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3.9 CAPACITY TO CONTRACT

3.9.1 Capacity of Minors

A minor is someone who has not reached the age of majority (18 years in Kenya.) As a general
rule, a minor is not bound by any contract made during his minority. There are 3 exceptions to
this:
 Contracts for necessaries
 Contracts of educational or employment or training nature
 Certain contracts which are avoidable.

a) Necessaries

The term necessaries is not restricted to things which are required to maintain a base existence
such as bread and clothes but includes articles which are reasonably necessary to the minor
having regard to his station in life. A watch for example, a radio or a motor cycle may be
considered necessaries & not articles of mere luxury.

An engagement ring may be a necessary but not a diamond necklace bought for the minors by
her fiancée. Goods are not the only necessaries, the hire of a car may be a contract for
necessaries. If the necessaries are goods, the minor is liable only when the goods are suitable for
his condition in life, necessary to his requirements at the time of sale and necessary for his
requirements at the time of delivery. A minor must pay a reasonable price for necessaries
supplied to him.

Although the goods supplied may be within the class of necessaries, they may not be necessary
to the particular minor.

Nash v. Inman (1908)

Inman, a minor, who was an undergraduate at Cambridge bought 11 fancy waist coats
from M on credit. He was at the time adequately provided with clothes. It was held the
waist coats were not necessaries and was not liable to pay for any of them.

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b) Education and Employment contracts for the minor’s benefits

Not every contract for the benefit of a minor is binding on him. But contracts for his education
service and apprenticeship or for enabling him to earn a living are binding unless they are
detrimental to the interests of the minor. E.g. apprenticeship on how to be a thief!

A contract relating to the minor’s education, which is not detrimental to his interest, can be
enforced although it is to be performed in the future. E.g. a contract by a minor who is a guitar
player to tour and play the guitar matches with a well-known singer. In these cases if contract as
a whole is for the benefit of the minor it will be binding on him.

A contract of apprenticeship is a contract of special character. If it is broken, the apprentice can

claim damages not only for his loss of earning for the remainder of his training period but also
for the reduction of his future prospects.

When a minor is engaged in trade, contracts entered into by him in the way of his trade however
much to his benefit, are not binding on him. He is therefore not liable to pay for goods bought for
trading purposes.

c) Voidable contracts
When a minor acquires an interest in a subject of permanent nature which imposes a continuous
liability on him. The contract cannot be enforced against him during his minority but after he
attains full age, it will be binding on him unless he avoids it within a reasonable time. Contracts
in this class include leases, partnership, and holding of shares in a company.

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Goode v. Harrison (1821)

A minor who has a partner in a partnership took no steps to avoid the partnership upon attaining
his majority. He was held to liable for the debts of the partnership incurred after he came of age.

 Recovery by minor

Money paid by a minor under a contract which is not binding on him can be recovered by him
only if there has been a complete failure of consideration.

Similarly if a minor has benefited in a void contract for the sale of goods other than necessaries,
he cannot return the goods to recover the money he has paid for them. Again if a minor delivers
goods under a contract, which is not binding on him, he cannot recover them, unless there is a
total failure of consideration.

 Recovery against the minor

In cases where the minor is not bound by the contract the court, has the power to consider if it
thinks it just and equitable to do so, to order the minor to return any property acquired by him
under the contract or any property representing it. Obviously the court will not make such an
order where the minor has paid for the property.

 Recovery against a guarantor

As a general rule somebody who guarantees someone else’s debt is not liable on his guarantee
unless the person whose debt is guaranteed is himself liable. Thus e.g. a bank which lent money
to a minor and took from an adult a guarantee of that loan would be unable to enforce either the
loan or guarantee.

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3.9.2 Capacity of Corporations

A corporation is an artificial person created by law. It is distinct from the individual persons who
are members of the corporation and it has a legal existence separate and apart from them.

The contractual capacity of a corporation is limited firstly by actual limits i.e. by the fact that it is
an artificial person and not a natural person.

A corporation can only contract through its directors; therefore it cannot enter into any contract
of a strictly personal nature. It cannot act as an advocate, doctor or accountant.

Secondly by legal limits i.e. by the restrictions imposed on the powers of a corporation of its
formation. It can only engage in activities found in its Memorandum of Association – these
activities are referred to as its objects

The ultra vires doctrine

According to general principles of law, the contractual capacity of corporations is limited by the
statutes governing them. Therefore, where the corporation is created by an Act of parliament, the
objectives the corporation may legitimately pursue must be ascertained from the Act itself. If the
contractual capacity is exceeded, the contract is ultra vires this means beyond power or excess of
power or abuse of power. Any ultra vires activities are void and cannot be made valid or ratified
even if all the members of the corporation agree to the making of the contract.

In brief an ultra vires action is one that goes beyond the authorized objects of the company stated
in the Memorandum of Association or in an Act of Parliament where the corporation is formed
by the said Act.

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Attorney-General v. Fulham Corporation (1929)

A municipal council was authorized by certain acts to establish baths, washhouses and bathing
places. It established a municipal laundry. A ratepayer objected and applied for an injunction.
In this case it was held that the injunction had to be granted as the council had acted ultra vires.

3.9.3 Capacity of Unincorporated Bodies

These are associations of persons, which are not incorporated such as clubs or societies. Such
associations contract as agents.

The committee or other persons authorizing the agent to contract are liable but the members are
not liable unless the rules provide that the agent is authorized by them.

3.9.4 Capacity of Mentally Disordered and Drunken Persons.

A contract entered into by a mentally disordered person who is subject to the control of the court
is voidable at the instance of such a party.

Where a mentally disordered party enters into a contract without the assistance of the court and
the other party knew that he was contracting with a person who was of unsound mind and could
not understand the nature of the contracts the contract is voidable at the option of the patient.

A person may suffer from delusions and yet be capable of understanding the nature of the
transaction into which he is entering. In such a case the contract is valid although the other party
may have not known of the delusions. A contract made during mental disability can be ratified
in a lucid interval. If a person is incapable by reason of mental disability to manage his property
and affairs he may execute an enduring power of attorney or the court may assume jurisdiction to
manage them.

Contracts made by persons who are drunk at the time as not to understand what they were doing
are voidable at the option of the person who was drunk provided that the other party knew of his
condition. The burden of proof in this, as in the case of mental patients, is on the party suffering

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from incapacity to prove the knowledge of the other party. A contract made by a drunken man
can be ratified when he is sober.

Both mentally disordered and drunken persons are liable for necessaries supplied to them. In
such cases they are bound to pay a reasonable price for the necessaries.

3.10 Reality of Contract

An arrangement between two parties which on first impression appears to satisfy all
requirements of a valid contract may on closer examination be found to lack reality because it is
affected by a defect which renders the contract unenforceable, void, voidable or illegal. These
are called vitiating factors.

3.10.1 Unenforceable Contracts

An unenforceable contract is one, which is invalid because it cannot be enforced due to some
technical defect. Such as in the case of insurance contract the absence of a signed agreement.

3.10.2 Voidable Contracts

A voidable contract is one which one of the parties can put to an end at his option.

The option can be exercised without reference to the other party so that the contract is binding, if
he elects to treat it as binding and not binding if he elects to set it aside. E.g., a contract might be
voidable if one of the contracting parties has been induced by misrepresentation or by duress or
undue influence to enter into the contract.

A by innocent misrepresentation induces B to make a contract with A. The contract is binding

on A unless B chooses to set it aside, B may set aside the contract or not at his option but A has
no option to set it aside.

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3.10.3 Void Contracts

A void contract is one without legal effect. It’s a complete nullity in law and confers no rights on
either party. Examples of these are contracts with minors for goods that are not necessaries.

3.10.4 Illegal Contracts

An illegal contract is affected by the most serious defect of all. Not only is the contract itself
void but collateral contracts tainted or stained by the illegality may likewise be void.

A contract, which is illegal, is normally unenforceable. The illegality may be present:

 In the formation of the contract e.g. if its contrary to public policy

Parkinson V College of Ambulance ltd

 In the performance of the contract e.g. a contract to commit crime

 In the consideration for the contract e.g. where A promises to give B his car and B promises
to kidnap someone for A in consideration of A’s promise.

 In the purpose for which the contract is made. Sometimes the contract itself is not illegal but
the purpose for which it is formed is illegal. E.g. If a motor boat is hired for the purpose of
smuggling drugs into the country.

Cowan v Milbourn
The defendant agreed to let a room to the claimant. When he subsequently discovered that it was
to be used for a blasphemous lecture he withdrew his consent, the claimant’s action against him
was unsuccessful.

Contracts are illegal because they are forbidden by statutes or contrary to common law concepts
or the principals of equity. Contracts, which are contrary to public policy, meaning public
interest, should not be enforced.

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3.10.5 Examples of Contracts with no legal effect

1. Contracts tending to injure the public service.

These include agreements for the sale of public office or for the assignment of salaries of public
officials or pensions granted for public service. A contract to procure a title of honor for reward
is also void.
Parkinson v. College of Ambulance (1925)
The Secretary of the College of Ambulance promised Col. Parkinson that if he made a
large contribution to the college, which was a charitable institution, he would receive a
knighthood. The Col. made a large donation and upon not receiving the knighthood sued
for the return of his money. It was held that the action failed because the contract was
against public policy and was illegal.

A contract by a person to use his position and influence with the government to get a benefit for
another person, is void as being against public policy, as also is a contract to restrain a person
from serving in the naval or military forces of the country.

2. Contracts tending to interfere with the administration of Justice

An agreement to interfere with a prosecution of a criminal offence is void because the public has
an interest in the proper administration of justice. On the other hand, an agreement to
compromise and settle out of court a civil claim is valid.

For example a witness contract not to give evidence - This is a contract by which a witness binds
himself not to give evidence before the court on a matter on which the judge says he should give
evidence. This is an interference with the administration of justice and contrary to public policy .
It is cannot be enforced by the law.

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3. Contracts for Maintenance and Champerty

Champerty means division of spoils of litigation. Champerty is an agreement whereby a person

obtains a promise of a share in the proceeds of an action in return for providing evidence or
financial assistance to the person who conducts the litigation.

Maintenance has been defined as the improper starting of litigation and strife by giving aid to
one party to bring or defend a claim without just cause or excuse

Contracts having maintenance and champerty as their objects tend to pervert (interfere) with the
cause of justice and are illegal. It is not maintenance however when the person giving assistance
acts from motives of charity or has a common interest with the person assisted. Common interest
includes a genuine business interest in the results of an action.

4. Contracts of Trading with the Enemy

At common law all contracts made with a person residing in enemy territory in times of war are
illegal unless made with the permission of the government. They are illegal on grounds of public
policy based on two reasons;

 The further performance of the contract would involve relating with the enemy.
 The continued existence of the contract would confer upon the enemy a benefit.
However, the rights of an enemy are preserved and are kept in suspense until the war
is over

Daimler Co. Ltd v. Continental Tyre and Rubber Co. (Great Britain) Ltd.
The continental tyre company was formed in Britain to sell German made tyres. The
bulk of the company’s shares were held by the German company which manufactured
the tyres. All directors of the company were Germans resident in Germany. After the
outbreak of the First World War, the Continental Tyre Company instituted
proceedings against the appellant (Daimler) to enforce a trade debt. The defendant

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denied liability and argued that the debt was unenforceable as enforcing it amounted
to trade with an alien enemy. The House of Lords agreed with this defense and
disallowed the action as the respondent was an enemy by reason of the nationality of
the members and managers of the company.

5. Contracts to commit a criminal offense or a civil wrong

An agreement to defraud the tax revenue authority by the evasion of taxes is illegal and
cannot be relied upon in a court of law.
Alexander v. Rayson (1936)
Alexander let a flat to Rayson at a rate of £1200 per year. With the object of
getting a low ratable value for the flat, two written agreements were entered into.
One agreement purported to let the flat for £450 pea and the other the other was
an agreement by Rayson to pay £750 p.a. for services in connection with the flat.
Alexander sued Rayson for an installment of £750 and it was held that the
agreement having been made to defraud the rating authority was void and
Alexander failed.

An agreement to take shares in a company, in order to fraudulently induce the public to

believe that there is a market for the shares is a conspiracy to defraud and is illegal.

An insurance policy indemnifying the assured against legal liability for deliberate and
unlawful acts caused by him cannot be enforced.

Gray v. Barr (1971)

Gray had an affair with Barr’s wife. Barr armed with a loaded shotgun went to Gray’s
farm to search for his wife. In a struggle with Gray, Barr fell down the stairs and the gun
was accidentally discharged and the shot killed Gray. Barr was acquitted of murder and
manslaughter. The administrators of the Gray’s estate sued Barr for damages under the
fatal accidents act and Barr claimed to be indemnified by Prudential Assurance under an
accident liability policy. It was held that Barr was liable for having caused Gray’s death

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by his negligence. The killing was not an accident within the meaning of the insurance
policy and that even if the killing was an accident, it was caused by the deliberate and
unlawful act of the assured and it was therefore against public policy to admit a claim for
indemnity against the insurance company.

Also, the suicide of the assured if sane at the time renders the sum assured irrecoverable
in a life policy.

6. Immoral Contracts

Contracts relating to sexual immorality such as agreements for future illicit cohabitation are
illegal and void. Moreover, collateral contracts which are good in themselves will become void
if they are knowingly made to further an immoral purpose. E.g. a contract to lease a flat which is
used as a brothel.

Peace v. Brokers
A let a Cab on hire to B a prostitute knowing that it was to be used for immoral purposes.
It was held that A could not recover the cost for the hire.

Agreements between husband and wife for future separation and between a married man
and a woman who knows him to be married for marriage after his wife’s death have been
held to be void.

7. Contracts Affecting the Freedom of Marriage

Contracts in general restraint of marriage are void as also are contracts unreasonably affecting
freedom of choice in marriage. Marriage brokerage contracts, that is, contracts to introduce men
and women to each other with a view to their subsequent marriage are void.

However, a contract between a dating agency and its clients is valid since it does not depend on a
marriage occurring.

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8. Contracts Contrary to Public Policy

A contract by a newspaper owner not to comment on the conduct of a particular person is

void.

Neville v. Dominion of Canada News Co. Ltd (1915)

In this case it was held “for a newspaper to stipulate for a consideration that it
will refrain from exercising its rights to commenting upon fraudulent schemes
when it is the ordinary business of the company to comment upon fraudulent
schemes is in itself a stipulation which is quite contrary to public policy and
which cannot be enforced in a court of law.’

A contract interfering with the liberty of an individual is void. Where therefore a man
agreed with a moneylender ‘not to change his residence or his employment or to consent
to a reduction of his salary or to part with any of his property, or to incur any
obligations on credit or any obligations legal or moral without the consent of the
moneylender’ the court held that the contract was void.
However in Denny’s Trustee v. Denny (1919
A father whose son had bad habits agreed to pay his son’s debt and the son in
consideration thereof agreed not to go within 80 miles of London, it was held that
the contract was binding because the object of the restriction was to reform the
Son.

9. Contracts in Restraint Trade

A contract in restraint of trade is one, which restrains a person fully or partially in the carrying
out of his trade or business. All such contracts are prima facie void and will only be enforced if
there are good reasons. A contract in restraint of trade may be enforceable if it is intended to
protect a legitimate interest. Examples are:

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 The purchaser of the goodwill of a business has a legitimate interest in protecting

that goodwill by getting the seller to agree not to set up immediately next door in
the same line of business.

 An employer also has a legitimate interest to prevent an employee from revealing

trade secrets.

Therefore, a contract provision which is in restraint of trade and which is intended to protect a
legitimate interest will be enforced if it is no wider than necessary to protect the legitimate
interest of the party in whose favour it is made and is reasonable in the public interest.

A provision which is wider than is necessary to protect a legitimate interest is unenforceable.

Thus in Morris v. Saxelby (1914) It was held that
“such a restraint has never been upheld if directed only to the prevention of competition
or against the use of personal skills and knowledge acquired by the employer in his
employer’s business.”

If the restraint although against competition is necessary to protect the employer against
any improper use by the employee of the knowledge he has acquired in the service of his
employer, e.g. trade connections, trade secrets or confidential information it will be
enforced provided it’s no wider than is reasonably necessary to effect that purpose.

Attwood v. Lamont (1920)

A, a tailor, employed L as his assistant under a contract by which L agreed that on the
termination of his employment he would not carry out business as a tailor within 10 miles
of A. It was held that the agreement was merely to prevent L from using skills that he
possessed in competition with A and was therefore void.

An employer may not after his servant has left his employment, prevent that servant from
using his own skill and knowledge in his trade or profession even if he acquired it when
he was in the employer’s service.

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Fitch Vs Dewes (1912)

Fitch was a Solicitor and Dewes was his Clerk. In his contract of service, Dewes agreed
that on leaving Fitch’s employment, he would not practice as a Solicitor within 7 miles of
Fitch. It was held that the agreement was valid because Dewes during his service with
Fitch had come to know details of F’s business and clients and therefore he could be
restrained from using that knowledge to the detriment of Fitch.

Solus Agreement
A solus agreement is an agreement whereby a trader agrees to restrict his business or one aspect
of it to a sole supplier or a sole outlet . It is subject to the scrutiny of the courts to see if the
restraint on the trader is reasonable.

A solus agreement whereby a garage owner binds himself to buy all his petrol from an oil
company though it is in restraint of trade, it is not necessarily unenforceable. In view of the
existing arrangements for the distribution of petrol, the widespread incidence of solus
agreements and the necessity for oil companies to protect their trade outlets, such an agreement
might be reasonable.

3.10.6 Effects of Illegality.

1. Contracts that are tainted by illegality are normally unenforceable. The law gives no
assistance of any kind to the guilty party in such a case and consequently, he cannot
recover any money paid or goods supplied under such a contract, nor can he sue for
damages or the price of the goods if in order to be successful he has to rely on his own
illegality.

2. Courts will not entertain an action founded on or brought in connection with an illegal
contract. This rule however has some exemptions.

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Firstly, where the parties are not partners in the crime, the innocent party may recover
anything he has paid under the contract. E.g. when a person was induced by fraud to take
over some insurance policies in which he has no insurable interest, he was entitled to
recover the premiums he had paid under the illegal contract.

Secondly, where the illegal purpose has not been carried out, one party to the contract
may repent his illegal purpose and if he does so before performance takes place, the law
will assist him. If however, non-performance is due not to his repentance but to other
forces, the law will not assist him.

3. Illegal acts are committed in the course of the performance of a legal contract. It can
sometimes happen that in the course of performance of a perfectly legal contract an
illegal act is performed. If only part of the contract is illegal, the whole contract will not
be void, if the illegal part can be severed from the rest of the contract.

Napier v. National Business Agency Ltd (1951)

Napier was employed as Secretary and Accountant at a salary of £13 a week with £6 a
week for expenses. Both parties knew his expenses were less than £1 a week. It was
held the contract was to evade tax and was illegal. It was impossible to severe the part
dealing with salary from the part dealing with expenses so that the whole contract was
unenforceable

Clay v Yates 1856

P agreed to print a book for D which had a libellous dedication. P discovered afterwards
the dedication was libellous and printed the book without it. He then claimed the cost of
printing the book. D argued it was an entire contract and that P could not recover
anything as he had only given part performance.
The court held that there was an implied undertaking to pay for so much of the book as
was lawful. Since the illegal part could be severed from the legal part, P could sue for the
legal part he had printed.

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3.11 Discharge of Contract

A contract may be discharged or brought to an end in the following ways: -
a) Performance
b) Payment
c) Agreement
d) Termination by notice
e) Frustration

3.11.1 Performance

If both parties have performed what they agreed to do under the contract, the contract is
discharged. Performance must be strictly in accordance with the terms of the contract in order
for the contract to be discharged by performance. In other words performance must be complete
and exact

Section 26 of the Sales if Goods Act provides that a contract of sale of goods is performed if the
seller delivers goods as agreed and the buyer accepts the goods and pays as agreed. Section 31
of the Act gives the buyer a right to reject the goods if the seller deviates from the terms of the
contract

Re: Moore & Company and Landauer & Company

A supplier of tinned fruits agreed to supply 3,000 tins of canned fruit from Australia to be
packed in cases containing 30 tins each. When the goods were tendered, it was found that a
substantial part of the consignment was packed in cases containing 24 tins. The buyers rejected
the whole consignment and the sellers sued for the breach of contract. It was held that the buyers
were not labile since they had acted within their legal rights.

Where a party to a contract is prevented by the fault of the other party from further performance
of his part of the contract, he may sue for damages for breach of contract or claim reasonable
remuneration on a quantum meruit (as much as he has earned)

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De Bernardy v. Harding
The plaintiff agreed to act as the defendant’s agent for the purpose of preparing and
issuing certain advertisements and notices designed to promote the sale of tickets to see
the funeral procession if the Duke of Wellington. He was to be paid a commission of 10
per cent upon the proceeds of the tickets actually sold. After he had prepared
advertisements and paid printers, but before he begun to sell the tickets the defendants
withdrew his authority to sell them. He sued in quantum meruit for the work already done
and his action succeeded.

The court indicated that ‘Where one party has absolutely refused to perform, or has
rendered himself incapable of performing his partoif the contract, he puts it in the power
of the other party either to sue for breach of it or rescind the contract and sue on a
quantum meruit for the work actually done’

Time performance may be fixed in the contract, in that case, the contract must be
performed within that time and especially when time is of the essence of the contract.
Time is of the essence of the contract when the parties have expressly said so; or when
the circumstances of the contract imply it to be so. E.g. the building of a swimming pool
for Olympic games. The requirement that time is of the essence may be waived by an
agreement of the parties.

3.11.2 Payment
Payment of amount due under a contract is a discharge. Payment of a smaller amount is not a
discharge unless it is accepted by the creditor as being full satisfaction. Payment to an agent is a
good discharge if the agent is authorized or held out as having authority to receive payment.
Payment to one of several joint creditors discharges the debt.

Waiver

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It’s a common experience in commercial practice that a party does not insist on its strict
contractual rights but when requested by other party’s shows some indulgence. Thus a
contract for sale may provide for delivery February 1st but the buyer may ask the seller to
defer delivery until March 1st. Or a building contract may provide for payment within
one month after completion of the work and the work being completed on April 1 st the
owner may ask the builder to agree to payment on May 15th.

In these cases, the party who agrees to the relaxation of the strict terms of the contract
receives consideration, a variation of the contract takes place and the new agreement is
binding on both parties.

More difficult from the legal point of view but more frequent in practice is the case where
an indulgence shown by a party is not supported by consideration. There the doctrine of
waiver applies and the court has evolved the following rules: -

Firstly, the party in whose favour the indulgence has been exercised cannot later claim
that the other party has not performed his obligation in time. E.g., if a contract of sale
provides for delivery on February 1st but by request of the buyer the seller postpones
delivery until March 1st and then tenders the goods, the buyer cannot refuse acceptance
on the grounds that the goods ought to have been tendered on February 1st.

Secondly, the party who grants indulgence is also bound by his undertaking. If one party
by his conduct, leads another to believe that the strict rights arising under the contract
will not be insisted upon intending that the other should act on that believe and he does
act on it; then the first party will not afterwards be allowed to insist on the strict rights
when it would be inequitable for him to do so.
Central Land and Property Trust v. High Trees House (1947)

Thirdly, if no time limit is provided for the indulgence or forbearance, the party who has
agreed to relax the strict terms of the contract can unilaterally restore them. This is
normally done by giving the other party notice of reasonable length that the indulgence is
over.

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Charles Richards v. Oppenhaim (1950)

Charles agreed to sell to Oppenhaim a Rolls Royce and to deliver it by March 20 th. It was
not delivered then. Oppenhaim pressed for delivery and finally said, in June, that he
would not accept delivery after July 25th. Delivery was not made then, and Oppenhaim
bought another car. Delivery was offered in October but Oppenhaim refused and
Charles sued for the price. It was held that the action failed. Oppenhaim had waived the
original time for delivery but was entitled on giving reasonable notice again to make time
of the essence of the contract. However such notice is not essential. It is not required if
it is clear from the circumstances that the time of relaxation is over and the strictness of
the contract is restored.

3.11.3 Agreement

A contract may be discharged by agreement in any one of the following ways: -

a) Release.
b) New agreement.
c) Provision for discharge contained on the contract itself.

a) Release
At any time before the performance of a contract is due or after a breach of contract has
taken place a release of the obligations under the contract may be granted in writing.
Such an agreement dissolves the contract and is binding whether or not it is based on
consideration.

b) New Agreement
A contract may be rescinded by a new agreement between the parties at any time before
it is discharged by performance or some other way. Discharge by mutual agreement can
only take place as long as there is something to be done by each party to the contract. If
one party has completely performed all his obligations under the contract, discharge must
be either by release in writing.

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c) Provision for discharge contained on the contract itself.

The parties to a contract may have agreed through a clause therein that the contract
should end automatically on the expiration of a specified time or the happening of a
specified event . For example, a clause in a tenancy agreement may provide that the
tenancy shall automatically come to an end if the tenant becomes bankrupt.

3.11.4 Termination by Notice

A contract may contain a term giving either party a power to terminate it by notice. E.g. A lease
can be terminated by notice to quit or a contract of agency with a power to either party on giving
notice to end the contract. The same can apply to an employment contract.

The more difficult is the position in a long-term contract, which is unlimited in time and does not
contain a term providing for termination by notice of a specified length. It cannot be assumed
that the parties to a commercial contract intend to bind themselves for eternity particularly as
changing economic circumstances such as the progressive inflation and increase in the cost of
raw materials and labour may affect the original agreement of the parties and lead to
fundamentally different situation. In these cases a term has to be implied into the contract by
necessary implication and entitling each party to terminate the contract unilaterally by giving
notice of reasonable length. What is reasonable will depend on the circumstances but generally
there is no case which is recorded where the length of reasonable notice was in excess of 12
months.

Staffordshire Area Health Authority v. South Staffordshire Waterworks Co. (1978)

In July 1929 the South W. Company agreed with the Health Authority by a contract, “At all
times here after”, to supply a hospital with 5,000 gallons of water per day free of cost. This
agreement continued until 1975 when the Water company in view of the great increase in water
rates gave the health authority six months notice to terminate the agreement. it was held that the
notice was reasonable.
3.11.5 FRUSTRATION

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a) The Principle of Frustration

This is when the common object of the contract can no longer be achieved because in the light of
the circumstances a situation fundamentally different from that contemplated when the parties
entered into the contract has emerged unexpectedly. The contract is at an end for otherwise the
parties would be bound to perform a contract, which they did not make.
An unexpected turn of events which does not create a fundamentally different situation does not
enable a party to refuse the performance of the contract on the ground that the contract is
frustrated. In particular, frustration cannot be pleaded merely because the performance of the
contract has become more difficult or more costly than expected or will result in a loss rather
than the anticipated profit. It should be noted that impossibility as a general rule does not excuse
from performance. Lord Denning “Frustration is a doctrine very rarely relied upon with
success. It is in fact a kind of last ditch and it is a conclusion which should be reached rarely
and with reluctance.” The discharge of contract by frustration is the exception and not the rule.

b) Circumstances in which the contract is not discharged by frustration

1. Where a party gives an absolute undertaking in a contract to perform something that is
obviously impossible. E.g. to build a castle in the air is void because there is no real
consideration for the contract but an absolute undertaking is binding though it might
be difficult or even impossible to perform.
2. Where the change is not fundamental.
3. Where the performance of the contract becomes more difficult

Davis Contractors v. Fareham (1956)

The appellants, contractors, agreed in July 1946 to build 78 houses for the respondents
over a period of 8 months for a fixed sum of £94,424. Owing to an unexpected shortage
of skilled labour and of certain materials the buildings took twenty-two months to
complete and const approximately £115,000. The appellants sued, contending that the
contract was frustrated and they were therefore entitled to payment on a quantum meruit
for the work done. The House of Lords held that the contract was not frustrated.

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Harman, L,j. in Tsakiraglou Co ltd v. Noblee Thorl GmbH

‘‘Frustration is a doctrine only too often involved by a party to a contract who finds
performance difficult or unprofitable, But it is very rarely relied on with success……I
have always favored the view that the doctrine when analyzed proves dependant on the
true construction of the contract. A man may only be released under this doctrine if he
can truly say ‘this is not the bargain that I made the contract properly construed does
not provide for the event which has happened and is therefore not binding because it has
no application.’ Hardship or unexpected expense falling on one of the parties to a
commercial adventure can never excuse him form it so long as the adventure remains
recognizable that on which the parties embarked’’

c) Circumstances in which the contract may be frustrated.

1. Strikes and outbreaks of hostilities

War will frustrate a contract with a person or a company in the hostile country at once.
The same applies to strikes which may affect the performance of the contract but these
events do not automatically operate as frustration. The strike may be over soon and the
hostilities may not affect the performance of the contract. But where it becomes obvious
that these disturbances will be lengthy and the nature of the rights and obligations of the
parties to the contract are so significantly charged by these events; that the performance
becomes different from that which the parties reasonably contemplated when they
entered into the contract it would be unjust to hold them to its performance and
frustration occurs.

2. Statutory Interference
A contract which is contrary to law at the time of its formation is normally void or
unenforceable but if after the making of the contract owing to an alteration (change) of

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the law or the act of some person armed with statutory authority, the performance of the
contract becomes impossible, the contract is discharged.

Baily v. De Crespigny (1869)

De leased some land to Baily and agreed that he would not put up any buildings in the
adjoining land. A railway company under statutory powers took this adjoining land and
built a railway station on it. It was held that D was excused from performance of his
agreement because the railway company’s power had rendered it impossible.
If a contract to be performed in a foreign country becomes illegal owing to a change in
the law of the country, the contract is discharged.

3. The destruction of a specific thing necessary to the performance of a contract

The contract may contemplate the continued existence of a particular thing as essential to
the contract so that if it ceases to exist, the contract cannot be performed. E.g. where a
musical hall burns down before the consent. The distraction of the essential object need
not be total as long as it is sufficient to prevent the contract from being carried out.

4. Fundamental Change in Circumstances

Only events which are of such gravity that they result in a fundamentally different
situation from that contemplated by the parties when they entered into the contract can be
regarded as frustrating events. A mere unexpected turn of events is not sufficient.
Frustration occurs when three requirements are satisfied:

1. The event occurs which was outside the contemplation of the parties.

2. The contract if performed would thereby be made a different contract from that
entered into “Frustration occurs wherever the law recognizes that without default of
party a contractual obligation has become incapable of being performed because the
circumstances in which performance is called for would render it a thing radically
different from that which was undertaken by the contract.”

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3. The event is one for which neither party can escape. Frustration when it occurs
automatically brings the contract to an end no notice or other action by either party is
required to terminate it.

4. Personal incapacity in contracts where the personal qualifications of one of the parties
are important.

Condor v. The Beatles

C was employed as a drummer by B under a contract for a term of 5 years. His duties
were to play for seven nights a week. C fell ill and the doctor ordered that he was only fit
to play on 4 nights a week. There upon, the band terminated his contract. It was held
that in the business sense, it was made impossible for C to continue his contract and that
the contract was properly terminated.

d) Effects of Discharge by Frustration

1. All the sums paid to any party in pursuance of the contract before its discharge are
in principle recoverable. Sums payable cease to be payable. If the payee has
incurred expenses before the time of discharge in performing or for the purpose of
performing the contract, the court may allow him to retain or recover from the
payer, the whole or part of these expenses where it considers it just. E.g. a ship
repairer repairs a ship but before completion of the repairs the ship is destroyed by
fire, he may be allowed to retain his expenses.

2. Where the party has by reason of anything done by the other party to the contract
obtained a valuable benefit that other party may recover from him such sum as the
court considers just.

3.12: REMEDIES FOR BREACH OF CONTRACT

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When a contract is broken, the injured party may have several courses of action open to him.
These are: -

1.12.1. Refusal of further performance

If one party has repudiated the contract, broken a condition or committed a breach that has
deprived the other party of substantially the whole benefit of the contract, then the other party
may treat the contract as rescinded and refuse further performance.

By treating the contract as rescinded, he makes himself liable to restore any benefits he has
received, e.g. if he has agreed to sell goods and has received all or part of the price, he must
return it.

1.12.2. Damages
Whenever there is a breach of contract by one party, the other is entitled to bring an action for
damages. If the aggrieved party has sustained loss, he is entitled to substantial damages which
will be calculated in accordance with the following rules:
a) The injured party is to be placed in the same financial position as if the contract had been
performed. This is referred to as damages for loss of bargain.

b) The law seeks not to compensate the Plaintiff for more than his true loss.

c) To be recoverable, damages must be for losses such as where reasonably foreseeable

when the contract was made as liable to result from the breach of the contract.

1.12.3. Quantum Meruit

Where there is a breach of contract, the injured party instead of suing for damages may claim
payment for what he has done under the contract. His right to reasonable remuneration for the
work .done does not arise out of the original contract but is an obligation imposed on the other
party by a value of law. This is termed as Quantum meruit.

The claim on a quantum meruit rises where one party abandons or refuses to perform the
contract.

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Planche V Colburn
P was engaged by C to write a book to be published by installments in a weekly magazine. After
a few had appeared, the magazine was abandoned by the owners. It was held that P would
recover on quantum meruit for the work he had done under the contract.

1.12.4. Action for the price

In an entire contract, providing for work to be done in return for an agreed lump sum. The law
presumes in the absence of any evidence to the contrary, that the intention of the parties is that
complete performance must take place before payment can be demanded. Failure to make
complete performance prevents any payment being recovered either under the contract or on a
quantum merit. The doctrine substantial performance applies where there is a lump sum contract
which is completely performed but with minor defects. The person who has performed the work
can recover the lump sum less a deduction for the cost of rectifying the defect.

3.12.5 Specific Performance

Instead of or in addition to awarding damages to the injured party, a decree for specific performance or an
order for specific performance may be granted. Specific performance means the actual carrying out by
the parties of their contract and in a proper case, the court will insist on the parties carrying out their
agreement this remedy is however discretionary and will not be granted in any of the following cases: -
a) Where the damages are an adequate remedy.
b) Where the contract is for personal services.

3.12.6 Injunction
An injunction is an order of the court restraining a person from doing some act. It will be granted, to
enforce a negative stipulation in a contract where damages would not be an adequate remedy.

In a contract for personal services, a clear negative stipulation will be enforced by injunction in a suitable
case e.g. where the defendant agreed to sing the Plaintiff’s theatre and nowhere else it was held, she could
be restrained by injunction from singing for someone else.

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