MODULE 10: FUNDAMENTALS OF THE LAW OF CONTRACT
10.1. Learning Objectives
At the end of this module you should be able to:
(i) State what constitutes a contract.
(ii) State who may be bound by a contract.
(iii) List why and how a contract may be invalid.
(iv) State when and how the parties to a contract will cease to be bound.
(v) List the remedies that may be demanded by an aggrieved party to a contract.
10.2. Law of Contract
10.2.1. Definition
In the simplest terms, a contract is a legally binding agreement. The definition of a contract shows that
there is a certain level of legality entailed in its constitution, such that for an agreement to be a contract,
it must be something that the law would intervene in to enforce or something that the law recognises.
10.2.2. Classification of contracts
A contract may be made orally (a parol contract) or in writing (a written contract).
(a) Oral contract: A contract may be expressed, in which it states clearly the intention of the parties
or implied, in which the intention of the parties must be derived from their actions or established
practice. A contract may be unilateral where one party furnishes consideration for the other, or
bilateral, where there is a mutual exchange of promises between the parties.
(b) Written contract: It may be made under seal, which means it carries the seal of a person, natural
or juristic. Where a contract is under seal, there will be no need for consideration, and where
there is no seal one of the parties must furnish consideration to enforce the promise of the other.
10.2.3. Elements of Contract
The main elements of a contract are offer, acceptance, consideration, intention to create legal relations,
and capacity to contract.
(a) An Offer: An offer is a proposal to enter into an agreement, an offer may be directed at a specific
person or group of persons or to the world, and an offer is made by an offeror to an offeree.
There is also an invitation to treat, which means an open proposal to engage, which may be responded
to with an offer stating the terms of engagement, an invitation to treat also means an offer for negotiation.
An offer may be terminated by lapse of time, revocation before acceptance, or the lapse of time or
rejection by the offeree unless, under very special circumstances, termination of an offer will no longer
be possible once there has been communication of a valid acceptance of an offer.
(b) Acceptance: An acceptance is a final, unqualified, unequivocal, and unconditional adoption of the
terms of an offer.
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A counter-offer is a qualified assent to the terms of an offer and does not constitute a valid acceptance,
however, silence does not constitute a valid acceptance, but the conduct of the parties may indicate an
acceptance of the offer.
A conditional acceptance is not a valid acceptance, as it does not comprise an unqualified assent to the
terms of the offer and usually depends on the acceptance of the condition by the offeror. But a written
acceptance becomes active from the time it is received by the offeror.
(c) Consideration
In order for a party to make a legal claim based on a contract, they must show that they are entitled to a
benefit or have incurred a loss. The reason for this is that a party who makes a claim based on the promise
of another must show that they are entitled to make that claim based on some reciprocal action on their
part validating their claim to the execution of the promise.
Consideration refers to a benefit conferred or a loss incurred in exchange for a promise made by another.
Consideration must not be equal to the promise but must be sufficient as an exchange. Consideration
must be given after the promise is made, so it must be in exchange for a promise that has been made.
(d) Intention to enter into legal relations
For a contract to be enforceable by the courts of law, the parties to such an agreement must show, not
only that there had been an offer, an acceptance, and consideration; but also the parties intended to create
a legal relation. Where there is an offer, an acceptance, and consideration, this would almost always
mean that there is a valid contract, but the situation may be one in which the parties did not intend for
their agreement to be legally binding and therefore unenforceable, in which case, the courts would not
be in a position to compel fulfillment of such an agreement.
An agreement may have all the stated elements of a contract but exist in a relationship that is not
governed by legal obligations, but rather by social or other duty, and so would not be legally enforceable.
For example, the relationship between a parent and a child.
Privity of contract: It is only the parties to a contract that are entitled to enforce that contract, even if
they are not the only ones who benefit or suffer loss from the execution of the terms of the contract.
However, under certain circumstances, a person who is not a party to a contract may be entitled to enforce
the contract. These are (i) when a party has entered into a contract involving the land; (ii) in case of
consumers’ protection right; (iii) trusts (the person that is supposed to benefit from the trust agreement,
though not a party to the trust agreement itself he/she may sue the trustee to carry out the contract); (iv)
third party insurance (even though the third party didn’t pay premiums, they can still claim on an
insurance policy made in their favour).
(e) Capacity to contract: Apart from being a party to a contract, it is important to explain who can be a
party to a contract in order for a contract to be valid, and for its parties to make claims under it.
There are certain groups that generally do not have the capacity to enter into a valid contract, in which
case the question of capacity would not even arise. Some of these groups include children, illiterates,
future companies, persons of unsound mind or mentally incapacitated, and drunken persons.
The reason for denying certain people the capacity to contract is that such groups are regarded under the
law as lacking the necessary mental, physical or social features necessary to enter into a legal contract
in which they bind themselves and others.
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10.2.4. Terms of Contract
Terms of the contract refer to the conditions of the contract that govern the rights and obligations of the
parties under the contract. Different terms in a contract carry varying degrees of importance, as one term
may be fundamental to the existence or abidingness of the contract, while another term may be merely
declaratory.
Terms of the contract may also be expressed or implied, and the court will consider a number of factors
to determine the intention of the parties where there are implied terms in a contract. Implied terms may
be inferred from the trade custom or usage, based on necessity or business efficacy.
Express terms of a contract will override implied terms, no matter how established the custom
constituting the implied term is, because the express terms constitute the clearest expression of the
intention of the parties.
10.3. Vitiating Elements or Factors that make Contract Ineffective
A vitiating element makes a thing imperfect or invalid. That is, it vitiates or frustrates it. Therefore, a
contract may be made void or voidable by vitiating element, a contract is void ab initio if it missing a
fundamental or material element or if it is illegal, but a contract is voidable where it is valid and
enforceable until it has been set aside at the instance of any of the parties.
An illegal contract is a contract that is against the law, involves criminal liability, and is therefore
unenforceable by the courts. It is void ab initio. All illegal contracts are void contracts; hence an illegal
or void contract is unenforceable.
10.4. Illegality and Unenforceable Contracts
According to Halsbury’s Laws of England, 3rd Edition, vol.8, 126, paragraph 218, a contract is illegal
“where the subject matter of the promise is illegal or where the consideration or any part of it is illegal”
such a contract is void ab initio and unenforceable because the courts will not enforce illegality.
There are certain vitiating elements that would make a contract void or voidable. Usually, these elements
influence the decision of the parties in entering into the contract, and where they are false, the courts will
intervene to ensure that parties are not forced to enforce contracts that they have not freely or voluntarily
or voluntarily entered into. Some of the vitiating elements are:
Mistake: A mistake is a situation under which the intention or consent of the parties into a contract is
nullified by the existence of a condition or circumstance that was unknown to the parties at the time of
entering into the contract.
Misrepresentation: A misrepresentation is a false statement that influences the decision of a party to a
contract to enter into a contract. The statement comes from a party to the contract and may be made
fraudulently to influence the other party to enter into the contract based on the wrong information
provided by the other party.
Duress: In entering into a contract, the parties must be clear as to the terms by which they intend to bind
themselves and their consent to being bound by those terms. The will and intention of the parties are
therefore very important to the creation of a valid contract in law. Consequently, where a party to the
contract is forced to agree to terms that he/she would ordinarily not accept, then the contract would be
invalid. Duress involves the threat or use of force to induce a person to consent to be bound by an
agreement. The following example will show what kind of force or threats could invalidate a contract.
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Undue influence: This vitiating element of a contract is very similar to duress, but here the coercion is
based on the relationship between the parties to the contract, so that one of them exercises significant
control over the decision-making process of the other in such a way as to vitiate the consent of the latter.
10.5. Discharge of Contract
For a contract to be discharged means that the contract is brought to an end, and this can happen in a
number of ways and for a number of reasons. In this section, we will discuss the different ways in which
a contract can be brought to its end. Before a contract can be said to have been discharged, there must
have been in existence of a valid contract.
Some ways through which a contract may come to an end are:
Performance: Performance refers to the fulfillment of contractual obligations under the terms of the
contract. Some cases suggest that performance must fit the requirements set out in the contract, i.e., that
the contracting parties must complete the contract.
Prevention of Performance: Where one party to a contract performs part of the agreed obligation and
is then prevented from completing the rest by some fault of the other party, a quantum meruit can be
used to claim the cost of the work done.
Agreement: Another way by which a contract can be discharged is by the agreement of the parties
involved. A contract comes into existence by agreement and the parties to the contract may also choose
to terminate the contract by an agreement between them. This is expressed as what has been effected by
agreement can be undone by agreement for example by way of Rescission.
Breach: Another instance where a contract will be discharged is where there has been a material breach
of its terms.
Frustration: frustration unlike performance, agreement, and breach, involves a kind of premature
interruption or the occurrence of an event or change of situation or circumstances that are beyond what
was contemplated by the parties at the time they entered into the contract. In other words, neither party
is responsible for the events that frustrate a contract. Therefore, for a contract to be frustrated, the
supervening event or unforeseen circumstances (e.g. coronavirus / COVID-19 pandemic) must be such
that they make it impossible to perform the contract.
10.6. Remedies
There are several remedies available to an aggrieved party to a contract. Usually, a person seeks remedies
when the other party to the contract has broken a promise made under the contract. There are two options
for remedies, which are:
a) To insist on the actual performance of the contract, i.e., specific performance; or
b) To seek damages for the breach.