CONTRACTS AND AGREEMENTS

1. MEANING AND NATURE OF CONTRACT

A contract is an agreement between parties which the law will recognise and enforce and which
creates rights and obligations between the parties. It is instructive to note that a contract can
only be entered between two parties. Where there are more than two parties to a contract,
there must be more than one contract. A good example is a contract between A (Lender) and B
(Borrower) for a loan in which C (Guarantor), provides security for the loan. In such contract,
there are two contracts contained in one document: the contract of loan between A and B, and
the contract of guarantee between A and C.

For there to be a contract, there must be agreement between the parties. Therefore, a contract
cannot come into existence without the parties reaching agreement. The parties are said to
have reached agreement when there has been a meeting of minds between them. This meeting
of minds is referred to as consensus ad idem. Prior to contract, it is common for parties to freely
negotiate the terms of their contract until there is a meeting of minds. There is, however, an
exception to the freedom of parties to negotiate terms before reaching agreement in a contract.
This has to do with a species of contracts known as standard form contracts. These are
contracts in which only one party stipulates the terms of the contract and leaves the other party
to either accept or leave the contract. Examples of standard form contracts are contracts
between a homeowner and utility companies like PHED, contracts between banks and
customers and certain types of employment contracts.

As a matter of necessity, contracts are binding on parties once entered into. That is to say, a
party to a contract is not at liberty to, for no good reason, to walk away from his obligations
under the contract after the contract has been concluded. The need for contracts to be binding
on parties is encapsulated in the Latin expression pacta sunt servanda, meaning ‘let
agreements be observed’. In the case of BFI Group v. Bureau of Public Enterprises (2012) 7
CLRN 1, the Supreme Court stated unequivocally that ‘when parties enter into a contract, they
are bound by the terms of the contract as set out by them.’ The fact that contracts are binding
on parties clothes contracts with a degree of sanctity referred to by lawyers as ‘sanctity of
contracts’.

Even where a party subsequently realises that the terms of a contract it freely entered into are
not favourable to him, he is bound by the provisions of the contract and cannot ignore them. In
Attorney-General of Rivers State v. Attorney-General of Akwa Ibom State (2011) WRN 1, the
Supreme Court stated that a party cannot ordinarily resile from a contract just because he later
found out that the conditions of the contract are not favourable to him.

But why are contracts binding? Commercial and economic transactions people enter into
everyday will, without doubt, become impossible if parties are allowed the liberty to break
promises made by way of contract or to walk away from their obligations under a contract
whenever they want. Trade and general commerce will grind to a halt and the whole of society
will become chaotic. It is important to note that the law of contract touches every sphere of
human activity be it buying and selling, employment, banking, hire-purchase, insurance,
shipping, aviation, etc. Without the bindingness of contracts, all these activities will cease to
work as contracts are freely violated without consequences.

Importantly, the fact that contracts are legally binding deters parties from avoiding their
obligations under a contract. An innocent party is, because of the bindingness of contracts, in a
position to sue and enforce promises made to him under a contract where the other party is
unwilling to do so.

Classification of Contracts

There are different ways of classifying contracts. For the purpose of our discussions in this
topic, we shall adopt a classification of contracts into three categories, namely, Formal and
Simple Contracts, Express and Implied Contracts and Bilateral and Unilateral Contracts.

(a) Formal and Simple Contracts

A formal contract is a contract under seal. It is also called a deed or contract by specialty. A
formal contract must be written, signed, sealed and delivered. Note that a contract under seal is
enforceable in the absence of consideration. This makes it very suitable for enforcing a
gratuitous promise made to a party, that is, a promise for which the promisee gave no
consideration. All contracts for transfer of interest in land must, as a legal requirement, be
under seal.

Simple contracts, on the other hand, are all other contracts which are not formal contracts.
They are contracts not under seal. They may or may not be in writing. When they are not in
writing they are called parole contracts. Unlike contracts under seal, simple contracts are only
enforceable by a party who had given consideration under it.

(b) Express and Implied Contracts

A contract is said to be express if the terms are clearly stated by the parties. As already said,
parties usually negotiate the terms of their contract before they conclude it. Negotiation involves
reaching agreement on the terms and conditions of the proposed contract. When the parties
have clearly agreed on and spelt out the terms and conditions of their contract through
negotiation, we can say that there is an express contract. An example of an express contract is
a contract of employment between an employer and an employee which sets out the terms and
conditions of employment such that nothing is left in doubt.

With regard to implied contracts, their terms are not clearly negotiated and stated by the
parties. As their name implies, their existence is implied from the conduct of the parties. Where
a dispute arises from such contract, the court will have to imply the terms of the contract from
the conduct of the parties. An implied contract can be illustrated with the contractual relation
between a bus driver and a passenger. When the bus driver stops at the bus-stop he says
nothing to the waiting passenger. The passenger saying nothing to the driver boards the vehicle
and the driver moves on. Though the parties agreed on no terms, a contract came into
existence between the driver and the passenger the terms of which could be implied from the
conduct of the parties. By stopping and picking up the passenger, the driver undertakes to take
him safely to his destination, while buy boarding the bus the passenger undertakes to pay the
fare for being taken safely to his destination by the driver.

(c) Bilateral and Unilateral Contracts

A bilateral contract consists of the exchange of promises between the parties to a contract. The
contract thus consists of mere promises without any performance by any of the parties. In this
type of contract, the consideration furnished consists in the promises made by the parties, one
to the other. Since the contract consists only in promises without execution, such contract is
said to be executory. And because there is no performance, the consideration given in a
bilateral contract is referred to as executory consideration.

A unilateral contract, as the name implies, is one in which only a party to the contract performs
his obligations under the contract and the other party only makes a promise. The party who has
performed under the contract therefore furnishes executed consideration while the other party’s
consideration is his mere promise which is executory consideration. Good examples of
unilateral contracts are the reward cases. These are cases where a party offers a reward for
anyone who finds and returns his lost property or provides information that leads to the arrest of
a criminal. In such cases, one party only makes a promise of reward while the other party
performs by finding and returning the lost property or giving the needed information.

2. ELEMENTS OF A VALID CONTRACT

For there to be a valid contract, certain elements must be present. These are what are referred
to as the elements of a valid contract. These elements are offer and acceptance, consideration,
intention to enter into legal relations and capacity to contract. We shall now examine each of
these elements seriatim.

Offer and Acceptance

Offer

An offer is an undertaking or promise made by one party called the offeror with the intention
that it will become binding on the other party to whom it is made called the offeree as soon as it
is accepted. Once an offer is unconditionally accepted, a valid contract comes into existence
between the parties.

An offer must be precise and unequivocal. It must be clear as to what is offered and leave
nothing to speculation. An offer could be either express or implied from the conduct of the
parties. While a written offer of employment is express, a commercial bus stopping at a bus-
stop for passengers to hop in makes an implied offer to the passengers. Whether express or
implied, once accepted, a contract comes into existence between the parties.

Note that there is no limit to the number of people an offer could be made to. In fact, an offer
could be made to the whole world. This does not mean that a contract can be entered into with
the whole world. Rather, a contract comes into existence between the offeror and each person
who accepts the offer. This is usually illustrated with the case of Carlill v. Carbolic Smoke Ball
Co. (1893) 1 Q. B. 256. In this case, the defendant, a company, had manufactured a smoke ball
during a period of influenza. It advertised in the newspapers that it would pay the sum of 100
pounds to anyone who used its smoke ball for a minimum period of 2 weeks, and nevertheless
succumbed to influenza. The plaintiff (Carlill) bought and used the smoke ball as prescribed
and still succumbed to influenza. The defendant argued that there was no contract with the
defendant because it could not have made a contract with the whole world. The court held that
the defendant did not contract with the whole world, but a contract came into existence between
it and anyone who accepted its offer by using the smoke ball and still succumbing to influenza.

It is important to draw a distinction between an offer and an invitation to treat. Sometimes an

offer is not made straight away without some form of negotiation or discussion preliminary to
the making of the offer. These preliminaries which may precede the making of a definite offer
are referred to as invitation to treat. Thus, while an offer is clear, definite and precise, an
invitation to treat is not. It is merely and invitation for an offer. An example is the display of
goods in shelves in a supermarket. The display is not itself an offer, but an invitation for people
to make an offer to the supermarket my picking the goods from the shelves. Another is an
invitation for tenders. The person who calls for tenders does not make an offer of the contract to
the tenderers. Rather, the tenderer makes an offer when he submits a tender. So the invitation
for tender is an invitation to treat.

Acceptance

Acceptance is the final and unqualified expression of assent to the terms of an offer by the
offeree. There can be no contract until an offer is accepted by the offeree. Until accepted, an
offer can be retracted or withdrawn. Acceptance can be manifested by word of mouth, in writing
or by conduct.

It is imperative to note that there must be an external manifestation of an intention to accept the
offer by the offeree. This means that an offer cannot be accepted by the offeree doing nothing
about it. To be effective, an offer must be communicated to the offeror. Silence does not,
therefore, amount to acceptance. In the case of Felthouse v. Bindley (1862) 7 L. T. 835, the
plaintiff (Felthouse) wrote to his uncle offering to buy his horse. The uncle intended to sell the
horse to the plaintiff but did not communicate his acceptance of the offer to the plaintiff until the
horse was sold to another person by an auctioneer. The plaintiff sued the auctioneer for
conversion of the horse. The court held that there was no acceptance and therefore no contract
because, although the uncle intended to sell the horse to the plaintiff, he did not communicate
that intention to the plaintiff in any way.

Invalid Forms of Acceptance

A contract may not come into existence even though an offer was purportedly accepted by the
offeree because the acceptance was invalid. Invalid forms of acceptance include counter offer,
cross offer and conditional acceptance

Counter Offer

An acceptance must agree completely with an offer. Any amendment to an offer in accepting it
cancels the original offer and makes the acceptance a fresh offer. In that case, no contract
would be created because the offer was not accepted as it was made. For example, if A offers
to sell his Mercedes Benz 190E car to B for N2million, B must accept the offer as made without
any amendment to it. If B accepts to buy the car for N1.9million, he has not accepted the offer
but has made a fresh offer to A called a counter offer, which is left for A to accept or reject.

Cross Offer

A cross offer results where two offers identical in terms are sent by the parties to each other
and the two offers cross in the post. No contract can arise from such situation because there
are two identical offers made and no acceptance. This could be illustrated thus: A writes a letter
to B offering to sell his Mercedes Benz 190E car to B for N2million. Before the letter is
delivered, B also writes a letter to A offering to buy A’s Mercedes Benz 190E car for N2million.
Here, there are two identical offers and no acceptance. Therefore, no contract was concluded
between A and B.

Conditional Acceptance

Any acceptance that is conditional or contingent on the happening of another event is not a
valid acceptance. This is because acceptance must be unqualified and unconditional.
Examples of conditional acceptance include acceptance of an offer ‘subject to contract’ or
‘provisionally’, or ‘without engagement’, or ‘subject to my lawyers approval’. In each of these
cases, liability is postponed to the future when an event to which the acceptance is conditional
would have happened.

Acceptance in Ignorance of Offer

Can a person accept an offer of which he did not know about? This question usually arises in
the reward cases where a person finds and returns a lost item to the owner ignorant of the fact
that a reward had been promised. The position of the law is that an offer cannot be accepted by
one who did not know about it. Thus, A cannot claim a reward promised by B for anyone who
found and returned to him his lost dog if A found and returned the dog without knowing that an
award was promised by B.
Communication of Acceptance

As pointed out above, acceptance must be communicated to the offeror. While this is so, there
are cases where the offeror may expressly or impliedly waive communication of acceptance.
Good examples are the reward cases where the finders of lost items do not have to
communicate acceptance to the offeror but simply find and return the lost item.

But at what point does acceptance occur and a contract comes into existence? Generally,
acceptance becomes effective the moment when the offeror becomes aware of the offeree’s
acceptance. This moment varies from case to case depending on the mode of acceptance. If
telex is used, the moment is when the message is received by the offeror; in phone calls, it is
when the offeror hears the voice of the offeree accept the offer; when it is inter praesentes
(face-to-face), it is when the offeror hears the offeree accept the offer. If the mode is email, it is
when the offeror receives the offeree’s email accepting the offer.

Where the offeror expressly demanded that acceptance must be by a particular mode of
communication, any other mode used by the offeree renders acceptance invalid. But if the
offeror demanded communication by a particular mode but does not make that mode
mandatory, any faster mode of communication may be used.

Acceptance by Post

Acceptance by post has a marked difference from the other forms of acceptance we have
already seen. Generally, acceptance by post becomes effective the moment the letter of
acceptance is posted, not when it is received. This rule was laid down in the old case of Adams
v. Lindell (1893) 1 B. & A. 681. In the case of Household Fire Insurance Co. v. Grant (1879) 4
Ex. D 216 where the letter got lost after it was posted, the court held that acceptance of the
offer became effective the moment the letter of acceptance was posted despite the fact that the
letter got lost thereafter and never reached the offeror.

Revocation of Acceptance

As general rule, acceptance can be revoked at any time before it is received by the offeror. Not
that this rule does not apply to acceptance by post. This is because, in accordance with the rule
in Adams v. Lindsell, once the letter of acceptance is posted, the contract is concluded. As a
result of this, an acceptance made by post cannot be revoked by any means, not even by a
phone call because the contract has been concluded at the moment the letter was posted.

3. CONSIDERATION

You would recall from our discussions earlier that a contract cannot be enforced in the absence
of consideration unless it is a contract under seal. Thus, only a party who has given
consideration under a contract can sue on the contract. This makes consideration a very
important element of a contract.
But what is consideration? Consideration is merely the right, interest or benefit which a party to
a contract confers on the other party to the contract which becomes a loss or detriment to him
after he has given it. See the case of Currie v. Misa (1875) L .R. 10 Exch. 153. In a contract
between A and B, consideration is that benefit which flows from A to B or which flows from B to
A. In a simple contract of sale of goods, consideration consists in, on the part of the seller, the
goods he gives to the buyer, and on the part of the buyer, the money he pays as price. In a
contract for services, it consists in the service rendered by one party and the money paid for the
service by the other party.

Note that consideration can also consist of mere promises exchanged between the parties. For
example, in a contract of marriage, consideration furnished by the parties is the promises
exchanged by the parties to marry each other.

Adequacy and Sufficiency of Consideration

It is generally said that while consideration does not need to be adequate, it must be sufficient.
This statement sounds contradictory because literally, adequacy and sufficiency mean one and
the same thing.

With respect to adequacy of consideration, the position of the law is that the court will not
concern itself with the adequacy of the consideration given under a contract by the parties,
provided the parties freely bargained and reached agreement. See Chappel v. Nestle (1960) A.
C. 87. Thus, if a party gives a huge consideration and receives only little in return, the court will
not inquire into the adequacy of what he received provided he agreed to such consideration.

Consideration is said to be sufficient if it is something that is of value in the eyes of the law. See
Bainbridge v. Firmstone (1838) 8 A. & E. 743. The expression ‘something of value in the eyes
of the law’ means that the consideration given is something that the party who gave it would
have loved to keep. Once, therefore, consideration of value in the eyes of the law, it is
sufficient.

While a court will not consider the adequacy of the consideration freely agreed by parties under
a contract, it will consider the sufficiency of such consideration.

4. INTENTION TO ENTER INTO LEGAL RELATION

Remember that we defined contract as an agreement the law will recognise and enforce. We
have also seen that there are 4 elements of a valid contract so that in the absence of any of
them there is no legally binding contract. So far we have discussed offer and acceptance and
consideration.

There can be no contract if, though those two elements are present, there is no intention to
enter into legal relation. Intention to enter into legal relation means an intention by the parties
that their promises should be binding and enforceable against them. While in formal contracts
there is always an intention to enter into legal relation, in some other contracts there may be no
intention to enter into legal relations. Contracts in which the courts have held that there was no
intention to enter into legal relations include domestic and social engagements, certain
commercial contracts and car pools. We shall, however, concern ourselves here with only
domestic and social engagements.

Domestic and social engagements refer to agreements entered into by family members and
relations and other contracts made in social situations in which the parties did not intend that
their promises should be binding on them. With respect to domestic and social engagements, it
is presumed that there is no intention by the parties to enter into legal relations. Such contracts
are, therefore, not binding. This is because family members make many promises between
them that they usually do not intend to be binding on them.

This can be illustrated with the case of Balfour v. Balfour (1919) 2 K. B. 571. Here, a Briton who
was employed by the Government of Ceylon could not return to Ceylon with his wife due to her
ill-health. The man promised to his wife a monthly allowance of 30 pounds until she joined him
in Ceylon. When the man failed to make the payment, the wife sued him to enforce the
promise. It was held that the agreement to pay the woman the allowance was a domestic
engagement between husband and wife for which there was no intention to enter into legal
relation.

Similarly, in the case of Spellman v. Spellman (1961) 1 W.L.R. 921, a husband promised to buy
a car for his wife as a means of improving their strained relationship. He purchased the car but
when it was delivered at their home he refused to transfer it to his wife. The woman sued her
husband to enforce the promise. It was held that this was a purely domestic arrangement, not
intended to create legal relation between them.

The rule that in domestic and social engagements there is no intention to enter into legal
relation does not apply where the family members are, at the time of entering into the contract,
not in amity. Contracts entered by them at times when there is no amity between them have
been held to have contractual intention. In McGregor v. McGregor (1888) 21 Q.B.D 424, a
husband and his wife had sued each other in court for assault and were living apart. It was
agreed that the man would pay the wife a certain sum weekly for her maintenance and the
maintenance of their children. When the man failed to pay the agreed sum to his wife, the
woman sued to enforce the agreement. The court held that there was an intention to enter into
legal relation between the couple because of the hostility that existed between them when the
agreement was reached.

The rule will also not apply where, as a result of the promise made, one of the parties incurred
huge expense or made a great sacrifice. In such situation, the court will hold that there was
intention to create legal relation between the parties. In the case of Parker v. Clark (1960) 1
W.L.R. 286, Clark who was Parker’s uncle had invited Parker to come with his family and live
with him in his house. It was agreed that the Parkers would share the expenses of running the
home with the Clarks. Based on this agreement, the Parkers sold their house and moved in
with the Clarks. But after a quarrel between the two families, the Clarks attempted to evict the
Parkers on the ground that the agreement was not binding because it was a domestic
engagement. The court held that the agreement was binding in view of the huge sacrifice the
Parkers had made by selling their house.

5. CAPACITY TO CONTRACT

Aside from offer and acceptance, consideration, and intention to enter into legal relation, there
is no valid contract if the parties or one of them lacks contractual capacity. Contractual capacity
refers to the capacity a person must attain before he can, under the law, be able to enter into a
contract. Persons who lack the capacity of enter into a contract include illiterates, infants,
drunkards and lunatics.

These persons who lack contractual capacity enjoy a special status in the law of contract due to
their peculiar circumstances. The fact that they could be easily exploited necessitates their
protection by the law.

Illiterates

An illiterate is, literally, a person who cannot read and write. In law, however, an illiterate is not
just a person who cannot read and write, but a person who cannot read and write in the
language in which a document is written. This means a person can be literate in a language but
an illiterate in another. See the cases of P. Z & Co. Ltd v. Gusau and Kantoma (1961)
N.R.N.L.R. 1 and Osefor v. Uwania (1971) 1 A.L.R. 421.

Illiterate persons enjoy a special status in the law of contract with respect to written contracts.
With respect to oral contracts, they enjoy no special consideration. In Nigeria, various laws
protect illiterate persons so that they are not exploited or defrauded when they enter into
contracts. Section 2 of the Illiterates Protection Law requires anybody who writes a document
for an illiterate person to include in such document his name and address. Such document
must also be read over and explained to the illiterate to his understanding before he signs or
makes his mark on the document. Also under section 8 of the Land Instruments Registration
Law, a land document in which one of the parties is an illiterate will not be accepted for
registration unless it was signed by the illiterate in the presence of a magistrate or a justice of
the peace as witness.

Note that a person is not an illiterate only because he made a thumb impression on a
document, and a person is not literate just because he signed his signature on a document.
This is because a literate person can choose to make a thumb impression on a document while
a literate person may sign a document.

Where a writer fails to write his name and address on a document prepared for an illiterate, or
fails to read over the document to the understanding of the illiterate before he makes his mark
on it, the consequence is that the writer of the document cannot enforce the document against
the illiterate but the illiterate can enforce it against him. The writer cannot take benefit of any
right or interest created in his favour in the document.

Infants

The word ‘infant’ is used in the law of contract to refer to persons who are below the age of
majority. In Nigeria, the age of majority is 21. Anybody under the age of 21 is an infant or a
minor.

Infants lack the capacity to enter into a contract except contracts for necessaries and beneficial
contracts of service. Any contract entered into with an infant which is not a contract for
necessaries or a beneficial contract of service cannot be enforced against an infant but the
infant can enforce it against the other party. Beneficial contracts of service are contracts for the
provision of such services as education of the infant or teaching him a trade a profession to
enable him earn a living. Necessaries are goods without which the infant cannot live. They
include food, water, shelter, clothing and medicine. They are goods needed by the infants to
exist. See the case of Chapple v. Cooper (1884) 13 M & W 253.

Even if the goods are necessaries, the contract will still not be enforceable against the infant if
the infant already has adequate supply of them. For example, while shoes are necessaries for
an infant, a contract to supply an infant another pair of shoes when he already has 20 pairs
cannot be enforced against the infant because he already has adequate supply of shoes. Note
that there are goods which an infant does not need to live yet they are necessaries. For
example, a wrist watch with which an infant can tell the time is a necessary even though it is not
a basic necessity of life.

Note that where an infant lies about his age and convinces the other party to contract with him,
the contract cannot still be enforceable against the infant. If, for example, the infant had
fraudulently obtained a loan by lying about his age, he is not bound to repay the loan. See
Leslie v. Shell (1914) 3 Q.B. 607.

Lunatics

Like infants, lunatics are bound by contracts for the supply of necessaries. Where necessaries
are supplied and delivered to a lunatic, he must pay a reasonable price for them. See section 2
of the Sale of Goods Act, 1893. But all contracts, whether for necessaries or otherwise, made
with a lunatic during his lucid moments are binding on him. A contract for the supply of non-
necessaries to a lunatic does not bind the lunatic.

Not that a lunatic is not liable to pay for necessaries supplied to him if at the time of supplying
them, the supplier did so as charity without the intention that he should be paid.
Drunkards

As in the cases of an infant and a lunatic, a drunkard is liable to pay for necessaries supplied to
him. He is under no obligation to pay for non-necessaries supplied to him at a time when he
was inebriated. Any contract for such supply is voidable, meaning that the court can declare
such contract to be of no effect whatsoever.