14.2.

14T BUILDING CONTRACTS

(THE LAW OF CONTRACT)
Introduction
The Law of Contract is the foundation upon which the superstructure of modern
business is built. In business transactions, quite often promises are made at one time and
the performance follows later. The law of contract lays down the legal rules relating to
promises, their formation, their performance and their enforcement.
The Law of Contract in Kenya was first based on the Contract Act 1872 of India,
which doesn‟t apply in Kenya today except to contracts made before 1st January 1961.
The Law of Contract as administered in Kenya is an adaptation of the rules of English
Law of Contract as modified by sections 2 and 3 of the Law of Kenya Act (Cap 23) 1962
and is applicable since 1st January 1961.

NATURE OF CONTRACT
A contract is an agreement or promise between two or more parties, which is intended
by them to create legally binding obligations.

Essentials of a Valid Contract

1. There must be offer and acceptance
2. There must be an intention to create legal relations
3. There must be consideration or the contract must be under deed.
4. There must be contractual capacity
5. There must be genuine consent, i.e. the consent must not be obtained through
mistake, misinterpretation, duress, or undue influence
6. The object of the contract must be lawful.

Types of Contract
Contracts are divided into the following headings:
1. Contracts of record
2. Contracts under deed or specialty contracts
3. Simple contracts

1. Contracts of record
Include the judgements of the courts and personal recognisances. They are not true
contracts, since the obligations under them are imposed on the parties by the courts, and
do not result through mutual agreements.
2. Specialty Contract
A contract under deed which is otherwise known as a specialty contract or under seal
is the only formal contract, must be (i) in writing, and (ii) signed, sealed and delivered.
Sealing and delivering are usually mere formalities. The delivery of such a contract may
be actual or constructive. It applies on various formal occasions, as in certain types of
contract, which are not supported by consideration, and contracts of sale of freehold land.
In these cases, and certain others, a deed is essential if contracts are to have legal validity.
Section 2 (1) of the law of Contract Act of Kenya provides that no contracts in writing
shall be void or unenforceable merely on the ground that it is not under deed. Contracts,
if not made under deed must be supported by consideration.
3. Simple Contracts
Any contract which does not satisfy the requirements of the contract under deed. Also
known as parole, does not need to be in any special form as it may be oral, or written, or
partly oral and partly written, or merely implied by conduct, e.g. A boards a bus, there is
a contract between him and the owner.

VALID, VOIDABLE AND VOID CONTRACTS

Contracts may also be classified in terms of their enforceability or validity.
A valid contract is an agreement, which is binding and enforceable, with all the essential
elements stated above.
A voidable contract is an agreement that is binding and enforceable, but because of
the lack of one or more of the essentials of a valid contract, it may be set aside at the
option of the aggrieved party. If the party entitled to such right does not exercise the right
within a reasonable time, the contract is binding. The right to avoid the contract is given
in the following circumstances:
1. Where on of the parties has been fraudulently induced to enter into such a contract
2. Where the other party has used duress or undue influence
3. Certain contracts entered by infants and insane persons

A void contract is really not a contract at all. The term means an agreement, which is
completely destitute of any legal effect. Here are a few examples of void contracts:
1. Where one of the basic ingredients such as offer, acceptance, consideration, and
the intention to create legal relations is missing
2. Contracts made under a mistake of fact material to the terms of the contract
3. Under Infants‟ Relief Act certain such as money lent or to be lent to the infant or
goods supplied or to be supplied to him other than necessaries are absolutely void.
4. An agreement of which the consideration or object is unlawful.

14.3.04.T13 FORMATION OF CONTRACT

The formation of a contract involves the following factors:
(a) The offer
(b) The acceptance
(c) Consideration
(d) Contractual Capacity
(e) Intention to Create a Legal Relationship

1. INTENTION TO CREATE LEGAL RELATIONS

A contract is a result of an agreement between the parties, but in order for a contract
to enforceable, there must be an intention to create legal relations. Agreements of a
purely domestic or social nature are generally not enforceable contracts. Whether or not
the parties intended to create legal relations is a question of fact to be inferred from all
the circumstances of a case.
In commercial or business agreements it is generally presumed by the courts that
there is an intention to create legal relations, unless the parties insert a clause that their
agreement shall not be binding in law but shall be binding in honour only.

2. OFFER AND ACCEPTANCE

 In order to be enforceable contract, certain basic requirements must be present. There
must be an agreement based upon genuine consent of the parties, supported by
consideration, and made for a lawful object between competent parties.
(a) Offer
An offer is defined as an expression of willingness to enter into a contract of definite
terms, as soon as these are accepted.
The following are the rules of offer:
1. An offer may be made to a specific person, or to any member of a group of persons,
or to the world at large, but it cannot form the basis of a contract until it has been
accepted by an ascertained person or group of persons.
2. An offer may be made by word of mouth, in writing, or by conduct. The person
making the offer is called the offeror, and the person to whom the offer is made is
called the offeree.
3. An offer must contemplate giving rise to legal consequences if accepted
4. The terms of the offer must be certain and free from vagueness in expression
5. Every offer must be communicated for a contract to arise, two parties must be of the
same mind and so it can‟t be accepted by a person who doesn‟t know it has been
made. This applies to both specific and general offers.
6. The offeror cannot bind the other party without his consent.
7. The offeror may attach any conditions to his offer, but must communicate then to
the offeree, before they bind him by his acceptance of the offer. In business this rule
is chiefly important where the terms of the offer are usually of a complex nature.
An offer must be distinguished from:
(a) An invitation to treat
(b) A mere declaration of an intention
(c) A mere supply of information

Invitation to treat: Marked prices, or catalogues mentioning prices of goods, do not as a

rule constitute an offer as to compel the shopkeeper to sell those goods at the marked
prices. The prospective buyer, by offering that price is himself the offeror, and his offer,
if accepted creates a binding agreement.

Declaration of Intention: Where a person declares his intention to do a thing or an act, it

does not bind him to another person who suffers damage because he fails to carry out his
intention despite the fact that someone relied on his declaration and acted on it.

Mere Supply of Information: There mere statement of the lowest price at which a
person will sell property or goods contains no implied condition to sell at that price to the
person making such enquiry.

TERMINATION OF OFFER
An offer may lapse before acceptance in any of the following ways:
i) If a stated time prescribed in the offer lapses, or if noe time limit is stipulated,
longer than a reasonable time.
ii) By the death or insanity of the offeror or the offeree; death of the offeree
automatically terminates the offer. Death after acceptance has generally no
 effect on the validity of the contract unless the contract is to render personal
services e.g. painting a landscape.
iii) By being accepted in the manner prescribed, or if no manner is prescribed, in
some usual manner implied by the nature of offer, i.e., an offer is made by post,
the acceptance is implied by post as well.
iv) Counter offer: An offer terminates if a counter offer is made to it, and the offer
cannot be revived by the person to whom it was originally made, even if he is
prepared to accept the original offer unconditionally. Rejection of offer has the
same effect as the counter offer.
v) Revocation (withdrawal) by the offeror at any time before acceptance. A bid at
an auction is revocable until the hammer falls. Rules of revocation include:
(a) Revocation of an offer must be communicated to the offeree, though not
necessary by the offeror himself, if is sufficient if the offeree comes to
know of it through any reliable source.
(b) The revocation by post does not take effect until it is actually received by
the offeree. Note that acceptance of offer by post becomes effective as
soon as the acceptance is posted.

(b) Acceptance
An offer can only be accepted by the person to whom it is made, but an offer made to
the world at large may be accepted by anyone.
Modes of Acceptance
1. An offer can be accepted orally, or in writing, or by conduct particularly by the
offeree.
2. The acceptance must be communicated, and mere mental intention to accept it is
not sufficient.
3. The acceptance of offer must be absolute and unqualified. Where the acceptor
varies the terms of offer, it amounts to counter-offer which destroys the original
offer, so that the offeror cannot, after making a counter-offer accept the original
offer.
4. The acceptance must be communicated to the offeror in the manner prescribed by
him, otherwise the acceptance is ineffective.
5. The acceptance must also be made within the time prescribed by the offeror, and if
no such time is specified, then within such time as is reasonable having regard to
the nature of the transaction.
6. The acceptance must be made before the offer lapses or is terminated
7. Acceptance once made cannot be revoked but an offer may be revoked by an
express notice before it is accepted.

Acceptance by Post
Where the parties choose post as a medium of entering into a contract the following
rules apply:
 An offer becomes effective when it reaches the offeree, not when the letter
of offer is posted
 The acceptance is considered complete immediately the letter of acceptance
is posted, even if it is lost or destroyed in the post so that it never arrived.
 This is what is sometimes called the Posting Rule. As long as the offeree can
prove that he posted the letter of acceptance, the court will enforce the
contract.

3. CONSIDERATION
Consideration is a doctrine of the English and Kenyan law, which in essence means
that there must be an element of „quid pro quo‟ in the normal contract; there must be
something. Usually one party makes a reciprocal promise, performs an act or gives goods
or services in exchange for money.
Previously a more classical definition was given in CURRIE v MISA 1875 as:
“Some right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.” Today,
however, consideration is more commonly viewed as the price paid by one party for the
promise made by the other party.
Though consideration is required in every simple contract, it need not be adequate as
long as it has some economic value. Even an act or omission of small value can be
consideration, but a mere sentimental motive for making the promise will not make it
binding.
Consideration to support a simple contract may be either (i) executed or (ii)
executory, but it must not be past.
EXECUTED consideration is some value already given by the promisee to the promisor,
e.g. purchase of goods on credit. The seller has performed his side of the obligation in
delivering the goods to the purchaser or when a person has returned lost property to claim
the advertised reward EXECUTORY consideration is a promise to do something in the
future e.g. in the above case the consideration for the purchaser of the goods is executory,
until he pays for the goods received.

Rules governing Consideration

1. Consideration must be real although it need not be adequate. This means that it
must have some value in the eyes of law. If the price paid for goods may reveal a
bad bargain, but the consideration is real: the contract can be enforced.
2. Consideration must not be past. It means some past act or forbearance which took
place before the promise is made e.g. A voluntarily helps B to pass a certain
examination. On passing, B promises A sh 1000. A cannot enforce B‟s promise
because it is founded on past consideration.
3. Consideration must move from the promisee, meaning that no one can enforce
another‟s promise unless he has been a party to a contract, and provided
consideration to the promisor. In other words, stranger to consideration cannot sue
on the contract though made for his benefit.
4. Consideration must be in excess of an existing obligation. An extension of the very
first rule that “consideration must be real”. It follows from this rule that a person
who is under a contractual or legal duty to perform a certain act, gives no
consideration for a promise to pay for the performance of that contract.
5. Consideration must be legal i.e. it must not be a type of consideration which is
either prohibited by law or is against the public policy. Thus a promise to smuggle
coffee from Uganda into Kenya for Ksh 10 000 must be regarded as unlawful and
void.
 4 CONTRACTUAL CAPACITY
Broadly speaking; all persons are equal before the law. Thus, apart from certain
exceptions (due to age, status, or mental instability), all possess the capacity to enter into
contracts.
(a) Infants (i.e. persons under 18) continue the most important exception, and their
contractual capacity is governed by the Infants Relief Act, 1874 of England. In
essence that Act states that some contracts, in particular loans of money, the
supply of goods other than necessaries, and contracts which could not fail to
operate to the infant‟s prejudice are “absolutely void” if entered into by an
infant. As a matter of judicial interpretation “absolutely void” means that no
such contract can be enforced in a court of law against an infant, whereas the
infant might be able to bring an action for breach of contract.
(b) Necessaries are defined in Sale of Goods Act Section 4 (2) as goods suitable to
the condition in life of the infant and to his actual requirements at the time of
sale and delivery”. They may include services as well as goods e.g. food,
clothing, shelter, medical care, education, and even services as legal advice.
Several other contracts entered into by an infant, particularly those of a
beneficial and continuing nature such as partnership or the holding of shares in a
company, fall into what is called the voidable category, that is they can be
avoided if an infant so wishes, but upon the infant‟s majority they become
binding, unless repudiated then or within a reasonable time afterwards. A
contract is beneficial to an infant if it enables him to earn his living, or improve
his skill or occupation or profession.
(c) Contracts made by persons of unsound mind are, on the face of it, perfectly
valid. Should the other party know of the mental incapacity, the contract is
voidable at the instance of the insane person during a lucid interval, or at the
instance of a person appointed by the court to act on his behalf. The crucial
question is “Was advantage taken of this person‟s mental condition?” If the
answer is in the affirmative the contract is voidable.
(d) If a person contracts under the influence of drink, and his mind cannot grasp
the significance of his act, and this fact is taken advantage of by the other party,
the contract is voidable.
(e) Cooperative Societies: A cooperative society registered under the Co-operative
Societies Act (Cap 490) can enter into contracts, sue and be sued in accordance
with the provisions of the Act.
(f) Trade Unions: Section 25 (1) of the Trade Union Act (Cap 233) provides,
“Every trade union shall be liable on any contract entered into by it or by an
agent acting on its behalf; provided that a trade shall not be liable on any
contract which is void or unenforceable by law”. A registered trade union may
sue and be sued and be prosecuted under its registered name.
(g) Aliens or Non-citizens: An alien, i.e., a person who is not a citizen of Kenya,
can sue or be sued. An enemy alien, i.e. a person resident in a county which is at
war with Kenya, cannot sue, but if sued can defend an action.
(h) Corporations: Its contractual capacity is limited by the provisions of its
Memorandum of Association. It can only enter into those contracts authorized
 by the Memorandum; any other contract is ultra vines and cannot be entered
into by the corporation.
(i) Married Women: these can sue and be sued in contract in the same as single
women.

TERMS OF CONTRACT
In the course of negotiations, a number of statements may be made by each of the
parties. Some of these eventually form part of the contract, while others are left out.
Statements, which form part of the contract, are known as terms of the contract. Those,
which are made in the course of negotiations but are ultimately left out of the contract,
are called representations. (A false representation either fraudulently or innocently made,
is called a misrepresentation). If the statement is within the contract there is a further
problem of deciding whether it is a condition or warranty.

Conditions and Warranties

In a contract of sale of goods, for example, a breach of condition by one party entitles
the other (innocent) party to treat himself as discharged from his obligations under the
contract and sue for damages, while a breach of warranty by one party only entitles the
other (injured) party to damages, but not to as right to regard himself as discharged from
his obligations under the contract.
Both conditions and warranties may be express or implied. But conditions are further
subdivided into precedent and condition subsequent.
A condition precedent is one, which must be satisfied before a contract can become
effective or operational: until such condition is satisfied the existence or operation of the
contract is suspended and enforceable right in the meantime. A condition subsequent, on
the other hand, is a condition whose occurrence may affect the rights of the parties under
a contract, which is already in operation. For instance, where there is a provision that a
contract is to remain valid until stated event occurs, the occurrence of the event is a
condition subsequent which terminates the contract.

Exemption Clauses
A term may be inserted into a contract with the aim of limiting the liability of one of
the parties. Such term is known as an exemption clause. Example: “Goods Carried at
Owner‟s Risk”, “All cars parked at owner‟s risk”.
Conditions contained in a document issued after a contract is made are not binding on
the recipient of the document. Reasonable notice must be given to the other party before a
contract is made.

Such a clause will be enforced by the court, if the document containing it was an
integral part of the contract and reasonable care was taken to bring it to the attention of
the other party before the contract was made. But where a person has failed to carry out
him to rely on the exemption clause to escape liability.
An exemption clause printed on a reverse side of the receipt is not valid unless special
care was taken to bring it to the notice of the other party.
Where a person puts his signature on a contractual document, he is bound by any
exempting clause contained in it. He cannot rely on his ignorance of the contents of the
document unless he was induced to sign by fraud or misinterpretation. On the other hand,
if the party relying on an exemption clause misrepresented the contents of the clause, it
will not be binding on the other party.

QUASI-CONTRACTS
One chief characteristic of a contract is that it is always founded on free consent of
the contracting parties. But sometimes it happens that the courts considering the
circumstances and conduct of the parties impose an obligation on one party and confer a
right in favour of the other despite the fact that no such agreement was present. Such
contracts are not contracts in the strict sense, because there is no offer and acceptance but
the court accords them full status of contracts and enforces them.
The basis of quasi-contract rests upon the equitable principle that a person shall be
allowed to an unjust enrichment at the expense of another.

i) Claims on Quantum meruit

The expression literally means, “as much as earned”. It is used where a person claims
reasonable remuneration for the services rendered by him in the absence of any express
promise to pay for the same. The general rule is that where a person has not performed
his contract completely he is not entitled to any part-payment for the partial performance.
But where one of the parties has performed part of his obligation and his prevented from
completing the rest by the other, he may claim payment for what he has already done
under the contract.

ii) Action for money had and received

The right to recover money this heading may arise where the defendant has received
money for the use of another by fraudulent means.

iii) Action for the money paid to the use of another

Cases arise where the plaintiff has been compelled by law to pay, or the plaintiff has
an interest to protect his goods, or the defendant expressly requests him to make a
payment on his behalf. Suppose A‟s goods are wrongly attached to realize (recover)
arrears of City Council‟s rates and rent due by B, and A pays the amount to save his
goods from being sold, he is entitled to recover the amount from B.

iv) Money paid on a total failure of consideration

Where the plaintiff had paid money to the defendant in pursuance of a contract the
consideration for which has completely failed, he can sue for the recovery of any money
he has paid. The right under this heading is not available to the plaintiff if the
consideration has partly failed.

v) Money paid under a mistake of fact

Where the plaintiff paid money under a contract caused by mistake of law or mistake
of fact, which is not due under the contract or otherwise, this can be recovered and the
contract will remain valid. If a person pays money to save his property, which has been
wrongfully attached by the order of the court, he is entitled to recover it. Similarly where
a creditor has been over-paid by his debtors, the money paid in excess can be claimed.
 vi) Account stated
This is an acknowledgement of the money owed by one person to another, or where
two parties after a series of transactions between them have agreed on a certain balance
showing in the plaintiff‟s favour. The agreed balance is known as account stated and
entitles the plaintiff to sue the defendant on it without proving all the previous
transactions, which led to the balance.

vii) Money paid to the defendant for the use of the plaintiff
This is relevant particularly in the field of agency. If an agent receives a secret
commission or fraudulent payment from a third party, the principal is entitled to recover
the same from him.

14.3.04.T14 FACTORS MAKING A CONTRACT INVALID

The majority of contracts are carried out to the mutual satisfaction of all parties and
cause no legal argument. From time to time, however, disputes do arise. Sometimes a
contract proves less advantageous than one of the parties had expected, but this of itself
would be no ground for either party repudiating the contract. Nevertheless there are some
well-recognized factors, which do affect the validity of contracts and these will now be
briefly analyzed:
1. Misrepresentation – This is an untrue statement made by one party to a contract to the
other before or at the time of contract, relating to some matter essential to the
formation of contract, which induces the other party to enter the agreement. It may be
(a) innocent misrepresentation, where a misstatement of fact is made without
knowledge of its untruth and without intention to deceive, or (b) fraudulent
misrepresentation, which is defined as “a false representation of fact made with a
knowledge of its falseness, or recklessly without belief in its truth, with the intention
that it be acted upon by the complaining party, and actually inducing him to act upon
it”. In both cases the party misled may normally repudiate the contract, but in the case
of fraud that party may claim damages as well.
2. Duress – Duress is actual or threatened interference with the personal liberty of one of
the parties to a contract or to a member of his family. It also includes threat
imprisonment, or criminal prosecution, or dishonour of a member of his family. The
presence of duress enables the party affected to repudiate the contract. Thus if a
person is forced at the point of a pistol to enter into a contract, the contract can always
be set aside later. It is voidable at the instance of the party to whom the duress is
applied.
3. Undue Influence – Undue influence represents mental or moral persuasion, but here
too the party affected may repudiate the contract. One of the parties is in a position to
dominate the will of another, which prevents him from making his judgement freely
or he uses the position to obtain an unfair advantage over the other. The influence
must be proved by the party seeking to set aside the contract. Undue influence is
presumed to exist unless the contrary is proved where a contract is between parties
who are within a fairly close relationship, such as doctor and patient, parent and child
or solicitor and client, but in other cases it must of course be proved to the satisfaction
 of a court. Undue influence makes the contract voidable at the option of the aggrieved
party.
4. Mistake – Mistake may be of two kinds; mistake of fact. A person may escape his
liability under an apparently complete contract by proving that he contracted under a
mistake of fact, and his mistake was so fundamental that it affected the root of the
contract: such as a mistake concerning the existence or identity of the subject matter
of the contract, or a mistake concerning the identity of the other contracting party
when such identity is important. In all these instances the contract is not voidable, as
in the above cases, but void, which means in effect that the law considers that a
contract never existed at all.
A mistake of law, however, is no ground for relief from a transaction. But mistake
of foreign law and mistake of private rights are treated as mistake of fact.
5. Illegality – Certain contracts are illegal, and, as such, are void. They may be illegal by
statute, or illegal at common law. Examples of the latter include agreements to
commit a crime or a tort, to defraud shareholders or to defraud revenue. Agreements
contrary to sexual morality are also illegal at common law, as are those, which are
contrary to public policy.

14.2.14T15 LIMITS OF CONTRACTUAL OBLIGATION

PRIVITY OF CONTRACT
A person who is a party to a contract is said to be privity to the contract. In technical
terms, there is privity of contract between him and the other contracting party.
Only a person who is a party (and not a stranger) to a contract can derive a benefit
from it of have obligations imposed on him by it; and it is only such person who may sue
or be sued on the contract. This is the general rule, commonly referred to as the doctrine
of privity of contract.
Tweddle v. Atkinson (1861)
The plaintiff intended to marry the defendant‟s daughter. His father and the defendant
entered into a contract in which each promised to pay a sum of money to the plaintiff; but
the plaintiff himself was not a party to the contract. The defendant failed to pay and the
plaintiff sued him. Held: The plaintiff was a stranger to the contract and could not
therefore take advantage of it, notwithstanding that is was that it has been made for his
benefit.
Exception to the Privity Doctrine
The general rule is no doubt rigid; once you are not a party to a particular contract
you cannot enforce it, nor can it be enforced against you. This general rule is however
subject to certain recognized exceptions.
(a) Agency
Under the law of agency, a person who is not a party to a contract may in certain
circumstances sue or sued on it. Where A, acting for B, enters into a contract with C
without disclosing the fact that the contract is being made on behalf of B. B is known as
an undisclosed principal. Upon discovering thee true facts, B has a right to intervene and
directly enforce the contract against C. Similarly, C upon discovering the existence of B,
has a right to elect whether to sue A, the agent, or B. in this way a person not a party to a
contract is allowed to enforce it or liable to have it enforced against him.
 (b) Statutory Provision
A statute may confer rights or impose obligations on a person who is not a party to a
particular contract. For instance, under the Married Women‟s Property Act 1882 a
married person may take out an insurance policy on his/her life for the benefit of his/her
spouse or children. In this case the beneficiary of the policy is given rights under the
contract of insurance although he/she was not a party to it.

(c) Doctrine of Constructive Trust

Where a contract is made with A for the benefit of B, A can sue on the
contract for the benefit of B and recover all that B could have recovered as
if the contract had been with B himself. The basis of the principle is that A
must be regarded as trustee for B under an implied trust.
Under the doctrine, if A fails to enforce the contract, B may sue him and the other
party to the contract so as to enforce his rights under the implied trust. Thus, in Tweddle
v. Atkinson the plaintiff‟s father could have sued the defendant so as to enforce the
contract for the benefit of the plaintiff; failing this, the plaintiff could have joined his
father in an action brought against the defendant – the father being treated as a trustee
under an implied trust.

(d) Restrictive Covenants

It is a promise given by one party to another, an undertaking, and refrain from doing a
particular act. Such covenants are common in contracts relating to the disposition of an
interest in land. Thus, where A purchases lane from B and promises B that, in developing
the land he will take care not to obstruct a neighbouring plot from light, such promise by
A is a restrictive covenant.
Par under the law of property, a restrictive covenant is said to „run‟ with the lane.
This means that any person who acquires land, which is subject to a restrictive covenant,
is bound by it.
If A subsequently resells the land to C, C will be bound by the covenant. C cannot
argue that he was not party to the contract between A and B, which created the restrictive
covenant.

ASSIGNMENT OF CONTRACTUAL RIGHTS AND LIABILITIES

Assignment means the transfer of rights and liabilities to a third person who is not a
party to the original contract so that the rights and remedies of the transferor (assignor)
are vested in the transferee (assignee).
In Kenya under the Transfer of Property Act 1882 the rights and benefits under a
contract may be assigned. The assignee can demand performance from the other party.
Where the other party fails to perform his obligations, the assignee can sue him in his
own name.
Assignment of choices in action i.e. personal rights of property may take place in one
of three ways:
i) Legal assignment
ii) Equitable assignment
iii) Assignment by operation of law.
 Legal Assignment
By Indian Law of property Act (Section 130) all debts and other legal choices in
action such as copyrights, patents rights, etc. may be assigned to the assignee (transferee)
but the assignment must be:
(a) In writing, signed by the assignor
(b) Absolute and not by way of charge
(c) Written notice of assignment must be given to the debtor, and assignee‟s
right dates from the date of such a notice
After such notice has been given, any payment to the original party will not discharge
the debtor from being liable to the assignee. In other words the debtor can assert no
equity against the assignee arising out of the transaction with the assignor after notice of
assignment.

Equitable Assignment
In certain circumstances even where the requirements of legal assignment are not
fulfilled, there may still be an assignment in equity. In equitable assignment the assignee
cannot sue the debtor in his own name but must join the assignor in any action he takes
against the debtor. In case the assignor is not willing to lend his name to be used for this
purpose, he can be compelled by the court to do so, provided the assignee gives him a
proper indemnity as to cost of the court proceedings.
However, if an equitable assignment is not supported by consideration, the assignee
cannot compel the assignor to join him in the court action against the debtor.

Assignment by Operation of Law

Death of a contracting party does not discharge the contract; though he himself is not
available to sue or sued, all his rights and liabilities are vested in his personal
representatives. The contracts entered into by the deceased are enforceable by or against
his personal representatives subject to available assets of he deceased‟s estate.
Contracts to render personal services are an exception to the above rule of
assignment, as they die with the death of the party responsible to such services.

14.3.04.16 PERFORMANCE AND DISCHARGE OF A CONTRACT

The termination of a contract discharges the parties from their obligations, and is
achieved in the following ways:
1. Agreement – Both parties may agree to release each other from the obligations of a
contract, while the contract itself may contain an agreed clause that, after a certain time
and upon the happening of a particular event, the contract shall be discharged. A
contract may be discharged by agreement in any of the following ways:
(a) By waiver: In case of a contract still executory, mutual agreement (a deliberate
abandonment or giving up of a right which a party is entitled to under a contract)
between the parties, can release each other from their respective obligations and
rights.
(b) By novation: An existing contract may be discharged when a new contract is
substituted in its place, either between the same parties or between different
parties, the consideration mutually being the discharge of the old contract.
 (c) Accord and Satisfaction: Where a party to a contract is actually paid on an
earlier date at the request of the payee, or something different in kind or a lesser
sum than what contracted for a lesser fulfillment of the promise made agreement
and the satisfaction is the consideration which makes the agreement operative

2. Performance – when both the parties duly perform a contract, the contract comes to a
happy ending and nothing more remains. But if one party only performs his promise, he
alone is discharged. Such a party gets a right of action against the other party who is
guilty of breach. When a promisor offers to perform his obligation under the contract,
but is unable to do so because the promise does not accept the performance, it is called
“attempted performance” or tender and is equivalent performance.

3. Frustration – A contract, which was capable of being performed when entered into,
may become frustrated before performance and, in such an event, it will be discharged.
Frustration applies where performance becomes illegal or impossible as the result of a
change in the law, or a change in circumstances so fundamental as to warrant discharge
because this change was entirely beyond the contemplation of the parties when they
entered into the agreement. An unexpected turn of events, which merely makes
performance more difficult or more expensive would not be regarded as “fundamental”.
Supervening impossibility of frustration will discharge the contract in the following
circumstances:
i) Destruction of Subject-matter: If premises of equipment or person form the basis
of a contract but are destroyed or die before or during the execution of contract. The
destruction of sub-matter need not be whole; it is sufficient as long as it prevents the
contract from being carried out.
ii) Non-occurrence of a stated event: When a contract is entered into on the basis of
the happening of a certain stated event, the contract is discharged if such an event
does not take place.
iii) Death or personal incapacity: In contract for personal services, the death or illness
of a particular person whose action is vital for the agreed performance discharges
the contract. But the personal incapacity must be serious enough, and not self-
created, to prevent the person from performing his obligations.
iv) Change in law (Supervening Illegality): A contract legal at the time of its
formation may subsequently become illegal due to an alteration of law or the act of
some person having statutory authority. The contract is then discharged.
v) Government interference: A contract is discharged by unexpected government
interference, causing a fundamental change of circumstances from that
contemplated by the parties when the contract was made.

4. Breach – This is failure of one of the parties to perform his obligation under the
contract. If a party breaks a term of contract going to its root, known as a condition, the
other party will be released from his obligations under the contract. But if the term
broken is one collateral to the main term of the contract, known as warranty, if the
innocent party will not be released from performance and can only claim damages.
Breach of contract may occur in two ways:
 i) Failure to perform: Where a person fails to perform a contract, when the
performance is due, the other party can hold him liable for the breach, provided the
time of performance was made as the essence of the contract.
ii) Renunciation often referred to as anticipatory breach occurs when, prior to the time
for performance of the contract, one party renounces the contract by refusing or
rendering himself unable to perform.

5. Operation of Law: Discharge here may take place as follows:

i) Lapse of time – A contract formed for a specific time (e.g. partnership deed,
employment contract etc.) is discharged when that period of time has elapsed.
Where no specified time is laid down, the lapse of reasonable time may render the
contract unenforceable in a court of law. The limitation period for simple and under
deed contracts is 6 years.
ii) By death: The death of either party will discharge a contract for personal services
but other contractual rights and obligations are not affected and survive for the
benefit of or against the estate of the deceased.
iii) By merger: This takes place when one contract is extinguished by being merged
into another e.g. when the parties embody a simple contract into a contract under
deed and in such circumstances action lies only on the deed.
iv) By bankruptcy: When a person becomes bankrupt, all his rights and obligations
pass to his trustee in bankruptcy. But a trustee is not liable on contracts of personal
services to be rendered by the bankrupt.
v) By authorized material alteration: Where a party to a contract in writing or under
deed makes any material alteration in it without the knowledge and consent of the
other, the contract can be avoided at the discretion of the other party. An alteration
is material, which varies the legal effect of contract.

14.3.04.T17 REMEDIES FOR BREACH OF CONTRACT

On breach of contract, the innocent party becomes entitled to any one or more of
the following remedies:
(a) Refusal of further performance
(b) Action for damages
(c) Action for specific performance
(d) Action for injunction

1. Refusal of further performance

A party who suffers by a breach of contract is entitled to treat the contract as ended
and may refuse any further performance on his own part. But in case the victim of the
breach does not take the initiative to bring an action for rescission of contract, and the
other party sues to him, he may set up the breach as a defense.

2. Damages
The normal remedy for breach of contract is damages. The aim of law is to place the
injured party as far as possible in the position he would have been if the contract had
been performed.
 It is not for every kind of damage that the plaintiff is entitled to recover
compensation. In some cases the law considers that the loss sustained from breach of
contract is too remote to merit any compensation.

CLASSIFICATION OF DAMAGES
i) Ordinary damages
General or ordinary damages are restricted to the proximate consequences of breach
of contract and remote consequences are not generally regarded. The measure of
damages is the estimated loss directly and naturally resulting in the course of events
from breach of contract.
ii) Special damages
Those, which do not arise naturally from the breach of contract, but are those
resulting from some particular circumstances. These damages must be specially
proved if the plaintiff intends to claim.
iii) Exemplary damages
The purpose of awarding damages is to compensate the innocent party for the loss
he has sustained from the breach of contract. The object of exemplary damages,
however, is to punish the promise-breaker, and to deter others from committing
similar breaches.
iv) Nominal damages
Awarded where the plaintiff has proved a breach of contract without suffering any
actual loss. The sum awarded is usually very nominal, but nevertheless is awarded
as an acknowledgement that the plaintiff has proved his claim.
v) Contemptuous damages
Damages assessed by the courts when satisfied that the action should not have been
brought by the plaintiff. The court may award five cents to the plaintiff as damages
to express its contempt of his conduct in bringing his action.
vi) Unliquidated damages
Damages assessed by the courts when breach of contract takes place and the
innocent party sues the defendant. In such cases the onus lies on the plaintiff to
produce evidence of the loss he has incurred.
vii) Liquidated damages
Sometimes the parties may themselves in their contract fix the damages to be paid
in case either party commits the breach of contract. If the amount so fixed reflects a
genuine pre-estimate of loss likely to result by breach, the innocent party can claim
the fixed amount, and this is known as liquidated damages.
viii) Penalty clause
A penalty is a sum agreed in a contract to be forfeited on breach of contract. It
differs from liquidated damages in that these are an attempt to value the financial
damage suffered as a result of breach of contract, whereas penalty is used as a
deterrent or security for the performance of the contract.

3. Quantum meruit
A claim on a quantum meruit in fact is a claim for the value of work done by a party
to a contract, whereas a claim for damages is for compensation in respect of loss suffered
by breach of contract. The general rule is that a contract provides for the services to be
 rendered in return for payment of a lump sum, nothing can be claimed unless the work
has been precisely performed completed or goods supplied. However, claim can be made
under quantum meruit it:
 A party to an entire contract is prevented from performing the whole of the
contract by the contract by the fault of the other party, for example; if the builder
of a house is prevented by the employer from completing erection of a house; the
amount recovered will depend upon the value of the work already done, or
 A party has only partially fulfilled his obligations but the other party has
voluntarily accepted the benefit of the work or goods supplied, or
 The contract is divisible as opposed to entire
There is no remedy for a person who has performed a contractual obligation and then
repudiated the contract. There must be either exact performance of the contractual
obligation, or a substantial performance before a claim can be made.

4. Equitable remedies
Both specific performance and injunction are equitable remedies, which may be
awarded at the discretion of the court to a person who has suffered a legal injury where
damages would not be an adequate remedy.
(a) Specific performance is an order requiring a person to carry out a contractual
obligation as agreed and is usually granted in the following cases:
 Where a contract is for the sale of land
 Where the contract is for taking debentures in a company
 Where the contract is for the sale of rare goods which are not easily available in
the market e.g. ships or the value of such could not be measured in money
Failure to obey an order of specific performance constitutes contempt of court, which
is punishable by a fine or imprisonment.
Specific performance is not granted in the following cases:
 Where damages would not provide an adequate remedy
 Where the contract is to render personal services e.g. a contract to paint a picture
 Where one party to the contract does not possess competency to contract and
hence cannot be sued for breach of contract as remedy will never be awarded
against an infant
 Where the contract is to lend money
 Where the court cannot supervise the actual execution and the contract e.g. a
building construction contract
(b) An injunction is an order of the court restraining the doing, continuance or repetition
of a wrongful act. It may be obtained to enforce a negative contractual term (i.e.
where one party is doing something he promised to do) where an order of specific
performance would not be available, for example, where a singer agreed to work only
for a certain employer and then in breach of contract, worked for arrival company.
Although her employer would not have been able to obtain an order for specific
performance of the original contract for personal services, he was successful in
obtaining an injunction restraining the singer from singing for anyone else.
 LIMITATION OF ACTIONS
Rights of Action cannot endure forever; there must be some end to litigation. As the
years roll by so it becomes more difficult to prove transactions, the memories of witness
fade with the years and the possibility of a just result to litigation becomes more remote.
The Limitation of Actions Act (Cap 22) Kenya is designed to limit the period within
which the various actions can be brought. The period of limitation begins to run from the
time the right of action arose.
i) Actions for breach of contracts is 6 years
ii) Actions to enforce a recognizance is 6 years
iii) Actions to enforce an award is 6 years
iv) Actions founded on torts is 3 years but for actions for libel or slander, it is 1 year
v) Actions to recover any penalty or forfeiture is 2 years
vi) Actions for an account is 6 years
Where the plaintiff is an infant or insane, the period of limitation does no run until the
disability ceased, or the plaintiff dies, whichever occurs first. But once time has started to
run, any subsequent incapacity will not stop it.
Where an action is based on the fraud of the defendant, or where the existence of a
right of action has been fraudulently concealed by the defendant, or where the action is
for relief from the consequences of a mistake, the period of limitation does not begin to
run until the plaintiff has discovered the fraud or the mistake of could with reasonable
diligence have discovered it.
Under the Limitations of Actions Act (Cap 22) where a right of action has become
statute barred, written acknowledgement by the person liable revives a fresh cause of
action in favour of the plaintiff. Similarly, a part payment of statute barred debt has the
same effect. In these two cases, the plaintiff obtains an extra 6 years to bring action in
order to enforce his contractual rights against the defendant.

14.3.04.T18 CONTRACT CLAUSES (36 №)

5. Final measurement and valuation is given as agreed, AAK – 3 months or – receipt of
contractors claim Bill of variation – i.e., calculated difference between contract sum
and adjusted contract sum.
6. Final certificate to be issued within one month of DLP or after make good (m.g.)
defects
Stating i) Amount paid to contractor in interim certificates
ii) Adjusted contract sum
7. Final certificate is conclusive evidence of performance except – fraud/dishonesty
Arithmetic errors - Omissions
- Inclusions
8. No further certificate implies work is good e.g. interim, m.g. and practical completion.

Adjustment of Contract Sum to original contract sum

DDT: (i) All P.C. sums
(ii) All profits on P.C. sums
(iii) All provisional sums and value of provisional quantities
(iv) Contingency sum
ADD: (i) Total payment (actual) to N.S.C.
 (ii) M.C. tender for P.C. items that were accepted.
(iii) Percentage profit on (i) and (ii)
(iv) Actual payment against provisional sums
(v) Value of measured quantities
(vi) Any extra to be added to the contract sum e.g. fluctuations, variations,
antiquities (valuables found under ground)

CLAUSE 31 – BONDS
 Contractor to provide a guarantor
 Guarantor to be an established bank
 Amount has to be agreed
CLAUSE 32 – FLUCTUATIONS
 Employer is to take care of variations in cost
 Variations are ascertained by Q.S. and contract sum is adjusted
 Basic prices of major material, components is included
Delete: if the clause does not apply the contractor bears the risk or variations in cost
CLAUSE 33 – WAR RISKS
 If war arises determination by either party
 Contractor is paid as in clause 26 except loss due to determination
CLAUSE 34 – WAR DAMAGE
 Contractor to be re-instated
 Contractor to continue completion up to completion
 Contractor will be paid for re-instatement and work done up to war
CLAUSE 35 – ANTIQUITIES
 All items of value belong to employer
 Contractor to remove them carefully and handover to Architect
 Contractor will be paid for any loss
CLAUSE 36 – ARBITRATION
 Disputes referred to Arbitrator
 Arbitrator to assess rights and obligations of each party
 Arbitrator to give an award
 Arbitrator is final and binding
 Arbitrator is after practical completion except where urgent
CLAUSE 37 – CORRUPTION AND BRIBERY
 Not to be practiced within the contract.
CLAUSE 17 – ASSIGNMENT AND SUBLETTING
 The contractor shall not without a written consent of the employer sublet the
contract.
CLAUSE 22 – DAMAGES FOR NON-COMPLETION
 If the contractor fails to complete the works by the date for practical completion
stated or within any extended time fixed by the architect and is with the opinion
of the architect the work should have been completed then the contractor shall
pay the employer a sum of money previously agreed. This sum of money is
known as liquidated and ascertained damage for the period during which the
work remains incomplete.
1. (a) Briefly explain how an offer may come to an end. (7½mks)
(b) Briefly explain how a contract cane be discharged by frustration. (5mks)
(c) In the law of contract, what is meant by each of the following?
i) Privity of contract
ii) Undue influence
iii) Quantum meruit
(7½mks)
2. (a) Termination of offers to execute construction works can take different forms.
Outline FIVE such forms. (7½mks)
(b) Peril sold his business to Victor on condition that Victor pays a monthly sum of
twenty shillings to Peril for life and a monthly sum of the same to his widow after
his death. After Peril‟s death, Victor declined to pay the sum to the widow. The
widow intends to sue Victor for breach of contract. Advise the widow.
(4½mks)
(c) Explain FOUR remedies for breach of contract that can be affected by the courts.
(8mks)
3. (a) State FIVE essentials of a valid contract. (5mks)
(b) State FOUR ways by which the parties to a contract may be discharged of their
obligations. (4mks)
(c) Outline FOUR remedies for breach of contract. (6mks)
(d) Briefly explain the following ways of assignment of rights under contract:
i) Novation
ii) Assignment by operation of law
(5mks)
4. (a) List FOUR essentials of a valid contract. (4mks)
(b) Briefly explain „Vicarious Liability‟ as used in contract. (4mks)
(c) (i) Distinguish between valid, void and voidable contracts. (4½mks)
(ii) A building merchant displayed a poker vibrator with a price tag showing Ksh
100.00. The buyer insisted he should be sold at that price displayed.
Advise the building merchant. (3mks)
(iii) The defendant promised „A‟ that if A did certain work for him, he would pay
a sum of money to the plaintiff. „A‟ did the work but the defendant failed to
pay the plaintiff, who there upon sued. Advise the plaintiff.
(4mks)
5. (a) Briefly explain any FOUR ways in which an offer can be terminated. (12mks)
(b) J wrote to Z offering to sell Z his house for sh 1 million. Z replied, “I accept your
offer but I can only pay sh million.” J rejected the offer of sh million. Z then
replied, “very well, I will pay sh 1 million”. Meanwhile J has sold his house to R. Z
now claims that he entitled to the house. Advise Z. (3mks)
(c) In law of contract, what is meant by:
i) Privity of contract?
ii) Liquidated damages?
(5mks)
6. (a) briefly explain how can be terminated or brought to an end. (7mks)
(b) On June 2nd X wrote to Y offering mangoes on certain terms and requiring an
answer “by post”. The letter was misdirected and reached Y on June 5th in the
 evening. On that night Y posted a letter of acceptance which was received by X on
June 9th. X who had expected a reply by 7th June has in meantime resold the
mangoes to Z on June 8th. Explain whether there was a contract between X and Y.
(5mks)
(c) Outline the THREE types of misrepresentation. (5mks)
(d) Explain the doctrine of privity of contract. (3mks)