Friday, 17 August 2018

WHEN A CONTRACT CEASES TO BE BINDING

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A contract is an agreement between two or more persons which creates an obligation to do or not to do a particular thing.[1] The essential elements of a valid contract are:
  • Offer
  • Acceptance
  • Consideration
  • Capacity to contract and
  • Intention to create a Legal relationship.
An offer has been explained to mean the expression by a party of his readiness to contract on the terms specified by him, which if accepted by the person to whom the offer is made amounts to an Acceptance of the offer made.[2]  Consideration has also been explained to mean something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee; that which motivates a person to do something, especially to engage in a legal act.[3] Capacity to contract refers to the legal ability or competence to enter into a contract.  An intention to create a legal relationship refers to the intention to actually enter into a commercial relationship; a legally binding contract, as opposed to domestic, friendly or social arrangements.
 
When the forgoing elements are present, a valid contract has been created.

‘The most basic rule of contracts is that they are binding on the parties to them. Indeed the most common definition of a contract is that it is an agreement that the courts will enforce, i.e an agreement binding at law’[4]. When a contract is binding, the parties to the contract are bound to perform their obligations under the contract and where a party fails to do so, he might be liable for breaching the contract and might be compelled to perform the contract or damages may be awarded against him.

The corollary of a binding contract is therefore a duty to perform the obligations under the contract.
There are factors which may make a contract cease to be binding; one of such factors is Misrepresentation.

 There are three basic types misrepresentation and in a case where misrepresentation is alleged, it is necessary to determine what type it is because the different types of misrepresentation give rise to different remedies under the law.

Generally misrepresentation means an unambiguous false statement of existing fact. ‘A representation is deemed to have been false, and therefore a misrepresentation, if it was at the material date false in substance and in fact.[5] Misrepresentation could be fraudulent, negligent or innocent.
Fraudulent misrepresentation is a statement made knowingly, or without belief in its truth, or recklessly, careless whether it is true or false.

Negligent misrepresentation is a representation which is made carelessly or without any reasonable ground for believing in its truth. This type of misrepresentation would be held to exist where the person making the representation owes the person to whom it is made a duty of care. Any representation which is not fraudulent or negligent is innocent.

Where misrepresentation is alleged, the aggrieved party is entitled to damages and rescission of the contract.[6] Thus, an aggrieved party can institute an action for the repudiation of the contract and for damages. He also has the option of setting up the misrepresentation (especially where it is fraudulent) as a defence for the non-performance of the contract. When a contract is rescinded by an aggrieved party, the contract ceases to bind him.

An aggrieved party who seeks damages or who seeks to rescind the contract must establish that the misrepresentation was of existing facts, that the misrepresentation was material and unambiguous and that he was induced by the misrepresentation to act or enter into the contract.

During negotiations, which is a prelude to entering contracts, parties make representations which are aimed at inducing a party to enter into the contract; the law imposes a duty on all persons to refrain from making active misrepresentations; a contracting party is not compelled or mandated by law to disclose all information, but once he decides to disclose, the law imposes a duty on him to do so truthfully. When he fails to do so, the contract might cease to bind the representee[7] on the basis of the false representation made.

A contract is expected to be terminated by the performance of the parties to the contract of their obligations under the contract, where misrepresentation is discovered, the contract ceases to be binding and the innocent party discharged.
 

[1] Bilante International Ltd v. NDIC (2011) 15 NWLR (Pt.1270) 407 @ 423 C - F
[2] Bps Construction & Engineering Company Limited V. Federal Capital Development Authority
(2017) LPELR-42516(SC)
[3] Spera In Deo Ltd V. Peccuno Mineral Industry (Nig) Ltd & Anor (2016) LPELR-41044(CA)
[4]I. E Sagay: Nigerian Law of Contract  (2ed) (Spectrum Books Limited) 457
[5] Afegbai V. A.G Edo State (2001) LPELR-193(SC)
[6] In a case of Innocent misrepresentation, an aggrieved party might only be entitled to rescind the contract and not damages and in some instances, he might also be entitled to indemnity which is less compensatory than damages.
[7] The party to whom representations were made.

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