Law of Contract

What is a contract?
Session1
© NU 2019
Objectives
 Define ‘contract’ correctly
 Explain the ‘objective’ and subjective

principles
 Expected standard of behaviour
 Freedom of contract and imbalance

bargaining power
 Describe essential elements of a Valid

Contract correctly and explain the types of

contracts
Definition of A Contract
 A contract is an exchange of promises
between two or more parties to do, or refrain
from doing, an act which is enforceable in a
court of law.
 A contract can also be defined as a promise

or a set of promises for the breach of which

the law gives a remedy.
Definition Cont.
 A contract is an agreement which is legally
binding on the parties.
 It gives rise to obligations for the parties

involved. (duty, commitment, responsibility)

 The law of contract determines which
agreements are enforceable and regulates
those agreements, providing remedies if
contractual obligations, that is, undertakings
or promises are broken. (some agreements are
unenforceable, i.e social and domestic agreements)
Definition Cont.
 Balfour v Balfour [1919] The husband in this
case was about to travel for work to Ceylon.
Before leaving he agreed to pay his wife a
monthly allowance but failed to do so. The
wife sued for the sum but the courts held that
this was a domestic agreement and therefore
the parties didn’t intend to create legal
relations.
Three elements in the
definition of a contract

(1) A Promise

(2) A Legal Duty arising from that promise

(3) A remedy for breach of that Duty

A Promise
 Distinction between two types of promise,
namely: Those which do and do not give rise
to a legal duty.
 A promise to contribute money to one’s

wedding does not give rise to legal

obligation, because it is a mere promise.
 However, a promise to sell someone a car for

K10,000 gives rise to legal obligation.

A Legal duty arising from that
promise
 A bilateral contract gives rise to obligations
to both sides. Thus in a sale contract, the
seller has an obligation to transfer title in the
thing sold to the buyer, while the buyer has
an obligation to pay the price.

 A Unilateral contract, by contrast, gives rise

to one sided obligations only.
A remedy for breach of that duty
 A distinction between common law and
equitable remedies:
 Common law Remedies - damages

 Equitable Remedies – Injunctions, Specific

Performance.
 (difference between common law and equity? Common law is
a body of legal precedent compiled by past court decisions.
These decisions become the rules that common law judges
use to decide legal disputes. Courts of equity provide a
remedy when common law courts decide a case which
constitutes an inequitable situation.)
Rationale for the law of contract
 To provide a general framework of rules that
determines which agreements are valid or
legally binding and ones that are void or not
legally binding.
 To enable parties to a contract to know or

ascertain beforehand whether what they

agreed to do was legally binding or not.
 To define the consequences of failure by a

contracting party to perform his/her

obligations under agreement.
Rationale for the law of contract
 For instance, failure to perform a moral
obligation such as a pledge to contribute to
friend’s wedding expenses does not create
any legal liability.
 However, non-performance of a contract

generally translates into legal liability.

Essential Elements of a Contract
 For a contract to be valid the following
essential elements must be present:
 (1) Agreement - Made of Offer and
Acceptance
 (2) Consideration
 (3) Intention to Create Legal Relations
 (4) Capacity of Parties
 (5) Free Consent
 (6) Legality
 (7) Form
Agreement
 An agreement is made up of an offer and
acceptance.
 One party must offer another party to enter

into a contract and the other party must

accept the terms of the offer.
 The person making the offer is called the

offeror, and the person to whom the offer is

made is called offeree.
 Acceptance should be communicated:
Agreement
 Felthouse v. Bindley  
 Can a person’s silence be considered acceptance?
 In this case, the petitioner, Mr. Paul Felthouse wanted to purchase a
horse from his nephew, but the price he offered to pay for the horse was
less than that his nephew was willing to sell it for.  The horse, therefore,
was still in his possession. The Uncle communicated his offer through a
letter, saying, “If I hear no more about him, I consider the horse mine at
£30.15s” The nephew could not respond to the letter because he was
busy with an auction on his farm. Though he asked the auctioneer, Mr.
Bindley, not to auction the horses, he accidentally did. Mr. Felthouse
then sued the defendant for conversion of his property. The defendant
argued that the horse was not actually Mr. Felthouse’s property, as there
existed no contract between him and his nephew at the time of the
auction because Mr. Felthouse’s offer was not accepted by his nephew
and the nephew’s silence cannot be considered to be an acceptance of
the offer.
Agreement
 Felthouse v. Bindley  
 Can a person’s silence be considered acceptance?
 In this case, the petitioner, Mr. Paul Felthouse wanted to purchase a
horse from his nephew, but the price he offered to pay for the horse was
less than that his nephew was willing to sell it for.  The horse, therefore,
was still in his possession. The Uncle communicated his offer through a
letter, saying, “If I hear no more about him, I consider the horse mine at
£30.15s” The nephew could not respond to the letter because he was
busy with an auction on his farm. Though he asked the auctioneer, Mr.
Bindley, not to auction the horses, he accidentally did. Mr. Felthouse
then sued the defendant for conversion of his property. The defendant
argued that the horse was not actually Mr. Felthouse’s property, as there
existed no contract between him and his nephew at the time of the
auction because Mr. Felthouse’s offer was not accepted by his nephew
and the nephew’s silence cannot be considered to be an acceptance of
the offer.
Agreement
 A communication will be treated as an offer if it
indicates the terms on which the offeror is
prepared to make a contract (such as the price
of the goods for sale) and gives a clear
indication that the offeror intends to be bound
by those the terms if they are accepted by the
offeree.
 In Carlill v Carbolic Smoke Ball (1893), the
defendants were the manufacturer of the
‘smokeballs’ which they claimed could prevent
flu.
Agreement
 They published advertisements stating that if
anyone used their smokeballs for the specified time
and still caught flu, they would pay that person 100
Pounds, and that to prove they were serious with
the claim, they had deposited 1,000 Pounds with
their bankers.
 Mrs Carlill bought and used the smokeballs, but
nevertheless ended up with the flu. They argued
that their advertisement could not give rise to a
contract, since it was impossible to make a contract
with the whole world and therefore they were not
legally bound to pay the money.
Agreement
 The Court of Appeal found that the
advertisement constituted a binding
agreement as the essential elements of a
contract – including offer and acceptance,
consideration and an intention to create legal
relations – were all present.
 The Carlill case played a large role in

developing the law of unilateral offers, and

laid the foundation for the modern practice of
outlawing misleading advertising.
Consideration
 The agreement must be supported by lawful
consideration.
 Consideration means value or benefit given

by the other party.

 Consideration is the essence of a bargain

between the contracting parties.

Capacity of Parties
 This refers to the legal competence for one to
contract.
 Both parties making the agreement must

have the legal capacity to enter into contract.

 They must be recognized by law as
possessing the characteristics that qualify
them as parties competent to contract.
Intention to Create Legal Relationship
 For any agreement to be considered as a
contract, the parties must make the
agreement with the intention to create legal
relations between them
 That is, they intend to be legally bound.
 In other words the parties must contemplate

legal consequences.
Consent
 A contract must be made with the free
consent of the parties.
 The validity of a contract may be affected if it

is induced by the following factors:

 Misrepresentation
 Undue influence
 Coercion
 Fraud
 Mistake
Legality
 A contract must be made to accomplish
something that is legal and not against public
policy.
 Thus courts of law will not enforce a contract

whose objective or consideration is found to

be:
 Illegal
 Immoral, or
 contrary to public policy.
Legality – case law
Re Mahmoud and Ispahani [1921] 2 KB 716
The effect of statutory illegality on contracts.
Facts:
Under the Defence of the Realm Act 1914 an Order was made, titled the Seeds, Oils and Fats
Order 1919 that said “a person shall not… buy or sell or otherwise deal in” linseed oil without a
licence. The claimant had a licence to deal in linseed oil and sold 150 tons of oil to the defendant.
The defendant had incorrectly told the claimant that they had a licence to deal in oil. In fact they
did not. Later, the defendant refused to accept delivery of the oil, and the claimant sued for
damages.  
Issues:
The defendant argued that as he had no licence to deal in oil the contract was illegal under
the 1919 Order. Consequently, the contract should be illegal and void. Therefore, the claimant
could not sue for damages upon it. 
Held:
The Court of Appeal held that the claimant could not sue upon the contract as it was illegal.
Banks LJ said:
“it is open to a party however shabby it may appear to be to say that the Legislature has
prohibited the contract, and therefore it is a case in which the court will not lend its aid to the
enforcement of the contract “.
Form
 Some contracts are required to be in a
particular form in order for them to be valid.
 For instance certain transactions involving

land such as conveyances, legal mortgages

and leases must be in writing and require the
execution of a deed.
 A guarantee requires to be in writing
Classifications of Contracts
 Contracts may be grouped according to the
followings classes / clusters:
(1) Formation
(2) Form
(3) Validity
(4) Performance
Types of Contracts According to
Formation
(1) Express Contract
 An express contract is a contract whereby the

parties specifically agree on the nature and

terms that will govern their relationship. 
(2) Implied Contract
 An implied contract is a contract whereby

there is no specific agreement between the

parties.
Types of Contracts According to
Form
(1) Standard Form Contracts  
 Standard form contracts are contracts where

the terms and conditions are not subject to

negotiation between the parties but are
predetermined.
(2) Simple Contract
 This is a contract that is not made under a

deed
 (3)
Types of Contracts According to
Form
(1) Standard Form Contracts  
 Standard form contracts are contracts where

the terms and conditions are not subject to

negotiation between the parties but are
predetermined.
(2) Simple Contract
 This is a contract that is not made under a

deed
Examples
◦ Contracts for the sale or transfer of land or when a legal
mortgage of land is created. (Lands & Deeds Registry Act)
◦ The transfer of shares in a registered company. This is
required under section 64 of the Companies Act, Cap 388,
which states that “a proper instrument of transfer” must be
delivered to the company. The company cannot register
the transfer until this is done.
◦ Cheques, Bills of Exchange and Promissory notes, under
the Bills of Exchange Act 1882.
◦ Assignment of Life Policies (Insurance Act)
◦ Hire Purchase and conditional sale
 Failure to comply with the statutory requirements
stated above renders the contract invalid.
Types of Contracts According to
Validity
(1) Void Contract
 A void contract has no binding effect at all.

(2) ) Voidable Contract  

 A voidable contract is a contract, which is

binding, but one party has the right at his

own volition to set it aside.
Types of Contracts According to
Validity
(1) Void Contract
 A void contract has no binding effect at all.

(2) ) Voidable Contract  

 A voidable contract is a contract, which is

binding, but one party has the right at his

own volition to set it aside.
Validity
 (3) Illegal Contract
 An illegal contract is a contract which is

forbidden by law or is contrary to some rule

of public or is immoral or is criminal in
nature.
(4) Unenforceable Contract
 An unenforceable contract is a contract which

cannot be enforced in a court of law due to

some technical defects as regards its form
Performance
 (1) Executed Contract
(2) Executory Contract
 An executory contract is a contract in which

one of the parties is bound to do a given

thing at some future date.
Factors Affecting Law of Contract
(1) Inequality of bargaining power
(2) The Use of standard Form Contracts
(3) Consumer Protection
(4) Globalisation of Contract Law – (International
Institute for Unification of Private law –
adopted principles of international,
commercial contracts; Principles of European
Contract Law