Knowledge Area 02 - Nature and Formation of Contracts

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OLW 123-KA02:

What is Contract
Introduction

• We make contract when we sign when we start a job, buy a house or


hire a television, buying and selling commodities, and many other
transactional relations.

• Also, we make contracts when we buy goods at the market, when we


get on a bus or train, and when we put money into a machine to buy
chocolate or drinks all without a word being written down, or
sometimes even spoken.

• Unsurprisingly, we do not understand what contract are, their nature,


types and essence. This lecture is for giving us that understanding.
Preview

• In this lecture, you will learn

• To explain what the term contract means;

• To distinguish contract from agreement;

• To describe nature of contract;

• To elucidate contract as an institution; and

• To discuss different types of contracts.


What is Contract

• There is no single and universal definition of the term contracts.

• For instance, contract is a voluntary, deliberate, and legally binding agreement


between two or more competent parties.

• Also, contract is an agreement between persons which obliges each party to do or not
to do a certain thing however this agreement has legal force.

• However, all the definitions and others merge at the point of capable of being enforced
by the law.
Statutorily defined?

• Yes.

• Which law? Section 2(1)(h) of the Law of Contract Act, Cap 345 RE 2019

• What does it say? Contract is an agreement enforceable by law.

• What does it mean? Contract arises from agreement however agreement


become contract when it can be enforced by the law.
What is Agreement?

• There are many ways to explain what agreement is all about.

• Agreement is compromise reached between two or more persons on


something.

• Agreement is mutual arrangement between persons.

• Agreement is meeting of minds of person upon a matter.


Statutorily defined?

• Yes,

• Which law? Section 2(1)(e) of the Law of Contract Act, Cap 345 RE 2019.

• What does it say? Agreement is a set of promises that form consideration for
each other.

• What does it mean? Promise is what makes an agreement however when it


forms consideration for every parties to such promise.
Characteristics of Contract

• It is normative. Why? It binds the parties. Failure to comply, the law may enforce it –
doctrine of sanctity to contract – Mohamed Idrissa Mohamed v Hashim Ayoub Jaku [1993]
TLR 280 (CA)

• It is autonomous. Why? The law recognises free will of parties when making it – ss 10, 14
and 19 of the LCA, Cap 345 RE 2019

• It is mutual. Why? It is made of the mutual promises between the parties to that contract –
ss 10 and 23 of the LCA Cap 345 RE 2019

• It is relative. In which sense? It takes effect only on the parties and the other persons
assigned or delegated in the said contracts – s 37 of the LCA Cap 345 RE 2019
Contract as Institution

• Contract is an institution. In which sense?


• It has established law and practice of society with particular function or aim
– sources of contract law ranging from constitution to legal treatises and
commentaries

• Institution of what? It is institution of exchange. Why?


• It supports system of exchanges in the society
• How? Protection, enforcement, standards
Reasons for?

• Contract as an institution did arise because of

• Surplus production

• Emergence of classes in societies

• Division of labour

• All these reasons necessitated the exchanges in the society. There was need of
having the system that support such exchanges. Contract arose as mechanism.
Basic Conception of Institution of Contract

• The idea of binding-ness of contract depended much on the material


conditions and mode of production.

• Developed institution of contract arose with freedom and sanctity of


contract.

• Freedom and sanctity of contract forms part of capitalist ideology.


Types of Contract

• Oral contract

• Made verbally, spoken words.

• Enforceable as good as written contract. 406868 Alberta Ltd. v Westfair Foods


Ltd[1997] A.J. 790. However, it has challenges in enforcement.

• Written contract

• Made in writings.
Types of Contract

• Simple contracts

• Made not under seal, prescribed forms.

• Specialty contracts

• Made under prescribed forms, deed e.g. Bill of lading, Contract of


Sale of Land under s 64 of Land Act, Cap 113 RE 2019
Types of Contract

• Unilateral Contract

• Occurs when one party makes an express promise, while another undertakes a
performance without first securing a reciprocal agreement from the other
party. e.g. Carbolic Smoke Balls Co. Ltd v. Carlil

• Bilateral Contract

• Occurs when both parties make reciprocal promises with each other. It also
occurs when mutual promises are offered and accepted.
Types of Contract

• Collateral contract

• Subsidiary contract to secure the main contract. It has independent existence


but it cannot exist without main contract.

• Quasi-contract - implied

• Transactions between persons that resemble to contractual relations. e.g.


founder of lost goods is as good as there is contract of custody with owner – ss
68 – 72 of the LCA, Cap 345 RE 2019
Types of Contract

• Standard form contract

• contract whose terms and conditions of the contract are set by one of the
parties, and the other party has little or no ability to negotiate more
favourable terms. e.g. loan contracts, flight contracts, insurance contracts.

• Express contract

• Contract whose terms and conditions were expressly agreed by both


parties.
Formation of Contract
▪ Contract is formed through agreement between
persons.

▪ Agreement is formed when a valid offer is


accepted between competent persons to contract.

▪ Section 2(1)(b) of LCA signifies that when the


person to whom the proposal is made signifies
his assent thereto, the proposal is said to be
accepted, and a proposal, when accepted,
becomes a promise.
Offer
▪ Offer is a promise or proposal to be bound on
particular terms, and it must be capable of
acceptance.

▪ Section 2(1)(a) of LCA defines offer. It states that


when one person signifies to another his willingness
to do or to abstain from doing anything, with a view
to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.

▪ The offer sets out the terms upon which the offeror
is willing to enter into contractual relations with
the offeree.
Conditions of Offer
▪ Offer must be certain, made willingly,
communicated, be intended to be binding and must
include some essential items especially the
subject matter of the agreement

▪ In the case of Edwin Simon Mamuya v Adam Jonas


Mbala 1983 TLR 410 (HC) the court observed that
for there to be an offer in law it must inter alia
be unconditional, it must be communicated, and it
must be made in such circumstances as to leave no
doubt that the party offering to perform is
presently able and willing to do so.
Termination of Offer
▪ Offer can be terminated through notice
of revocation, rejection, lapse of time,
death or insanity of offeror and
counter offer.

▪ Section 6 of the LCA provides for the


circumstances through which the offer
can be terminated. These are revocation,
rejection, lapse of time, death or
insanity of offeror and counter offer
Invitation to Treat
▪ It a mere declaration of willingness to
enter into negotiations. Invitations to
treat are invitations to the general
public to make an offer on a particular
item.

▪ An offer needs to be distinguished from


an invitation to treat. Whereas an offer
will lead to a binding contract on
acceptance, an invitation to treat
cannot be accepted it is merely an
Circumstances of Invitation to treat
▪ Goods on display in shops are generally not offers but
an invitation to treat. Fisher v Bell [1961] 1 QB 394

▪ Advertisements are also generally invitations to


treat. Partridge v Crittenden (1968) 2 All ER 421.

▪ There are some instances an advert can amount to an


offer. Carbolic Smoke Ball Co. ltd v Carlill [1893] 1
QB 256

▪ The request for tenders represents an invitation to


treat. Spencer v Harding Law Rep. 5 C. P. 561
Acceptance
▪ Acceptance is final and unequivocal expression of
assent to another's offer to contract.

▪ Section 2(1)(b) of the LCA explains acceptance. It


states that when the person to whom the proposal is
made signifies his assent thereto, the proposal is said
to be accepted.

▪ Without an acceptance there can be no contract.

▪ Acceptance may be revoked at any time before the


communication of the acceptance is complete as against
the acceptor. Section 5(2) of the LCA
Conditions of Acceptance
▪ Acceptance must be absolute. Section 7(a) of the
LCA

▪ Acceptance must be unqualified. Section 7(a) of


the LCA

▪ Acceptance must be communicated to the promisor.


Section 7(b) of the LCA

▪ Silence does not generally amount to acceptance.


Felthouse v Bindley [1862] EWHC CP J35.

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