Human Resource Management  ·  Level 6
Principles Of Commercial Law
Chapter 4: Apply law of Contract
📚 5 Topics
⚑ What you will be able to do

By the end of this chapter, you will be able to:

  • Identify the key elements that make a contract valid according to contract law.
  • Recognize the essential components required for a contract to be legally binding.
  • Understand how to distinguish between valid and invalid contracts.
  • Apply your knowledge to evaluate whether an agreement qualifies as a valid contract.

Mastering this skill helps you confidently handle agreements in the workplace, ensuring that all contracts you engage with are solid and legally sound.

Compiled by: Duncan Ochieng

4.1 Essentials of a valid contract

The essentials of a valid contract are the core legal requirements that make an agreement binding and enforceable. Without these elements, agreements may be void or unenforceable, exposing parties to legal risks. Each element ensures clarity, mutual understanding, and lawful intent between the contracting parties, which is critical in sectors such as county hospitals, universities, banks, and retail businesses where formal agreements govern service delivery, employment, sales, and partnerships.

4.1.1 Offer

An offer is the initial step in contract formation, where one party proposes definite terms to another with the intent to be bound if accepted. It sets the stage for negotiation and agreement by clearly communicating the willingness to enter into a contract. Understanding the nature and requirements of an offer helps professionals identify when a legally binding proposal has been made.

Meaning of Offer

An offer is a clear, unequivocal statement by one party expressing willingness to enter into a contract on specified terms, intending to create legal relations upon acceptance. It differs from an invitation to treat, which merely invites others to make offers. For example, a retail business in Nairobi advertising a product with a fixed price is usually making an invitation to treat, not an offer.

Communication of Offer

For an offer to be effective, it must be communicated to the offeree. This means the intended party must receive the offer and understand its terms. In a county government office, a procurement officer may send a written offer to supply office equipment, which is only valid if the supplier receives and comprehends the terms.

Types of Offer

Offers can be classified as unilateral or bilateral. A unilateral offer involves one party promising something in return for an act (e.g., a hotel offering a reward for lost property returned), while a bilateral offer involves mutual promises between parties, such as a service contract between a university and a catering company.

Duration and Termination of Offer

An offer remains open until it is accepted, rejected, revoked, or lapses after a reasonable time. For instance, a SACCO offering a loan proposal to a client must specify how long the offer stands; if the client delays beyond this period, the offer may no longer be valid.

4.1.2 Acceptance

Acceptance is the unequivocal agreement to the terms of the offer, creating mutual consent necessary for contract formation. It must correspond exactly to the terms of the offer without modifications, or it becomes a counter-offer. Acceptance confirms that both parties are on the same page regarding their obligations.

Definition of Acceptance

Acceptance occurs when the offeree communicates assent to the offer's terms, thereby completing the agreement. It can be expressed verbally, in writing, or implied through conduct, such as a school paying for delivered supplies without objection.

Methods of Acceptance

Acceptance may be communicated by various means: oral, written, conduct, or electronic communication. For example, a retail supplier accepting a purchase order via email from a county hospital demonstrates acceptance through written communication.

Timing of Acceptance

Acceptance must occur while the offer is still open; late acceptance is ineffective unless the offeror waives the lapse. In practice, a bank may send a loan offer valid for 10 days, and acceptance after this period without renewal is not binding.

Communication of Acceptance

Generally, acceptance must be communicated to the offeror unless the offer specifies otherwise. For instance, an insurance company requires explicit acceptance of policy terms before coverage begins; silence or inaction is insufficient.

4.1.3 Capacity

Capacity refers to the legal ability of parties to enter into a contract. It safeguards vulnerable persons and ensures that contracts are made by those competent to understand and assume legal obligations.

Meaning of Capacity

Capacity means having the legal competence to enter into a contract, which excludes minors, persons of unsound mind, and certain insolvents. For example, a cooperative society cannot enforce a contract signed by a minor member.

Age and Capacity

In Kenya, the age of majority is 18 years. Contracts entered into by minors are generally voidable at the minor’s option, protecting young individuals from exploitation. A county government office employing a person below 18 may face challenges enforcing employment contracts.

Mental Capacity

Persons must have mental soundness to understand contract terms. Contracts with persons declared mentally incapacitated by a court are void. For instance, a hotel cannot enforce a contract signed by a guest who was mentally incapacitated at the time.

Corporate Capacity

Companies and organizations must act within their legal powers (ultra vires doctrine). A university entering a contract beyond its constitutionally authorized activities risks nullity. This principle ensures entities do not exceed delegated authority.

4.1.4 Intention

Intention to create legal relations is a vital element that distinguishes social agreements from legally binding contracts. It ensures that parties genuinely intend their agreement to be enforceable by law.

Meaning of Intention

Intention means the parties agree to enter into a legally enforceable agreement, not merely a social or domestic arrangement. For example, a contract between a retail business and a supplier shows clear intention to be legally bound.

Presumption in Commercial Agreements

Commercial agreements are presumed to have intention to create legal relations unless proven otherwise. A SACCO entering into a loan agreement with a member is assumed to intend legal enforceability.

Social and Domestic Agreements

Agreements between family or friends are generally presumed not to have legal intent, such as a promise to meet for a meal. However, this presumption can be rebutted by evidence showing clear contractual intention.

Effect of Lack of Intention

If there is no intention to create legal relations, the agreement is not a contract and cannot be enforced. For example, a hotel manager’s informal promise to staff without contractual terms lacks legal binding force.

4.1.5 Consideration

Consideration is the price or value exchanged between contracting parties, which distinguishes contracts from gifts. It must be something of value recognized by law and serves as evidence of a bargain.

Definition of Consideration

Consideration is a benefit to the promisor or a detriment to the promisee, representing the quid pro quo in a contract. A cooperative society paying for agricultural inputs receives consideration in return for its payment.

Types of Consideration

Consideration may be executed (performed immediately) or executory (promised to be performed in the future). A hotel booking deposit is an executory consideration, whereas payment on delivery is executed.

Adequacy of Consideration

The law does not require consideration to be equal in value, only that it is sufficient. For instance, a bank may accept a lower repayment amount as valid consideration if agreed by both parties.

Past Consideration

Consideration must not be past; it must accompany the promise. A retail business cannot enforce payment for goods delivered before any contract was made unless a new promise is given.

4.1.6 Legality

Legality ensures that the contract’s purpose and terms comply with the law and public policy. Illegal contracts are void and unenforceable, protecting society from unlawful agreements.

Meaning of Legality

A contract must have a lawful object and not contravene any statute, regulation, or public policy. A contract involving the sale of prohibited substances is illegal and void.

Contracts Contrary to Law

Agreements to commit crimes or fraud, or those violating statutory provisions, are void. For example, a contract to evade tax obligations with KRA is illegal.

Contracts Against Public Policy

Contracts that harm public interest or are immoral are unenforceable. A contract restricting a worker’s right to join a union would be against public policy.

Effect of Illegality

Illegal contracts cannot be enforced by courts, and parties may not recover losses. For instance, a hotel entering an illegal contract cannot seek legal remedy for breach.

Practice Questions

  1. Explain the role of an offer in contract formation and distinguish it from an invitation to treat. (10 marks)
  2. Discuss the significance of acceptance and the various ways it can be communicated in Kenyan commercial law. (10 marks)
  3. Analyze the importance of capacity in contract validity and identify who may lack capacity under Kenyan law. (10 marks)
  4. Describe how intention to create legal relations affects the enforceability of contracts, with examples. (10 marks)
  5. Define consideration and explain why past consideration is not valid in contract law. (10 marks)
  6. Examine the principle of legality in contracts and outline the consequences of entering into an illegal contract. (10 marks)
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🔒4.2 Types of Contracts

Specialty contracts, often referred to as formal contracts, require a particular formality to be legally valid, typically involving written documentation and signatures. These contracts are vital in environments where clarity and enforceability are paramount,…

🔒4.3 Methods of Discharging a Contract

In Kenyan commercial practice, the discharge of a contract marks the legal end of the parties’ obligations under that agreement. Understanding the different methods by which a contract may be discharged is essential for professionals across sectors such as ban…

🔒4.4 Remedies of Breach of a Contract

The equitable doctrine of part performance protects parties who have partly performed their contractual obligations, especially in cases where formal written contracts are absent or incomplete. This doctrine is significant in Kenyan legal practice where inform…

🔒4.5 Terms of Contract

Terms of a contract define the obligations, rights, and duties of the parties involved. They form the core content of any agreement and determine how the contract operates in practice. In Kenya’s diverse professional landscape, clear understanding of contract…

Chapter Summary

This chapter explored the essential elements that constitute a valid contract, including offer, acceptance, capacity, intention, consideration, and legality, all of which must be present for a contract to be enforceable. It examined various types of contracts such as specialty or written contracts, simple contracts, contracts under seal, and those requiring written evidence, highlighting their distinct characteristics and legal requirements. The discussion then moved to the methods of discharging a contract, covering express agreement, performance, breach, impossibility through the doctrine of frustration, and operation of law as ways contracts can come to an end. Remedies available for breach of contract were considered, with particular attention to the equitable doctrine of part performance that provides relief in certain situations. Finally, the chapter differentiated between express and implied terms of a contract, emphasizing how terms shape the rights and obligations of the contracting parties. Together, these topics provide a comprehensive understanding of contract law principles essential for commercial transactions.

Self-Assessment

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A. Written Assessment

  1. Define the term offer in contract law and explain its role in forming a contract. (4 marks)
  2. Which of the following is NOT an essential element of a valid contract?
    a) Offer
    b) Acceptance
    c) Intention to create legal relations
    d) Witness signature (2 marks)
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Chapter Examination Questions

🔒 PDFDownload these examination questions, with worked answers

SECTION A (40 Marks) - Answer ALL Questions

  1. Explain the role of an offer in the formation of a valid contract, using an example from a county hospital procurement process. (4 marks)
  2. Define acceptance and describe how it can be communicated in a contract between a retail business and a supplier. (4 marks)
🔒18 more in this section.
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Am I competent?

At the start of this chapter we promised you would be able to:

  • Identify the key elements that make a contract valid according to contract law.
  • Recognize the essential components required for a contract to be legally binding.
  • Understand how to distinguish between valid and invalid contracts.
  • Apply your knowledge to evaluate whether an agreement qualifies as a valid contract.

Tick each one you can genuinely do.

So, are you there yet?

You're competent when you can confidently do 50% or more of what this chapter promised.

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