Business Law and Ethics for Masters and Postgraduates PDF

Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 A. INTRODUCTION Definition of law Osborn’s: A Concise Law Dictionary A law is an obligatory rule of conduct A law is a rule of conduct imposed and enforced by the state The law is the body of principles recognized and applied by the state in the administration of justice. Oxford Advanced Learner’s Dictionary A law means a rule established by authority or custom, regulating the behaviour of members of a community, country, etc. Shivji et al. Constitutional and Legal System of Tanzania (2004) Law may be defined as a body of binding rules or norms imposed on a given society breach of which leads to exercise of direct, indirect or ultimate force by a centralized organ (state) having the monopoly of violence. [Constitutional and Legal System of Tanzania, I.G. Shivji et al. Mkuki and Nyota Publishers, 2004, p.6 A law is a rule established by authority or custom, regulating behaviour of members of a community, country, etc. ibid. p.4 We may define law as: A set of rules made by some authority to regulate behaviour of members of a community, country, etc. Laws passed by Parliament - The National Assembly and the President o Act of Parliament o Acts passed by the Legislative Council (LEGICO) By-laws made by local authorities – Subsidiary or delegated legislation Regulations made by Ministers – Orders – Subsidiary/Delegated legislation. A set of rules governing relationships between persons Laws made by Parliament (Acts) – Law of Contract Act/Law of Marriage Act By-Laws Laws made by the people themselves to regulate their relationships - Contract A set of rules recognized as giving certain rights to certain persons and imposing certain obligations on certain persons - Tort Bussines Law and Ethics, Faulu Inc! 2009 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Functions of law (i) Structuring of public power - Constitutional law provides for various organs/branches of the state, namely the executive, parliament and the judiciary. (ii) Facilitating and regulating private relations – contract, property, marriage, etc. (iii) Resolving conflicts - the state through law may set up institutions, e.g. courts, tribunals to resolve disputes. Sources of law (i) Received law – common law principles of equity and statutes of general application (ii) Local law – statutory law (Acts and Acts), delegated legislation (by-laws) (iii) Customary law and religious law – customs of communities, Islamic law, personal and other religious laws Branches of law (i) Municipal law (within a state) o Public law – concerned with enforcement of a code of conduct upon the citizens Criminal law – criminalizes and punishes certain acts and omissions e.g. stealing, rape, treason, murder etc. Constitutional law – regulates relationship between citizens and state organs Administrative law – confers powers on officials Regulatory law, e.g. Company law – oversees certain private relations. o Private law – available to citizens to settle disputes among themselves Contract –Governs bargains between persons Tort – Deals with civil wrongs Property – Deals with rights over land and chattels Succession – How property devolves on death Trusts – Regulates relations between trustees and beneficiaries (ii) International Law o Public international law o Private international law Law which attempts to establish acceptable codes of conduct on matters of international interest and to overcome `conflict of law` in such matters as interpretation of contracts, movement across national frontiers, air, sea and space travel etc. Bussines Law and Ethics, Faulu Inc! 2009 2 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Divisions of law Criminal law and civil law Public law and private law Substantive law and procedural law Criminal v. Civil law Criminal law Deals with crimes and punishment Deals with relationship between state and individual Republic v. Accused Accused is prosecuted by the Republic (police and state attorneys – public prosecutors) – if found guilty is convicted and sentenced – fine and/or imprisonment. Civil law Deals with relationships and disputes between persons The person who is wronged sues the wrongdoer Plaintiff v. Defendant Public v. Private law Public law Deals with relationship between state and individual Deals with how public power is exercised Examples are criminal law and administrative law Private law Deals with relationship between persons Examples are law of contract, law of torts Substantive v. Procedural law Substantive law Deals with different rights and relationships which give rise to rights and obligations Provides for remedies for injuries or damage suffered Examples are law of contract, law of torts Procedural law Deals with the procedure to follow in establishing a right Bussines Law and Ethics, Faulu Inc! 2009 3 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Definition of ethics Oxford Advanced Learner’s Dictionary A science that deals withy morals Moral correctness – sets standards of correctness Professional ethics Medical ethics Business ethics Ethics means moral philosophy A systematic study of the ultimate problems of human conduct – what is right and what is wrong. And ethics provides for sanctions for moral conduct. Ethics like morality is based on the cultural values of a given society and individual behaviour is patterned according to the culture of that society. Such patterns of behaviour are popularly called custom. What is ethically or morally accepted as being good over a period of time becomes a custom of a particular society. Customs are rules that govern the behaviour of individuals in a given society. Notorious customs are referred to as customary rules/laws Principles of ethics Ethics are made up of principles which set standards within which persons must act and/behave An officer or manager, director, should act with honesty, compassion (pity for the suffering of others, making one want to help them), sobriety, continence (control of one’s feelings especially in sexual matters) and temperance (moderation and self restraint in one’s behaviour or in eating and drinking) with a view to conserving and enhancing confidence and trust in the integrity (quality of being honest and morally upright), objectivity and impartiality of his office/business. An officer or manager or director should perform his official duties and arrange his private affairs in such a manner that the two do not conflict. And, where the two do conflict, he/she should resolve in favour of office/business. Do not put yourself in a position where your personal interests conflict with those of your office/business. An officer, manager or director should make his/her decisions in accordance with law, in the public interest or interest of the business /office and with regard to merits of each case. An officer, manager or director shall not knowingly take advantage of or benefit from information which is obtained in the course of official duties and responsibilities, An officer, manager or director is not expected to solicit or accept transfers of economic benefits other than incidental gifts, customary hospitality or other Bussines Law and Ethics, Faulu Inc! 2009 4 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 benefits or nominal value unless the transfer Is pursuant to an enforceable contract or property right. Relationship between law and ethics Ethics Law Sets standards of what is good/bad Rules made to sanction bad behaviour behaviour Based on conscience, beliefs Formulated and imposed by the Sanctioned by public opinion, state or agreed between the parties disapproval, possibly ridicule and involved. exclusion from a particular society Has fixed and powerful sanctions Has regard to thoughts and feelings Has regard to acts/omissions Moral principles must be applied with reference to individuals and Legal rules are of general and circumstances. absolute application Why ethics? Principles of ethics set the moral standards of behaviour. Professional ethics set standards within which a professional must act Medical ethics provide standards within which medical personnel must act. Business ethics set standards within which business community must act Ethics provide for principles which one may be required to comply with. Why law? Forbids certain actions/omissions Permits certain actions/omissions Provides sanctions against law breakers Meaning and purpose of business law Meaning of business law Rules and principles that govern the conduct of the participants engaged in negotiating and performing transactions by which economic objectives are achieved. Rules and principles that govern the formation, business relationships and exit from business entities Bussines Law and Ethics, Faulu Inc! 2009 5 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Business laws include the law of contract, sale of goods law, banking law, insurance law, law of agency, law of partnership, company law, bankruptcy/insolvency law. Purpose of business law Regulates formation, operation and exit of business entities Controls anti-social activities, e.g. employer dismissing employee out of spite. Regulates harmful activities, e.g. forbids sale of adulterated foodstuffs. Provides for remedies who have private grievances – the law spells out the rights and obligations of parties. If a right is violated the injured party may seek remedy (compensation). So, business law protects legitimate interests of the parties. Sources of business laws of Tanzania Received laws – common law, principles of equity and statutes of general application Local laws Acts of Parliament Acts of the colonial Legislative Council Subsidiary/delegated legislation – by-laws Customary laws Uncodified except Haya and Sukuma Customary Laws Unwritten International business principles, customs and usages THE TANZANIA LEGAL SYSTEM I. The Court System Based on a hierarchy – from primary court to the court of Appeal of Tanzania. Judiciary is not a union matter – So Zanzibar has got its own court system. For Tanzania Mainland the court system is as follows: Primary Court Is the lowest court Is established in and for a district However there are many primary courts in a district, each with its geographical boundaries Is presided by a primary court magistrate whose qualification used to be a certificate in law from a recognized institution. Now the qualification is a diploma in law. Jurisdiction of a primary court Has original jurisdiction to hear and determine both civil and criminal cases. This court has no power to hear serious criminal cases e.g. murder, treason, economic sabotage cases, etc. Geographical jurisdiction of a district court is, in theory, within the district in which it is established. However, in practice the jurisdiction Bussines Law and Ethics, Faulu Inc! 2009 6 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 of a primary court is limited within the area that has been demarcated for it. Pecuniary jurisdiction of a primary court has been fixed as follows: o Where the subject matter of the suit is movable property, then a primary court can hear a case the value of whose subject matter does not exceed T. Shs. 10 million. o Where the subject matter is immovable property, the value of subject matter should not exceed T.Shs. 12 million. District Court Established for a district Presided by a District Magistrate whose qualifications used to be a diploma in law from a recognized institution. Now a district magistrate has to have a first degree in law. Jurisdiction Original jurisdiction to hear both criminal and civil cases Appellate jurisdiction to hear appeals from primary courts Geographical jurisdiction to hear cases emanating from the area for which the court is established – within the district. Pecuniary jurisdiction to hear cases as follows o In the case involving movable properties, where the value of the subject matter does not exceed T.Shs. 100 million. o Where immovable property is concerned the value of the subject matter should not exceed T.Shs. 150 million Has no power/jurisdiction to hear and determine serious criminal cases such as murder, manslaughter, treason, economic sabotage cases, etc. Resident Magistrates` Court Established for a region Presided by a resident magistrate whose qualification is a first degree in law (LL.B) from a recognized university. Jurisdiction Like that of a district court However a resident magistrate can preside over cases in any of the district courts of the region in which he is resident magistrate. May be given extended jurisdiction in which case may hear and determine serious cases including murder. High Court of Tanzania Established for the whole of Tanzania Mainland. For administrative purposes there have been established high court zones e.g. Dar es Salaam, Arusha, Mwanza, Tabora, Songea, Mbeya, etc. Thus we have High Court of Tanzania at Dar es Salaam, Mwanza, Tabora, etc. The Land Court and Commercial Court of Tanzania are divisions of the High Court of Tanzania. Presided over by a High Court Judge whose qualifications are a first degree in law from a recognized university and experience in judicial matters Jurisdiction Bussines Law and Ethics, Faulu Inc! 2009 7 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Original jurisdiction to hear and determine criminal and civil cases No limitation to pecuniary jurisdiction Has appellate jurisdiction to hear appeals from district and resident magistrates` courts. Court of Appeal of Tanzania Is a union matter, hence extends to Tanzania Zanzibar. Has appellate jurisdiction only; no original jurisdiction Presided by justice of appeal whose qualification is first degree in law plus many years of experience in judicial matters. The quasi judicial bodies with (Civil Jurisdiction) Land: The system under the Land Courts Act, 2002 Employment: System Under the Employment and Labour Relations Act, 2004 and Labour Institutions Act, 2004 Tax: The system under the Income Tax Act, 2004 Fair Competition: The system Under the Unfair Competition Act, 2003 II. Laws The Constitution The mother law (Grundnorm). The Constitution of the United Republic of Tanzania, 1977. All laws get their legitimacy from the Constitution Provides for basic rights of citizens and also obligations – bill or rights and obligations Provides for the three pillars of the state o The executive o Parliament o Judiciary Provides for separation of powers and checks and balances among the pillars. Provides for the rule of law, i.e. no one is above the law. For any act or omission one must show the legal basis for it. Even the President is not above the law. Other laws Derive their legitimacy from the constitution These include o Acts of Parliament o Received laws o Customary laws o Case law (judge-made law). Bussines Law and Ethics, Faulu Inc! 2009 8 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 B. ETHICAL DIMENSIONS OF BUSINESS LAW (i). Law of contract Introduction: The law of contract is a foundation upon which the superstructure of modern business is built. In business transactions quite often promises are made at one time and performance follows later. It follows therefore that the law of contract lays down the legal rules relating to promises, their formation, their performance and their enforceability. Law of contract defined: Law of Contract may be defined as:- A set of rules made by the people themselves to govern their contract relations. An authority, say parliament, may have made rules to provide for general principles/guidelines to give the scope and limits within which private persons may make their own rules. Sources of Contract Law - Law of Contract Act, [L.C.A] 1961 Cap. 345 closely follows the Indian Contract Act 1872 - Common law, principles of equity and statutes of general application - Customary law - Courts – judge - made law - precedent CLASSIFICATION OF CONTRACTS There are several classifications: 1. Oral and written contracts: Oral: Made by word of mouth Written: Terms are put into writing. 2. Executed and executory Executed: When one or both of the parties have done all that the contract requires Bussines Law and Ethics, Faulu Inc! 2009 9 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Executory: when the obligations of one or both of the parties remain to be carried out. 3. Specialty and simple contracts Specialty contracts: Also called contracts under seal or deeds. All terms of these contracts are reduced into writing and then the contract is signed, sealed, attested. (witnessed and delivered. Simple contracts: Sometimes called parole contracts. This includes all contracts not under seal and for their enforcement they require consideration. They may be made orally or in writing, or they may be inferred from the conduct of the parties. There must be an offer and acceptance. 4. Unenforceable, voidable, void and illegal contracts This is a classification of contracts with regard to their status owing to their respective defects. (this will be clarified clearly later) THE FORMATION OF CONTRACT Basic concepts Promise, Agreement, Contract Promise: Offer + Acceptance. s. 2(1) (b) L.C.A. Agreement: Promise or set of promises forming consideration for each other. S. 2(1) (e) L.C.A. Contract: An agreement enforceable by law. S. 2(1)(h) L.C.A. Essentials of a Contract: To be enforceable by law an agreement must have the following elements: 1. Parties 2. Offer and Acceptance 3. Lawful Object 4. Capacity Bussines Law and Ethics, Faulu Inc! 2009 10 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 5. Intention to create treaty 6. Lawful consideration 7. Free consent NB: Some of these elements are enumerated under s. 10 of the Law of Contract Act. What is the effect of lack of either one or more of these elements? The effect is the formation of a defective contract namely void contract, voidable contract, unenforceable agreement and illegal agreement. Unenforceable contracts An enforceable contract is valid in all respects except that it cannot be enforced in a court of law by one or both of the parties should the other refuse to carry out his obligations under it. This is because the enforceability of these contracts is conditional upon fulfillment of certain requirements. Thus failure to comply with such conditions makes the contracts to be unenforceable. ss 2(1) (g) and 2 (i) (j) L.C.A provides that unenforceable contracts are void but s.2 (2) provides that there may be contracts which are unenforceable but not void. Illegal contracts These are contracts whose object or consideration is unlawful or is contrary to public policy. The effect of illegality is to render the contract void. s.23 (2) L.C.A provides that every agreement which the object/consideration is unlawful is void. Voidable contracts These are agreements which are enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others. Bussines Law and Ethics, Faulu Inc! 2009 11 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 A voidable contract is a contract with full legal force unless and until one of the parties, who is entitled to bring it to an end does bring it to an end. The right to rescind the contract has got limitations, a party must exercise his right within reasonable time otherwise estoppels may apply; where the entitled party has taken a benefit under the contract and he cannot return it then he may not avoid the contract; and where the third parties have acquired right under it, the right to rescind ends. Void contracts The term void connotes that the agreement is of no legal effect. A void contract is an agreement which the court hold to be no contract at all, a nullity from the beginning. ss. 2(1) (g), 2(1)(j), 11 (2), 20, 23 (2), 24-30, 32, 35, 36, 56, 57 of the Law of Contract Act, refer to void contracts. Rationale for treating certain contracts as unenforceable, illegal, voidable or void 1. To limit enforceability of actions with a view to ensuring fair play in contractual transactions. 2. To protect: a) the proprietary interests of an owner of property. No one can obtain better title than owners. b) The proprietary interests of a bonafide purchaser for value without notice of any defect in the seller’s title. Commercial transactions have to be protected. PARTIES TO A CONTRACT In every contract there must be two parties. These parties may be natural persons or artificial persons. Natural persons are the individuals. For instance Neema, Juma, Rose etc. Artificial persons are persons created by law such as corporate bodies. For Bussines Law and Ethics, Faulu Inc! 2009 12 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Example companies, corporations and other associations or organizations which are empowered by law to enter into contracts. Therefore a contract may be between natural persons and natural persons, natural person and artificial persons or artificial persons and artificial persons. OFFER/ PROPOSAL An offer may simply be defined as a set of terms moving from one party to another. An offer or proposal is defined under s. 2(1)(a) of the Law of Contract Act as a signification by one person to another of his willingness to do or abstain from doing anything with a view of obtaining the assent of that other to such act or abstinence. A contract therefore is an agreement and it comes into existence when one party makes an offer which the other accepts. The person making the offer/proposal is called the offeror/ proposer and the person to whom it is made is called the offeree/ proposee. Example: Suppose X says to Y “ I will sell you this watch for 5/=” and Y says “I agree.” An express offer and acceptance have been made; X is the offeror and Y is the offeree. Characteristics of an offer 1. It must be made willingly: ie. The offeror must be willing to be bound by the terms he has stated. 2. It must be clear and certain: ie. Clarity and certainty of an offer are essential because the person to whom the offer is made should be in a position to know what the offer is. If the terms of the offer are not certain yet the offeree accepts the offer the agreement reached will be treated by the law as no agreement at all. Under s. 29 of the Law of Contract Act, agreements, the meaning of which is not certain or capable of being made certain are void. 3. Final Expression: an offer must be firm and final expression by the offeror of his willingness to be bound should his offer be accepted. Bussines Law and Ethics, Faulu Inc! 2009 13 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 To whom can offer be made? An offer can be made to specific persons or group of persons or to the world at large. In Carlill v. Carbolic Smoke Ball Co., (1893) 1 QB 256 The defendants were proprietors of a medical preparation called “the carbolic smoke ball.” They inserted advertisements in various newspapers in which they offered to pay £100 to any person who contracted influenza after using the ball three times a day for two weeks. They added that they had deposited £1000 at the Bank for that purpose. The plaintiff, a lady, used the ball as advertised, and was attacked by influenza during the course of treatment. She sued for £100. The Company raised the following defences to which the court held as follows: a) The company argued that the offer was too vague since no time limit was stipulated in which the user was to contract influenza. To this the court held: that it must have been the intention that the ball would protect its user during the period of its use. b) The Company suggested that the matter was an advertisement “puff” and that there was no intention to create legal relations. To this the court held: that the deposit of £1000 at the bank was clear evidence of an intention to pay claims. c) It was further suggested that this was an attempt to contract the whole world and this was not possible in English law. To this the court held: that the advertisement was an offer to the whole world and that, by no analogy with the reward cases, it was possible to make an offer of this kind. d) The Company claimed that the plaintiff had not supplied consideration. To this the court held: that using this inhalant three times a day for three weeks or more was sufficient consideration. e) The defendant suggested that there had been no communication of acceptance. To this the court held: that looking at reward cases, contracts of this kind, acceptance may be by conduct. Bussines Law and Ethics, Faulu Inc! 2009 14 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Making of offers under various situations Offer/proposal vs. Invitation to treat Sometimes what looks like an offer may be no more than an invitation to make an offer, or as it is sometimes called an invitation to treat. The invitation to treaty unlike proposal is not final, clear in expression but merely an invitation to be bound in those terms. The inviter process certain terms on which he is willing to negotiate. He invites any person to make an offer which he may accept or reject. Common cases for invitation to treat (a) Where goods are displayed for sale: This is merely invitation to treat even if they bear price tags in a self service shops/stores. Re: Fisher v.Bell (1961) 1 Q.B. 398, In this case Bell was charged with offering for sale a flick knife in violation of the Restriction of Offensive Weapons Act, 1959, the relevant provision which read in part “ any person who manufactures, sells, or hires or offers for sale or lends or gives to any person …a flick knife shall be guilty of an offence.” The trial court decided that there had not been an “offer for sale” of the flick knife. On appeal to the Queens Bench it was held that in the absence of a definition of “offer for sale” in the Act, the words were to be construed as they are in the law of contract. The court observed that it is clear that according to the ordinary law of contract, the display of an article with a price on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale the acceptance of which constitutes a contract. Also see Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. (1953) 1 QB 401 The defendants’ branch was adapted to the self service system. Customers selected their purchases from shelves on which the goods were displayed and put them into a wire basket supplied by the defendants. They then took them to Bussines Law and Ethics, Faulu Inc! 2009 15 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 the cash desk where they paid the price. In every case involving sale of a drug a pharmacist supervised that part of transaction which took place at the cash desk and was authorized by the defendant company to prevent, if he thought fit, any customer from removing any drug from the premises. One section of shelves was set out with drugs included in the poisons list under the Pharmacy and Poisons Act, 1933 which were required to be sold in the presence of a qualified registered pharmacist. These drugs had price tags. The plaintiffs which was a body empowered to enforce that law sued the defendants for infringing the provisions of the said law by selling drugs in contravention of the laid down procedure. The plaintiff Society argued that by their deliberately devised self-service system, the defendant was making an offer to sell and the customer accepted the offer when he picked an article from the shelf and put it in the basket and the contract of sale was concluded. The court held that the self-service system did not amount to an offer by the defendant company to sell but merely an invitation to the customer to offer in case of a drug, to buy; that such an offer was accepted at the cashier’s desk under the supervision of the registered pharmacist; and that there was, therefore, no infringement of the section. (b) Advertisements: These are mere invitations to treat. In Patridge v. Critendem (1968) 2ALLER 421 The appellant had placed an advertisement indicating that he had certain wild birds for sale. The advertisement did specify the price but gave no details about delivery or quantities available. It was an offence to offer such birds for sale. In order to prove the offence it was necessary to prove that the advertisement was an offer. The trial court was satisfied that the advertisement was an offer and thus convicted the accused. On appeal it was argued that the advertisement was not Bussines Law and Ethics, Faulu Inc! 2009 16 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 an offer but a mere invitation to treat because, first, the advertisement was not sufficiently specific to amount to an offer. Secondly the court said that it would not be reasonable to think that the appellant was willing to be bound by any and every acceptance made. (c) Request for information: A request for information is an invitation to treat. In Harvey v. Facey (1893) AC 552 The appellant sent a telegram to the respondent asking “will you sell us Bumper Hall Pen? (this was a piece of land) telegraph lowest cash price, reply paid.” The respondent replied simply “ lowest price of Bumper Hall Pen £900.” The appellant then purported to accept this offer. The respondent denied that his reply was an offer. The Court held that no offer had been made which the appellants could accept. The reason given by the court for its decision is that the respondents did not reply to the first part of the question “ will you sell us Bumper Hall Pen?” Rather that the reply was limited to the second part of the question “ telegraph the lowest cash price” (d) Contracts by tender: In contracts by tender offers are made by those tendering. The law is to the effect that where a person is invited to tender under certain conditions and he complies then he acquires a right to have his tender considered along with other tenders. But it should be noted that a person who invited tenders must accept the tender. The right is limited to the tender being opened and considered. Thus this is a mere invitation to treat. (e) Auction sales: The Advertisement of an auction is an invitation to treat. At an auction a bid is an offer, the auctioneers request for bids is an invitation to treat. The sale is complete when the hammer falls. ACCEPTANCE Once an offer is proved it must be satisfied that the offeree has accepted the offer for there to be a contract. Thus the person who accepts the offer must be aware that the offer has been made. Bussines Law and Ethics, Faulu Inc! 2009 17 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Under the Law of Contract Act s.2(1)(b) – Acceptance is defined as an assent to the proposal by the person to whom it was made. Acceptance must be firm and final: The signification of acceptance must be a firm and final expression of assent to the terms of the proposal as communicated by the offeror/proposer. Conditional acceptance: An acceptance must be absolute and unconditional. If the acceptance is qualified it ceases to be accepted instead it becomes a counter offer to the original proposal. The original proposal would be free to accept or reject the counter offer. One form of conditional assent is an acceptance “ subject to contract.” The law has placed a special significance on these words, and they are always construed as meaning that the parties do not intend to be bound until a formal contract is prepared. In Winn v. Bull (1877) 7 Ch. D. 29 The defendant had entered into a written agreement with the plaintiff for lease of a house, the term of the lease and the rent being agreed. However, the written agreement was expressly made “ subject to the preparation and approval of a formal contract.” It appeared that no other contract was made between the parties. The plaintiff sued for specific performance of the agreement. It was held that the written agreement provided a memorandum under law (s.4 of the Statute of Frauds, 1677) but there was no binding contract between the parties because, although certain covenants are normally implied into leases, it is also true that many and varied express covenants are often agreed between the parties. That words “ subject to contract” indicated that the parties were still in a state of negotiation and until they entered into a formal contract there was no agreement which the court could enforce. But there is a different position if the statement is qualified and the terms of a proposed contract can be identified. In this case the court will enforce it. Bussines Law and Ethics, Faulu Inc! 2009 18 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 In Filsby v. Hounsel (1896) 2 Ch. 737 Property had been offered for sale by auction but had not been sold. An offer was then made to buy the property, stating that if the offer was accepted the purchaser would sign a contract “on the auction particulars.” This offer was accepted “subject to contract as agreed.” It was held that the parties were bound by a contract drafted on the auction particulars, although they had not signed a formal contract. Counter offer: A counter offer is a rejection of the original offer and in some cases has the effect of canceling it. Where the counter offer introduces a new term, the original offer is cancelled. Hyde v. Wrench (1840) 3 Beav. 334 In this case the defendant offered to sell his farm at £1000 to the plaintiff on June 6. The plaintiff’s agent immediately called on the defendant and made an offer of £950 which the defendant wished to have a few days to consider. On June 27 the defendant wrote to say that he could not accept the offer of £950. On June 29 the plaintiff wrote “ accepting” the offer of June 6. The defendant refused to sell his land to the plaintiff at £1000 The plaintiff filed a case asking the court to award an order of specific performance. Ie. To order the defendant to sell him the farm at £1000. The court held that the plaintiff could not enforce this “acceptance” because his counter offer of £950 was an implied rejection of the original offer to sell at £1000 (of June 6). So when the plaintiff purported to “accept” the June 6 offer, in fact there was no such offer. Rules governing acceptance To constitute acceptance the offeree’s signification of assent to the proposal must: (a) Be made in response to the offer (b) Exactly match the terms of the offer Bussines Law and Ethics, Faulu Inc! 2009 19 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 (c) The matching acceptance must be communicated to the offeror. Communication of Acceptance Acceptance may be made in various ways. It may be made in writing or orally, but it must in general be communicated and communication must be made by a person authorized to make it. In Powell v. Lee (1908) 99 L.T. 284 The defendants were managers of a school and wished to appoint a headmaster. They passed a resolution appointing the plaintiff (Powell) among other two applicants to be the headmaster but gave no instruction that this decision was to be communicated to him. One of the managers was instructed to inform one of the candidates (Parker) that he had not been selected. This manager without authority also informed Powell that he had been selected. Later the matter was reopened and Parker was properly appointed. Lee then informed the plaintiff that this appointment had been made. The plaintiff sued the six managers for damages for breach of contract. The court held that there was no contract because there was no authorized communication of the intention to contract by the managers. See also Felthouse v. Bindley (1862), 11 C.B. (N.S.) 869 Principally, acceptance must be communicated to the offeror. However, it can also be communicated to an agent of the offeror who is authorized to receive acceptance. Thus, where the authority given to the agent is merely to transmit no acceptance is complete until it reaches the principal. However, there are some cases in which the offeror is deemed to have waived communication of the acceptance. This most often occurs in the case of unilateral contracts such as a promise to pay money in return for some act to be carried out by the offeree. Performance of the act operates as an acceptance, and no communication is required. Re. Carlill v. Carbolic Smoke Ball Co. Ltd. (supra) Bussines Law and Ethics, Faulu Inc! 2009 20 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 The mode of communication of acceptance Under common law communication of acceptance is normally by post either through a letter or a telegram. The main issue has always been “when is communication of acceptance complete?” Due to this the courts have developed the postal rule. The postal rule states that once a mail is correctly addressed , a proper stamp put on it and put in right hands of the postal officer, that is effective communication unless expressly excluded by the offeror. Therefore, on correctly posting the letter of acceptance both parties become irrevocably bound. However the same rule applies to acceptance by telegram. A better view is that under Common Law an acceptance cannot be recalled once it has been posted even though it has not reached the offeror. Despite all this position, the offeror may signify the mode of acceptance which is different from the use of post eg telex, email, fax etc. But under common law sometimes the court may refuse to recognize some modes of acceptance. For instance in Entores v. Miles Far East Corporation (1955) 2Q.B. 327 the plaintiff a London company and the defendants, an American Coreporation with agents in Amsterdam made an offer by telex to the defendants’ agents who accepted also by telex. When the dispute arose the Court of Appeal of England held that the parties were in the same position as if they had negotiated in each other’s presence, thus no binding contract was created until the plaintiffs in London had received acceptance. With regard to e-mail services, the European Union Parliament passed a rule that a contract is formed when acceptance is confirmed. Some important authorities on posting rule Adam v. Lindsell (1818) In this case it was held that where acceptance is communicated by post a contract arises on the date when the letter of acceptance is posted. Household Fire and Accident Insurance Co. Ltd. v. Grant (1879) Bussines Law and Ethics, Faulu Inc! 2009 21 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Here it was held that “ an acceptance which only remains in the breast of the acceptor without being actually and by legal implication communicated to the offeror is no binding acceptance… But if the post be treated as agent of both parties, then as soon as the letter of acceptance is delivered to the post office, the contract is made as complete and final and absolutely binding as if the acceptor had put his letter into the hands of a messenger sent by the offeror himself as his agent to deliver by the offer and to receive the acceptance…” Bryne v. Van Tienhoven (1880) It was held that a contract is complete on posting letter of acceptance even though the letter may not reach the offeror (its destination). Henthorn v. Fraser (1892) It was held that where circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usage of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted. Communication of Acceptance under the L.C.A. Mode of communication There is no an express rule governing postal services under the Act but the s.4(2) reads: “Communication of an offer is complete: (a) as against the proposer, when it is put in the course of transmission to him so as to be out of the power of the acceptor. (b) as against the acceptor, when it comes to the knowledge of the proposer.” Therefore, the parties are bound at different times. Unlike the position under the Common Law in which after the acceptor has put the acceptance into the mode of transmission both parties are irrevocably bound. Thus under the Act, the rule is that where an acceptor posts his letter of acceptance so that the letter is out of his power, Bussines Law and Ethics, Faulu Inc! 2009 22 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 then the proposer is bound but not the acceptor himself. The acceptor is bound when his acceptance comes to the knowledge of the proposer. As far as the other modes such as telex, fax, and e-mail there is no authority at the moment in Tanzania but the English authorities are persuasive. Revocation Revocation means to withdraw or to recall. The offeror may revoke his offer, but to be effective, this must be done before the acceptor has parted with his acceptance. This is a position under both the Common Law and the L.C.A. Thus under s.5 (1) An offer may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards. In the same way under the L.C.A. the acceptor may revoke his acceptance but also this must be done before his acceptance comes to the knowledge of the offeror. Thus s.5 (2) provides that “an acceptance may be revoked at any time before the completion of its communication.” This position is not the same under the Common Law where the rule is that once the acceptance has been duly posted it cannot be revoked by a faster means because both parties are irrevocably bound. Thus for example under Common Law if X has posted an acceptance to Y, he cannot withdraw the same by telephoning Y and asking him to ignore the letter of acceptance when it arrives. And Y can hold X bound by the contract if he wishes to do so. If successful, the revocation has an effect of nullifying the offer (if it is a revocation of an offer) or acceptance (if it is a revocation of acceptance). Note: -The L.C.A. position is more favourable to the acceptor than the common law position as regards revocation. - Revocation of an acceptance is not effective until its communication is complete. Bussines Law and Ethics, Faulu Inc! 2009 23 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 -Revocation discussed above is a revocation done by the offeror sending a notice of revocation to the offeree. (S.6 (a) Revocation of proposal / termination of an offer Under the L.C.A there are many other circumstances in which a proposal can be revoked. These are provided for under s. 6. These include: 1. Revocation by notice: As discussed above 2. Lapse for want of acceptance An offer may provide that it will remain open for a specified period of time – This acceptance must be effected within times limit. Where time is not indicated the offer must be accepted within a reasonable time. 3. Death/insanity of the offeror Death/insanity renders the offer to be incapable of acceptance. Under the L.C.A this happens where the fact of death/insanity is known to the acceptor before acceptance – S.6 (d). The law seems to suggest that if the fact of death is not known to the acceptor at the time of acceptance then he should be entitled to accept the offer. 4. Failure of the acceptor to fulfill conditions: This happens when the acceptor has failed to fulfill the conditions precedent to acceptance. Formation of an Agreement Once an offer has been accepted a binding contract is formed: Anson holds that an acceptance to an offer is what a lighted match is to a raining of gunpowder; It produces something which cannot be recalled or undone. In other words when the offer is accepted, both the offer and acceptance are terminated / they come to an end and in their place a contract comes to existence. LAWFUL OBJECT The object of the contract must be lawful or legal. An agreement in which the object is unlawful is void. (s.23(2)) Bussines Law and Ethics, Faulu Inc! 2009 24 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 For instance the agreement to carry out an act which is forbidden by public law is void. The same applies to an agreement which is contrary to public policy. CAPACITY TO CONTRACT Capacity to contract refers to competence to contract. The general rule is only sane, sober persons of contractual age are capable of making valid contracts. This means that certain groups of persons natural and artificial may have the disabilities to contract. Under s.11 of the L.C.A refers to competency. Thus minors, persons of unsound mind, and person disqualified by law can not qualify to make contracts. Factors Vitiating Capacity There are factors which vitiates / negatives the capacity to contract. These factors include age, soundness of mind and disqualification by law. Age A minor or an infant is not competent to contract as a general rule. (see s. 11(1). Minors or infants are persons who have not attained the age of majority. The age of majority is mature age. Sometimes this age is referred to as being the contractual age. The age of majority is determined by laws, to which a particular person is subject. Such an age therefore may differ from one country to another. In Tanzania mainland the Age of Majority Act, Cap.431 and the Laws of Zanzibar Cap.53, provide that the age of majority is 18 years. In Kenya – Age of Majority Act 1974 – 18 years In Uganda – Uganda Contract Act Cap.75 – 18 years In England before 1969 – It was 21 years but The Family Law Reform Act established 18 years. Bussines Law and Ethics, Faulu Inc! 2009 25 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Why is age competence important in contracts? A person without capacity lacks intellectual maturity, lacks experience to exercise sound judgment and as a result he may not know or appreciate the effects of the agreement upon himself. Thus, since he cannot protect himself then he needs the protection of the law. Note: The protection by law in some cases is not absolute. There are circumstances where the legal protection can be waived. But despite the above legal position, the true fact remains that minors / infants enter into agreements with majors everyday. How is the conflict resolved? Two principle ideas are advanced concerning the law on minors / infants. 1. That the law protects minors from their inexperience, hence to invalidate agreements which are unfair to the minors or which are wasteful. 2. The law is not to cause unnecessary hardship to adults who deal fairly with minors. It is under the second principle idea that the law recognizes some contracts with minors as being valid and others as voidable. Additionally a minor may be liable on quasi-contract and in equity where he is found guilty of fraud. Therefore contracts by a minor may be valid, voidable or void depending on the principles explained above. (a) Valid contracts by a minor: The Common Law position The position under the Common Law is that all agreements for necessaries and beneficial contracts of service with a minor are valid. It should be borne in mind that the latter category (ie. Contracts for the benefit of a minor) apply only to the contracts of the nature of apprenticeship, education or analogous contracts. Bussines Law and Ethics, Faulu Inc! 2009 26 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 The Tanzanian position The Law of Contract Act provides that the effect of incapacity is to render the contract to be void. It is silent on the issue of contractual liability of a minor. The Act however regards some agreements entered into by a minor as being “relations which resemble those created by a contract.” Thus s. 68 provides: “If a person incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person” Therefore it can be seen that a contract with a minor is not recognized as a contract but as a relation resembling a contract and where a person has supplied necessaries to a minor he is entitled to reimbursement from the property of the minor. Also the Sale of Goods Act, a minor who has been supplied with necessaries must pay a reasonable price.(s. 4 proviso Cap. 214) What are necessaries? Necessaries are not defined under the L.C.A. but the Sale of Goods Act, defines necessaries as: “goods suitable to the condition in life of such infant/minor or other person and to his actual requirement at the time of sale and delivery.” (see s.4 proviso, Cap. 214) This definition may not be satisfactory. One may say that necessaries are things or services without which an individual cannot reasonably exist. Thus food, shelter and clothing are necessaries and in addition education and medical services may be included on the list of necessaries. One ought to note that what is or is not a necessary will depend on the condition in life of the minor. As such articles that to one person might be mere convenience or matters of taste, may in the case of another be considered necessaries. The agreements for supplied / offered goods / services which Bussines Law and Ethics, Faulu Inc! 2009 27 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 are necessaries will not be treated as void. On the other hand no contractual liability will be imposed on the minor. The person supplying the goods or offering the services becomes entitled to either a reasonable price or reimbursement from the property of the minor if he has any. NB: The general test of necessaries is that of utility and in this connection the minors condition in life together with the supply of such goods which he already has, become relevant. Reference cases Nash v. Inman (1908) 2 KB 1 The plaintiff was a tailor and the defendant was an infant undergraduate of Cambridge. The plaintiff sent his agent to Cambridge because he had heard that the defendant was spending money freely and might be sort of a person who would be interested in high class clothing. As a result, the plaintiff supplied the defendant with various articles of clothing to the value of £145 during the period of October 1902 to June 1903. The clothes included eleven fancy waist coats. The plaintiff sued the infant for the price of the clothes. The evidence showed that the plaintiff’s father was in good position and it could be said that the clothes supplied were suitable to the defendant’s position in life. However his father proved that the defendant was amply supplied with such clothes when the plaintiff delivered the clothes in question. Thus it was held that the plaintiff’s claim failed because he had not established that the goods supplied were necessaries. Elkington v. Amery (1936) 2 All ER 86 The defendant was an infant and the son of a former minister. He purchased from the plaintiff an engagement ring and an eternity ring, the court treating the latter as a wedding ring. Bussines Law and Ethics, Faulu Inc! 2009 28 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 He also purchased a lady’s gold vanity bag. The court treated the two rings as being necessaries but did not accept that the vanity bag was a necessary because there was no evidence to show that it was purchased in respect of the engagement. Robberts v. Gray (1913) The defendant wished to become a professional billiards player and entered into an agreement with the plaintiff, a leading professional to go on a joint tour. The plaintiff went to some trouble in order to organize the tour, but a dispute arose between the parties and the defendant refused to go. The plaintiff sued for damages of £6000. The court held that the contract was for the infant benefit being in effect for his instruction as a billiard player. Therefore the plaintiff could sustain an action for damages for breach of contract, and damages of £1,500 were awarded. Merchantile Union Guarantee v. Ball (1937) 2 KB 498 The purchase on hire purchase terms of a motor lorry by an infant carrying on business as a haulage contractor was held not to be a contract for necessaries but a trading contract by which the infant could not be bound. De Franceso v. Barnum (1890) 45 Ch. D. 430 Two infants bound themselves in contract to the plaintiff for seven years to be taught stage dancing. The infants agreed that they would not accept any engagements without his consent. They later accepted an engagement with Barnum and the plaintiff Barnum for interfering with the contractual relationship between himself and the infants, and also to enforce the apprenticeship deed against the infants and to obtain damages for its breach. The contract was prima facie for the benefit of the infants and so would be binding on the infants. But the court considered the contract further in detail, and it found up some erroneous terms: eg. The infants bound themselves not to marry during the apprenticeship; they were paid very poorly; the plaintiff did not undertake to maintain them during unemployment and did not undertake to find them engagements; the plaintiff could Bussines Law and Ethics, Faulu Inc! 2009 29 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 terminate the contract if he felt that the infants were not suitable for the carrier of dancing. Thus it appeared from the contract that the infants were at the absolute disposal of the plaintiff. The court therefore held that the contract was unreasonable one and was therefore unenforceable against the infants. Thus Barnum couldn’t be liable. NB: A contract is not binding on a minor merely because it is proved to be for the minor's benefit; but a contract which would otherwise be binding as a contract for necessaries is not so if it contains harsh and onerous terms: Fawcett v. Smethurst (1914) 84 LJKB 473, (Atkin J). (b) Voidable contracts by minor Under the Common Law all agreements by which the minor acquires an interest of a permanent nature in the subject matter of the agreement e.g. lease of premises, a partnership contract, holding of shares in a company may be treated as voidable. They are voidable at the option of the minor. So a minor is allowed by law to call to an end such contracts during his minority or within reasonable time after attaining the age of majority. Reference case Steinberg v. Scala (Leeds) Ltd. (1923) 2 Ch. 452 The plaintiff purchased shares in the defendant company and paid certain sums of money on application, on allotment and on one call. Being unable to meet future calls, she repudiated the contract whilst still an infant and claimed for the removal of her name from the register to relieve her from liability to future calls and also the recovery of money already paid. It was held that she could succeed to remove the name from the register but the claim for recovery failed because there had not been a total failure of consideration. That is; Bussines Law and Ethics, Faulu Inc! 2009 30 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 the shares had some value and gave some rights even though the plaintiff had not received any dividends. (c) Void Contracts by minor Under the Common Law all other contracts with a minor which do not fall within (a) or (b) are void. In Tanzania, the L.C.A elaborates clearly that the general rule is that contracts with a minor are void.(s. 11(2). Thus the contracts which do not fall under s. 68 of the L.C.A or s. 4 of Cap. 214 are void. For instance the following contracts entered into with a minor are declared to be absolutely void. - contracts for the repayment of money lent or to be lent (loan contracts) - contracts for goods supplied or to be supplied other than necessaries 2. Soundness of mind A) LUNATICS Another factor which vitiate capacity is the soundness of mind. A person of unsound mind is incompetent to contract. (s.11(1) A person of sound mind is defined as: “a person who is capable of understanding the contract during the formation of a contract and who is capable of forming a rational judgment as to its effect upon his interests.” (s. 12) SS.12 (2) & (3) provides on the ability to contract by a person who is of always sound mind who sometimes becomes of unsound mind and a person who is always of unsound mind and sometimes sound mind that such persons may only contract when they are of sound mind. In Tanzania a contract with a person of unsound mind is void unless it falls within the ambits of section 68 of the L.C.A or s. 4 of the Sale of Goods Bussines Law and Ethics, Faulu Inc! 2009 31 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Act where the liability of such a person is reimbursement and reasonable price respectively. Under the Common Law, a person of unsound mind can make voidable contracts only if the other party knew of his unsoundness of mind. The contract is voidable at his option (the person of unsound mind). Thus in Moulton v. Camroux, 2 Ex 487, it was held that: "the rule concerning unsoundness of mind has in modern times been relaxed, and unsoundness of mind would now be a good defence to an action upon a contract, if it can be shown that the defendant was not of the capacity to contract 'and the plaintiff knew it." Read also: Imperial Loan Co. v. Stone 1 QB 599, CA. B) INTOXICATED PERSONS The authorities are scanty; but in Gore v. Gibson (1845) 13 M & W 621; 153 ER 260, it was held that a contract made by a person so intoxicated as not to know the consequences of his act is not binding on him if his condition is known to the other party. It appears, however, that such a contract is not void but merely voidable, for it was held in Matthews v. Baxter (1873) LR 8 Ex 132 that if the drunken party, upon coming to his senses, ratifies the contract, he is bound by it. 3. Persons disqualified by law Sometimes persons may be disqualified by law from contracting generally or from entering into certain types of contracts. For instance: a) Bankrupt Persons: The bankrupt persons are disqualified by law from entering into any type of contracts and whosoever enters into a contract with a bankrupt does so at his own peril. Bussines Law and Ethics, Faulu Inc! 2009 32 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 b) Unincorporated bodies and Corporations Unincorporated bodies eg. Clubs, associations and societies are not capable to enter into contracts. This is because they have no separate existence in law. However, these bodies contract through agents and persons authorizing these agents (members of such bodies) are personally liable on such contracts. If a member of a club for instance enters into contract with outsiders for the club; the contract will bind the club members personally if they authorized such a member to contract for them but if the member was not authorized then the contract can not bind the members but it will bind such a member personally. As for Corporations/Companies these are legal persons: A company for instance is capable of concluding contracts in its own name through its duly authorized agents ie. Directors. Such contracts will bind the company but not members personally. But the contractual capacity of a company is limited i.e It can only enter into those contracts which the Memorandum of Association of the company allows. This capacity is found in the objects clause. If the company contracts within the powers stipulated in the objects clause it acts intra-vires and such contracts are valid contracts. But if a company contracts outside this clause it acts ultra-vires/beyond its powers and so the contract be comes null and void. Reference Case In Ashbury Railway Carriage and Iron Co. v. Riche (1875) The company bought a concession for the construction of a railway system in Belgium and entered into an agreement whereby Riche were to construct a railway line. After the commencement of work, the company ran into difficulties and the shareholders wished the directors to take over the contract in a personal capacity and indemnify the shareholders. The directors thereupon repudiated the contract on behalf of the company and Riche sued for breach of contract. The objects clause of the company’s memorandum stated that it was established “ To make or sell or lend on hire railway carriages, wagons and all kinds of railway plant, fittings, machinery and rolling stock, to carry on the business of mechanical Bussines Law and Ethics, Faulu Inc! 2009 33 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 engineers and general contractors, to purchase and sell as merchants timber, coal, metal and other materials and to buy and sell such materials on commission or as agents” The court held that the purchase of the concession to build a complete railway system was ultra-vires and void because it was not within the objects of the company. The contract with Riche was therefore void and the directors were entitled to repudiate it. INTENTION TO CREATE LEGAL RELATIONS This is also referred to as an intention to create treat.. Under Common Law it is a settled principle that there must be a common intention of the parties to enter into legal relations for there to be a contract. What is the importance of intention to create treat? The importance of the intention to create treat lies on the fact that contracts should not be spots of idle hour or mere matters of pleasantry never intended by the parties to have any serious effect whatsoever. Thus under the English law although there may be an evidence of offer and acceptance, the courts may not recognize the agreement as a legally binding contract if they feel that there was no intention on the part of the persons involved that a contract should result from their dealings. The intention to create legal relations may be categorized into two groups namely the domestic arrangements and the business or commercial arrangements. Intention in domestic arrangements The presumption is that social or domestic arrangements do not give rise to legally enforceable contracts even if they look like one. This is a general rule. Domestic or social arrangements include arrangements between a husband and wife, family members or friends. Bussines Law and Ethics, Faulu Inc! 2009 34 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 The agreements between a husband and wife are difficulty to decide whether the intention was there or not especially when they are living in amity. It is easy to infer the intention when the parties to an agreement are not living in amity. Reference case: Balfour v. Balfour (1919) 2 K.B. 571 Balfour went to work in India leaving his wife in England for health reasons. He promised to pay his wife £30 per month for her maintenance. The wife later divorced her husband. Then his husband refused to pay as promised. The wife sued and it was held that this was not a contract because the parties did not intend that they should be attended by legal consequences. In Merrit v. Merrit (1970) 2 All E. R. 760 it was held that the agreement which had been made when the parties were not living together in amity was enforceable as there was an intention to create legal relation. NB: This does not mean that in family or social matters there cannot be a legally biding contract. What the law requires is that the parties must intend legal consequences to follow. Intention in business/commercial arrangements The general presumption here is that in such agreements are intended by the parties to carry legal consequences or to be followed by legal consequences. This presumption may be rebutted where parties intend to rely on each others good faith and honor and not on legal consequences. Reference case: Rose & Frank Co. v. J. R. Crompton & Brothers Ltd., (1925) AC 445 In this case an agreement was drawn between one American & two English firms for their dealings in paper tissues. The agreement contained the following clause: This Bussines Law and Ethics, Faulu Inc! 2009 35 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 arrangement is not entered into as a formal legal agreement and shall not be subject to a legal jurisdiction in the law courts either in US or in England. The agreement was terminated by one of the parties contrary to its terms. The American firm brought an action for breach. The Court held that the document did not constitute a binding contract as there was no intention to effect legal relations. Test for Contractual Intention The intention of the parties must be ascertained from the arrangement & the surrounding circumstance. It is the duty of the court to find out whether the parties intended to enter into legal obligations. The court employs an objective test: i.e what a reasonable person would say in circumstance. CONSIDERATION The meaning of consideration revolves around exchange of values embedded in goods or services. That is, a person who parts with value must be given some value in return. This is according to the maxim “Quid pro quo” which means “something for something and nothing for nothing.” Consideration is a vital element in some contracts but not in all contracts. Thus contracts under seal need no consideration. For an agreement to have legal force it must either be under seal or must be supported by some consideration. Under the Common law Consideration is an important ingredient in all contracts which are not made under seal. Thus in Rann v. Hughes (1778) it was held that all simple contracts (ie. Contracts not under seal whether written or not) must be supported by consideration. It was held Bussines Law and Ethics, Faulu Inc! 2009 36 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 further that the law of the country supplies no means, nor affords any remedy to compel performance of an agreement made without sufficient consideration. What is consideration? There have been various definitions on the concept. But the most celebrated definition was given in the case of Currie v. Misa (1875) LR 10 Ex.153. In this case consideration was defined as: “Some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other” From here we can see that consideration comprises of both positives or negatives to a party. But payment of money is a common form of consideration. In Dunlop v Selfridge Ltd AC 847, it was held that: "An act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable Simply stated therefore, consideration is a detriment to the promisee or benefit to the promisor bargained for, and given in exchange for a promise. Under the L. C. O Consideration is an essential element in all simple contracts concluded in Tanzania as opposed to contracts under seal. The L.C.A. defines consideration as: “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does nor abstains from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise” (s. 2 (d). Bussines Law and Ethics, Faulu Inc! 2009 37 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 From this definition the following things can be deduced: 1. that consideration must be given when the promisor has expressed a desire and not otherwise. 2. that consideration consists of both an act or omission and a promise to act or to omit. Contracts without consideration are generally void. However there are exceptions in the L.C.A which includes the following: a) an agreement expressed in writing and registered under the existing law for the registration of documents which is made on account of natural love and affection between parties standing in a near relation. b) A promise to compensate a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do. c) A promise made in writing and signed by the person to be charged therewith, or by his authorized agent to pay a debt which the creditor might have enforced payment but for the law of limitation of suits (see s.25) Who can furnish consideration? Under the Common Law consideration must be furnished by promisee and promisee only. In Tanzania consideration can be furnished by the promisee or any other person who is not the promisee.(s.2(d) Adequacy and sufficiency of consideration Bussines Law and Ethics, Faulu Inc! 2009 38 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 The price fixed by the parties out of their own free will or consent is what in law is termed as sufficient consideration. However, the kind of consideration agreed upon by the parties may not be based on the market value but only on the wishes of the parties. The law only requires there to be a sufficient consideration hence the rule that consideration needs only to be sufficient but not adequate. This is because parties themselves agree as to what each of them has to do under the contract. The rationale for this is that parties are presumed to be capable of appreciating their own interests and of reaching their own equilibrium. The court will only interfere where it proves duress, fraud, mistake under influence or misrepresentation. Consideration must have economic value In determining sufficiency of consideration one has to consider whether or not the consideration has economic value. Sentimental motives such as natural love and affection have no economic value and therefore they cannot qualify as good consideration. (White v. Bluett (1853) On the other hand nominal consideration and trivial acts of very small value may constitute sufficient consideration in law. Consideration must be Legal The law requires that consideration must be lawful. Illegal consideration renders the whole contract to be illegal and hence void. Types of Consideration (a) Executory consideration: This results from an exchange of promises to perform acts in the future. E.g. “A promises to deliver goods to “B” and “B” promises to pay for the goods. In Tanzania the definition of consideration under S. 2 (1) (d) – The phrase “….. a person may promise to do or to abstain from doing” – Reflects executory considerations. Bussines Law and Ethics, Faulu Inc! 2009 39 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 (b) Executed consideration: This happened where one party promises to do something in return for the Act of another, rather than for the mere promise of future performance of an act. Here performance of an act is required before there is any liability on the promise. E.g. Where “A” offers a reward for return of his lost dog, A is buying the Act of the finder and will not be liable until the dog is found and returned. (c) Past consideration: Comprises of an act (abstinence) which was done before the promise was made and not in response to or induced by subsequent promise. Re McArdle 1 All ER 905. Past consideration is no consideration at all under English law. In Tanzania the phrase “…. Has done or abstained from doing something…. Are questionable as to whether they suggest past consideration is good consideration in Tanzania. However it is argued that the use of the word “has done” is not of past tense but of present perfect tense and therefore the act of doing is not independent of the promise. Therefore it is not past consideration. On the other hand there are exceptions to the general rule that past consideration is not consideration at all which include: i. an agreement expressed in writing and registered under the existing law for the registration of documents which is made on account of natural love and affection between parties standing in a near relation. ii. A promise to compensate a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do. iii. A promise made in writing and signed by the person to be charged therewith, or by his authorized agent to pay a debt which the creditor might have enforced payment but for the law of limitation of suits. (see s.25) Bussines Law and Ethics, Faulu Inc! 2009 40 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 FREE CONSENT / REALITY OF CONSENT Every party to a contract is required to conclude a contract out of his own free will or volition. This is what is meant by the concept of free consent. The concept of free consent is a reflection of the underlying assumptions of a contract namely the freedom of contract and sanctity of contract. By freedom of contract it means that every person is free to enter into any contract. A person may enter into employment contract as an employer or employee and change as he may wish. He has the freedom to bargain the terms of the contract. Principally freedom of movement and freedom of will presuppose equality, that parties bargain the terms of the contract on equal footing and so they enter into contract freely. Meanwhile sanctity to contract means no one other than the parties to a contract who can interfere with a contract validly concluded. This means that it is only the parties to a contract who have the rights and duties under a contract. However, the concept of the freedom to contract has been eroded by the coming of the standard form contracts. This is because the formation of a standard form contract is based not on free consent but rather on the relationships which develop independent of men’s will. Under the L.C.A the concept of free consent is reflected under s.10 as an essential ingredient of a valid contract. On the other hand, although consent may be given by a party to a contract, it may not be real but rather a vitiated or undermined consent. Therefore consent may be undermined by the following factors as discussed hereunder. Factors which undermine / vitiate consent (a) Coercion / Duress Coercion or duress means– committing, threatening to commit any act forbidden by the penal code or unlawful detaining / threatening to detain any property, to the Bussines Law and Ethics, Faulu Inc! 2009 41 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 prejudice of any person whatever: With intention of causing any person to enter into an agreement. (s.15) It must be proved that the other party actually committed/threatened to commit the forbidden act or he unlawfully detained/threatened to detain some property in order to obtain such consent. The effect of coercion is to make the contract voidable at the option of the party whose consent was so improperly obtained. (b) Undue influence This involves improper use of power to affect somebody’s character, beliefs or actions through fear, administration etc. In contract undue influence means improper use of power to obtain consent. The relations between the parties must be such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. S.16 (2) L.C.A. gives situations whereby there is a decreed position of one person to dominate the will of the other. These include:- i) Holding a real / apparent authority over the other or where there is a fiduciary relationship. Eg. Real authority – A magistrate holds a real authority over a person charged with an offence before him; a director has a real authority over a secretary etc Apparent authority/ implied authority: A dismissed police officer or a dismissed agent has an apparent authority. Fiduciary relationship: a husband and wife; A parent and child; A doctor and a patient; etc Bussines Law and Ethics, Faulu Inc! 2009 42 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 ii) Making contract with persons with temporary or permanent incapacity by reason of age, illness, mental or bodily distress. The effect of undue influence is to render the contract voidable at the option of the party whose consent was so caused by undue influence. (s.19) (c) Misrepresentation /Representations Representations are factual statements which are pre-contractual. The pre-contractual statements are statements made to induce a party to enter into a contract. They may be written or spoken or made by conduct. They do not become terms of the contract. These may be true or untrue. They also may be untrue although the maker believes them to be true. If they are untrue they are called Misrepresentations or misstatements. A false statement as to the law cannot be a misrepresentation since everyone is presumed to know the law. The maker of such statements may have been negligent or not in making these statements. If the maker was not negligent in making them they are called innocent misrepresentations / innocent misstatements while if the maker was negligent in making them they are called negligent misstatements or negligent misrepresentations. The statements may be untrue to the knowledge of the maker but he proceeds to make them. In this case they are called fraudulent misrepresentations. In Derry v. Peek (1889) fraud was defined as a false statement made, knowingly, or without belief in its truth or recklessly, i.e without caring whether it be true or false. Under section 18 enumerates three types of misrepresentations namely:- i. Unwarranted statements ii. Breach of duty to speak iii. Inducing mistake about the subject matter of the agreement. Remedies under Common Law: Bussines Law and Ethics, Faulu Inc! 2009 43 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 Innocent misrepresentation: The party so misled can rescind the contract. The effect of rescission is to restore the parties to their original positions. Status quo ante. So that each party become entitled to be relieved of the obligations created by the contract and to recover any benefit which he may have conferred upon the other. Fraudulent misrepresentation: The injured party may either affirm the contract and sue for damages or rescind the contract and sue for damages for any loss suffered. Under L.C.A Both Innocent & fraudulent misrepresentation: The contract become voidable. d) Mistake In the law of contract the word mistake applies to two situations: i) Where the contracting party or parties believe that a present or past fact which is material to their transaction exists when it not; or ii) Where the contracting party or parties believe that a present fact which is material to their transaction does not exist while it does. Mistake of fact and mistake of law The mistake which affect the contract must be a mistake of fact as opposed to a mistake of law. The reason is that everyone is presumed to know the law. (s. 21) Operative and non-operative mistake The mistake which affects the validity of a contract is called operative mistake and it must be a mistake of fact and not of law. Operative mistake can be classified into the following categories:- a) Mistake as to the nature of the contract itself b) Unilateral mistake c) Bilateral mistake Bussines Law and Ethics, Faulu Inc! 2009 44 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 A. Mistakes as to the Nature of the contract itself. The General rule is that a person who signs a contractual document is bound by its terms whether he has read it or not. But under certain circumstances if a person signs a contract in the mistaken belief that he is signing a document of a different nature, there will be a mistake which avoids the contract. Thus mistake as to the nature of the contract itself renders the contract to be void. B. Unilateral mistake This happens when one of the parties to a contract is mistaken as to some fundamental fact concerning the contract and the other party knows, or ought to know this. This is mainly concerned with the mistake on the identity or attributes of the other party. E.g. An offer made to A by C, is accepted B. who pretends to be A. The effect here is that the contract becomes void. C. Bilateral mistake This happens when both parties to a contract are mistaken. They are of two types:- 1. Common or identical mistake: This occurs when both parties make an identical mistake as to some fundamental fact concerning the contract. In absence of fraud or misrepresentation where there is a common or identical mistake in a contract the parties are bound except in cases of Res extinata and res-sua which renders the contract void. Res extincta: Mistake as to the existence of the thing contracted for e.g. parties agree to sell a car which is destroyed by fire at the time of sale unknown to them both. Res Sua: Occurs when a person makes a contract to buy something which already belongs to him. 2. Mutual or non-identical mistake: Bussines Law and Ethics, Faulu Inc! 2009 45 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 This occurs when the parties are both mistaken as to a fundamental fact concerning the contract but each party has made a different mistake: The contract does not necessarily become void if the court can find a sense of promise in it under common law under the law of Contract. Therefore there are circumstances where it may not become void. See s.20 – Mutual mistakes in which consent may not be defeated but nullified. See also s. 13 – Mutual mistake in which consent may be defeated or rendered unreal and negatived. Here each of the parties to an agreement is mistaken as to the intention of the other and each does not know that he has been misunderstood. The parties make different mistakes. Parties were not ad idem as such there was no consent. The Plea of Non Est Factum (It is not my act) Under Common Law The apparent signed contract will be regarded as void if a party can successfully plead the defence of non est factum. Under this plea a person disowns his signature and the document, that he never consented to the terms appearing in the document. However to succeed under this defence three things must be proved: a) that the signature must have been induced by fraud b) that the document must be fundamentally different from that thought to be signed. But a mistake as to the contents is not sufficient to allow non est factum to be raised. c) That the writing fails to express the agreement of the parties. Reference cases: Lewis v. Clay (1897) In this case a party who was induced to sign promissory notes by the fraudulent misrepresentation that his signature was required as a witness successfully pleaded non est factum. Here the rest of the document apart from the space for signature was covered by blotting paper having being told that this was a document of a private nature. Bussines Law and Ethics, Faulu Inc! 2009 46 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 It was held by the court that the defence of non est factum applied even though the plaintiff could not say precisely what type of the document he thought he had signed. In Tanzania There is no provision in the L.C.A. which covers the plea of non-est factum but it is traced from the Common Law precedents. An authority for this position is found in the case below:- Sluis Bros (EA) Ltd. v. Mathias & Tawari Kitomari (1967) H.C.D. 425 The appellant is a Tanzania registered Company affiliated to a Dutch Co. The appellant had entered into a standard form contract with the respondent farmers for the business of growing, buying and exporting seed beans. The company supplied stock seeds to farmers and peasants and then the appellant would buy the harvested seed beans and export them. The standard contract contained “terms and conditions of agreement written in English. The terms spelt out the rights of the appellant on the one hand and the obligations of the peasants/farmers on the other. The peasants did not understand English and they believed they were dealing in a joint venture with the appellant in which they would contribute their farms, energy and time while the appellant would contribute seeds, fertilizers, insecticides and cost of labour. Meanwhile the contract provided that what was given to the peasants farmers was by the way of loan deductible at the time of the sale of the produce. The appellants sued the respondents claiming 48,007/25 as an outstanding on the contract. The Respondents raised a defence of non-est factum The respondents won the case. On further appeal to the CAT the decision of the high court was upheld. Bussines Law and Ethics, Faulu Inc! 2009 47 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 PRIVITY OF CONTRACT Privity of contract is the relation while exists between the parties to a contract which is necessary to enable one person to sue another on it. The Common Law doctrine of Privity This is noted from the Common Law doctrine that no one can sue or be sued on a contract to which he is not a party. Therefore it is only the parties to a contract who acquires rights and incur liabilities under it. It is only a person who made promise or consideration has rights and liabilities. A stranger can neither sue or be sued on the contract. Reference cases Scruttons v. Midland Silicones (1962) In this case a shipping company agreed to carry drums of chemicals belonging to P from America to England, the contract limiting their liability to $ 500 per drum. The shipping company hired a firm of stevedores to unload the ship and due to the stevedores negligence the chemicals were damaged to the value of $ 1,800 per drum. P were successful in their tort action against the stevedores, recovering their full loss. The court held that the stevedores could not rely on the exemption clause in the contract between P and the shipping company because they were not a party to this contract, nor were they protected by a similar exemption clause in their contract with the shipping company because P was not a party to this contract. Beswick Beswick (1867) Mr Beswick entered into an agreement with his nephew, whereby the nephew was to take over Beswick’s business in return for a payment of £6.50p per week to Beswick during his life and after his death £5 per week to his widow. When Beswick died the nephew stopped the payments. Beswick’s widow sued the nephew both in her personal capacity and in her capacity as an administratix of his estate. She failed in her personal capacity but succeeded as administratix and was awarded a decree of specific performance against the nephew. Bussines Law and Ethics, Faulu Inc! 2009 48 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 The Tanzanian Position In Tanzania the Law of Contract Act is silent on the principle of privity of contract. S.2 (1) (d) permits a 3rd person to furnish consideration but doesn’t allow him to sue on the contract on the ground that although he furnished consideration he is not a party to a contract. In Ephraim Obongo v. Naftael Okeyo (1968) HCD 288 it was held that the principle of privity of contract should not be applied in customary contract cases. But the doctrine applies in non-customary contracts. In Tarlock Singh Nayar v. Sterling General Insurance Co. Ltd. (1966) EA 144 the claimant who was not a party to the insurance contract was held unable to sue in his own name because he was a stranger to the contract. Exceptions to the privity rule 1. Negotiable instruments: The Bills of Exchange Act cap.215 empowers a holder of a bill to sue in his own name. 2. Agency: Contracts entered into through an agent may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person. 3. Arrangements creating trust: When a trust has been created and proved, then the beneficiary third party, may sue on the contract in his own name. THE CONTENTS OF CONTRACTS A contract is made up of terms or clauses which shows what the parties have undertaken do, and the manner of performing the agreement. Depending on the nature of a particular contract; a contract may contain three types of clauses namely express terms, implied terms and exemption clauses. Bussines Law and Ethics, Faulu Inc! 2009 49 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 1. Express terms: They can be deduced from the following: i. Statements of the parties: In order to decide upon the express terms of the contract it is necessary to find out what was said or written by the parties. This is because contracts may be oral or written, or partially oral and partially written. ii. Representations and terms: Having ascertained what the parties said or written it is necessary to decide whether the statements are representations or terms. Representations: These are statements which merely induce a party to enter into contract. Terms: These are party of the contract itself and make up its contents. How can you distinguish a term from a representation? Certain tests are applied to decide whether a statement is a representation or a term: 1. Intention of the parties: If the parties have indicated by their words a particular provision to be a term the court will follow the intention. Therefore it will be a term. 2. A statement is likely to be a term if it is made with intention of preventing the other party from finding any defects and succeeds in doing so. On the other hand a statement is not likely to be a term if the person making it asks the other party to check or verify it. 3. If the statement is such that the aggrieved party would not have made the contract without it, then the statement will be a term of the contract. 4. The statement made during preliminary negotiations tend to be pre- contractual. Bussines Law and Ethics, Faulu Inc! 2009 50 Bussines Law and Ethics, for master and postgraduate Faulu Inc 2009 iii. Collateral contracts/ collateral warranty: This is a concept used by court to provide a remedy for what was in effect on non-fraudulent misrepresentation such as a statement by the defendant which could not be regarded

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