CONTRACTS AND THEIR
THEORETICAL
FOUNDATIONS
OUTLINE
 Definition
 Freedom of contracts
 Sanctity of contracts
 Contracting parties beware
 Protecting the innocent third party purchaser
 Reasonableness
 Intolerance of fraud
DEFINITION
 The theoretical foundations refer to the philosophical
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justifications, their underlying principles, and their
sub-strata.
They cover two matters namely;
(1) the reasons why contracts must be respected and
enforced; and
(2) the reasons why some transactions are excluded
from the status of contracts even if advanced the
contracting party(s).
There are six of such principles, including (1) freedom
of contracts; (2) sanctity of contracts; (3) contracting
party beware; (4) protecting the innocent third party
purchaser; (5) reasonableness; and (6) intolerance of
fraud.
Freedom of Contracts CONTI’
 In simple terms, it means parties, no matter who they are
at liberty to enter into contracts.
The limitation is that
 (1) the parties must have capacity to undertake the
contracts entered into;
 (2) the transactions must be legal.
 Hence, freedom of contract means the liberty of parties
with capacity to enter into contracts on terms set for
themselves so long at it is legal at the time of the
contract.
Freedom of Contracts CONTI’
 Legal persons include, the Republic, corporate
bodies and individuals; these persons can enter into
contracts.
 Persons without capacity includes, insane (non
compos mentis), terribly drunk, infants (below 18
years) or bankrupt.
 Freedom of contract merges into Sanctity of
Contract.
Sanctity of Contracts
 After parties enter into contracts by freewill, the law
treats this agreement as sacred; ‘’Pacta sunt Servanda’’.
 The law is concerned about the freewill not the fairness
of the contract.
 Hence, if A who is a legal person enters into a contract
with B who is also of sound standing in law to undertake
a legal contract, the law will not entertain complaints of
fairness.
 Consideration must thus be sufficient not adequate.
Sanctity of Contracts CONTI’
 In Bainbridge v Firmstone (1938), the defendant who owned
valuable boilers approached the plaintiff who had a weighing
scale and said that he wished to weigh the boilers and
thereafter he would give the boilers to the plaintiff but after
the plaintiff gave it, the defendant refused to return it. The
plaintiff sued successfully.
Courts uphold sanctity of contracts for
 (i) there is a judicial deference to the contracting parties and
 (ii) the courts are reluctant to substitute terms freely entered
into by the parties.
 The principle is not a licence for fraud or to deceive illiterates
and blind.
CONTRACTING PARTY BEWARE
 Traditionally, the governing maxim was ‘caveat
emptor’, meaning ‘’buyer beware’’,
 but was expanded to include ‘caveat venditor’,
meaning ‘’seller beware’’ hence contracting
parties beware.
 Each party must satisfy himself about the identity,
credit worthiness of the other party; fitness, quality,
existence, usefulness of land among others of the
goods.
CONTRACTING PARTIES BEWARE CONTI’
Four things are required of the wary contracting party:
 (1) a contracting party must inspect or otherwise undertake due
diligence measures.
 (2) a contracting party must obtain appropriate (written) warranties
and indemnities from the other contracting party.
 (3) a contracting party must seek professional advise such as from
lawyers, accountants, valuers, etc
 (4) a contracting party must obtain appropriate insurance cover
against damage, loss or liability
 This principle is also not a licence for fraud or to misrepresent.
PROTECTING THE INNOCENT THIRD PARTY
PURCHASER
 The third party, without notice of any fraud or deficiency,
obtains a contractual benefit is entitled to keep it.
 An innocent third party is one who does not know in fact or
constructively of the existence of fraud, mistake or deficiency.
 A third party is one who is not a party to a given transaction.
 In Seidu v. ADB (1992), it was held Benin J that the plaintiff
was a bona fide purchaser for the value of the vehicle without
notice of any defect in the vendor’s title or any adverse title
hitherto.
PROTECTING THE INNOCENT THIRD PARTY
PURCHASER CONTI’
 A purchaser is the party who has obtained the
benefit or good by providing consideration for it.
 If consideration is absent, the party is described as a
volunteer not a purchaser.
 A third party who knows or should have known that
a fraud was made or a deficiency exist is not
innocent.
REASONABLENESS
 Reasonableness is said to be the law’s best friend; they keep close
company.
 It connotes moderation; temperance; normal ordinary or regular
conduct.
 It excludes the extreme or absurd
 Reasonableness is a question of fact ultimately decided by the court
after assessing all the circumstances
 In making such determination, the court places itself in the position of
the ordinary person or layman.
 A reasonable person is the ordinary layman or the ordinary
technical person as the case may be, depending on the matter in issue.
REASONABLENESS CONTI’
Reasonableness features in;
 implied terms,
 quantum meruit,
 exemption clauses,
 mitigation of damages, and
 remoteness of damages.
REASONABLENESS CONTI’
 The basis here is that the reasonable terms so
implied are presumed to have been intended by the
parties to give business efficacy to the contract.
 By implying the terms, the courts merely does what
the parties themselves would have done in fact in
order to cover the situation had the averted their
minds to that situation.
INTOLERANCE OF FRAUD
 Finally, the law has no tolerance of fraud, hence the Latin
maxim, ‘fraud omnia vitiate’, meaning, fraud vitiates everything!
 Fraud, deceit and dishonesty are considered a trinity of
turpitude.
 Fraud may manifest itself in words or conduct.
 Derry v Peek (1889), defines a fraudulent misrepresentation as
one made by a person to induce another into a contract knowing
very well that the statement he is making is false, or recklessly
making a statement not caring that it is true or false.
 Fraud manifest itself in conduct when one does something, with
the intention of inducing reliance for perfomance by another
knowing very well that his action is of no right or truth.
INTOLERANCE OF FRAUD CONTI’
Intolerance of fraud manifests in these two ways;
 1. fraud renders contracts voidable ( a vitiating
factor).
Thus, If the court’s assistance is sought in a timely manner, if no third party rights
have intervened and if not other grounds exist which will make the inequitable or
unjust to do so, the court will set aside a contract tainted by fraud to protect the
innocent party.
 2. fraud delays time to be statute barred
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