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All about Contracts

This article is provided by Mohamed Madhani & Co 


You may have gotten into an Agreement with either a supplier or a service provider. But do you really know what contracts entail, their implications and enforceability?

 

If not, this will be an enlightening read!

 

  • What is a contract?

A contract is a legally binding agreement made between two or more parties, or a promise or set of promises, a breach of which, the law would provide a remedy and the performance of which the law recognizes as an obligation.

 

  • When does a contract come to existence?

When an offer by one party is unequivocally accepted by another and both parties have the requisite capacity.

 

Some consideration must pass and the parties must have intended their dealings to give rise to a legally binding agreement.

 

The purpose of the agreement must be legal and any necessary formalities must have been complied with.

 

  • Elements of a contract

The elements of contract consist of an offer, acceptance, capacity, consideration and intentions to create legal relations.

 

Offer is an expression of willingness to contract made with the intention that it shall become binding on the offeror as soon as it is accepted by the offeree. A genuine offer is different from what is known as an "invitation to treat", i.e. where a party is merely inviting offers, which he is then free to accept or reject.

 

Acceptance is another element of a contract and entails a final and unqualified acceptance of the terms of an offer. In order to make a binding contract, the acceptance must exactly match the offer and the offeree must accept all the terms of the offer.

 

Capacity- this is the legal ability of a party to enter into a contractual relationship. The law provides that any person is competent to bind himself to any contract he chooses to make, provided that it is not illegal or void for reasons of public policy. At common law, there are exceptions to this rule in the case of minors, un-discharged bankrupts and mentally incompetent and intoxicated persons    

 

Consideration -The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other.

 

Intention to create legal relations- An agreement is unenforceable unless the parties thereto intended such a consequence.

 

  • Are there instances where a contract may be challenged or declared unenforceable in a court of law?

Yes.

 

This usually occurs if the contract is either void or voidable

 

  • Instances when a contract may be rendered void

When a contract is declared void, it simply means there was no contract in the first place.

 

Such a 'contract' cannot be enforced by the courts and no party can acquire rights or obligations through it. This means, for example, that the ownership of goods or property cannot pass under a void contract.

 

A contract will most certainly be rendered void if any one or more of the elements of a contract discussed above are missing. An agreement against public policy will also be rendered null and void.

 

An agreement having all the elements of a contract but entered into to further an illegal endeavor will be declared null and void and not enforceable in a court of law.

 

  • Instances when a contract may be rendered voidable

The term 'voidable' means that at least one party can either 'take the contract or leave it'.

 

A voidable contract is an agreement that is enforceable contract, but which also contains some inherent flaw that is not immediately fatal, but nonetheless renders the contract vulnerable to challenge by one of the parties to it.

 

Such a contract generally remains valid unless and until the party entitled to avoid it takes steps to annul it or set it aside.

 

The right to challenge a voidable contract must be exercised timeously. If the party entitled to repudiate the contract acquiesces in the face of knowledge of its voidable status he may be taken to have affirmed the contract and accepted the obligations arising from it.

 

Furthermore, it is a condition that entire restoration is both possible and carried out. If the parties are unable, for some reason, to restore each other to their original, pre-contractual positions then the right to cancel the contract may be lost.

 

  • What are some of the factors that may make a contract voidable?

These include:

 

Misrepresentation – this is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter into the contract. Generally speaking such statements have to be made before the contract is entered in to. Thus the requirements of an action for misrepresentation are that it must purport to be a statement of fact or law, it must have induced the other party to enter the contract and it must have been a false statement.

 

Mistakes can be split into those mistakes which nullify the agreement (common mistake) and those which negate the agreement (mutual mistake). At common law, a common mistake will nullify the agreement where the mistake is to the existence of the subject matter e.g a party buys property which he already owns or if there has been a mistake as to the quality if it is rendered radically different.

 

A person who mistakenly signs a contract may plead non-est factum, and have the contract set aside if he proves that the there was a radical difference in what was signed and what he thought he was signing and he was not careless in signing the document e.g a blind person who believes he is signing an agreement where the consideration is Kshs.500,000/= but in real sense the agreement reflects Kshs.1.500.00/=.

 

Unfortunately, there is no general doctrine of mistake - the rules are contained in a disparate group of cases and all agreements are dealt with on a case to case basis

 

Duress is another vitiating factor. It was originally based on threats of physical violence. The victim must be subjected to pressure amounting to compulsion of the will and the pressure is illegitimate taking in to account the nature and extend of the threat.

 

  • Discharge of a Contract

A contract is discharged when the obligation created by it ceases to bind the parties from performance.

 

A contract can be discharged in various ways including by performance, breach of contract, frustration and operation of the law.

 

Discharge by performance simply entails performance of obligations by all parties to the contract as agreed.

 

Breach of contract- a failure to perform the terms of a contract constitutes a breach. A breach which is serious enough to give the innocent party the option of treating the contract as discharged can occur in one of two ways: - either one party may show by express words or by implications from his conduct at some time before performance is due that he does not intend to observe his obligations under the contract (anticipatory breach); or - he may in fact break a condition or otherwise break the contract in such a way that it amounts to a substantial failure of consideration.

 

Frustration- the doctrine of frustration operates in situations where it is established that due to subsequent change in circumstances, the contract is rendered impossible to perform, or it has become deprived of its commercial purpose by an event not due to the act or default of either party.

 

  • Remedies

Remedies for breach of contract include obtaining injunctive orders, rescission of the contract, specific performance and damages as compensation to the innocent party.

 

An injunction is an equitable remedy and therefore only granted at the discretion of the court. It is awarded in circumstances where damages would not be an adequate remedy to compensate a party because there is a need to restrain the defendant from starting or continuing a breach of a negative contractual undertaking (prohibitory injunction) or a need to compel performance of a positive contractual obligation (mandatory injunction).

 

In the event of a breach of a contract, rescission is the remedy sought to bring the contract to an end, allowing the innocent party to perform no further, recover any part performance and seek damages. It is an equitable remedy and will not be granted unless restoration of the parties to the state they were before the contract is possible. Therefore, the rescission remedy restores the parties to the position they were in before the contract.

 

Specific performance is an equitable remedy granted at the court’s discretion and it compels a party to perform his contractual obligations. It is usually only ordered where damages are not an adequate remedy but not if a replacement of the subject matter could be obtained. It is a general rule that specific performance will not be ordered if constant supervision over a period of time is required and the obligations in the contract are not clearly defined.

 Unlike the equitable remedies of specific performance and injunction, damages for loss in a breach of contract claim are available as of right.

 An innocent party may claim damages from the party in breach in respect of all breaches of contract. The damages may be nominal or substantial. Nominal damages are awarded where the innocent party has suffered no loss as a result of the other's breach and substantial damages are awarded as monetary compensation for loss suffered as a result of the other party's breach.

For an innocent party to obtain substantial damages he must show that he has suffered loss as a result of the breach and the amount of his loss. It is up to the party in breach to argue that the innocent party has failed to mitigate his loss.

Parting Shot

Depending on the complexity of the agreement, it is recommendable to get a lawyer to prepare contracts on your behalf.

 

Copyright © 2016 Mohamed Madhani & Co . All Rights Reserved.

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