Law of Contract (ii): Terms, Vitiating Factors, Discharge and Remedies

Once a contract is formed, three questions follow. What exactly did the parties promise, and which promises matter most? Is the contract free of the defects that allow a party to escape it? And if it is valid, how does it end, and what can the injured party do if the other side breaks it? The first topic dealt with formation.

This one deals with the contents of a contract, the factors that invalidate it, its discharge and the remedies for breach, and the examiners use it for both list questions and problem questions.

This topic covers the terms of a contract (express and implied terms, conditions, warranties, innominate and fundamental terms), exemption clauses, the vitiating factors (mistake, misrepresentation, duress and undue influence), the discharge of a contract, and the remedies for breach: damages, rescission, specific performance, repudiation, restitution, rectification, injunction and quantum meruit.

Terms of a contract

The undertakings, promises or compromises made in the course of negotiating a contract, with which the parties intend to abide, are its terms. They must be certain and never vague. The discussions during formation are representations, and the points agreed become the terms. Terms are the legal contents of the contract.

Express and implied terms

• Express terms are agreed by the parties and stated in the agreement.
• Implied terms are not specifically stated but are read into the contract as if the parties had agreed to them. Terms are implied by: (i) the custom or usage of the trade, profession or locality; (ii) provisions of law regulating the type of transaction; (iii) decisions of the courts in similar cases; and (iv) terms the court could introduce if the parties had not agreed on them. An implied term cannot override an express term, except as a statute provides.

November 2020 asked the examiners for definitions of express terms, implied terms, conditions and warranties (4 marks).

Conditions, warranties, innominate and fundamental terms

The fundamental term developed after L’Estrange v Graucob (1934), where the court held that liability for breach of a condition could be excluded by an exemption clause.

Exemption clauses

An exemption or limitation clause exempts a party partially or totally from liability if a certain event occurs. The courts usually uphold them except where they are against public policy or a known law. The rules are:

1. The clause must be clear and unambiguous.
2. In a standard form contract (such as a passenger ticket or a receipt for goods), it must be brought to the attention of the other party in good time. A clause in small print behind the document, whose attention is not drawn to it, is not effective for lack of notice.
3. Where the party signs the document, he is bound by the clause unless fraud is proved (L’Estrange v Graucob).
4. Where a statute prohibits a type of exemption clause, a clause of that type is void.
5. It may not exclude a fundamental breach, so it is not an absolute defence.

Vitiating factors

Even where all the elements of a contract are present, a factor may make it invalid. The syllabus lists mistake, misrepresentation, and duress and undue influence. In November 2017 the examiners added illegality. November 2017 asked for three vitiating elements (3 marks).

Mistake

The parties may be under a mistaken assumption about the subject matter or purpose. It may be of fact or of law. In general a mistake makes the contract void, though equity sometimes holds otherwise. There are four kinds (November 2022 asked for three, 9 marks).

Misrepresentation

Misrepresentation is making a false statement to the other party, with the intention that he act on it and enter the contract. It is a good ground for avoiding the contract.

The elements

• a statement of fact, not law;
• the statement is false, and known only to the maker;
• it relates to a present or past event, not a future one, and is not a statement of intention;
• it is capable of vital proof; and
• generally, silence is not misrepresentation.

In addition:

• an opinion that is not actually held, or on which the speaker is ignorant, is a misrepresentation
• an opinion stated as a fact is a misrepresentation
• conduct, a nod or a smile can be a misrepresentation if it induced the other party

November 2022 asked for four elements (4 marks), May 2015 for the meaning and a type, and May 2018 for the meaning and two types.

The types

The effects include the right to avoid (rescind) the contract, and, for negligent and fraudulent misrepresentation, damages.

Duress and undue influence

Parties are presumed to be of equal status, but a contract made under force or influence is voidable.

• Duress is entering a contract under a threat to the party’s person, property or livelihood. It is unlawful pressure by threat that induces a party to contract for fear that the threatened act will be carried out. A man made to sign a contract while a gun is pointed at his head acts under duress.
• Undue influence arises where one party, at an advantage over the other, uses that position to influence him to contract. The relationships given are solicitor and client, parent and child, and religious adviser and member of the congregation.

A person who wishes to avoid such a contract must act within a reasonable time of leaving the duress or undue influence.

Illegality

A contract with an unlawful purpose is void and cannot be enforced. The syllabus does not discuss it in detail, but the examiners asked about illegal contracts and their effects in May 2023 (4 marks), and in November 2017 included illegality as a vitiating element. The safest answer is that the court will not enforce an illegal contract, and that the parties generally cannot recover what they have paid under it.

Discharge of a contract

A contract is discharged when it comes to an end. The syllabus gives these ways:

1. Performance. It releases the parties from further obligations, but performance must be full and complete.
2. Operation of law. A law may make performance of an otherwise valid contract illegal.
3. Fundamental breach. A breach that goes to the root of the contract. It renders the contract void and can lead to damages and other consequences.
4. Agreement. It may arise from a condition precedent already written into the contract, or from the parties’ mutual consent.
5. Frustration. An act outside the control of the parties, often called force majeure, makes performance impossible through no fault of either. Examples are the destruction of the subject matter, the death of a party, the unavailability of materials, the cancellation of an event, and supervening illegality.

November 2015 asked for three ways (6 marks). The examiners explained performance, fundamental breach and agreement between the parties.

Remedies for breach of contract

A breach occurs when a party refuses to perform his obligations. It may be an express repudiation before the date for performance or during it, or making performance impossible. A breach does not itself discharge the contract, but it may allow the injured party to sue for damages. The remedies depend on the nature of the contract and the gravity of the breach.

Damages

Damages is the compensation that puts the aggrieved party in the position he would have been in if the breach had not occurred.

Nigerian courts follow Kusfa v United Bawo Construction (1994), which relied on Hadley v Baxendale: damages should be such as may fairly and reasonably be considered either (a) as arising naturally, in the usual course of things, from the breach, or (b) as may reasonably be supposed to have been in the contemplation of both parties at the time of the contract as the probable result of the breach.

If special circumstances were communicated to and known by both, damages cover the injury that would follow in those circumstances. If the special circumstances were unknown to the party in breach, he is liable only for the general injury.

The other remedies

The examiners’ list in May 2022 (five remedies) added an action to account for profits from the breach and an action for the price or other sum, called money had and received.

Working through the rules

Condition or warranty?

Which vitiating factor?

Is the contract discharged?

Worked problems

Problem 1: Ayo and Bola

1. The issue. A unilateral mistake by Bola, and Ayo’s awareness of it.
2. The rule. A unilateral mistake does not avoid the contract if the other party did not know of it. But the contract may be avoided if the other knew that the party was making a mistake (Lake v Simons).
3. The application. The price had been agreed at ₦10 million, so Ayo knew ₦1 million was a mistake and took advantage of it.
4. Advice. The contract is not enforceable against Bola, and Ayo’s action for specific performance will fail.

Problem 2: Christy’s wedding photographer

1. The remedies. Damages; quantum meruit; specific performance; injunction; rescission; rectification; restitution; and an action for the price or money had and received.
2. The best remedy. The event has passed, so specific performance, injunction and rectification are of no use. Christy should claim damages for the extra cost she bore, and recover the fee she paid (money had and received or restitution).

Problem 3: the contract for the exhibition

1. The rule. A contract is discharged by frustration where an event outside the parties’ control makes performance impossible, such as destruction of the subject matter.
2. The application. The fire made performance impossible without fault.
3. Advice. The contract is frustrated and discharged. The owner is not liable in damages.

Problem 4: the ticket

1. The rule. An exemption clause in a standard form contract must be brought to the other party’s notice in good time and must be clear. A clause in small print behind the document, not drawn to the passenger’s attention, gives insufficient notice.
2. Advice. The carrier is likely not to be able to rely on the clause, and the passenger may claim damages. If he had signed, he would be bound unless there was fraud.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying a breach of warranty lets the innocent party end the contract. It gives damages only.
• Saying that all mistakes make a contract void. A unilateral mistake does not, unless the other party knew.
• Confusing misrepresentation (a false statement before the contract) with a breach of a term.
• Saying that silence is misrepresentation.
• Naming negligent misrepresentation outside a fiduciary relationship, as the syllabus limits it.
• Saying a signed document is never binding. A signed document binds unless there is fraud or non est factum.
• Listing damages as the only remedy. Name at least five.
• Offering specific performance for a personal contract, or for an event that has passed.
• Saying frustration entitles one party to damages. It discharges both parties without fault.

Quick revision

• Terms: express and implied (custom, law, courts). Condition (discharge or damages). Warranty (damages only). Innominate. Fundamental (goes to the root).
• Exemption clauses: clear, noticed in good time, binding if signed unless fraud, void if statute forbids, no excuse for fundamental breach.
• Mistake: common, mutual, unilateral, non est factum. Misrepresentation: false statement of fact, innocent, negligent, fraudulent. Duress and undue influence: voidable.
• Discharge: performance, operation of law, fundamental breach, agreement, frustration.
• Remedies: damages (Hadley v Baxendale), rescission, specific performance, repudiation, restitution, rectification, injunction, quantum meruit, action for the price.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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