extended period. In such transactions ownership of goods is transferred to a
finance company at a discounted price, and the company hires out and then sells those goods to the buyer. The
process of hire purchase financing is an alternative option for consumers who want to buy large and expensive
items which may otherwise be difficult to afford. This payment of installments is also beneficial to the owner
since the goods remain on hire only and the property in them does not pass to the hirer unless and until all the
agreed hire purchase installments have been paid and the option to purchase exercised on payment by the hirer
of a specified nominal amount. This position was enunciated in the case of Nurdin Bandali vs. Lombark
Tanganyika Ltd88where the court stated that the fact that all hire purchase installments have been paid by the
hirer does not mean that the goods becomes his. Until the property passes by reason of due exercise of the
option, the goods remain the property of the owner who can repossess, sell or otherwise deal with them.
2. Section 12 of the Act gives the hirer an option to severe the contract at his option before making the full payment
by invoking the minimum payment clause. Minimum payment clause under Section 12 provides that the hirer
may terminate an agreement by returning the goods to the owner at any time before final payment, and that the
transaction becomes a sale only when the hirer exercises the option to purchase. This position has been
supported further by the appeal court decision in Associated Distributors Ltd v Hall89, which held that the courts
can enforce the minimum payment clause if the contract is terminated, within its terms. In such cases, the
operation of the minimum payment clause which binds both parties where the goods are returned with an
intention to terminate the contract. This is an advantage to both parties as the hirer who has taken the goods is
not bound to purchase them and can return them if he changes his mind.
3. The hirer has an opportunity to terminate the transaction through a notice in writing to the retailer if they
experience hardships in payment. The goods must, however, be as good as new because returning them in a poor
condition may attract a suit by the retailer seeking damages. Section 2(1) of the Act provides that a hirer may
purchase the goods. However, the hirer is not bound to purchase as provided in Dalpat Rai v Manohar Lal &
Sons90where court stated thatunder the Act, the hirer is not bound to purchase but the Act gives the hirer the
option, but not the obligation, to buy thus, where the hirer breaches the contract, it will be up to the courts to
decide whether a penalty has been incurred. Furthermore, if the hirer returns the goods as his or her right, the
hirer must pay the owner damage.
88
[1963] EA 304
89
(1938) 2 KB 142
90
(AIR 1974 Raj 61).

Page 164 of 166
4. A hire-purchase agreement is not enforceable unless it has been registered. Section 5(4) (a) and (b) states that
unless a hire-purchase agreement is registered no person shall be entitled to enforce the agreement against the
hirer or to enforce any contract of guarantee relating to the agreement and the owner shall not be entitled to
enforce any right to recover the goods from the owner. Similarly, no security given by the hirer in respect of
money payable under the agreement or given by the guarantor relating to the agreement shall be enforceable
against the guarantor by any holder thereof. This was illustrated in the case ofFidelity Commercial Bank ltd D.H
v Agritools Limited and two others (Judgment debtor).91The decree holder sought to attach a motor vehicle in
order to satisfy his judgment against judgment debtor. The objectors filed an application to lift the attachment
arguing the motor vehicle in question belonged to them and not the second judgment debtor who was only a
hirer. The second judgment debtor had entered into a hire-purchase agreement with the objectors for the
purchase of the motor vehicle. Following the agreement the motor vehicle was registered jointly. The objector
argued that the hire purchase agreement was still in existence and since the second judgment debtor had not
completed payment of installment she was only a hirer. It was held that there wasn’t a valid hire-purchase
agreement since it had not been registered. It was also held that Section 5(4) of the Hire Purchase Act was very
specific that an agreement which had not been registered could not be enforced against a hirer.
5. Section 15 of the Act provides that when the hirer has paid two thirds or more of the hire purchase price the
owner must not take any step to recover possession of the goods in the event of default except through the
courts or unless the hirer himself terminates the agreement. If the owner acts contrary to this Section, the
agreement is terminated and the hirer is released from liability under the agreement and can recover all
payments made by him from the dealer. The two thirds provisos are meant to protect hirers from unscrupulous
dealers. This can be deduced from the case ofElijah Barasa Wepukhulu Vs Munir Omar & 2 others.92 The first
and second defendants bought a vehicle under hire purchase from the plaintiff. The third defendant financed
the transaction and held the log book as collateral. The first and second defendants sold the vehicle to a third
party who did not bother to check the title of the two defendants. The first and second defendants completed
paying two thirds of the hire purchase price as required under Section 15of the Act. They defaulted in paying
the third defendant who took possession of the vehicle as per their loan agreement. The owner sued under
Section 15 of the Act for possession of the vehicle. It was held that Section 13 of the Hire Purchase Act protects
parties who are privy to contracts, that is, a hirer against an owner so that where necessary an owner may become
entitled and claim the balance of the unpaid balance as opposed to repossession. It was also held that Section 15
can’t be used by a third party purchaser against the owner.
6. Where an owner becomes bankrupt, a hire-purchase agreement entered into him will remain in force and binding
on the trustee without prejudice to the trustee right to disclaim. This is stipulated under Section 30 of the Act.
The hirer is required to pay the installment to the trustee. However, if the trustee decides to disclaim (do away
with the agreement) the hirer is relieved of the contract. Section 31 provides that if the hirer is adjudged
bankrupt his rights and obligations rest in his trustee although this is subject to the trustee’s right to disclaim.
7. The hirer acquires certainty in ownership of an object as long as he complies with the terms of the underlying
agreement. This certainty, which comes with known fixed repayments, eases budgetary cash flows for the buyer.
Purchasing of goods using hire-purchase agreements comes with a fixed rate of interest covering the full period
of repayment so that you can easily budget without fearing the effects of changes in interest rates that may
occur with changes in the economy generally. Hire purchase transactions are cushioned against inflation and are
therefore a cheaper alternative to bank overdraft where the rate could be subject to fluctuations. There are also
other advantages with regard to tax where one can account for a rebate to the taxman.
-END-
91
Goess (C.C.A. 2)
92
HCCC 119/1999

Page 165 of 166
F. CHATTELS
G. INSURANCE
H. BILL OF EXCHANGE & PAYMENT SYSTEMS
I. JOINT VENTURES
J. MERGERS AND ACQUISITIONS
K. LABOUR LAW
L. PATENTS, COPYRIGHTS, INDUSTRIAL DESIGNS
M. OIL AND GAS
N. STRUCTURING COMMERCIAL SOLUTIONS
O. BANKING AND CHEQUE LAW
P. INSOLVENCY OF INDIVIDUALS AND COMPANIES
Q. COMPANIES ACT 2016 ZND ITS AMMENDMENT ACT
R. INTERNATIONAL SALE OF GOODS AND INCOTERMS
S. COMPETITION LAW
T. CONSUMER PROTECTION LAW
U. DRAFTING AGREEMENTS AND OTHER COMMERCIAL PAPER
V. OTHER AREAS OF LAW AFFECTED BY COMMERCIAL LAW EG. PROBATE

AND SUCCESSION LAW
W. STEPS OF REGISTRATION OF VARIOUS COMMERCIAL PROPERTY
X. COMMERCIAL DISPUTE RESOLUTION NATIONAL AND INTERNATIONAL

IN REGARDS TO I.P.; BANKING; M&A; CORPORATE LAW; LABOUR LAW

Page 166 of 166
Y. TAX LAW
Z. CONSTRUCTION LAW
AA. MARTIME LAW
BB. AIRCRAFT AND AIRSPACE LAW
CC. NEGOTIATING COMMERCIAL CONTRACTS
DD. THE BUSINESS DECISION QUESTION
EE.RESEARCHING COMMERCIAL LAW AND INTERNET SCOURCES
FF. STARTING A COMMERCIAL LAW PRACTICE
GG. COMMERCIAL CLIENT MANAGEMENT
HH. WAR AND COMMERCIAL LAW
II. GLOBALIZATION VS NATIONAL & REGIONAL COMMERCIAL LAW
JJ. PAST PAPERS
KK. EXPOSURE & MENTORING A COMMERCIAL LAW PUPIL
LL. REMARKS ON THE FURTURE OF COMMERCIAL LAW
MM. COMMERCIAL LAW AND THE INDUSTRIES
NN. COMMERCIAL LAW AND ACCADEMIA

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Compiled by Kevin Ndoho Macharia on 9th March, 2017

THE LAW OF COMMERCIAL TRANSACTIONS

Kevin Ndoho Macharia

9th March, 2017

THE LAW OF COMMERCIAL TRANSACTIONS

THE LAW AND PRACTICE OF COMMERCIAL TRANSACTIONS

Compiled by Kevin Ndoho Macharia

9th March, 2017

THE LAW OF COMMERCIAL TRANSACTIONS

Perhaps failure is the mother of invention.

THE LAW OF COMMERCIAL TRANSACTIONS

Kevin Ndoho Macharia

9th March, 2017.

THE LAW OF COMMERCIAL TRANSACTIONS

General table of Contents

A. CHAPTER ONE COMPANIES .......................................................................................................... 21

B. CHAPTER 2 - PARTNERSHIPS ....................................................................................................... 79

C. CHAPTER THREE - SALE OF GOODS AND AGENCY ............................................................... 86

D. CHAPTER FOUR - THE LAW OF AGENCY ................................................................................114

E. CHAPTER 5 - HIRE PURCHASE AGREEMENTS........................................................................152

H. BILL OF EXCHANGE & PAYMENT SYSTEMS ............................................................................165

I. JOINT VENTURES ...........................................................................................................................165

J. MERGERS AND ACQUISITIONS ..................................................................................................165

K. LABOUR LAW ..................................................................................................................................165

L. PATENTS, COPYRIGHTS, INDUSTRIAL DESIGNS...................................................................165

M. OIL AND GAS ...................................................................................................................................165

N. STRUCTURING COMMERCIAL SOLUTIONS.............................................................................165

O. BANKING AND CHEQUE LAW .....................................................................................................165

P. INSOLVENCY OF INDIVIDUALS AND COMPANIES ...............................................................165

Q. COMPANIES ACT 2016 ZND ITS AMMENDMENT ACT ........................................................165

R. INTERNATIONAL SALE OF GOODS AND INCOTERMS ........................................................165

S. COMPETITION LAW .......................................................................................................................165

T. CONSUMER PROTECTION LAW .................................................................................................165

U. DRAFTING AGREEMENTS AND OTHER COMMERCIAL PAPER .........................................165

V. OTHER AREAS OF LAW AFFECTED BY COMMERCIAL LAW EG. PROBATE AND

W. STEPS OF REGISTRATION OF VARIOUS COMMERCIAL PROPERTY ................................165

X. COMMERCIAL DISPUTE RESOLUTION NATIONAL AND INTERNATIONAL IN REGARDS

Y. TAX LAW ..........................................................................................................................................166

Z. CONSTRUCTION LAW ...................................................................................................................166

AA. MARTIME LAW ................................................................................................................................166

BB. AIRCRAFT AND AIRSPACE LAW ...............................................................................................166

THE LAW OF COMMERCIAL TRANSACTIONS

CC. NEGOTIATING COMMERCIAL CONTRACTS ...........................................................................166

DD. THE BUSINESS DECISION QUESTION ........................................................................................166

EE. RESEARCHING COMMERCIAL LAW AND INTERNET SCOURCES ......................................166

FF. STARTING A COMMERCIAL LAW PRACTICE .........................................................................166

GG. COMMERCIAL CLIENT MANAGEMENT ....................................................................................166

HH. WAR AND COMMERCIAL LAW ...................................................................................................166

II. GLOBALIZATION VS NATIONAL & REGIONAL COMMERCIAL LAW ................................166

JJ. PAST PAPERS...................................................................................................................................166

KK. EXPOSURE & MENTORING A COMMERCIAL LAW PUPIL ....................................................166

LL. REMARKS ON THE FURTURE OF COMMERCIAL LAW .........................................................166

MM. COMMERCIAL LAW AND THE INDUSTRIES ............................................................................166

NN. COMMERCIAL LAW AND ACCADEMIA ....................................................................................166

THE LAW OF COMMERCIAL TRANSACTIONS

Detailed Table Of Contents

I. TYPES OF COMPANIES .............................................................................................................. 21

II. FUNDAMENTAL CONCEPTS OF COMPANY LAW ............................................................... 21

2) Capacity to Create Legal Binding Relations ............................................................................................................. 22

III. ADVANTAGES OF INCORPORATION .................................................................................... 23

2) Holding Property ............................................................................................................................................................. 24

3) Suing and Being Sued .................................................................................................................................................... 24

4) Perpetual Succession ...................................................................................................................................................... 25

5) Transferability of Shares .............................................................................................................................................. 25