CONTRACT LAW SEMESTER TWO

Section 10(1) of the Contracts Act lays out the ingredients of a valid contract:

“A contract is an agreement made with the free consent of the parties with the capacity to contract, for a lawful
consideration and with a lawful object, with the intention to be legally bound.”

However, a party to such a contract may still avoid obligations under it by pointing at the surrounding
circumstances, if it can be shown that there was no genuine consent of the parties to the agreement.

VITIATING FACTORS:

They invalidate an otherwise valid contract and they include:

 Fraud
 Mistake
 Misrepresentation
 Illegality
 Duress/Coercion
 Undue influence

The common feature they have is that they nullify apparent consent of the contracting party. As Section 10(1) of the
Contracts Act 2010 defines a contract as one made with the free consent of the parties, a factor which renders that
consent not free takes the contract out of the scope of section 10(1).

MISTAKE

Although the courts continue to uphold the doctrine of freedom of contract and are reluctant to interfere in bargains
entered into by the parties, they may do so where it is demonstrated that in reality there was no consent of the
contracting parties to the terms of the contract, there is no consensus ad idem and therefore no agreement.

The Contracts Act provides in Section 13 for mistake as one of the grounds on which the courts may intervene:

“Free consent of the parties is taken to be free where it is not caused by – (a) coercion (b) undue influence, as
defined in section 14 (c) fraud, as defined in section 15 (d) misrepresentation (e) mistake, subject to sections 17
and 18.”

 FOR A MISTAKE TO BE AN OPERATIVE ONE, IT MUST BE ONE RELATING TO A

FUNDAMENTAL, UNDERLYING FACT THAT EXISTED AT THE MOMENT THE
CONTRACT WAS ENTERED INTO – Section 17(1) of the Contracts Act.

Amalgamated Investment and Property Co. Ltd. V John Walker and Sons Ltd [1976] 3 ALL ER 509

The defendant, John Walker & Sons Ltd, advertised their warehouse for sale, either for occupation or redevelopment
of the property. It had been previously used for making whiskey. The complainants, Amalgamated Investment &
Property Co Ltd, bought this warehouse for £1,710,000. In the process of the sale, the complainants had asked the
defendants whether the warehouse was registered as an architectural or historic interest building. The defendants had
told them that it was not. However, it became a listed building on 22 August 1973 and the contract was signed on
25th September 1973. The defendant was informed that it had become a listed building.

Issues

The complainants argued that the contract should be set aside over the common mistake of the building being listed
as historic. Alternatively, they argued for frustration of the contract. The issue in this case was whether the contract
could be set aside for common mistake or whether there was frustration of the contract.

CATEGORIES OF MISTAKE

A mistake may be one of law or one of fact.

Mistake of law

Under common law, only a mistake of fact could vitiate a contract. The argument behind this is that a party or both
parties had to satisfy themselves as to the state of law on the matter which they’re contracting on. One could not
plead ignorance of the law as a defence.

The position in Uganda has been modified; a mistake of law could also vitiate a contract as provided by Section 18
of the Contracts Act – When a contract is entered into by a mistake in respect of any law in force in Uganda, the
contract is void.

TYPES OF MISTAKE

The general rule is that

 A MISTAKE OF FACT DOES NOT AFFECT THE VALIDITY OF A CONTRACT.

This arises because of two major principles:

i) The freedom of contract doctrine:

Here, parties may enter into a contract on such terms as they wish and it is not for the courts to
intervene and adjust the terms.
ii) The maxim of caveat emptor:
It is for the contracting party to look out for their interests and ensure that they are not misled. He
cannot seek the help of the courts after entering a contract without performing the necessary
precaution.

CASE LAW

 Tamplin v James (1880) 15 Ch D 215

James LJ held that the defence to specific performance for mistake could not generally be sustained where the
vendor did nothing to mislead the purchaser and the mistake arose because of the purchaser's lack of reasonable care
(here, the failure to inspect the plans). However, James LJ left it open for specific performance to be excused where:

“...a hardship amounting to injustice would have been inflicted upon [the purchaser] by holding him to his bargain,
and it was unreasonable to hold him to it.”
  Solle v Butcher [1950] 1 KB 671

Plaintiff agreed to lease his property to Defendant for £250 per year but they later found out that because of the
status of the property (to which they were both mistaken), rent was limited to £140 unless a notice of increase was
served at the time the lease was offered, which had not been done. CA said that P could rescind the contract on an
equitable basis, provided he agreed to offer D a new lease for £250 together with the notice of increase.

a) Common mistake
This arises in instances of Res Extincta and Res Sua.
 Res Extincta is the type of mistake relating to the existence of the subject matter of the contract. Where
both parties enter into a contract believing the subject matter of the contract to be existent when in fact it is
not, the contract is void. This position is reflected in Section 7 of the Sale of Goods and Supply of Services
Act of Uganda:
‘Where there is contract for the sale of specific goods, and the goods, without the knowledge of the
seller have perished at the time when the contract is entered into, the contract is void.’

Couturier v Hastie (All ER 280 [1856] 673) – Sale of corn aboard a ship.

Where the mistake is related to the quality of the subject matter, as opposed to its existence or ownership, it
is not considered to be so fundamental as to vitiate the contract. Section 17(3) of the Contracts Act provides
that ‘an erroneous opinion as to the value of the things which form the subject matter of an agreement shall
not be deemed a mistake of fact.’

Bell v Lever Brothers Co. Ltd – Contract of compensation on termination of employment.

 Res Sua refers to a situation where a person buys something that actually belongs to them. If the action is
based in equity, Res Sua will render a contract voidable.

Cooper v Phibbs – Lease of a fishery

 A mistake as to a matter essential to the agreement renders the contract void – Section 17(1) of the
Contracts Act.

Galloway v Galloway – Separation agreement, a non-existent marriage.

Ocharm Plumbers and Associates Ltd v Drury (U) Ltd HCCS No. 723 of 2006 – subcontract based
on the assumption of another contract.
b) Mutual Mistake
 Mistake as to identity: This occurs when both parties are mistaken as to the identity of the subject matter of
the contract. In such a situation, there is no consensus ad idem, therefore no agreement hence the contract is
void.

Raffles v Wichelhaus (1864) 2 H&C 906 – Sale of cotton to arrive aboard ship called Peerless, two ships
with an identical name.

A party seeking to rely on mutual mistake must prove that there existed a degree of ambiguity which makes
it impossible, on applying the objective test of a reasonable man that the parties intended to be bound by
one set of terms or the other.

Smith v Hughes (1871) L.R 6 QB 597– Purchase of green oats.

Impossibility: When parties to a contract enter into it believing that it is capable of performance when it is in fact
not so, there is a mistake of fact as to the possibility of performance. Such a contract is void on the ground of
impossibility.

c) Unilateral Mistake

The distinguishing factor of unilateral mistake is that one party knows that the other party is mistaken as to the
nature of their promise. In such a situation court may hold that there was no contract.

Hartog v Colin & Shields [1939] ALL ER 566

A unilateral mistake may also occur where a person is mistaken as to the identity of the person contracted with and
the other part is aware of that mistake. In order to prove unilateral mistake as to identity, the person alleging mistake
must prove each of the following:

 an intention to deal with some other person

 that the other person knew of this intention
 that the identity was of fundamental importance
 that reasonable steps had been taken to verify the identity

Car and Universal Trading Co. v Caldwell

‘Nemo dat quod non habet’ – ‘no person can pass what they do not have.’

Cundy v Lindsay

Kings Norton Metal Co. Ltd v Abridge, Merret & Co. Ltd

Phillips v Brooks

Ingram v Little

Lewis v Averay

Citibank NA v Brown Shipley & Co. Ltd & Another

d) Documents mistakenly signed and the plea of ‘non est factum’

The general rule is that a person is bound by his signature on a document whether or not they knew, read the
document or whether or not they can read at all – (Lestrange v Gracouth)
Where a person is misled into signing a document, he may not be bound by it, he can plead ‘non est factum’ – it
is not my deed.

Curtis v Chemical Cleaning Co,

Thoroughgood’s case – document misrepresented, landlord tricked into releasing tenant from liability for
rent and gifting part of the property to him.
Foster v Mackinnon – ‘where a person signs a document whose contents have been misrepresented to him,
it doesn’t bind him as his mind doesn’t accompany his signature.
Lewis v Clay – defendant was tricked into signing a promissory note to pay 11,113 pounds to plaintiff
under the guise of the document being a family document.
Saunders v Anglia Building Society – old lady bequeathed house to nephew on condition that she
continued living there till she died, clerk tricked her into transferring the property to himself under the
 guise that it was a gift of deed to the nephew, used the property as security to borrow money from plaintiff
and defaulted.
The House of Lords held that ‘non est factum’ could not be pleaded because the document was not
fundamentally different from what she had intended to sign. For the plea to apply, the document must be
fundamentally and radically different from the one intended to be signed.

Courts have developed rules which limit the plea’s operation:

i) it is available to a limited class of persons who without any fault of their own are unable to read or
understand a document
ii) it will apply if the document signed is fundamentally different from the one intended to be signed
iii) mere ignorance as to the contents as opposed to the inability to read and understand the document will
not suffice to avail the plea
iv) a person pleading ‘non est factum’ must not be guilty of negligence.

Effect of Mistake

Mistake at common law renders the contract void ab initio while mistake in equity has the effect of merely rendering
the contract voidable. Equity provides the following remedies to mistake:

1) Rescission – it is a discretionary remedy that may be granted by the courts where they feel it is appropriate in
order to fulfil the principle of restitutio in integrum. It is lost where;
i) a party fails to apply for it in a reasonable time
ii) where the granting of rescission would have the effect of depriving a third party or their rights in the
subject matter
iii) Restitutio in integrum is impossible.

It may also be used where the contract has been held to be void and an order of court is required to place the
parties back in their original positions such as in Cooper v Phibbs. In such a case court may grant rescission
considered that restitutio in integrum could only be achieved by making such an order because the respondents
have a right over the fishery to the value they had spent improving it.

2) Rectification – it arises where a written document does not represent the agreement between the parties. The
exercise of this remedy is also discretionary, as in all equitable remedies. It does not lie where there is a mistake
as to the subject of the contract but where there is an error in the face of the record. In order to obtain
rectification, three conditions must be satisfied:
 The instrument that the application is made to rectify must have failed to reflect the agreement of the
parties. If one party considers that the instrument reflects their intentions but the other does not,
rectification is unavailable.
 The party seeking rectification has to provide evidence that the instrument does not reflect the intentions of
the parties at the time of contracting.
 There must be a total disparity between what was agreed and what was recorded. The terms of the
agreement must have remained static to the time the instrument/document was executed. It is not necessary
that the prior agreement must have amounted to a binding contract. (Joscelyne v Nissen [1970] 2 QB 86 –
exchange of a car hire business to daughter for her payment of certain bills)

MISREPRESENTATION
Section 13(d) of the Contracts’ Act lists misrepresentation as one of the factors that vitiate a contract. A
representation is a statement of fact, made by one party to the contract to the other (representor to representee)
during negotiations leading to the contract, which though not incorporated into the contract, is nevertheless one of
the factors that induce the representee to enter into the contract. Where such a statement turns out to be false, there is
a misrepresentation.

The Contracts’ Act defines misrepresentation as:

a) A positive assertion made in a manner which is not warranted by the information of the person who makes
it, or an assertion which is not true, though the person who makes it believes it to be true;
b) Any breach of duty which without an intent to deceive gains advantage to the person who commits it or
anyone who claims under that person misleading another person to his or her prejudice or to the prejudice
of any one claiming under that other person; or
c) Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing
that is subject of the agreement.

A Misrepresentation can thus be defined as a false statement of fact that induces a person to whom it is made
to enter into a contract. In Fred Nuwagaba v Ade Musana Kaguma (HCCA No. 42 of 2012), Court held that a
Misrepresentation is a statement of fact that is made by a party to a contract and is untrue and has the object of
inducing the representee to enter into a contract.

The nature of misrepresentation.

For a statement to amount to misrepresentation, it must measure up to three criteria:

1. It must be a statement of fact:

This means that it must not be a statement of opinion. An opinion can ordinarily be identified by the words
used by the representor.
- Bisset v Wilkinson
It must also be a statement of fact, not of law. However, a legal opinion made by an advocate in
professional capacity may give rise to consequences if it turns out to be inaccurate.
It must not be a mere puff as defined in Carlill v Carbolic Smokeball Co. as a statement so obviously
exaggerated that it isn’t intended to be taken at face value but is to be regarded as mere sales talk.
It must be a statement of existing fact and not a claim concerning the future. A promise as to the future is
only binding as a term of the contract, yet by its nature, misrepresentation is never a term of the contract.
 Edgington v Fitzmaurice

2. It must be intended to induce the representee to enter the contract.

The statement must be directed at the representee.
 Peek v Curney
3. It must have actually induced the representee to enter into contract.
The decision to enter the contract has to have been induced by the statement. Courts apply the ‘but for’ test
to prove this. The representee must prove that the statement came to his notice before the contract, that he
believed it to be true and that he acted on it. If it is shown that he doubted the correctness of the statement
but took a gamble, he knew that the statement was untrue but considered other factors to enter the contract.
 Section 16(3) of the Contracts Act is a relevant provision for the third criterion.

Silence as misrepresentation:
One cannot be liable for misrepresentation as to something they did not say. Misrepresentation only occurs for
positive statements/actions. The general rule is that mere silence does not amount to misrepresentation.

Section 15(2) lays down the rule and the exception regarding silence. Both under common law and the previously
mentioned section, there are situations where silence may amount to misrepresentation:

1. Where a person keeping quiet has a duty to speak:

a. Where the contract in question is a contact uberimma fides – a contract of good faith e.g.
insurance policy contracts. In this instance, all the material facts are known to one party and not to
the other. They have a duty to disclose them to another. If he conceals these facts, he is guilty of
misrepresentation by non-disclosure – silence.
Winther v Arbon, Langrish and Southern Ltd.
b. Where there exists a fiduciary relationship. Section 14(5) of the Contracts Act is a relevant
provision here. It is a relationship between parties having unequal power such that one party has
undue power over the other because of either social position, qualification or financial status and
experience. Such a party has a duty of trust and candor, which is to say the weaker party trusts the
stronger to be candid and dependable.
Gordon v Gordon.
2. Where silence is equivalent to speech.
Such a situation may arise where a contracting party makes a statement of fact, which at the time is true but
before the contract is concluded, the facts change but they do not disclose this change, leading to the other
party to believe that the situation is the same.
 With v O’Flanagan
 Hedley Byrne v Heller & Partners
 Wittington v Seale-Hyne
 Loaf v International Galleries
 Nocton v Lord Ashburton
 Hedley v Baxendale

Relevant provisions: Section 15 and 16 of the Contracts Act

Types of Misrepresentation:

1. Fraudulent Misrepresentation: this is a statement made by a person who knows it to be untrue/who has no
reason to believe it to be true or who makes the statement in reckless regard of whether it is true or not.
- Derry v Peek: transportation company applied for an act of Parliament permitting it to operate
horse drawn carts. It was also stated that it could operate steam powered trams
- Freedman v Njala Co. Ltd
2. Negligent Misrepresentation: it arises where the representor has a duty of care. Duty of care may arise from
a statute or from trust or from the nature of the relationship with the representee.
- Initially, the duty of care would arise where there is a contractual relationship, but in Necton v
Lord Ashburton, it was held that where there is a fiduciary relationship, a duty of care arises. A
solititor owed a duty of care to a client in making decisions even if the relationship between them
is not contractual.
- Lord Denning in Byrne v Heller & Partners: in the absence of contract and in the absence of a
fiduciary relationship, a party is liable for negligent statements so long as three elements are
satisfied:
 The party makes a statement
 They knew the plaintiff would act on the statement
 In fact, the plaintiff acted on the statement and suffered loss as a result
 The principles in Hedley Byrne v Heller & Partners were reproduced in Kirima Estates Co.
Ltd. v Konde – plaintiff lent money and the borrower gave his property as security. Plaintiff
asked Konde, an advocate to ascertain the value of the land. Konde, without using the services
of a property valuer and not enquiring about the property prices in the area, told the plaintiff
that the land was worth 120,000/=. On the basis of this assurance, the plaintiff lent out
60,000/=. The borrower defaulted and when the property was put on market, it would only
fetch 45,000/=. Konde was sued for negligent representation. Court held that the defendant
acted in a reckless and perfunctory manner when he made the statement without any basis and
was therefore liable.

3. Innocent Misrepresentation: this arises when a person makes a statement in an honest but mistaken belief
that it is true. For a party not to be found liable, they must not be negligent.

Remedies to Misrepresentation

Misrepresentation renders a contract voidable at the option of the representee under Section 16(1) of the Contracts
Act. Unlike mistake, misrepresentation does not render a contract void.

Reading s. 16(1) with 16(4), a party induced by misrepresentation has two options:

i) To rescind the contract on that ground.

ii) To affirm the contract and recover damages.

The remedies available depend on; a) the types of misrepresentation b) the wishes of the representee c) the
prevailing circumstances at the time of discovery of the misrepresentation.

The remedies available are

a. Damages
The monetary compensation for loss incurred or injury suffered. Court ay use two principles in
assessing damages:
- Restitutio in integrum: the court gives such damages as would restore the injured party to the
position as to which it would have been, had the misrepresentation not occurred. In the Kirima
Estates case, damage recoverable was the difference between what the plaintiff got from obtaining
the loan and what they got from selling the land.
- The principle of remoteness: the first claims, which are considered far-fetched, the damages,
which really resulted naturally and from the defendant’s conduct.
Damages are only recoverable in cases of fraudulent and negligent misrepresentation. In the case
of innocent misrepresentation, the promisee can only seek rescission and indemnity.
b. Indemnity
The difference between damages and indemnity is that while damages seek to compensate the loss
caused, indemnity involves a refund of expenses incurred under a voidable contract.
Whittington v Seule-Hyne: the plaintiffs were induced to buy farmland from the defendants, who
assured them that it was in sanitary condition for poultry. This turned out to be an innocent
misrepresentation. The chicken died and the farm manager fell ill.
The plaintiffs sued claiming value of the birds which died, profits which they would have made
and medical expenses.
Court declined to award these as to do so would be an award of damages. It only awarded rent,
local rates and repair expenses as indemnity.
c. Rescission
 Section 16(4), upon discovering the misrepresentation, the representee may rescind the contract or
alternatively affirm the contract and seek damages in addition.
Affirmation arises when the representee, after learning of the misrepresentation communicates the
intention to continue with the contract. Such an affirmation may be express or implied by their
conduct i.e. if he continues to perform his obligations under the contract after learning of the
misrepresentation.
A contract is rescinded where it is set aside for all intents and purposes so as to restore the status
quo ante i.e. the position before the contract.
It involves in the contract of sale, the return of goods by the buyer and refund of money received
by the seller.
- The party seeking rescission must be in position to effect restoration. Common law did not
recognize the right of rescission, the only common law remedy for misrepresentation was
damages. Rescission is a creature of Equity: in some situations it may be necessary to reverse the
position of the parties to that before the contract.
Rescission is an equitable remedy, that can be claimed as of right and is granted by the court
through exercise of its discretion. The party seeking this party must convince the court to apply it
in its favour. Rescission is granted only where the court is satisfied that damages alone cannot
sufficiently atone for wrongs done.
Parties seeking rescission must satisfy the cannons of equity.
The right to rescind is lost when:
a. A party affirms the contract after discovering the misrepresentation.
b. Delay; a party must seek rescission within a reasonable time after learning of the
misrepresentation – Leaf v International Galleries: A constable sold an art piece. 5 years
when the buyer was trying to resell it, he discovered that it was a fake and sought to return it,
to rescind the contract. Court held that he could not rescind the contract, owing to the time
that had elapsed.
Rescission is lost due to delay only when the misrepresentation is innocent. No amount of
time takes away the right to rescind where there is fraudulent misrepresentation.
c. Restitutio in integrum is no longer possible: Such a situation arises where the buyer has
already consumed the goods or irreversibly changed their identity or has resold them to a third
party.

Mode of exercising rescission:

The representee, indicating that they no longer consider the contract valid or no longer
consider themselves bound by the contract, effects rescission. Any conduct, which is
sufficient to communicate that intention, is sufficient to give rise to rescission. Sometimes it
may be necessary to resort to court for finality.
Carr & Universal Co. v Caldwell

COERCION/DURESS AND UNDUE INFLUENCE

The Contracts’ Act makes no express mention of duress – it is now referred to as coercion.

It has been established that a contract is not a contract where the consent of any party to it is not voluntary. Section
10(1) of the Contracts act defines a contract as an agreement made with free consent of the parties. Therefore, a
contract made where consent is obtained by force, the threat of force or by other improper pressure, consent is not
free and the contract is not a contract within the meaning of s. 10(1). Section 13 states that consent is not free if it is
induced by coercion or undue influence.
Initially, the law only recognized duress as nullifying consent. Later, equity introduced the correlating concept of
undue influence. Under common law, duress meant the use of force or threat of force to induce a party to give their
consent to enter into a contract. This concept of duress operated in very narrow confines: the threat had to be an
unlawful one; a threat to enforce one’s right was not considered duress.

Hassan Ali Issa v Geraj Produce Store: the plaintiff took his motor bike to the defendant’s garage for repair. It was
abandoned there for a year and he was presented with a bill amounting to almost over the market value for the bike.
He protested but the defendants refused to release the bike unless he paid. It was held that in refusing to release the
bike, the defendants were exercising their legal right.

Section 2 of the Contracts Act gives a wider definition to include not only common law duress, but also economic
duress: the commission, threat of any unlawful act or threat to detain the property of any other person to induce the
other person to enter into a contract.

North Ocean Shipping Co. v Hyundai Construction Ltd:

The plaintiffs entered into a contract with the defendants to construct for them a ship at about $40 million,
which was to be paid in installments. After the plaintiffs had paid the first installment, the exchange rate of
the dollar collapsed.

The defendants threatened not to build the ship unless the amount was raised by 10% and the remainder to
be paid as a lump sum. The plaintiffs had already signed agreements with various clients to deliver oil to
them using the ship under construction. For fear of failing to perform those contracts, they agreed to the
new terms. Eight months after receiving the ship, they sued for a refund of the excess.

Court held that the threat not to build the ship amounted to economic duress. However, by delaying to seek
a refund for eight months after the threat had ceased to be effective, the plaintiff had implied to have
affirmed the contract and lost the right to claim a refund.

Barton v Armstrong – for economic duress to arise, the threat must be a real one: the party induced must have no
reasonable alternatives for a course of action.

Undue influence and the concept of bargains

Some situations do not amount to actual duress. They nevertheless happen because a party is in a position to
dominate the will of another and uses it to secure an unfair advantage over the other. A party may seek to get out of
the contractual arrangement by pleading undue influence.

Section 13(b) & 14 of the Contracts Act:

The Allcard case defines undue influence as some unfair or improper dealing, some coercion from the outside, some
overreaching, some form of cheating and generally, though not always, some personal benefit obtained by the guilty
party.

Section 14(1) of the Contracts Act makes a clearer definition (only applying to class II undue influence): “A contract
is induced by undue influence if one party is in a position to dominate the will of another and that party uses that
position to obtain an unfair advantage over the other.”

i. Class I Undue Influence

This arises where there is actual pressure exerted. When such undue influence is alleged, the burden is
on the affected party to prove that there was pressure on them.
ii. Class II Undue Influence
 This arises where there exists a special relationship between the parties, such that one is in a position to
dominate the will of another. Section 14(2) provides that this arises in three situations:
- When a person is in actual/implied authority
- Where there is a fiduciary relationship, where a party has duties involving trust, faith and special
confidence.
- When the mind of one party is temporarily or permanently impaired on account of illness or
otherwise.

When such a situation exists, the dominant party is presumed to have taken unfair advantage over the other and if
the transaction between the two looks prima facie uncautionable, the burden is on the stronger party to prove that
they acted fairly.

Where a special relationship exists, undue influence is presumed even if the dominant party did not personally
benefit from the transaction.

*Case of the lady who made three vows (poverty, obedience and chastity) and later claimed to recover the property
she gave away*

Section 16(5) of the Contracts Act provides that where a contract is induced by coercion/undue influence, the court
may entirely set it aside, but where the party has gained some benefits from such a contract, the court may set it
aside subject to some terms as it may deem fit.

The right to rescind for coercion is lost in the same ways as it is lost for misrepresentation.

ILLEGALITY

Courts will not enforce contracts, which are considered to be illegal.

Section10(1) of the Contracts Act defines a contract as an agreement made…with a lawful object and for a lawful
consideration. Legality is therefore one of the requirements for a contract to be valid. Once the purpose is unlawful
or either of the parties is providing unlawful consideration, the contract is not one within Section 10(1).

ILLEGAL AND VOID CONTRACTS – Section 19(1) of the Contracts Act.

A contract can be illegal by statute.

Where a contract is expressly declared to be prohibited in a statute, there is little doubt that Parliament intended that
the contract could not be enforced.

Cope v Rowlands: statute probided that anyone acting as a broker in London had to have a license or pay 25 pounds
to the city for any transaction conducted without such a license. The plaintiff was an unlicensed broker, and when he
sued the defendant for his commission in buying and selling the defendant’s stock, it was held that the action must
fail.

A contract may be created lawfully but nevertheless be illegal because of the way in which it is performed. In
Anderson Ltd v Daniel, there was a statutory requirement that vendors of artificial fertilizers had to state on the
invoice the chemical breakdown of the fertilizer. In the contract in question, the vendors had sold 10 tons of
fertilizer but failed to comply. When the defendants failed to pay, the plaintiffs sued for the price, but were met with
the defence that the contract was unenforceable due to statutory invalidity. Court held that the plaintiffs would lose
in their action; where a contract is lawful in its inception but illegal in its execution, the plaintiff vendors would be
unable to rely on their contractual rights.
A contract can be illegal under common law on grounds of public policy.

 Contracts of maintenance and sham party

Trendtex Trading Corporation v Credit Suisse 1982 AC 679.
Champerty: an illegal agreement in which a person with no previous interest in a lawsuit finances it with a
view to sharing the disputed property if the suit succeeds.

A contract may not be illegal but void on grounds of public policy.

 A contract that is prejudicial to the institution of marriage.

The law assumes the family to be the basis of civilization; that modern society is founded on the concept of
family. Therefore, any transaction that undermines marriage undermines the family and therefore
undermines civilization and is thus considered void.
- Where someone restricts his/her future freedom to marry – Lowe v Peers (1798) 4 Burr 225;
- A marriage brokerage contract: it is unenforceable at law because it reduces marriage to a market
commodity - Herman v Charlesworth (1905) 2 KB 123.
- Where you promise a married person that you will marry a person after their spouse dies - Spiers v
Hunt (1958) 1 KB 720.
 A contract which seeks to restrict trade (a contract in restraint of trade)
- Restraint of trade is a situation where a party undertakes to limit his future freedom to undertake
his profession/business in any manner he or she chooses.
There are three types of such agreements;
a) Solus Agreements
This is where a party is helped to set up business as a retailer by a big corporation.
Esso Petroleum v Harper’s Garage
b) Employer-Employee agreements
This is where a party to the contract is
Anielo Giella v Casman Brown & Co. [1973] EA 358.
Attwood v Lamont
c) Sale of goodwill in business.

The general position is that such contracts are contrary to public policy and are generally void because of their
protection to the employer and could starve the employee. However, a restraint can be enforced if it is considered
reasonable in respect to the interests between the parties and not injurious to the public – Section 21(1) & (2) of the
Contracts Act.

In determining whether a restraint is reasonable, a court will consider 3 things – Section 21(2) of the Contracts Act.

 The geographical coverage in which a party is restrained to operate.

 The duration during which the restraint is applied.
 Range of activities prohibited by the restraint.

Atwood v Lamont [1920] 3 KB 714.

The burden of proving the reasonableness of the restraint lies upon the promisor (employer) – Section 21(3) of
the Contracts Act.

A party is entitled to use a restraint of trade to protect his business secrets but not to shield himself from
competition.

Nordenfelt v Maxim Nordenfelt Guns and Ammunitions

  A contract that undermine the administration of justice; one that seeks to oust the jurisdiction of
courts.
- If the contract has provided an alternative mechanism for dispute resolution, that mechanism must
be pursued first – Section 22(2)(a)(i) of the Contracts Act.
The Arbitration and Conciliation Act – Section 6(1).
Lord Denning, Lee v Showmen’s Guild of Great Britain: “Parties cannot, by contract, oust the
ordinary courts from their jurisdiction. They can indeed make the tribunal the final arbiter on
questions of facts but cannot make it the final arbiter on questions of law.”

Consequences of illegality

 Section 19(2) of the Contracts Act – where a contract is illegal, the contract is void: as a general rule.

Exceptions to the general rule (conditions under which it is possible to enforce payment for goods and
services delivered under an illegal contract)
i. When the court is satisfied that one of the parties was ignorant about the illegality – Section 19(2)
(a).

ii. Where the illegality arises later, during the course of performance of the contract.

Ashmore, Benson & Pierce v Dawson Ltd (1973) 1 WLR 828.

iii. Where the consent to the contract was induced by misrepresentation, mistake, fraud, coercion or
undue influence. – Section 19(2)(c)

iv. Where the parties are not in pari delicto.

Pari delicto means that parties are equally at fault. The state of not being in pari delicto means that one of
the parties had a primary obligation to ensure that the law is obeyed.

Kilili Cotton Company Ltd v Dewani [1960] EA 188

Section 26 of the Employment Act No. 6 of 2006 – A contract of service with an employee with an employee
should be attested to before it is valid.

Section 26(4) – where it is not attested to, the employee can still enforce it.

v. Where there is breach of a fiduciary relationship between the parties.

Section 16 of the Contracts Act is relevant in such a situation.

vi. Where a party repudiates the contract before it is substantially performed.

The party must have reneged and withdrawn from the contract before it has been substantially performed –
Section 19(2)(b)

Bigos v Bousted 1952 All 1 ER 92.

vii. Where the contract is severable.

 A contract is said to be severable where it is made of distinct units. Where the illegality affects some parts
but not others, the ones unaffected by illegality will be enforceable, unlike the ones affected by illegality –
Section 19(3), 27 of the Contracts Act.

viii. Where the contract deals with property rights.

Mistry Amar Singh v Serwano Kulubya [1963] EA 408.

Consequences of a void contract

The law is that courts are more lenient when it comes to void contracts as opposed to illegal contracts.

1. The contract will only be declared invalid only to the extent that it is necessary to safeguard public
policy.
2. Money paid is more easily recoverable under a void contract.

Herman v Charlesworth (1905) 2 KB 123.

Section 53(1) of the Contracts Act

3. When a contract is illegal, subsequent transactions from it are illegal i.e. it is void ab initio. Where it is
void, subsequent transactions may be enforceable.
4. Unaffected promises are enforceable.
Atwood v Lamont

With the aid of statutory provisions and case law, discuss the circumstances under which a contract may be
discharged by:

Discharge of a contract generally means that the obligations of the parties have come to an end. This may be done
by performance, by breach, by agreement or under the doctrine of frustration.

a) Performance
The general rule in relation to performance is that it must be carried out strictly in accordance with the
terms of the contract: the performance must be precise and exact.
Section 33(1) of the Contracts’ Act provides that ‘the Parties to a contract shall perform, or offer to
perform, their respective promises, unless the performance is dispensed with or excused under this act or
any other law.’
The general rule that performance should be precise and exact is so strict that a party who has only partially
performed his or her obligations cannot recover anything for the work he or she has done.
It is manifestly harsh so courts have developed several rules to mitigate its effects:
i) Substantial Performance
The doctrine of substantial performance arises when a party to the contract performs their side of
the bargain, but there are minor defects in such performance.
ii) Partial Performance
This arises where a party only partially performs their side of the contract but the other party,
rather than reject the work, decides to accept what has actually been done. In such an instance, the
promise will be obliged to pay for the work on a quantum meruit basis.
iii) Divisible Contracts
 The general rule that performance must be precise and exact does not apply to divisible contracts.
A divisible contract is one in which partial performance attracts an obligation to provide payment
of part of the consideration – Paul Richards, Law of Contract p. 291.
iv) Prevention of completion by one party
This arises when a party to the contract performs part of the work that they have undertaken and is
prevented from completing the work by fault or refusal of the other party. ‘When a contract
contains reciprocal promises and one party to the contract prevents the other party from
performing his or her promise, the contract shall become voidable at the option of the party who
is prevented from carrying out his or her promise.’ – Contracts Act, Section 45(1)
The aggrieved part ‘is entitled to compensation from the other party for any loss which he or she
sustains.’ – Contracts Act, Section 45(2)
The innocent party may thus sue for damages in breach of contract or may claim on a quantum
meruit basis. They may also not be liable where the other party neglects or refuses them
reasonable facilities to perform – Contracts Act, Section 56.
v) Tender of performance
This in an offer by a person who has bound him or herself to fulfil a contract to carry out his or her
obligations. To offer a tender of performance may in certain circumstances be regarded as
equivalent to actual performance. Where a party refuses or disables himself or herself from
performing a promise in its entirety, the promisee may put an end to the contract unless he or she
signifies by words or conduct, to its continuance – Contracts Act, Section 35.
Thus, where a party is willing to perform and tries to tender performance but the other party does
not accept the performance, then the party seeking to tender performance is discharged from the
contract and the non-accepting party is liable in damages for non-acceptance.
‘It is the duty of the seller to deliver the goods, in accordance with the terms of the contract of
sale.’ – Sale of Goods and Supply of Services Act, Section 34(1). Thus, if the seller has promised
to deliver the goods to the buyer and fulfils the promise, and the buyer refuses to accept delivery,
the seller may sue for breach of contract. However, the seller’s tender of performance must
conform to the rules of delivery (Section 36), especially the requirement that ‘tender of delivery
must be treated as ineffectual unless made at a reasonable hour (this is a question of fact). The
buyer must also have had reasonable opportunity to see what is delivered ad decide whether it was
what the seller was bound to deliver in terms of quantity, description, fitness for purpose and
quantity (Sections 14, 15 and 37).
vi) Time and place of performance
At common law, time is regarded as being of essence to a contract unless otherwise agreed by the
parties. Conversely, equity does not regard time as of essence and would apply equitable remedies
where there is failure to comply with time fixed for completion in the contract. Where parties
expressly stipulate that the conditions as to time have to be complied with; or the nature of the
subject matter of the contract or the surrounding circumstances show that time should be
considered of essence, equity regards time to be of essence. Where time is of essence, any delay
will amount to repudiation or avoidance of the contract.
Time is not deemed of essence under the Sale of Goods and Supply of Services Act, unless a
different intention appears in the contract [Section 11(1)]. Whether any other stipulation as to time
is of essence to the contract depends on the terms of the contract – Section 11(2). The Contracts
Act also does not regard time as of essence to the contract unless the parties otherwise agree. The
performance of a promise may be made in a manner and at any time that a promise prescribes or
sanctions – Section 42(5), and determination of what is a proper time is a question of fact –
Section 42(6). Where time is not specified, the promise shall be performed within a reasonable
time – Section 42(1). The promise may be performed during hours of business of the agreed day at
the agreed place – Section 42(2)-(4). Where time is of essence and a party does not perform within
 the agreed time, the other party may avoid or repudiate the contract and/or claim damages –
Section 47(1) & (2). The party may extend the time of performance of the contract – Section 52(b).
vii) Contracts that are impossible to perform
A contract should be capable of performance since the law does not compel a person. An
agreement to do an act which is impossible to perform is void – Contracts Act, Section 25(1). A
contract becomes void, where the contract is to do an act which, after the contract is made,
becomes unlawful or which by reason of an event which the promisor could not prevent, becomes
impossible or unlawful – Contracts Act, Section 25(2). An act is impossible if in law or the course
of nature, no person can do or perform it – Contracts Act, Section 25(4).
A person who receives an advantage under a void contract must restore it or pay compensation
for it to the party from whom he or she received the advantage – Contracts Act, Section 54(1).
Section 54(2)(a) provides for the circumstances under which a party may be allowed to retain part
of or the whole advantage received and 54(2)(b), those that discharge the party from making any
compensation for any expenses incurred.

b) Breach
When a party fails to perform their part of the contract, they are said to be in breach of the contract. A
breach of contract occurs when a party fails to fulfil the obligations imposed on them by the terms of the
contract. The innocent party is entitled to a remedy which depends on the type of breach which the other
party has committed. A breach of contract will always give rise to a claim for damages regardless of the
type of breach committed.
Breach may take two forms:
- Repudiation: this ‘occurs where a party intimates by words or conduct that he does not intend to
honor his obligations when they fall due in the future.’ – Furmston. It may be express or implied.
The determination as to whether a contractual term is a condition or a warranty depends on the
intentions of the party as deduced from the construction of the contract. Where the contract
contains no indication on its face of the status of the terms, the trial court must review the contract
within the context of its extrinsic circumstances on order to determine the intention of the parties.
Repudiation of obligations that are not yet ripe for performance is called an anticipatory breach.
This doctrine was first laid out in Hochster v De Latour. The innocent party must prove that the
other party has made their intention clear that they no longer intend to perform their side of the
bargain. The intention can be discerned from the nature of the contract, the circumstances of the
case and the motives that prompted the breach.
The repudiation of a contract by one party before the time for performance has arrived may not be
an actual breach of contract but the other party may, if he thinks fit, treat it as an immediate breach
of the contract, giving him the right to bring forward an action for damages. Where the injured
party sues for damages, he must treat the contract as having been brought to an end.
- Fundamental breach: this is a breach of the primary obligation of the contract: it goes to the root of
the contract. Whether the term breached is fundamental depends on the construction of the
contract in question. Court considers the intention of the parties and asks; “Did the parties, at the
time of the contract, regard the term as major or minor?”

Effects of breach

 The right to affirm the contract: the innocent party may decide to affirm the contract, i.e. to treat it as if it is
still in force. They, with full knowledge of the facts constituting the breach, make it clear by words or
conduct that they refuse to accept the breach as a discharge of the contract and therefore it remains in force.
Both parties retain their rights to sue for damages for past and future breaches.
  The right to treat the contract as discharged: the innocent party may accept the repudiation as discharging
the contract. All obligations of the parties under the contract come to an end, except that the guilty party
has to pay damages as a matter of law. This decision should not be taken lightly. There are two alternative
tests for determining what amounts to a fundamental breach;
- In the first instance, court looks at the importance that parties seem to have attached to the term
which had been broken. “Did the parties regard the promise which has been breached to be of
major or minor importance?”
- Secondly, court may instead look at the seriousness of the consequences that have resulted from
the breach.

c) Agreement

DISCHARGE OF THE CONTRACT

Discharge of the Contract generally means that the obligations of the parties to a contract have ended. A contract
may be discharged in four ways:

- By performance
- By agreement
- By breach
- Under the doctrine of frustration

Discharge by performance

“John contracts Tom, an engineer, to build a house for him at 150 M UGX as labour charges. The house is
supposed to be built in 1 year. The engineers builds the house, roofs it and reaches a level where only tiling
and painting are required. He has already been paid a deposit of 50 M UGX, however the engineer dies.
The administrator of his estate demands the balance but John has refused to pay.”
The general rule regarding performance is that it must be carried out strictly in accordance with the
terms of the contract. Performance must be precise and exact. In our scenario, Tom having died and
not completed the house, his widow/estate cannot claim the rest of the money.
Section 33(1) of the Contracts Act - (1)
 Re Moore & Co v Landauer & Co. [1921] 2 KB 519.
 Cutter v Powell (1795) 6 Term. Rep. 320.
 Arcos Ltd v EA Ronassen & Son [1933] AC 470.
The law, strictly applied, often produces unfair results. Equity was applied to alleviate the harshness and
rigidity caused by common law. Like most general rules, there are exceptions to the above rule of strict
performance.
i) Substantial Performance
This arises where a party has performed his or her side of their bargain but there are minor defects
in the performance of their contract. It permits the party to be paid for the substantial work done.
Hoenig v Issacs [1952] 2 All ER 176;

ii) Partial Performance

This arises where a party performs only part of their side of the contract and the other party, rather
than reject the work, decides to accept what has actually been done. In such a case, the promisee is
obliged to pay for the work on a quantum meruit basis. Partial performance differs from
substantial performance by matter of degree of completion and acceptance by the other party of
the work done.
  Sumpter v Hedges [1898] 1 QB 673;
 Godom Builders & Contractors Ltd v Departed Asian Property Custodian Board, HCCS
No. 681 of 1994.
Equity does not allow a person to unjustly enrich himself.
Section 57, 58, 60 of the Contracts Act
Leslie v Shill
iii) Prevention of completion by one party
This arises when a party does their part of the bargain but is prevented from completing their
obligation by another party.
Section 46
The innocent party can sue for damages.
iv) Tender of performance – This is an offer by a person who has bound him or herself to fulfil a
contract to carry out his or her obligations. To offer a tender of performance may in certain
circumstances be regarded as equivalent to actual performance.
Section 35 of the Contracts Act.
Section 34(1) of the Sale of Goods and Supply of Services Act.
Startup v MacDonald (1843) 6 Mann & G 593.
v) Time and place of performance
Time was regarded as being of essence to the contract, unless otherwise agreed by the parties.
Equity on the other hand, did not regard time as of essence and would apply equitable remedies to
the contract even if there was failure to comply with the time fixed for completion in the contract.
However, equity regarded time to be of essence to the contract where it was expressly stipulated
that conditions as to time had to be complied with; or the nature of the contract/surrounding
circumstances showed that time should be considered of essence. – Halsbury’s Laws of England
(4th Ed) para 481.
Where time is of essence to the contract, any delay will amount to repudiation or avoidance of the
contract. – Union Eagle Ltd v Golden Achievement Ltd [1997] 2 All ER 215.
The Sale of Goods and Supply of Services Act does not deem time to be of essence of the contract
unless a different intention appears in the contract – Section 11(1). Whether any other stipulation
as to time is of the essence of the contract depends on the terms of the contract – Section 11(2).
The Contracts Act holds the same position regarding time – Section 42(5).

vi) Contracts that are impossible to perform

A contract must be capable of performance since the law does not compel a person to do an
impossible act. Section 25(1) of the Contracts Act provides that ‘an agreement to do an act which
is impossible to perform is void.’ Section 25(2) provides that a contract to do an act which, after
the contract is made, becomes impossible or unlawful or which by reason of an event which the
promisor could not prevent, becomes impossible or unlawful. An act is impossible of performance
if in law or the course of nature, no person can do or perform it – Section 25(4).

Discharge by Breach

Where a party fails to meet their obligations, they are said to be in breach of contract – Kwalnet Technology Ltd v
Plessy Uganda Ltd, HCCS No. 634 of 2013.

The innocent party is entitled to a remedy which will depend on the type of the other party has committed. However,
a breach of contract will always give rise to a claim for damages regardless for damages of the nature of the breach.
Discharge may take two forms: repudiation and fundamental breach.

Repudiation occurs where a party intimates by word or conduct that he does not intend to honor his obligations
when they fall due – Furmston. It may be express or implied.

Express repudiation – Hochester v De La Tour (1853) 2 E & B 678.

Implied repudiation – Frost v Knight (1872) LR 7 Exch 111.

Sihra Singh Santokh v Faulu Uganda Ltd HCCS No. 517 of 2004.

Fundamental breach relates to the object of the contract. The court considers the intention of the parties to determine
whether a breach is fundamental or not.

Effects of breach

 The aggrieved party may decide to affirm the contract.

 The aggrieved party may treat the contract as discharged.
Medium Airtime v UBC

Discharge by Agreement

The General Rule: Since contracts are created by agreement, they may be dissolved by agreement - “Eodem modo
quo oritur, eodem modo dissolvitur.”

It may be unilateral or bilateral. Unilateral discharge arises where one party has fulfils its obligations while the other
is yet to do so.

Bilateral discharge arises where both parties are yet to fulfil their obligations and it may be through accord and
satisfaction; waiver; and novation.

 Accord and satisfaction

For a contract to be discharged there must be accord and satisfaction. Accord is the agreement: it must be
freely given. The satisfaction is the consideration: both parties must provide consideration.
Pinnel’s case
Petrol Uganda Ltd v Mwesigwa
 Waiver
This arises where one party is prepared to waive or vary the terms of the agreement.
Section 67 of the Contracts Act
“Kenneth agrees to sell a motorcycle to Peter at 10 M UGX, to be delivered in one month’s time. Two days
to the expiry of one month, Kenneth calls Peter asking for one more month to deliver the motor cycle. Peter
accepts.” Both Peter and Kenneth are discharged of the original agreement by the extension.
Charles Richards v Oppenheim [1950] 1 All ER 420.
 Novation
Where the parties agree to substitute the original contract with a new agreement, the terms of the old
agreement may not be enforced/binding. A novation can transfer rights and obligations of the parties;
requires the consent of the party that benefits from the transfer and extinguishes the original contract.

For there to be an effective novation, there must be:

 - Evidence on basis of which it can be deemed that the parties met and with their consent, the
agreement was put through.

Discharge by frustration.

Frustration arises when a party is prevented from performing its obligations by unforeseen circumstances beyond
their control. In such a situation, a party is allowed to plead frustration.

Whether a contract is frustrated depends on the particular facts of the circumstances.

*Pay attention to the dates of problem questions to not confuse common mistake with frustration.*

Section 66 of the Contracts Act.

Circumstances that lead to frustration

 Destruction of the subject matter of the contract.

This may arise in instances of common mistake and in instances of frustration.
*there is a tendency to confuse initial impossibility to perform a contract with subsequent impossibility to
perform a contract.*
In common mistake, there is initial impossibility to perform the contract; it is void ab initio - Res Extincta.
“X agrees to sell a car to Y. They enter into a contract, unaware that the car has been destroyed by fire.”
In frustration, there is subsequent impossibility to perform the contract.
“The car is destroyed after the contract has been signed.”
In both cases, parties cannot perform their obligations because the subject matter is destroyed.
Taylor v Caldwell (1647) Aleyn 26.
Section 7 & 8 of the Sale of Goods and Supply of Services Act on common mistake and frustration
respectively.

 Government intervention or supervening illegality

 Nonoccurrence of an event central to the contract
The question is: does the non-occurrence render the object or purpose of the contract defeated and thus
frustrated?
Krell v Henry [1903] 3 KB 740.
Herne Bay Steamboat Co. v Hutton [1903] 2 KB 683.
 Self-induced frustration
Where the event arises out of the actions of the parties to the contract, the court will not readily allow the
plea of frustration.
 Where frustration is expressly provided for in the contract
The force majeure clause – a provision providing for a supervening event.

The legal effect of frustration

At common law, from the date of the supervening event, the parties were released from all future contractual
obligations but any obligations that had already arisen under the contract had to be performed.

Chandler v Webster [1904] 1 KB 493.

Fibrosa Spolka Akcyina v Fairburn Lawson Comber Barbour Ltd [1943] AC 32 – Total failure of consideration.

Section 66 of the Contracts Act provides for instances of frustration.

Where a party has alternative means of concluding a contract, they need to see if frustration can be upheld by the
court.

THE LAW OF AGENCY

Defining an agency.

Section 118 of the Contracts Act contains the definitions for a principal and an agent.

“Agent” means a person employed by a principal to do any act for that principal or to represent the
principal in dealing with a third person;

“Principal” means a person who employs an agent to do any act for him or her or to represent him or her in
dealing with a third person;

“Sub-agent” means a person employed by and acting under the control of an agent in the business of the
agency.

The relationship that exists between two persons when one, called the agent, is considered in law to represent the
other, called the principal, in such a way as to be able to affect the principal’s legal position in respect of strangers to
the relationship by making of contracts in dealing with a third person. – Fridman.

Agency is therefore a situation where a person called a principal appoints another known as an agent to deal with a
third party on his or her behalf. Quic facit per alium facit per se – he who acts through another does the act himself.

Selle & another v Associated Motor Boats Company & Others [1968] EA 123

The second appellant fell on the quay while disembarking from a motor boat, which was part of a fleet, ran by a
number of boatmen on behalf of the respondent. The appellants sued for damages on grounds that the second
appellant’s fall was caused by the negligence of the respondents’ servant or agent. He “suddenly seized her arm and
so negligently and forcibly pulled her forward as to cause her to fall violently to the ground.”

Court held that where a person delegates a task or duty to another, not a servant, to do something for his benefit, or
for the joint benefit of himself and the other, whether that other person be called agent or independent contractor, the
employer will be liable for the negligence of that other in the performance of the task, duty or act. Such liability is
an application of quic facit per alium facit per se. It exists in the same kind of circumstances as that of a master for
those of his servants if “scope of authority” is substituted for “course of employment” (at least in regard to use of
vehicles.

“J purchased a vehicle that she is too busy to sell. She engages D to sell the vehicle at an agreed
commission of 5% of the buying price. D finds a buyer who agrees to the price wanted by J. D signs an
agreement with the purchaser on behalf of J. The purchaser after one week discovers that the engine is
defective. Advise the parties.”

The law of agency seeks to protect purchasers who deal with agents on behalf of the principal.

Types of agents

Auctioneers; Estate Agents; Directors; Law firm partners; Factors; Brokers; del credere agents etc.
Creation of an Agency

A person who has the capacity to contract may create an agency. Section 119-120 of the Contracts Act provides that
a person may appoint an agent to act on his behalf, provided that both are eighteen years and more; of sound mind;
and each of them is not disqualified from acting in that capacity by any law to which he or she is subject. Although
the general law of contract requires consideration for the existence of a valid contract, an agency may be gratuitous.
Agency may arise in any of the ways described below:

 Actual Authority
This is where the principle gives the agent authority to act on his behalf. This may be express or implied.
Section 122(1) & (2) provide to this effect.
Direct Domestic Appliances v Nile Breweries Limited – Court held that to establish an agency requires the
consent of the principal and agent to do so and such consent may be express or implied. Court may take
into account words written and spoken in the ordinary course of a dealing in order to determine whether an
agency exists, depending on the circumstances of each case – Section 122(3).
Ireland v Livingston – defendant wrote to plaintiff asking him to deliver 500 tons of sugar: ‘Fifty tons more
or less of no moment, if it enables you to get a suitable price.’ The plaintiff shipped 400 tons, presumably
intending to ship the rest in another vessel. The defendant refused to accept the shipment and wrote to the
plaintiff asking him to cancel any further shipment. The House of Lords held that the defendant was bound
to accept the sugar.
- It is more prudent to appoint an agent expressly in writing by giving him a power of attorney in
certain transactions such as the sale of land. A power of attorney is a document that gives the
agent the power to act for a principal. Under such, an agent can be given broad legal authority, for
example ‘to sell a house and any other act necessary for carrying out the transaction.’ The agent
may have limited authority, fore example ‘to sell the house as it is and no more.’
Whether implied authority exists or not is subject to an objective test. It usually arises out of an express
authority because an agent’s authority is not necessarily confined to only those matters expressly referred to
by the principal. The agent has implied authority to carry out matters incidental to the performance of his
duties under the express authority. Mullens v Miller – court held that an estate agent has implied authority
to make representations relating to a property when conducting negotiations with a prospective buyer.
Section 123(1) & (2) – an agent with authority, whether express or implied, can do any lawful act and can
undertake business and do anything which is necessary for the carrying on of that business.
 Apparent/Ostensible authority arises where a person acts in such a way to lead people to believe that
another person is their appointed agent
Court may allow the principal to deny that the other person is his or her agent. Ostensible authority forms
an extension of the doctrine of estoppel - Rama Corporation Ltd v Proved Tin and General Investments. It
arises where a principal, by words or conduct, creates an impression that the agent is entitled to act on his
behalf, where in fact no such authority exists. Notwithstanding that, the agent acts within this apparent
authority as such; he or she will bind the principal to a third party.
Lord Cranworth in Pole v Leask: “No one can become an agent of another person except by the will of that
person. His will may be manifested in writing, or orally or simply by placing another in a situation in which
according to the ordinary rules of law, or perhaps it would be more correct to say, according to the ordinary
usages of mankind that other is understood to represent and act for the person who has placed him…this
proposition, however, is not at variance with the doctrine that where one has so acted as from his conduct to
lead another to believe that he has appointed someone to act as his agent, and knows that person is about to
act on that belief, then unless he interposes, he will in general be estopped from disputing the agency,
though in fact no agency really existed.”
 To establish ostensible authority, the key elements of estoppel must be met:

- There should be an express or implied representation, which is relied upon the third party leading
to an alteration of his or her position. – Freeman and Lockyer v Buckhurst Properties Ltd: the
articles of association of a company granted it powers to appoint a managing director. Y with the
knowledge and approval of the board of directors acted as a managing director, although his
appointment was never confirmed. Y then entered into a contract with a firm of architects on
behalf of the company. The company argued that it was not liable because Y had no authority to
act on behalf of the company because his appointment was not confirmed. Court held that the
company was liable, as it had represented that Y was its managing director and third parties relied
on that representation. The company was estopped from denying his apparent authority and was
thus bound by the contract.
 Usual Authority
This authority binds the principal to a contract entered into by his agent where the latter has no express, implied
or apparent authority to act.
Watteau v Fenwick 1893 1 QB 346: F owned a hotel and appointed H a manager. H was expressly forbidden
from buying any goods other than mineral water and bottles of beer. H had previously owned the hotel and his
name remained above the door as the license. H ordered cigarettes from W, who believed he was the owner of
the hotel. F was liable for the price of the cigars, since a principal whether disclosed or not, was liable for the
acts of an agent acting within his authority. The limits of the decision are clear: it will not apply where the agent
acts for himself or herself, or where the third party knows, or reasonably ought to know of the restriction of the
agent’s authority.
Court in NIS Protection (U) Ltd v Nkumba University relied on Watteau v Fenwick to hold the respondent liable
for general and special damages for breach of contract, interest and costs. The parties had entered into a contract
for provision of security services, which was signed by a guard on behalf of the plaintiff and by the managing
director of the University. The defendant later stopped the plaintiff from deploying staff for performance of the
contract, arguing that the security officer had acted without authority.

 Agency by Necessity

A principal may be bound by a contract made by an agent on his or her behalf but without authority in case of an
urgent necessity or an emergency. Agency of necessity arises when a person is faces with an emergency in which
the property or interest of another, which are his responsibility, are in imminent danger and it becomes necessary, in
order to preserve the property or interest to act for that person without authority. Section 127 of the Contracts Act
provides for Agency by Necessity.

Argos case – the master of a ship, is entitled in cases of emergency to enter into a contract, which will bind the
owners of the cargo, notwithstanding that it is out of the scope of his or her authority. A land carrier may also
dispose of perishable goods without authority in case of an accident or emergency – Sachs v Miklos. The acts of the
agents should have been done bona fide in the interest of the owners of the cargo or goods.

 Presumed agency

This is the kind of implied agency that arises out of cohabitation of husband and wife. Although it is not expressly
mentioned, it can be inferred from ‘where authority is inferred from the circumstances of a case.’ While in
cohabitation, a wife is entitled to pledge her husband’s credit for necessaries which are suitable for their station in
life.

Debenham v Mellon – there is a presumption that she has such authority in the sense that a tradesman, supplying her
with necessaries upon her husband’s credit and suing him, makes out a prima facie case against him, upon proof of
that fact and of cohabitation. But this is a mere presumption of fact upon the supposition that wives while cohabiting
with their husbands ordinarily have authority to manage and to pledge their husband’s credit in respect of matters
coming within those departments.

Philipson v Hayter defines ‘necessaries’ as ‘things that are necessary and suitable to the style in which the husband
chooses to live, in so far as the articles fall fairly within the domestic department which is ordinarily confided to the
management of the wife.’

The presumption may be rebutted by the husband by proving that the goods supplied were not necessaries and
therefore the wide is liable on her own right. Such law is unfortunate, from a gender perspective. It presumes that
women (wives) are incapable of providing for themselves; deemed dependent on their husbands and restricted to the
domestic sphere.

Nanyuki General Trading Stores v Peterson 15 EACA

 Ratification

Where a person acts without authority, or exceeds their authority, their actions cannot bind the principal on whose
behalf they purport to act, However, the principal may decide to ratify or adopt the contract so that he or she will be
bound by it.

Section 130(1) of the Act provides for ratification. It may be express or implied from the unequivocal conduct of the
principal – Section 131; Marsh v Joseph. The principal can only ratify acts which the agent purported to do on the
principal’s behalf – Keighley, Maxted & Co. v Durant.

i) The agent must first contract as an agent. They must disclose the existence of the principal since an
undisclosed principal cannot ratify the act of an agent – Keighley, Maxted & Co. v Durant.
ii) The principal must be in existence – NEC v Nile Bank Ltd: “If a person contracts with a non-existent
principal, that person may be found personally liable on the contract.” Kelner v Baxter: the promoters
of a company purchased a quantity of wine on behalf of a company that had not yet been formed or
incorporated. After the company was formed, it purported to ratify the contract entered into by the
promoters. It was held that since the company was not in existence at the time, ratification was not
possible and the contract could not be enforced against the company.
Section 54(1) of the Companies’ Act departs from this position, nonetheless. It provides that pre-
incorporation agreements are binding on the company, which may adopt or ratify them (Section 54(2)
& (3))
iii) The principal must be competent. They must have the capacity to enter into the contract at the time the
agent did so on their behalf – Dibbins v Dibbins [1896] 2 Ch 348.
iv) The actions must be capable of being ratified. Contracts that are void ab ignition e.g. due to illegality
are incapable of being ratified – Brook v Hook (1871) LR 6 Exch 89
v) The actions of an agent are capable of being ratified where the Principal is aware of the facts of the
particular case – Section 132.
vi) Where a person ratifies an unauthorized act done on their behalf, the whole transaction of which the act
forms part is accordingly ratified – Section 133. The principal cannot choose to ratify some parts of the
contract and not others: they must ratify the whole contract. They cannot ratify an unauthorized
contract that is prohibited by statute.
vii) Ratification should not subject a third party to damages or terminate his or her right or interest –
Section 134.
Ratification operates retrospectively: the principal’s authority relates back to the time when the agent did the
unauthorized act. It validates the agent’s actions from the time when those actions from the time those actions took
place – Koenigsblatt v Sweet [1923] 2 Ch 314.

It must take place within a reasonable time after the unauthorized act; what a reasonable time is will depend on the
facts of each case. Furthermore, the restorative effect of ratification will not be allowed to deprive a stranger to the
contract of any property rights which had vested in him before ratification - Bird v Brown (1850) 4 Exch 786.

Duties of an agent to the principal.

 To conduct business according to the principal’s directions and render true accounts
- To conduct the business of a principal according to the instructions given by the principal –
Section 145(1).
- Where the agent acts contrary to the directions of the principal, they have to make good the loss
and account for any profits that may accrue – Section 145(2); Turpin v Bilton – an agent agreed to
insure his principal’s ship. He failed to do so, which meant that when the ship was lost, the
principal was uninsured. It was held that the agent was liable for breach of contract. However, the
agent is not obliged to do something that is illegal, or null and void at common law – Cohen v
Kittel.
- Where there are no directions from the principal, the agent must act in accordance with the usage
and customs that prevail at the material time – Section 152
- To keep accurate accounts of all transactions entered into on behalf of his or her principal and
render proper accounts on demand – Section 147.
- The agent must keep the money and property of his principal separate from his own.
- To pay all sums received, less his or her remuneration – Section 152.
- The principal may repudiate the transaction where any material fact was concealed from them –
Section 149.
- The principal may also claim any benefit that may have accrued to the agent from the transaction –
Section 150.

An agent is in a fiduciary relationship with the principal. This is largely because the agent has power to affect legal
relations of his or her principal, who normally places trust and confidence in the agent with regard to the exercise of
that power.

- An agent has a duty not to put himself in a position where his duties conflict with their own
interests, or the interests of another principal – Armstrong v Jackson: the plaintiff instructed the
defendant, a stockbroker, to buy shares in a certain company for him. Although the defendant
purchased the shares on the open market, he actually sold his own shares in the company to the
plaintiff. On discovering the truth some years later, the plaintiff claimed to have the transaction set
aside. Court upheld the claim and ordered the defendant to repay all sums paid by the plaintiff for
the shares.
Lord Cranworth in Aberdeen Rly Co. v Blaikie Bros: “…no one having fiduciary duties to discharge,
shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting,
or which may possibly conflict, with the interests of those whom he is bound to protect.”
 Unless he makes full disclosure to his principal and obtains their consent, an agent must not make
secret profit out of his or her relationship with the principal and must account for any profits made by
virtue of confidential information that comes his or her way because of his position as an agent –
Boardman v Phipps [1967] 2 AC 46. An agent must also account for any commission paid to them
without the knowledge of the principal – Boston Deep Sea Shipping and Ice Co v Ansell (1888) 39 Ch
D 339: the defendant was working as a managing director of the plaintiff company. Acting on their
 behalf, he contracted for the construction of certain fishing smacks, but, unknown to the company,
took a commission from the shipbuilders. He also accepted bonuses from two other companies, in
which he held shares, with which he had placed orders on behalf of the principal company. Court held
that the receipt of the commission was good ground for dismissal and ordered the defendant to account
for his secret commission and bonuses. Bowen, LJ:
“…An agent employed by a principal…who unknown to that principal or master, takes from that
other person a profit arising out of the business which he is employed to transact, is doing a
wrongful act inconsistent with his duty towards his master, and the continuance of confidence
between them. If it is a profit which arises out of the transaction, it belongs to his master, and the
agent has no right to take it, or keep it, or so bargain for it, or to receive it without bargain, unless
his master knows it.”
 To act with due care, skill and diligence
- An agent must exercise reasonable care and skill in the performance of his or her undertaking.
Section 146(1) of the Act provides that an agent shall act with as much skill as is generally
possessed by a person engaged in similar business, unless the principal has notice of the lack of
skill by the agent. Thus the agent must carry out the principal’s directions with reasonable care,
skill and diligence – Marianne Wither v Arbon Langrish and Southern Ltd [1966] EA 292.
The standard of care depends on a particular case. Chaudry v Prabhakar: the plaintiff had just
passed a driving test. The asked the defendant to find a second-hand car, which had not been
involved in an accident, for her to buy. P agreed to do so for no payment. C knew nothing about
cars, unlike P. The latter found a car for sale by someone who was a car sprayer and a panel-
beater. P noticed a dent in the bonnet but did not make enquiries about whether the car had been
involved in the accident. C bought the car and later discovered that it had been involved in an
accident and was not roadworthy. The trial judge gave judgment for C and the appeal arising
therefrom was dismissed.
 To act personally
- Section 125(1) of the Act provides that an agent shall not employ another person to perform an act
by which the agent expressly or impliedly undertook to perform personally. This rule is expressed
in the Latin maxim “delegatus non potest delegare” – a delegate cannot delegate.
A delegate is only allowed to sub-delegate where the authority to do so is expressly conferred by
the instrument of appointment, or can be implied from the ordinary customs of a trade or the
nature of an agency – Section 125(2) & (3).
An agent is responsible for the actions of the sub-agent – Section 126(1) & (2); and the latter shall
be responsible for his or her own acts to an agent except in instances of fraud.
De Bussche v Alt – court found a sub-agent liable to account to a ship owner for his profit off
selling a ship. Thesiger, LJ: “…where in the course of the employment, unforeseen emergencies
arise which impose upon the agent the necessity of employing a substitute [sub-delegate]; and that
when such authority exists and is duly exercised, privity of contract arises between the principal
and the substitute, and the latter becomes as responsible to the former for the due discharge of the
duties which his employment casts upon him, as if he had been appointed agent by the principle
himself.”

Duties of a principal to an agent.

 Consideration is not necessary to create an agency. Thus, where a person is a gratuitous agent,
remuneration will neither be expected nor demanded. However, an agent will be entitled to remuneration
from their principal and there is an express or implied term to that effect. Where there is an agreement to
pay remuneration, the principal has a duty to meet their side of the bargain – where they have expressly or
impliedly agreed to pay the agent for his or her services.
Oriental Insurance Brokers Ltd v Transocean Uganda Ltd – the appellant sued the respondent in the High
Court for 46,126,635 shillings. The appellant was contracted by the respondent to procure insurance covers
in respect of fire, burglary and customs bonds. The respondent obtained the necessary insurance covers and
customs bonds and subsequently terminated the contract unilaterally. At the time of the said termination,
the respondent owed NIC 37 million in respect of unpaid premiums for insurance covers and customs
bonds arranged by the appellant for the respondent. Although the respondent promised to pay the appellant
the outstanding insurance premiums at the time of termination of the contract, it never did so. The appellant
had also brokered insurance covers from Universal Insurance Co. for the respondent, for which the latter
owed 8 million shillings.
Court held that an insurance broker/agent is entitled to sue the insured for premiums not paid to the broker
and for commissions due from the insured in respect of insurance policies or covers procured by the broker.
This is the only way by which the broker can recover his commission on outstanding premiums, and pass
the premiums so recovered to the insurer. Court observed that, generally, the principles of the law of
agency apply to the relationship between the broker and the insurer on one hand and between the broker
and the insured on the other. Where the insurer holds out the broker as his agent, the broker has ostensible
authority to bind his insurer as his principal.

- Where there is no express agreement as to the payment of remuneration, the agent may be paid on
a quantum meruit basis. In Way v Latilla, the defendant agreed to with the principal to send the
latter information concerning gold mines and concessions in West Africa. Although the principal
led the agent to believe that he would receive an interest in any concession obtained, no terms as
to remuneration were expressly agreed between the parties. The House of Lords held that the
agent was entitled to a reasonable remuneration on an implied contract to pay him a quantum
meruit.
Whether a term as to payment is to be implied depends on the normal rules as to the implication of
terms into contracts. Thus a term as to payment may be implied by trade usage, on grounds of
business efficacy, or to give effect to the intention of the parties.
- In the case of a professional that is hired to act as an agent and there is no term as to the effect of
remuneration, there is a strong presumption that he or she is to receive remuneration for his or her
services – Miller v Beale. What is reasonable may depend on the trade, profession or business in
which the professional is employed. Any implied term must not be inconsistent with an express
term in the agency contract.
- Unless there is a special contract between the principal and the agent, the entitlement to
remuneration only arises where the agent has completed the act in accordance with his or her
agreement with the principal – Section 153.
- An agent who acts outside the scope of his or her authority or is guilty of misconduct or commits a
breach of his duties as an agent is not entitled to remuneration – Section 154; Mason v Clifton;
Boston Deep Fishing and Ice Co. v Ansell; Hippisley v Knee Brothers [1905]1 KB 1
- In order to claim remuneration, an agent must show that they caused the transaction. In Alfa
Insurance Consultants v Empire Insurance Group, the appellants sued the respondents for a sum
of 15 million shillings as balance on their commission for brokerage work they did for the
respondent. It was held that the appellant could only be entitled to what was a reasonable rate of
the commission in the circumstances of the case – citing McNeil v Law Union & Rock Insurance
Co. Ltd: where an agent (or a broker) is claiming a commission upon a certain transaction, he must
show that he was an efficient cause of that transaction. To be a complete cause, the agent need not
take part in all the negotiations. It is not enough for him to prove that he introduced the parties to
each other.
 - The agent has a right to retain part of the monies received on account of the principal as
remuneration – Section 151.
 To indemnify the agent

Indemnity arises where a person under contract takes on the obligation to pay for any loss or damage that has been
or might be incurred by another individual.

- The principal is under a duty to indemnify the agent for any loss or liability arising from all lawful
acts done in good faith – Section 156; Gundle v Mohanal Sunderji 18 KLR 137.
 The right to indemnity arises as an express or implied term of the contract – Rhodes v
Fielder, Jones and Harrison (1919) 89 LJKB 15. The right may, however, be excluded by
the parties or by a term implied through the custom of trade.
- The principal is not liable to indemnify an agent for criminal acts – Section 157.
 Exercise of a lien

A lien is the right of an agent to retain goods or other property until he or she is paid the remuneration. Section
155 of the Contracts Act permits this unless there is a contract to the contrary.

- The right of lien is only a possessory right that gives the agent no right to sell the goods to settle
the debt.
- The agent can only exercise a lien over their principal’s goods if they lawfully acquired possession
of them in the course of the agency – Taylor v Robinson (1818) 2 Moore CP 730.
- He should obtain a court order unless there is a contract allowing him to sell without resort to
court.
- Since a right is possessory, the agent loses the right when they part with the goods in question.

How an agency may be terminated:

Authority of an agent may be terminated by an act of either party or by operation of law. Section 135 of the Act
outlines the following circumstances under which an agency may be terminated;

a) A principal revokes his or her authority

b) An agent renounces the business of the agency
c) The business of the agency is completed
d) A principal or an agent dies – Camponari v Woodburn
e) A principal or an agent becomes of unsound mind – Drew v Nunn
f) A principal is adjudicated an insolvent under the law – Elliot v Turquand
g) A principal or agent agree to terminate
h) The purpose of the agency is frustrated – Marshall v Glanwill

In terminating agency, special attention should be paid to the agent’s interest in the affected property – Section 136.

Revocation can only take place before the authority to bind the principal is partly or wholly exercised – Section 137;
Frith v Frith [1906] AC 254. It may be express or implied from the conduct of the principal or agent, respectively –
Section 141 and a party who revokes or renounces must give reasonable notice to the other party and make good the
damage suffered – Section 140.

In order to take the effect, termination of the authority of the agent must be made known to the agent and the third
party – Section 142.
Where the principal dies or becomes of unsound mind, the agent shall take all reasonable steps to protect and
preserve the interests entrusted to him or her – Section 143.

Termination of an agency is prospective and not retrospective.

QUESTION APPROACH

Problem Questions:

 No need to summarize facts in a contract law paper.

- Where there is a glaring gap in the facts, bring it to the attention of the invigilator. Do not assume
facts.
- “Would your answer have been different if…” in such an instance, provide answers accordingly.
 Facts should lead one to identify the relevant legal issues.
- Legal issues are matters of controversy/dispute between the parties.
- Pay attention to the particular party that the examiner wants one to advise.
- When formulating issues one may use “Whether” or question matters. State the matter that the
court is going to decide. Clearly number the issues.
- Consider the plaintiff, the defendant and the judge to be the parties involved in a problem question
and their viewpoints.
 Resolving the issues.
- Deal with one issue at a time. Be clear and coherent.
- Number the issues and be concise as you answer.
- As you resolve the issue, do not omit relevant issues because they have been handled before. Start
with the law applicable – the relevant section of the law: Constitutional provisions, Acts of
Parliament (Principal legislation), Subsidiary legislation and then case law.
- Where there is a local case, begin with that because it is a binding precedent. Other cases serve a
persuasive purpose, much as they are cited with approval.
- Refer to the facts and resolve the issues using the relevant law.
- It is not consequential to include the “law applicable” section.
 - One is at liberty to bring out the arguments for both parties, plaintiff and defendant…and where
there is uncertainty, explain the nature of the uncertainty and make a suggestion as to how this can
be resolved.
- Avoid irrelevance and breaking down issues into sub-issues.
 Advising the parties
- Where the party is specified, limit the advice to that particular party.
- Briefly recant part of the analysis in the resolution of issues on which you would base to advise
the party to follow a given course of action.
- Include available remedies to the parties and use statutory provisions to justify your suggestion.

Essay questions

There are 3 types of essays

1. Complex essays
“Discuss/examine the factors that discharge a contract.” or “Discuss the factors that vitiate a contract.”
2. Brief Essays
“Discuss the consequences of illegality to a contract.” or “Write a short paper on circumstances that vitiate
a contract.”
3. “Write brief/short notes on the following: a) Misrepresentation”
Here, pay attention to the marks awarded. The level of detail required depends on the marks awarded to the
question.