Theoretical Foundations

of Contracts

Outline
Introduction
 Freedom of Contract
 Sanctity of Contract
 Contracting Parties Beware
 Protecting Innocent Third Party Purchaser
 Reasonableness
 Intolerance of Fraud
 Introduction
 Theoretical foundations refer to the
philosophical justifications, and principles that
are covered in contract law.
 It looks at why contractual transactions should
be respected and enforced
 It also covers why other transactions are
excluded from being enforced
 The principles are dependent on each other
(1) Freedom of Contracts
 This is the liberty that people have to enter
into any valid contract of their choice
 The contracting parties are free to set their
own terms
 The contracting parties must have capacity to
enter into contract
 The transaction entered into must be legal
(1) Freedom of Contracts
 Parties with capacity to contract include:
Corporate bodies, adults with sound minds, etc
 Parties without capacity include:
Bankrupt, the insane, the terribly drunk,
infants (those less than 18 years)

 Note: infants can enter into contracts of

necessaries.
 (2) Sanctity of contracts
 Contracts freely entered into by parties with
capacity are treated as sacred

 The law is concerned with the freewill of the

parties and not the fairness of the terms of a
valid contract

 It assumes that consideration must be sufficient

and not necessarily adequate
 (2) Sanctity of contracts
 Reasons why courts uphold sanctity of
contracts:
1. The court respects the terms of contracting
parties and will not alter it
2. Courts consider themselves incompetent, and
are therefore reluctant to change the terms of
contracts validly entered into by parties.
 Note: sanctity of contract is not a license for
fraud or to deceive the illiterate and the blind
 (3) Contracting Party Beware
(the caveat – Warning or Beware)
 The buyer beware (caveat emptor) and the seller
beware (caveat venditor)

 A contracting parties must be ever careful and

vigilant under the contract

 All parties must take due diligence about the

nature of contracts and the character of the
person they intend to contract with
 (3) Contracting Party Beware
(the caveat – Warning or Beware)
A contracting party must observe the following:
 Inspect or undertake due diligence measures
 Obtain written warranties and indemnities
from the other contracting parties
 Seek for professional advise – lawyers, valuers,
accountants, etc
 Obtain appropriate insurance cover against
damage, loss or liability
 (4) Protecting the Innocent
Third Party Purchaser
 A third party is someone who is not a party to a given
transaction

 A purchaser is the one who obtains the benefit or

good by providing consideration for it
Note: if consideration is absent, the person is
called a volunteer.

 A third party, who without notice of fraud, obtains a

contractual benefit is entitled to keep it.
 (5) Reasonableness
 Reasonableness is the law’s best friend. The
court always considers what is reasonable
 Reasonableness means normal, moderate or
regular conducts
 What is reasonable in law is always a question
of fact
 Courts imply reasonable terms and ascribe
them to the parties when it is necessary to do
so
 (5) Reasonableness
Reasonableness features in the following area of
law:
 Implied terms
 Quantum meruit
 Exemption clauses
 Mitigation of damages
 Remoteness of damages
(6) Intolerance of fraud
 Fraud omnia vitiate: fraud vitiates everything
 Fraud may manifests both in words and in
conducts
 The one who says he will do what he knows he
will not do has by words committed fraud
 If Kofi goes into a shop, dressed as an army
officer, which he is not, and does this to gain
credit which otherwise he will not get, he is
guilty of false pretense
 (6) Intolerance of fraud
 Fraud makes a contract voidable

 The objective of fraud is to induce by willful

falsehood or to obtain by false pretense

 The standard of proof of fraud in a contract

case is proof beyond reasonable doubt