Kenya Contract Law Revision Papers

1. What is the challenge of an ideal contracting system? Express your answer in terms of the risk and balance of power.

An ideal contracting system must allow parties the freedom to identify and redistribute all possible commercial risks, while regulating the balance of power between them. (Class notes 8/30).

2. In an ordinary commercial transaction, what are the pre-contractual risks of the buyer and the seller, respectively?

The buyer risks that he could pay less for the item, and that the price will go up. The seller risks that he could get more for the item, and that the price will go down. In simple terms, both risk that they could do less well.

3. (T/F) A person can contract to redistribute risks over which he has absolutely no control.

True. As in Anderson v. Backlund, where one party contracted that there would be water, essentially guaranteeing that it would rain.

4. (T/F) Both parties assume the risk of fulfilling exactly the terms of the contract, however absurd or improbable, as long as it remains possible to fulfill that contract.

True. In School Trustees of Trenton v. Bennett, the contractor was still responsible for completing the school house even after it was destroyed twice by acts of God, because there was no redistribution of that kind of risk in the contract. The parties could just as easily assigned liability for acts of God in the contract.

5. Short of specifically identifying each possible risk and assigning it between parties, what is one way a contract avoid litigation for unforeseen risks?

The contract can contain language that states that in the event of unforeseen events, such as acts of God, the parties will then submit themselves to binding arbitration. (Class notes 8/30).

6. In the absence of fraud, or specific contractual language to the contrary, who assumes the risk that the item being purchased is of a higher quality than either party had known? Buyer or seller?

The seller has the specific pre-contractual risk that he might get more money for the item in a perfect market. Thus, unless the contract specifically redistributes that risk, or the buyer is fraudulent, the seller retains that risk. For example, the woman in Wood v. Boynton risked that the jewel she sold was a diamond and not a topaz. Also, the rancher in Sherwood v. Walker risked that he was selling a cow that he did not know was pregnant. Furthermore, the shareholders in Kennedy v. Panama Mail Co., could not back out once they realized that the company was not as attractive as they had thought because they had not won a lucrative contract.

7. Why should parties not be allowed to exit from a contract when they have ended up worse overall, even greatly worse, as a result of contracting instead of foregoing a contract?

To allow parties to exit contracts because it turned out to be a bad decision would be to defeat the very nature of the contract. It would become useless as a means to regulate commercial transactions because they would no longer be enforceable. (Class notes 9/1).

8. How explicit in a your reservation of power language does you have to be to place yourself squarely within the "zone of safety" and avoid being subjected to contractual liability?

There is no amount of explicitness of language that can exempt you from contractual liability if there is contradicting language or conduct on your part designed to reasonably convince the other party that you have committed. (Class notes 9/6). For example, in Jenkins Towel, Fidelity was very explicit in stating that the final determination of the contract was up to them. However, their actions were such that Jenkins Towel was reasonable in ignoring the explicit language and relying on Fidelity's conduct. Similarly, in Mabley v. Borden, the Mabley Co. was very explicit in absolutely reserving the right to withdraw their offer of pension at any time. However, the nature of the pension document as a whole was to induce employees to remain with the company.

9. Why is the law of contract deliberately fuzzy as to when parties have crossed the line into contractual obligation?

In order to promote good faith, ethical business practices, the courts will not draw a bright line between contract and no contract. This enables them to better regulate the contracting process. The courts realize that contracting parties need room to "wiggle", but the more carefully you couch your terms and equivocate, the more likely that you will lead the other party into reasonably relying on your favorable language and conduct. Courts are quicker to step in when the risk is very lopsided.

10. (T/F) A contract is rendered invalid due to lack of consideration if the parties leave some terms open to be negotiated at a later time.

False. The fact that some matters are left for future negotiation does not preclude the finding that a binding contract was formed during the preliminary stages. In both Itek and Borg-Warner the parties left terms open to be later negotiated, and in both cases, a binding contract was enforced. It is a common equivocation strategy to attempt to reserve power to terminate a contract if some future negotiations turn sour. This enables the parties to keep on the look out for better opportunities in the future, and be able to exit from any obligations that they might already be under. However, when these actions are coupled with conduct that creates a reasonable reliance in the other party, a binding contract is formed. (UCC §2-311).

11. What is the pre-contractual risk between an unconscious patient and a doctor who has performed services upon him? What type of contract is found between them? How would a "sliding scale" based on the patient's ability to pay affect the risks?

The unconscious person risks that he will not be treated, and perhaps die. The doctor risks that he could get more money for his services. A court would construct a "quasi-contract" also known as an "implied in law" contract between them to avoid the patient being unjustly enriched at the doctor's expense. The sliding scale, if used, would determine the amount of the doctor's recovery, thus "fine tuning" the exact amount of risk redistributed between them. The more closely the recovery was fixed to the ability of the patient to pay, the more closely the transaction would resemble a normal doctor/patient relationship of the time, therefore bringing the remedy closer to expectation damages. The court in Cotnam v. Wisdom found that the sliding scale was not applicable to unconscious patients, and thus limited the recovery to restitution damages.

12. In Vickery v. Ritchie, the parties attempted to form an express contract for the construction of a turkish bath house, but they were each presented an improper price by the architect who later left. As it turns out, the construction company spent about $33,000 in materials and labor, but the resulting market value of the property dropped to about $22,000. In terms of risk and good regulatory policy, why should the court award the contractor the fair market value of his materials and labor, as opposed to the resulting fair market value of the property?

Since the bath house had already been built, the landowner had been unjustly enriched at the expense of the builder. Therefore, the court constructed a quasi-contract between the two parties. In determining the remedy, the court must determine the amount of the unjust enrichment. In making their decision, the court observed that the parties had made no redistribution of risk as to who would bear the loss if the resulting value of the property was less than expected. Since this was a pre-contractual risk to the landowner, which had never been redistributed, it was left with the landowner. Thus, the landowner was forced to pay the fair market value of the materials and services because that is how much he was unjustly enriched at the builder's expense.

13. Should a bidder for a government contract be awarded damages if his bid is not considered by the government, or if it is considered but rejected in bad faith? If so, how should damages be awarded? Does the government obtain any benefit from the bidding process?

Yes. When a contractor entertains bids under the advertisement of giving them good faith consideration, he is liable to the bidders for the cost of preparing the bid if he does not give them good faith consideration. Thus, the bidder should be awarded reliance damages. The contractor receives the benefit of getting the lowest price because of the competitiveness of the bidding process. In return, he offers the bidders the opportunity to be considered in good faith for the contract. (Heyer Products).

14. What considerations, other than the conduct of the parties involved, might a court take into account in determining the amount of damages to award in a contract case?

The court takes an active role in regulating commercial transactions. Thus, in order to encourage litigation in cases where the stakes might otherwise be to low, the court will sometimes award expectation damages. This policy sends a clear message of deterrence to potential contracting parties.

15. What is the difference between express and implied in fact contracts? Any difference at the "bottom line"?

An implied-in-fact contract differs from an express contract in the medium of expression. The express contract is in words, either spoken or written, and the implied in fact contract is in terms of conduct of the parties. Both contracts protect the expectation interest, so there is no difference in the remedy. However, the implied in fact contract can be more difficult to prove. (Class notes 9/22).

16. What special problems to contractual obligation are found in cases involving family members?

In cases involving familial relations, the courts tend to presume that the services rendered were solely due to love and affection, and not due to any deliberate contractual re-distribution of risk. The courts prefer to let the families manage risks in their own way without becoming involved unless the transaction has some commercial nature. (Class notes 9/22).

17. If two parties to a transaction leave the price open for further negotiation in the future, but then fail to reach a good faith determination of price when it comes time to negotiate, can the "contract" be enforced? If so, what should the price be set to?

Yes, the contract can be enforced. Even such an essential term as price can be left to future negotiations. If the parties fail to negotiate a price between them, then the price shall be deemed to be a reasonable price at the time of delivery. (UCC §2-305, and Sun Printing, dissent).

18. Where there is ambiguity as to the terms of a transaction in the communications between parties, how is the "mistake" most likely to be construed by the courts?

The courts will most likely construe "mistaken" language to be intentionally equivocal and not merely sloppy, so as to put a strong message forward that the burden is on the communicator to ensure that they are as clear as possible in their communications. The originator is in a better position to avoid ambiguity in communication than the recipient is to interpret it as it was "intended". To hold otherwise would create an incentive for persons to be intentionally ambiguous because they could later claim that the language was a mere "oversight". For example in U.S. v. Braunstein, the gov't made a clerical error in the price on the telegram. Although the ∆ knew it, he was allowed to exit the contract because the burden of clarity was put on the gov't. In Butler v. Foley, the letter omitted the word "subject", meaning "subject to other considerations". Had this word been present, the case would have been judged according to how broad a reservation of power was created by the word "subject".

19. Under what circumstances could silence be viewed as assent?

If the silence of one party causes the other party reasonably conclude that the other party has assented, then the silence is sufficient. The determination depends more upon the reasonable interpretation of the other party than it does upon the "intent" of the silent party. When the nature of the goods, or the market conditions surrounding those goods, requires prompt action on the part of the contracting parties, the silent stalling by one of them constitutes an action from which assent may be inferred. (Cole-McIntyre-Norfleet). UCC §2-204 provides specifically that a "contract for sale of goods may be made in any manner sufficient to show agreement", which includes silence if the facts fit, even if the precise moment of contractual commitment is unknowable.

20. Explain, as precisely as you can, the reliance principle. What measure of damages can be protected by invoking the reliance principle?

The reliance principle protects the π in the situation where the ∆s conduct could reasonably mislead the π into performing an act or forbearance, and the π is reasonably misled by that conduct. The reliance principle can be invoked to protect even the expectation interest. (Class notes 10/4).

21. The "battle of the forms" is a term for the problems that arise when the offeror and the offeree have standard contract forms that each attempt to reserve power for themselves, but are in conflict with each other. Explain how these situations are regulated under modern contract law.

These situations are regulated by UCC §2-207 which provides that additional terms in an acceptance are to be treated as proposals for addition to the contract unless the offer specifically limits the acceptance to the terms of the offer, or they materially alter it, or notification of objection to them is given within a reasonable time. Furthermore, it states that conduct by both parties which recognizes the existence of a contract is sufficient, even if the actual writings of the parties conflict.

22. What are some examples of terms that would be thrown out by a court from a form contract ?

1) Substantial reduction of a customary warranty, 2) Substantial limitation of a customary remedy.

23. How does the reliance principle come into play in Capital Savings to protect the bank customer from having to make up the difference in the mortgage payments that resulted from a miscalculation of the monthly payment by the bank?