I.

THEORY / DOCTRINE OF UNCONSCIONABLE BARGAIN

The term “unconscionable” literally means ‘shockingly unfair or unjust, not guided or
controlled by conscience’.
Broadly speaking ‘unconscionability’ is therefore an aspect of the rationale of estoppel,
mistake, duress, undue influence, relief from penalties and forfeiture, all of which act to
improve fairness.
Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust,
or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that
they are contrary to good conscience.

Unconscionability has emerging as a separate substantive doctrine in its own right, particularly
in common law jurisdictions.
The jurisdiction to grant relief to set aside 'catching and unconscientious bargains' was
developed in England in the 19th century to protect heirs, reversioners and expectants from
finance agreements on account of their age and the frailty of their interests.
Initially the presumption of unfairness arose simply on account of inadequacy of consideration.
The doctrine was later refined to draw the focus away from inadequacy of consideration to the
conscience of the defendant, and the classes of disadvantage were broadened.
The English common law does not have a general doctrine of wrongful exploitation, although,
in some situations the court will void a contract on the grounds of undue influence or duress.
This requires not only a manifest disadvantage, but also a special relationship of trust between
the parties.
One of the most prominent cases in this area is Lloyds Bank Ltd Bundy, where Lord Denning
MR advocated that there be a general principle to govern this entire area. He called the concept
'inequality of bargaining power’, while the American case Williams v. Walker-Thomas
Furniture Co, espousing an equivalent doctrine, termed the issue as ‘unconscionability".
Although it is accepted that an ‘inequality of bargaining power' is relevant to the doctrine of
undue influence, Lord Denning's suggestion of a general equitable principle of an 'inequality
of bargaining power' was later rejected by the House of Lords in National Westminster Bank
plc v Morgan.

In summary, some lawful contracts are so oppressive or manifestly unfair that they are unjust
or unconscionable. To prevent the enforcement of such contracts, the courts have developed

1
the equitable doctrine of unconscionability. A contract found to be an unconscionable bargain
under this doctrine is called an unconscionable contract, or a contract of adhesion.

Elements of unconscionable bargain contract:

The elements that must be shown to prove that a contract or clause is unconscionable are:
1. The parties possessed severely unequal bargaining power;
2. The dominant party unreasonably used its unequal bargaining power;
3. The adhering party had no reasonable alternative.

Unconscionable Contracts or Clauses

If the court as a matter of law finds the contract or any clause of the contract to have been
unconscionable at the time it was made, the court may:
1. Refuse to enforce the contract, or
2. May enforce the remainder of the contract without the unconscionable clause, or it
3. May so limit the application of any unconscionable clause as to avoid any
unconscionable result.

When it is claimed or appears to the court that the contract or any clause in a contract may be
unconscionable, the parties to the contract shall be afforded a reasonable opportunity to present
evidence as to the contract’s commercial setting, purpose and effect, in order to aid the court
in making the determination.

A very important American decision can usefully be included to illustrate the way a court can
attempt to assist the weaker party, who has had no choice but enter into a contract with a
powerful party and by so doing apparently deprives himself of all legal redress.
In Henningsen Vs. Bloomfield Motors Inc. 75 A.L.R. 2d 1 (1960), where the plaintiff
purchased a car from Bloomfield Motors that had been manufactured by Chrysler Corporation.
After ten days of normal use the steering mechanism failed and the second plaintiff, the first
plaintiff’s wife, was seriously injured and the car was wrecked. The sellers and manufacturers
defended themselves by pointing to a disclaimer of liability printed in the sales contract.
The court rejected the defense’ arguments and went on to admit that no uniform policy had
emerged by which unfair use of exclusion clauses could be neutralized

2
The Court stated that in the absence of statutory guidance the judges themselves must attempt
to create an atmosphere of mutual trust and public good between the private citizen and
commercial enterprise.
Further, the court also stated that “Unconscionability is a doctrine in contract law that
describes terms that are so extremely unjust, or overwhelmingly one-sided in favour of the
party who has the superior bargaining power, that they are contrary to good conscience.”

Typically, an unconscionable contract will be held to be unenforceable because no reasonable

or informed person would otherwise have agreed to it. The perpetrator of the conduct is not
allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate,
that to enforce the contract would be unfair to the party seeking to escape the contract.

II. DOCTRINES OF ESTOPPEL

The term “Estoppel” is a collective name given to a group of legal doctrines/principles in
common law legal systems whereby a person is prevented from making assertions that are
contradictory to his or her prior position on certain matters before the court. In such
circumstances it is said that-the person is ‘estopped’ from changing his/her positions based on
the fact of previous assertions. Estoppel is used to keep one party to a contract from promising
one thing and then changing or denying the promise after the second party has relied on the
first party’s promise.
Generally, there are two types of estoppels: promissory and equitable.

PROMISSORY ESTOPPEL
Contract law generally requires that a person receives consideration for making a promise or
agreement.

Legal consideration must be something of value such as a valuable asset, money, or a promise
to refrain from some action or enforcement of a legal right, which are exchanged between two
parties to a contract at the time when an agreement or a promise are made. For a valid contract
to be enforced there must be an exchange of consideration between the contracting parties. If
one party fails to uphold their end of a contract, the other party can withdraw from that
contract. However, Promissory Estoppel is the exception to this rule.

3
In attempting to ensure justice or fairness, a court may enforce a promise even in the absence
of any consideration, provided that the promise was reasonably relied on and that reliance on
the promise resulted in a detriment to the promisee. Thus, under the doctrine of promissory
estoppel, even the existence of a promise may be sufficient to enforce an agreement, if the
other party has suffered damage as a result of acting on that promise.

Promissory estoppel is the legal principle in contract law that a promise is enforceable by law,
even if made without formal consideration. This is when a promisor has made a promise to a
promisee who then relies on that promise to his subsequent detriment or change in the
promisee’s circumstances.

Promissory estoppel is intended to stop the promisor from arguing that an underlying promise
should not be legally upheld or enforced i.e. it stops a person from going back on a promise
even if a legal contract does not exist, thereby promissory estoppel enables an injured, wronged
or aggrieved party, who was hurt by or due to his/her reliance on a promise, to recover on that
promise i.e. to collect damages.

Elements of Promissory Estoppel

There are common legally required elements for a person to make a claim for promissory
estoppel. These are:
1. A promisor, who makes a promise, with the intention that a reasonable person would
act on the promise and then, later reneges on that promise causing financial harm to the
promise;

2. A promisee, who believed the promisor, and acted in good faith on the promise made
by the promisor;

3. A promise (statement or representation) which is made by the promisor, which much

be clear, obvious and unambiguous in its wording. The promise (representations /
statements) goes to the future intents of the promisor. The nature of the promise must
be such that the only way to avoid injustice to the promisee is by enforcing the promise.

4
 4. A detriment that the promisee has suffered i.e. the promisee must have suffered an
actual substantial detriment in the form of an economic loss that results from the
promisor’s failing to deliver on his/her promise.

5. A reliance - the promisee must have reasonably relied on the promisor’s promise. In
other words, the promise was one that a reasonable person would ordinarily rely on and
the reliance must be both reasonable and foreseeable.

Promissory estoppel is usually only granted if a court determines that enforcing the promise is
essentially the only means by which injustice caused to the promisee can be cured/rectified.

Examples of Promissory Estoppel

1. Promissory Estoppel might be applied in a case where an employer makes an oral

promise to an employee to pay the employee a specified monthly or annual amount of
money throughout the full duration of the employee's retirement. If the employee then
subsequently retires based on a reliance on the employer's promise, the employer could
be legally estopped from not delivering on his promise to make the specified retirement
payments.

2. Tom, working in Kisumu who seeks a new job. After a certain number of interviews,
he receives a job offer from an employer in Nairobi, offering a high salary and
relocation expenses. Tom, immediately quits his job in Kisumu, ends his tenancy in
Kisumu, and begins to relocate to Nairobi. Upon arrival in Nairobi, Tom, learns that
the job is no longer available, or has a greatly reduced salary. Because Tom relied on
the employer's promise, he may be able to seek judicial relief for the expenses he
incurred due to the employer's promise.

3. Ed requests Sue to paint Ed’s house at a consideration of Kshs.50,000/=. Sue agrees to

paint Ed's house. Sue buys supplies and paints the house based on Ed's promise to pay
her. Ed changes his mind and refused to pay Sue, claiming there was no contract so he
isn't obligated to give her a dime.
It is not fair to let Ed have his house painted at no cost to him. In such an instance, it is
equitable to award Sue the money she should have received from the job.

5
Promissory Estoppel may be used as a cause of action that might be asserted against a party for
the first party’s detrimental reliance upon a promise from the second party i.e. Promissory
Estoppel may be used by the promisee as a sword to attack the promisor, who made the promise
and changed his/her in the relation to that promise.

The rules for Promissory Estoppel vary from one common law country to another. However,
generally, a successful case of Promissory Estoppel may result in the award of either reliance
damages or expectation damages. Reliance damages are based on what it would cost to restore
the promisee to their economic position before they relied on the broken promise, while
expectation damages are based on the cost of putting the injured party in the same position as
if the promise had been fulfilled.

EQUITABLE ESTOPPEL

Equitable Estoppel is a legal principle/doctrine that prevents a party from taking a position that
is contrary to their previous position, if doing so (changing the position) harms the other party.
This rule prevents someone from going back on their word in a court of law. Thus, the court
can a party to stop doing something because it is not fair to another party.

Unlike Promissory Estoppel, which involves a definite promise, Equitable Estoppel involves
only representations and inducements, which are statements of past or present fact.
A representation can be made either by words or conduct in equitable estoppel.

A party who has a duty to make a statement but fails to make one is in effect making a statement
by its silence. The party making the representation intends for the other party to rely upon such
a representation.
After the first party makes a representation by word or deed, it may not contradict its
representation. The second party states that the first party is estopped from changing its position
based upon the first party’s initial representation to the second party. The second party’s claim
of estoppel is a defense against whatever claim the first party is putting against the second
party. Each of these claims must be factual in nature in order for the two parties to argue them.

6
Equitable estoppel is typically used as a shield by a party i.e. to protect a victim, and not as a
means of legal attack. Equitable Estoppel is a defense.

Elements of Equitable Estoppel

A case for equitable estoppel requires certain events to occur for the claim to be effective.
Evidence for a case asserting equitable estoppel will usually contain these three basic elements:
1. A Representor – the party that makes representation of facts.

2. A Representee – the party to whom representation of facts is made, and who relies on
the representation.

3. A representation of facts, which must be clear and unambiguous. The promise or

representation has to be about existing fact or future conduct which can be either
express or implied. (See: Legione vs. Hateley). This happens when one party has
previously represented a material fact that contradicts a position that is later argued by
that party. The representation may comprise of an inconsistent argument or denial of a
previously asserted material fact by the opposing party, or voluntary concealment of
material facts, fraud, silence or omission of facts and acquiescence.
The representation does not have to be express, but must be clear and unambiguous. A
representation will not be clear if important information is omitted (ACC vs. Gray).

4. An assumption or expectation – the plaintiff (the party relying on the representation)

needs to have established and shown a legal relationship or future legal relationship or
expectation of future benefit, contract or interest. The assumption must be reasonable
in all circumstances. (See: Hammond vs. J. P. Morgan Trust Australia Ltd.)

5. An inducement – the defendant induced the plaintiff to hold the assumption or

expectation, which means that the plaintiff must have acted or refrained from acting in
reliance on the assumption or expectation. It is the inducement to rely on the assumption
not the representation that is at the centre of the doctrine of equitable estoppel (See:
Waltons Stores, Verwayen). Usually this is shown by the representation itself, when
seen in context. However, silence can be enough (See: Waltons Stores).

7
6. A reliance - there must be reliance on the previously represented material fact. Reliance
must be reasonable. The Representee must have acted in reliance on the induced
assumption. There must be a causal link between the assumption and the action or
conduct. Further, the action or conduct must have been reasonable in all circumstances.
(See: Commonwealth Bank of Australia vs. Carotino). In assessing reasonableness, the
court will look at whether the relying party was well resourced and was used to dealing
in commercial transactions, as well as whether the relying party sought legal advice.

7. Knowledge – the representor (the defendant) must actually know, or intend(ed) that the
relying party (the representee i.e. the plaintiff) will act or refrain from acting in reliance
on the representor’s assumption or expectation.

8. A detriment / harm - the representee must suffer detriment or stand to suffer detriment
if the assumption is not fulfilled by the representor. In other words, there must be
detriment to the relying party. The detriment must be significant (See: Hawker Pacific
PTY VS. Helicopter Charter) The representee must had failed to avoid the detriment
by fulfilling the assumption or expectation or by acting otherwise (Waltons Stores vs.
Maher), where the term “acting otherwise” includes simply disabusing representee of
incorrect assumption before detriment is incurred (Lorimer vs. State Bank of NSW).
Detriment occurs when the party claiming estoppel (the representee) is harmed by the
changed position of the representor due to the representee’s reliance on the previously
represented position and material fact. If the side asserting equitable estoppel cannot
also prove prejudice, loss, injury or some form of detriment in addition to these
attributes, the case for equitable estoppel is insufficient.

9. Failure to prevent detriment to the representee (the relying party) caused by the
defendant (representor) i.e. the representor had a chance to prevent detriment, but let it
continue or did not resolve the issue and the harm to the representee happened.
However, reasonable notice to the representee may mitigate the case.

10. A belief - there also needs to be clear proof that the side claiming Equitable Estoppel
fully believed the actions, speech, conduct, and ommisions of the side that the estoppel
is claimed against. This means that the court will also consider the amount of belief in

8
 the misleading information or action and damage caused by that belief to the party
claiming the estoppel.

Where a plaintiff proves all of the elements of Equitable Estoppel, equity in favor of the
plaintiff (the relying party) will arise i.e. is the minimum equity required to do justice.

An equitable estoppel plea may, in some jurisdictions, require proof of intent i.e. that the party
against whom equitable estoppel is pleaded intended to deceive. In some countries, misleading
someone by way of negligence is an acceptable reason to plead equitable estoppel.

Example of circumstances where Equitable Estoppel can arise and be pleaded

1. Joe requests Lynne to paint his house at a consideration of Kshs.50,000/=. Lynne had
arranged to paint Joe's house. However, Joe wrote down the wrong address and Lynne
ended up painting the house belonging to Sam, Joe's next-door neighbor. Sam sees
Lynne painting his house and keeps his mouth shut. When the job is done, Lynne can
bring an equitable estoppel action claiming that Sam knew his home was being painted
but decided to keep quiet instead of asking Lynne why she was working on the home.
Equity suggests that Sam shouldn't get a free house out of the deal -- he knew or should
have known Lynne made a mistake and should have taken steps to correct it.

2. An example of equitable estoppel involving a contract can be seen in marriage. Two

people enter into the contract of marriage, believing each other to be legally single, and
live together for years as a married couple. If one person decides to file for divorce and
during the process, the other person discovers that their marriage is not legally
recognized, the courts may uphold that the other person cannot deny payment of
alimonies based on an argument that their marriage never existed. If both parties
believed they were married and carried out their lives in a way that supported that belief,
it would fall under acquiescence within equitable estoppel. This would not allow the
newly discovered fact that the marriage does not legally exist, to be used to harm the
case made by the complaining party.

The remedy in cases of Equitable Estoppel must be proportionate to the detriment suffered –
to make good the assumption unless in the circumstances that would be inequitably hash to the

9
defendant, in which case a lesser remedy will be appropriate. The requirements for equitable
estoppel vary from one common law country to another.

III. FUNDAMENTAL OBLIGATION THEORY / DOCTRINE

The strongest example of the courts dislike of the modern use of the exclusion clause and their
determination to curtail it is to be seen in their creation of the Fundamental Obligation Theory/
Doctrine.

The idea is that in every contract there is some central theme, some basic obligation. If a party
tries to exclude himself from performing what amounts to the core or the very essence of the
contract then that party is attempting to avoid his/her fundamental duty or fundamental term of
the contract. These courts will not allow such a party to do so.

This fundamental obligation doctrine developed in the 1950s and 60s, building on earlier
decisions, a doctrine that, as a rule of law, an exclusion clause could not protect a party from
liability for serious i.e. fundamental breach of contract, or breach of a fundamental term of a
contract even where on the true construction of the contract, the wording of the clause covered
the breach which had occurred.

The so –called “doctrine of fundamental breach” was rejected by the House of Lords in Suisse
Atlantique Societe d’Armement Martitime S.A. vs. N.K. Ratterdomsche Kolem Cetrale, HL,
1967 who stated, obiter, that “there was no rule of substantive law that an exclusion clause
could not cover a fundamental breach, and that it was a question of construction whether the
clause in fact covered the breach in question.”
The Court of Appeal effectively revived the rule of law doctrine in the case of Harbutt’s
“Plasticine” Ltd vs. Wayne and Pump Co Ltd, CA, 1970 and subsequent cases, albeit in a
modified form and in 1980 reaffirmed Suisse Atlantique.
For example, in the case of Photo Production Vs. Securicor Transport Ltd where the claimants
employed the defendants to protect their factory by a visiting patrol, a clause provided that
“under no circumstances shall the (defendant) company be responsible for any injurious act or
default by any employee of the company”
One night, one of the defendants’ guards lit a small fire inside the factory which got out of
control and completely destroyed the claimant’s premises, with loss amounting to £615, 000.

10
The House of Lords held that though the defendants were in breach, they were permitted to
rely on the clause as it clearly and unambiguously covered the breach in question.
This decision is clearly based on the reasonableness of the clause since the parties, being of
equal bargaining power, were free to apportion the risks as they thought fit. The claimants, as
owners of the premises, were in a better position to insure against the risk of fire.
The decision in Photo Production Case is in line with section 9(1) of the Unfair Contract
Terms Act 1977 (UK statute). Although the Act of 1977 did not apply to the case (the facts
occurred before the Act came into force).

In Karsales (Harrow), Ltd Vs. Wallis [1956] 2 ALL E.R. 866, where X decided to take a
second-hand car on hire purchase and signed what might be regarded as the perfect exclusion
clause, at least as far as technicalities go, which read, “ no condition or warranty that the
vehicle is roadworthy or to its age, condition or fitness for any purpose is given by the owner
or implied herein.” On the day of delivery, the car would not move and many parts had either
disappeared or been replaced by even older parts.
The court decided that despite the all-embracing wording of the clause the sellers could not
hide behind it. In simple language, the sellers had contracted to sell a car and at the same time
had tried to exclude themselves should it turn out not to be a ‘car’ at all. Thus, the burden of
proving there has been a fundamental breach is on the party alleging it.

In the case of East African Road Services Ltd. Vs. J.S. Davis And Co. Ltd [1965] E.A. 676,
where X consigned goods to Y to transport from Nairobi to Tanzania. The goods never arrived.
Such loss was covered by the wording of the clause. The court held that it was for X to plead
fundamental breach and this he had not done and therefore the clause was good protection. The
court explained: ‘A defendant does not lose the benefit of an exemption clause unless and until
it is shown that he had deviated from the performance of his contractual obligations, and while
the essential obligation under the contract is carriage of goods, it would be unrealistic to
suggest that the exemption clause does not begin to operate until the goods are set in motion
towards their destination. It becomes operative as soon as the goods are delivered to the
defendant.’
In this case, the mistake of treating all exemption clauses on the same footing was explained
by Lord Reid. He pointed out that in the standard form type contracts there is no freedom of
contract and the consumer is left in a ‘take it or leave it’ position. In such a situation it may be

11
reasonable for the courts to spend some energy in nullifying the unfair result that may arise by
allowing the clause to avoid basic liabilities.
His Lordship held that “On the other hand, some exemption clauses, particularly in business
as opposed to consumer contracts, are the results of hard bargaining between the parties”.
The present fundamental obligation theory, his Lordship felt, treated all contracts on the same
footing. What was required, apart from Government control such clauses, was that each
contract be treated on its merits and rather than look upon earlier cases as establishing a new
rule of law they should be regarded as rules of construction, with emphasis placed on the
intentions of the parties.

In the case of Kenyon, Son And Craven Ltd Vs. Baxter Hoare And Co. Ltd.[1971] 2 ALL E.R.
708, where, the plaintiffs stored 250 tons of groundnuts in the defendant’s warehouse. A clause
in the contract stated that the defendants should “not be liable for loss of or damage to goods
unless (i) occurs whilst the goods are in the actual custody of the company and under its actual
control and unless such loss or damage is due to the willful neglect or default of the company
or its own servants” The groundnuts were badly damaged by rats because the warehouse was
not “rat proofed”…
The plaintiffs had argued that the defendants were in fundamental breach of their contract of
bailment and that the defendants had not affirmed the contract which according to the Suisse
Atlantique would mean they were accepting the continuance of the contract, that therefore the
presence of the exemption clause. They argued further that the therefore the exemption clause
no longer applied. The court held that the exemption clause was good and the plaintiffs failed
in their claim for damages. The court decided that the way in which the nuts had been stored
did not amount to such a breach of bailment as to destroy the foundation of the contract. Neither
did the defendant’s behavior amount the wilful neglect. In these circumstances the exception
clause covered the loss.
Of importance is that the decision in the Suisse Atlantique is not binding on the courts in
Kenya. The courts have in fact adopted the fundamental obligation theory and so long as it is
used in situations that would otherwise lead to injustice then it has a very important role to
play.
One criticism of the fundamental obligation theory is that it lacks a coherent and cohesive
appearance. The underlying feeling of what one judge may think is social justice may be very
different from what another judge may feel is necessary.

12
IV. DOCTRINE OF PRIVITY OF CONTRACT

The doctrine of privity of contract is a common law principle that provides that only the parties
directly involved in a contract can enforce its terms. Third parties to a contract cannot benefit
under the terms of the contract In other words, the Doctrine of Privity of Contract prohibits
persons from seeking redress when such persons have no contractual relationship with each
other or those under a given contract, despite such persons being affected by the contract. This
affects redress of such third parties.

As a result of doctrine of Privity of Contract, historically the courts have held a person who is
not party to contract (A THIRD PARTY) is not protected by an exclusion clause in that
contract, even if the clause purports to extent to him.
This doctrine is important as it aids in the protection of contracting parties from third-party
interference.

However, the doctrine of privity of contract isn't absolute. There are some exceptions to the
general rule, allowing rights to third parties and some impositions of obligations.
A third party to a contract or someone who was not directly involved in the contract can sue in
these exceptional circumstances. These include:
1. Trust exceptions,
2. Assignments of contracts,
3. Third-party insurance
4. Restrictive Agreements
5. Collateral Contracts and the Sale of Defective Goods
6. Cases of Negligence
7. Agency
8. Etc.

Trust Exception
The trust exception is one of these exceptions. A trust is a legal arrangement in which one
party, the trustor/settlor, grants another, the trustee, the right to hold title to property or personal
assets for the benefit of a third party, the trust beneficiary.

13
A trustee is the person who receives the settlor's trust property and is responsible for
administering and disposing of it on behalf of the beneficiaries in accordance with the trust
objectives.
The trust beneficiary is the person who receives the trustee's distribution of trust income in
accordance with the trust's terms.
In some circumstances, an agreement between a trustee and another party may affect the owner.

Restrictive Agreements
In some cases, a restrictive agreement may be enforceable against a third party. This may be
the case when owners of a house sell to another person with the understanding that the buyer
would not change the design of the house. If the buyer sells the house to a third party and some
requirements are met, the third party may be obligated to follow the original owners' conditions.

Collateral Contracts and the Sale of Defective Goods

A third party may sue the seller over defective goods if the third party is affected by the flaws
in the goods.

Agency
An agent may enter a contract with another party on behalf of a principal. In this case, the
principal may not be able to be released on grounds of the privity principle because he was
represented by his agent in the contract.

Negligence
In the case of personal injury resulting from negligence, the negligent party may generally be
sued by third parties who are not parties to any contract with the negligent party.

Assignments
This is in some cases, where benefits from a contract may be assigned to another party.
For example, where X agrees to repair Y’s house for Kshs.10,000. X can assign the dept of
Kshs.10,000/- owed to him by Y to be paid to Z. Then Z can sue Y for payment of the dept.
The fact that X can assign the debt to Z giving Z the right to sue Y is an invention of equity.

Insurance Contracts

14
Compulsory insurance for using a vehicle on the public highway gives an injured third party
the right to enforce the insurance contract that exists between the company and the insured
person. A third party involved in an automobile accident with an insured vehicle may, in some
cases, sue the insurance company when he gets a favorable court ruling against the vehicle
owner.
Another example can be taken from life insurance contact, where the husband insures his life
with an insurance company. He intends his wife and children to benefit from his contract with
the company. Legislation gives the beneficiaries a right to enforce that contract.

15