Introduction
Contracts are fundamental to both business and personal transactions. They govern the sale of land, goods, and services, and establish various business relationships, such as partnerships, joint ventures, and employer-employee relationships.
A well-drafted agreement defines the parties, their rights, roles and responsibilities and sets clear expectations. Further, it provides the parties with legal protection and may outline a dispute resolution framework. The goal of a good contract is to create a legally binding relationship, prevent disputes and to serve as a reliable reference in case of a conflict.
This article is a comprehensive guide to contract law in Kenya. It covers the legal framework, the essential elements of a contract, the validity of contracts and breach of contract. It is an invaluable guide for anyone drafting, reviewing handling contractual disputes.
Legal Framework of Contract Law in Kenya
Kenyan contract law is primarily governed by the Law of Contract Act. It regulates contractual relationships, establishing the elements of valid and enforceable contracts, and the remedies for breach. Therefore, it helps to protect contracting parties.
English common law and the doctrines of equity apply to contract law. They are applicable under Section 3(1)(c) of the Judicature Act. They apply as long as they align with the Kenyan context, our local laws, customs, and values.
Other sources of contract law are Kenyan case law and sector-specific statutes governing a sector when the contract governs a relationship in a specified sector. For example, the Employment Act and its subsidiary legislation govern employment contracts; and the Insurance Act and its subsidiary legislation govern insurance contracts.
What Is a Contract?
A contract is a legally binding agreement between two or more parties. It ensures that promises made by the parties are valid and enforceable under the law.
Contracts can be in writing, verbal, or implied through conduct. However, written contracts are preferable as they provide clarity and simplify enforcement.
Contracts vs Deeds
While both contracts and deeds create legally binding obligations, they differ in key ways. A contract must have an offer, acceptance, consideration and an intention to create legal relations. In contrast, a deed does not require consideration to be valid and enforceable. A deed need only be signed, sealed, and delivered. Examples of deeds include a Deed of Guarantee, a Trust Deed and A Power of Attorney. Depending on the type of deed, additional formalities, such as registration, are necessary to give validity.
Elements of a Valid Contract: What Makes a Contract Legally Binding?
A contract needs to meet certain legal requirements to be valid. Where these requirements are not met, a dissatisfied party can go to court to have the agreement declared void, invalid, or unenforceable.
1. Offer and Acceptance
A contract begins when one party makes an offer, and the other party accepts it under the proposed terms. Acceptance must be clear and unconditional. For example, if a party offers to sell a car for KSh. 500,000 on “as is, where is basis”, the other party must agree to this offer without modifying the terms to form a binding agreement. If instead the buyer agrees to the purchase price but proposes that the seller repaint the car before he accepts it, there is no valid acceptance.
2. Consideration
Consideration refers to the exchange of something valuable between the parties. This could be money, goods, services, or even a promise to perform or refrain from performing certain actions. In our example, the car is exchanged for the purchase price. This is the consideration.
3. Intention to Create Legal Relations
The parties must intend for the agreement to be legally binding on all of them. In our example, the seller may give possession of the car to the buyer to test drive for a few days. There is no valid agreement even if the buyer has possession of the vehicle. If a buyer says they will return to purchase the same car later, this promise is not legally binding. The buyer isn’t obligated to come back, and the seller can’t be forced to hold onto the car until they do. It’s simply a casual agreement, not a legal contract.
4. Capacity to Contract
For a contract to be valid, all parties must have the legal ability to enter into a contract. This means that they must be adults, of sound mind, and acting voluntarily. Minors, people under the influence of drugs or alcohol, individuals with mental impairments, or those not acting freely do not have this legal capacity.
Here it is relevant to also mention that one must enter into a contract with a party that has the power to act. For example, with companies a party must be authorized to sign an agreement on its behalf.
5. Lawful Purpose
The contract must involve legal activities. A court cannot validate an agreement created to fulfil an illegal purpose even if it meets all other criteria. If an agreement establishes an illegal relationship, like employing a minor, or manages an illegal trade, such as selling prohibited drugs, a court will declare it unenforceable.
6. Certainty and Clarity
The contract must clearly define the parties, outline their rights and obligations and the consideration (the goods, services, property, or money to be exchanged) so that there is no confusion about the parties’ intentions. Following our example, a seller may have 2 cars of the same make, model and year of manufacture, the only thing that distinguishes them is their number plate. It is therefore important that the parties ensure that they are referring to the correct vehicle.
It is very challenging to enforce a vague or ambiguous agreement. This is why it is so important to have a well-drafted, and written agreement.
The Validity of Contracts: Void, Voidable, and Unenforceable Agreements
Understanding the difference between void, voidable and unenforceable contracts is crucial in contract law. It helps clarify the status of agreements and the options available to parties involved in case of a dispute.
Void Contracts
A void contract is not legally valid from the start. It has no legal effect, and both parties are released from any obligations to perform it. An example of a void agreement is one involving an illegality or one signed by a person without authority. Unlike Voidable contracts, a void contract cannot be enforced by or against any party.
Voidable Contracts
A voidable contract is an agreement that is legally valid and enforceable on the surface, but one or more parties have the right to void or rescind the contract due to specific legal reasons, such as:
- Duress: One or more of the parties entered into the contract under threat or pressure.
- Misrepresentation: One or more of the parties was induced or entered into the contract based on false information.
- Undue Influence: One or more of the parties took advantage of their position of power over another to influence their decision to enter into the contract.
- Lack of Capacity: One or more of the parties were not legally competent to enter the contract.
The key feature of a voidable contract is that the affected party can choose to enforce it or rescind it. However, if not rescinded on time, it becomes enforceable as a valid contract.
Unenforceable Contracts
An unenforceable contract cannot be enforced by law due to some issue that prevents its enforcement. Common reasons for unenforceability include:
- Statute of Limitations: A contract may no longer be enforceable if the legal time limit for bringing an action has passed. This is set at six years.
- Failure to Comply with Legal Formalities: Some contracts must meet specific formalities. For example, contracts involving land must be in writing, registered, and stamp duty paid). If the requirement is not met, the contract is unenforceable.
- Illegality: Contracts involving illegal activities are unenforceable. For example, a contract that involves an illegal activity like drug trafficking is unenforceable.
An unenforceable contract remains valid, but cannot be enforced by legal action.
Valid Contracts
A valid contract meets all the essential elements of a contract and is fully enforceable by law. A valid contract is legally binding, and failure to perform according to its terms can result in remedies like damages or specific performance against the defaulting party.
Breach of Contract
Definition
A breach of contract occurs when one party fails to fulfil their obligations under the agreement. Breaches can be:
- Minor Breach: The breach doesn’t significantly impact the contract’s purpose. For example, delivering goods slightly late but in acceptable condition.
- Material Breach: A significant failure that undermines the contract’s purpose, such as delivering defective goods or failing to provide agreed services.
- Anticipatory Breach: When one party communicates their inability or unwillingness to perform their obligations before the due date.
Regardless of the type, a breach can have serious consequences. Kenyan courts assess the severity of the breach and the damages caused when determining remedies.
Remedies for Breach of Contract
When a breach occurs, the injured party can seek legal remedies. The goal is to compensate for losses or restore the situation as if the contract had been performed. Common remedies include:
1. Damages
Damages are monetary compensation for losses suffered due to the breach. They can be:
- Compensatory Damages: Cover actual losses, such as lost profits or additional costs incurred.
- Punitive Damages: Awarded in rare cases to punish the breaching party for egregious misconduct.
2. Specific Performance
The court orders the breaching party to fulfil their obligations. This remedy is common in contracts involving unique goods or land, where monetary compensation may not suffice.
3. Injunctions
An injunction restrains a party from performing specific actions that would breach the contract. For example, a court might issue an injunction preventing a party from selling property they promised to another buyer.
4. Rescission
The injured party cancels the contract, restoring both parties to their pre-contractual positions.
5. Restitution
The breaching party must return any benefits they received under the contract to the injured party.
Termination of Contracts
Termination of a contract marks the legal end of an agreement and releases the parties from their obligations. Contracts can terminate in several ways, depending on the terms and circumstances involved. These include:
- Termination by mutual agreement is a common route, where both parties consent to end the contract. It is often formalized through a written termination agreement.
- A contract may also terminate naturally through performance, where all parties fulfil their obligations, bringing the contract to its intended conclusion.
- Breach of contract can also lead to termination, especially when one party fails to meet their commitments, giving the injured party grounds to terminate and pursue remedies.
- In some cases, unforeseen circumstances may render performance impossible, leading to termination by frustration; examples include the destruction of essential materials or legal changes that make the contract impossible to perform.
Many contracts include termination clauses, which specify the conditions under which the agreement may be ended. Regardless of the method, proper documentation and compliance with the relevant law, help to ensure that termination is legally valid and minimizes disputes. A common scenario here is employment contracts bringing rise to ispute such as Unfair Dismissal and Constructive Dismissal.
Written Agreements
While verbal contracts are valid and enforceable, written agreements offer greater clarity and protection. They serve as concrete evidence of the terms agreed upon and help avoid misunderstandings.
Types of Contracts That Must Be in Writing
Section 3(1) of the Law of Contract provides that certain agreements must be in writing to be enforceable under Kenyan law. These include:
- Contracts for the sale or disposition of land.
- Leases exceeding three years.
- Contracts of guarantee (where one party agrees to be responsible for another’s debt).
Under Section 6(3) of the Marriage Act prenuptial agreements are also required to be in writing to be enforceable. It states that parties intending to marry may enter into a written agreement before their marriage to determine property rights during the marriage.
Finally, under Section 4 of the Insurance Act, an insurance contract is valid when evidenced by a written policy. Further, the Insurance Regulatory Authority (IRA) mandates that all insurance companies issue written policies that outline the terms of the insurance coverage, premiums, exclusions, and claims process.
Failure to formalize these agreements in writing renders them unenforceable in court.
Both parties must sign a written agreement to make it valid. These days electronic signatures are a valid way to sign an agreement. It is also recommended that the agreement is dated. Witnesses may be useful but are not necessary unless required by law.
Enforcing Your Contract
If a party to a contract is dissatisfied in some way, depending on the terms of the agreement that party can enforce the contract. Kenya allows the use of various dispute resolution mechanisms to enforce agreements and/or resolve contractual disputes.
Dispute Resolution under Contract Law
Common dispute-resolution mechanisms include:
- Negotiation: Parties try to resolve the issue through direct communication.
- Mediation: A neutral third party helps both sides reach a mutual agreement.
- Arbitration: An arbitrator makes a binding decision outside of the court system.
- Litigation: The formal process of resolving a dispute through the courts.
While it is not necessary to include a dispute resolution mechanism in your agreement, if you refer to use arbitration, it is important to specifically say so in the agreement. Otherwise, the default mechanism is through litigation in a court of competent jurisdiction. However, parties are free to decide to use arbitration at any point.
Conclusion
Contract law is intricate, therefore, even minor errors can lead to significant financial or legal consequences. A contract should aim to protect the rights and interests of both parties to the agreement. To ensure that your rights and interests are well protected, always seek legal assistance to ensure that you understand the agreement before signing it.
Need Help with Contracts?
If you’re unsure about any aspect of a contract, have a general contract law query or need assistance drafting or enforcing an agreement, reach out to us through our Contact Us form, by Scheduling a Free Consultation or through Email on info@wacumureithiadvocates.co.ke.