INSTITUTE OF ACCOUNTANCY ARUSHA

DEPARTMENT OF BUSINESS MANAGEMENT

BUSINESS LAW LECTURE NOTES

(Revised)

Prepared by Kisilwa, Zaharani

FOR

STUDENTS OF THE INSTITUTE

AND

LAW STUDENTS AND CANDIDATES OF PROFFESSIONAL BODIES

EXAMINATIONS

© 2007
These are merely Lecture Notes not to be cited as authority
These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

Prelude
This work presents the lecture notes on selected Business Law topics that are common
in most institutions subject outlines and which the students and other related groups
who are subjects to this course, are intended to learn over the stretch of the specified
time. The work is intended to aid students to avail themselves of the guidelines to this
course, usefulness of which it is assumed, will help them create a definite scope on what
they have to learn when they do their library materials exploration. In no way is this
work destined to be an exhaustive and all-in-one facility for every matter in Business
Law required of students to gain knowledge of in this course. Students are called upon
to refer to the Library Materials cited by the Instructors in the class as well as those
provided in the course outline for a better understanding and an ever lasting, well
packed satisfaction.

Kisilwa, Zaharani

2 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

1.1 DEFINITION AND NATURE OF LAW

In the realm of the legal theory, the word law is a complex term which is capable of
multiple definitions and has for a long time been subject of legal writer’s arguments.
However simply stated, the term law presupposes presence of rules that affect the daily
lives and activities of peoples.

These rules emerge in different ways, though in most cases there must be a consensus,
as to whether or not such rules are desirable. On being widely accepted this rule will
become law when a class of persons who are in power (the government, for instance in
present day societies) in any given society enforces it.

The enforcement of a rule makes it a legal rule which status is a condition precedent
before it gains the title of law in its real sense. It follows therefore that not every rule
that has been consented to by the members of a particular society is legal; many of
these rules fall way short of being legal rules. Paul Denham (see references at p.g. 17 of
this work) furnishes an instance of these non -legal rules which he names as conventions
and in his own phraseology he states as follows:

‘It is a convention that a man will normally take his hat off in a church. But it is a legal rule that
one person shall not hit another.’ Or that it is just a convention that the young will normally
respect the elders. But it is a legal rule that the young or any other person should not
abuse another.
You should be able to distinguish between legal rules and non-legal rules. Non legal
rules, when they are breached there may never be enforcement.

Due to this, then, the law may be defined as:

‘The complete body of all those individual rules that bind the society together’

3 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

The definition of law may also include ‘the process by which these rules are created and
applied’

Collectively, the development of these rules, their substance (content), and the
application together make up a legal system [Denham]. This includes the process of
making of these rules by the relevant organs, interpretation of the rules by courts of law
and enforcement by the police and other organs charged with that duty; all of these are
subject to presence of the rules. If there were no rules what would the courts interpret
or the police enforce?

1.2 GENESIS AND DEVELOPMENT OF LAW

How did the law begin for the first time? Who brought it? When was it and why? These
are the basic questions one might ask himself.

As it has been shown above, law began as a rule (s) set by people in a given society to
govern their conducts. The law becomes more important when the relations between
persons in a given society are complicated. Usually as the society develops the relations
of production turn out to be more or less of conflicting interests . To understand better
this statement I would , by way of illustration, adopt the “desert island analogy” given
by Gregory Allan in his article titled , The origin of law [refer to pg. 17 for full reference]
He states with my own emphasis that:

“if one man lives alone on a desert island, he has no use for any law to guide his
conduct in which case he can do whatever he pleases without causing any injury to
any other soul. He thus needs no law.”

The situation would be different if another man showed up on the same island. There
would be the two of them now. When two persons live together, it is certain that there
will be disagreements on certain matters and they will always have arguments. It is

4 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

likely that the stronger man will take advantage of his strength to dominate the weaker
man who in turn will be submissive. This delicate situation entails requirement of law to
guide them so that no one of them may be disadvantaged.
Whatever the case Gregory Allan states:
“…In the end they will either agree on certain rules of behaviour or conduct.” These rules of

behaviour become customarily binding to the present as well as the men who later
become the members of that society.

If there was this agreement, why is it that only a section of the members of the public
become the makers and enforcers of the law?
This has to do with the influence the development of a society has had on the
development of the law. In its development the human society has passed through five
stages namely, communalism, slavery, feudalism, capitalism and socialism.
During the era of communalism the nature of life the members of these societies were
leading was such that they worked together and shared out the fruits of their labour on
equitable basis. During this time technology was rudimentary (low) and man only
struggled to produce for his subsistence.

Later better technological tools were discovered and those who seized the early
advantage of the advent of this technology began to produce enough food not only for
subsistence but also for surplus. The power of surplus food made them prominent and
superior over others. It was the powerful that later dominated the less powerful, it was
them who later made the rules and the weaker followed.
That was the beginning of the so called centralized governments which later turned out
to be the makers and enforcers of the laws they made. This is the reason why it is the
governments that make law to day.
You will agree with me that it takes one to have enough resources to gain power.

5 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

DEVELOPMENT OF THE LAW IN TANZANIA

In Tanzania, like it is in most of the Common Wealth Countries, the original law is
customary law which developed from rules of conduct set by the indigenous societies to
govern their behaviors such as marriage, contracts inheritance etc. There are about 120
tribes in Tanzania; every one of them had a set of its own customary rules necessary to
govern their way of life.

However the dominant law in Tanzania is not customary law, why is this so? The answer
is simple: because our country has been, at some time, the subject of colonial rule.

Though there were two colonial masters in our country namely Germans and the British
I am inclined to discuss the latter (British) only since their influence in country is greater
than that of the former (Germans).
The British who ruled Tanganyika from 1818-1961 imposed the nature of their Legal
System to Tanganyika which we still use to day. Before going further into the effect of
this imposition to Tanzanian Law let me offer an insight into the English Legal System, in
brief so that you may know what kind of system Tanzania has adopted and what is the
extent of this adoption.

NATURE OF THE ENGLISH LEGAL SYSTEM

The laws which were applicable to England before it was brought to Tanganyika was
based on two major sources, namely common laws found in Judicial Precedents and
codification (acts of parliament/ statutes).

1. Common law
Started developing by year 1066 in England where representatives of the King (known as
circuitry courts) visited local courts and decide cases. They would regularly meet for
discussion in London after every other round trip. They discovered a lot about laws
applicable where they went to in local courts including the discrepancies between one

6 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

local court and another. Over a period of 200 years, with this practice the diverse laws
of various areas were commonised, thus common law.

Foundation of common law

The heart of common law is judicial precedent/ Case Law which refers to application of
a decision by judges, reached in a particular case to a similar case that arises later, if the
facts of the two cases are materially the same.

Ratio decidendi (R.D)

R.D is the reason why a particular decision was given in certain circumstances. Usually,
in judicial precedent, application of a principle forming the basis of a decision in one
case, to another case largely depends on its R.D. if the Reason would be reasonable in
any given circumstances then the decision of the case would be applicable.

Weaknesses of common law

When the laws from various areas of England were commonised, many deficiencies in
common law surfaced. One most important weakness is on the remedies- there is only
one remedy for injured parties in common law which is the common law damages
(monetary award). This was found to be inapplicable in certain circumstances since if
monetary award was not appropriate there was nothing else to offer. This is when
equity developed.

2. EQUITY
Equity is another type of law applicable in England. It grew out of weaknesses of
common law. Separate courts were formed known as courts of equity which decided
cases in which the wronged party was not satisfied by the decisions of common law
courts. Thus up to 1870s there were two courts running side by side in England; these
are the Courts of Common law of England and Courts of Equity respectively.

7 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

Unification of the common law and equity courts in 1873

In 1873 a law was passed; the Judicature Act of 1873. This law united the two courts and
created the Court of Appeal and the High Court of Justice which could apply both
Common Law and Equity. Thus same court may award either common law or equity
remedies.

Changes brought by equity law

1. Equity brought about many other remedies apart from damages and these are;
i. Specific performance
ii. Rescission
iii. Injunction and
iv. Rectification
2. These remedies are given only when common law damages are inappropriate and at
the Discretion of the court i.e. Court may decide to award or not to.

3. Codification (Acts of Parliament/ Statutes)

Codification refers to the process where by the various rules of law are created by the
parliament and laid down in books of law called statutes.

This is the model of English Law which was imposed on Tanganyika during the British
rule. I hope you have gained a clear insight into the kind of legal system that our country
has adopted.

THE EXTENT OF APPLICATION OF ENGLISH LAWS TO TANZANIA

Before the coming of the British, the indigenous population as it has been illustrated
above, mainly used customary laws. When the British came these customary laws began
to apply subject to English law highlighted above which was dominant then. This means
the English Law was received in Tanganyika.

8 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

July 22nd 1920 is a very important date in Tanzania. It is referred to as the reception
date. It was the date on which the extent of application of English Law to Tanganyika
was declared by the British Colonial Government by the Tanganyika Order in council of
1920 which met at the Court of Buckingham Palace.

THE TANGANYIKA ORDER IN COUNCIL OF 1920

This is an order which defined the scope of application of English laws as well as laws of
other countries to our country:

WHAT WAS THIS DECLARED LAW?

The Colonial Government on behalf of his majesty King of England declared
1. The substance of Common Law (that which used to be applied by the courts of
law in England as shown above)
2. Principles of Equity (that which was applied by the courts in England as shown
above)
3. Statutes of General Application
As the laws that would apply to Tanganyika.

OTHER LAWS WHICH WERE DECLARED APPLICABLE TO TANGANYIKA

By s. 13 (a) (9) the Tanganyika Order in Council declared that any Ordinance which by s.
13 (a) (1) the governor of the Tanganyika territory is allowed to pass may apply to the
territory (i.e. Tanganyika) any Act or law of the United Kingdom, or of any legislature of
India, or of any Colony or Protectorate, subject to any exceptions and modifications
which may be deemed fitting.

WHAT IS THE IMPLICATION OF THIS APPLICATION?

It implies that English laws would, by this declaration, apply to Tanganyika as they were
standing by 22nd July 1920 and other laws adopted from other countries would apply
subject to modification, so that they suit the local environment. This means all cases

9 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

decided by the Common Law and Equity Courts before 1920 apply to Tanganyika and all
those which were decided by the English courts above 1920 are persuasive to local
courts.

WHAT ARE OTHER LAWS APPLICABLE TO TANGANYIKA APART FROM THE ENGLISH
LAW?
By s. 13 (a) (1), the governor of Tanganyika acquired a legal authority to apply to
Tanganyika the Indian Contract Act of 1872 whose application to Tanganyika ended in
1961 and its place was taken by the Law of Contract Ordinance of 1961, Cap 433
hereinafter called the LCO.. Therefore with minor modifications this Act has, since its

application, been the relevant Act directly providing for the matters pertaining to
contracts in Tanzania. The substance of this act is the same as that of its counter part,
The Indian Contract Act of 1872. In law they are called statutes in parimateria. The LCO,
1961, with the general revision of the laws in Tanzania, is now referred to as the Law of
Contract Act, Cap 345 of 2002.

In 1961, a Law known as the JUDICATURE AND APPLICATION OF LAWS ORDINACE

[JALO] was passed with the view to restrict application of customary laws in Tanganyika.
By s. 11 this law declared that these customary laws would only apply when they did not
conflict with the general laws of the land.

And in 1963 two years later most of the customary Laws that were still applicable to
Tanganyika and which were thought to be not able to conflict with the general law were
codified under a statute known as the Local Customary Law (Declaration) Order of
1963.

Therefore customary laws apply to Tanganyika subject to such limitations underscored

above. Due to the effects of the imposition and adoption of the English Law to

10 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

Tanganyika, development of our Law is largely through judicial precedent and

codification by the parliament just like in the English Legal System. Law made by the
parliament is largely characterized by public opinion rather than customary practices.

You will, thus, notice later that all the laws in Tanzania that relate in one way or another
to business have a more or less direct relation to the English law and Practices. Judicial
Precedents from English courts will, by and large, be of that inevitable significance to
this course. Indian cases might be of some use in the general understanding of some
issues especially in contract cases for we share with them common matters in various
aspects of contract law and due to the fact that some part of their law has at some point
in time been imposed on our legal system.

Therefore this account, in short illustrates the development of the law in Tanzania.

CLASSIFICATION OF LAW
There are various ways of classifying laws; thus it may be classified as one of the
following groups:
i. Public/ Private
ii. Civil/Criminal
iii. Substantive/ Procedural
iv. International/ Municipal
v. Common Law/ Equity
However, to simplify the classification, as the legal systems develop the rules of law it
tend to fall into two major groups [Soulsby] i.e. criminal law and civil law
CIVIL LAW
i. Nature: It is referred to as private law; it deals with the relationships between
individual persons. Instances of this law are company law, contract law, banking Law,
business law etc. the cases under this law are cited as: Yahoo.Com v. Hotmail.Com, IAA
v. NBC.. You might be wondering why it is said that the law governs relationships

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These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

between individual persons and a case has its parties as IAA v. NBC. In law there are two
kinds of persons; natural persons, you and I for instance, and legal persons, those which
are established by law like the IAA, the NBC, and the STUDENTS’ LOANS BOARD. You
shall encounter a lot of these as you move forward in this course.
ii. Initiating a case: the wronged party himself institutes a case at a court of law,
containing the wrong done and reliefs sought.
iii. Punishment: The wrong doer in civil law is not punished but he is required to
make good the loss he or she has caused to another.
iv. Objective/ Function: Since civil law involves individual persons, its main function
is to protect these individual persons against the wrongful acts or omissions of other
persons. A simple instance of a wrongful act is breaching a contract. Thus the main
objective of civil law is compensation to the person who has suffered loss by the one
who has caused it.
v. Onus of proof of a wrong done: Lies on the wronged person who has to prove on
a balance of probabilities.
vi. Remedies: Common law remedies e.g. Damages or equitable remedies e.g.
Specific performance, rescission of a contract, Courts injunction.

CRIMINAL LAW
i. Nature: it is referred to as the public law since it deals with the relationship
between the individuals and the state. The wrong when done to individual is presumed
to have been done against the state. So when a wrongdoer has broken the law the state
interferes. That is why you might have seen criminal cases being referred to as R v. Cash
Book, the letter R refers to the Republic (the government of Tanzania while cash book is
the wrong doer.)

ii. Initiating a case: the government through the office of the DPP (Director of
Public prosecutions) initiates a case by prosecuting against the wrong doer.

12 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

iii. Punishment: if the wrong doer is found guilty he is punished, the most
common of punishment is serving a term in prison.
iii. Onus of proof of a wrong done: lies with the prosecution who must prove
beyond reasonable doubt.
iv. Remedies: sometimes criminal damages may be awarded.

SOURCES OF LAW
The sources of law in Tanzania are as follows:
i. The Constitution of the United Republic of Tanzania of 1977
This is the Highest Law of the Land; all other laws must be made subject to this law. In
more precise terms other laws of the land must not contravene the provisions of the
constitution, if they do the constitution will prevail and the other law will be declared
null and void [treated as no law].

ii. Legislation: statutes/ Acts of Parliament

A great majority of laws are made through the parliament which is the only organ
vested with that duty by the constitution. The process is that, the government must
show an intention to have a particular law in place bringing a bill to the parliament for
the proposed law on which the parliament will debate and decide if it is a suitable law.
The response of the interested parties would be sought before passing the law. To
become the law the president must assent to it and the same must be advertised in the
gazette. A law, once established, remains in force until it is repealed [shorn of its legal
force by another law made by the parliament].

iii. Delegated Legislation

Though the supreme law making body of the country is the parliament, it usually
delegates [assigns], its power to make the law through the laws it has made to specific
authorities in charge of that law. This authority to which power to make law is delegated
by the parliament will make a valid and enforceable law only when it does not exceed

13 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

the powers granted to it. The laws made by delegated power are known as by-laws,
regulations and circulars.
Importance of Delegated legislation
(a) It saves parliamentary time
(b) Allows for a greater flexibility in application
(c) Allows fine details to be added later by minister responsible after the statute
has been passed as law.
(d) Allows very quick passing of a statute in cases of states of emergency
(e) Relieves parliament of excessive work – load

iv. Customary and Islamic Laws

You already know what are customary laws, these together with the Islamic laws, apply
subject to the limitation that they should not infringe the general law of the land.
Remember s. 11 of the Judicature and Application of Laws Ordinance of 1961
v. English Law subject to Reception Clauses, 22nd July 1920
(a) Common law
(b) Principles of equity
vi. Case Laws and Precedents decided by the higher Courts of the land i.e. The High
Court and The Court of Appeal.
vii. Books and other literatures on law.

You already know what is and how judicial precedent applies to the courts. However to
consolidate your understanding, the courts in Tanzania use the principles established in
the already decided cases to future cases whose facts are materially the same as of
those cases.

14 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

COURTS SYSTEM IN TANZANIA

The judicial hierarchy is a follows;

Court of Appeal (C.A)

High Court (H.C)

Commercial Division Labour Division Land Division

Resident Magistrate’s Courts (R.M’s Court)/District Magistrate’s Court (D.M’s Court)

Primary Courts

Tribunals

Court of Appeal
The Court of Appeal of Tanzania, established under Article 108 of the Constitution, is the
highest Court in the hierarchy of judiciary in Tanzania. It consists of the Chief Justice and
other Justices of Appeal. The Court of Appeal of Tanzania is the court of final appeal at
the apex of the judiciary in Tanzania.

The High Court of Tanzania (for mainland Tanzania) and the High Court of Zanzibar are
courts of unlimited original jurisdiction, and appeals there from go to the Court of
Appeal.

High Courts
The High Court of Tanzania was established under Article 107 of the Constitution and it
has unlimited original jurisdiction to entertain all types of cases. The High Courts

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These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

exercise original jurisdiction on matters of a constitutional nature and have powers to

entertain election petitions. The High Court's Main Registry, (which includes the sub-
Registries) caters for all civil and criminal matters. The High Court (mainland Tanzania)
has established 10 sub Registries in different zone of the country. It also has two
specialised divisions, the Commercial Division and the Land Division. All appeals from
subordinate courts go to the High Court of Tanzania.

Subordinate Courts
These include the Resident Magistrate Courts and the District Courts, which both enjoy
concurrent jurisdiction. These courts are established under the Magistrate Courts Act of
1984. The District Courts, unlike the Resident Magistrates Courts, are found throughout
all the districts in Tanzania (the local government unit.) They receive appeals from the
Primary Courts, several of which will be found in one district. The resident magistrate’s
Courts, which serve as the regional courts, are located in major towns, municipalities
and cities.

Primary Courts
The primary courts are the lowest courts in the hierarchy and are established under the
Magistrates Courts Act of 1984. They deal with criminal cases and civil cases. Civil cases
on property and family law matters which apply customary law and Islamic law must be
initiated at the level of the Primary Court, where the Magistrates sits with lay assessors.
(The jury system does not apply in Tanzania)

Tribunals
There are specialized tribunals, which form part of the judicial structure. These for
example include Ward Land tribunals, District Land and Housing Tribunal1, Tax Tribunal
and the Tax Appeals Tribunal, the Commission for Mediation and Arbitration (CMA)

1
established by s. 22 of the Courts (Land Disputes Settlements) Act, 2002

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These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

established under section 12 of the Labour Institutions Act, 2004;, and Military Tribunals
for the Armed forces. Military Courts do not try civilians. A party who feels dissatisfied
with any decision of the Tribunals may refer the same to the High Court for judicial
review.

LAW AND BUSINESS

One Legal Writer states that:
“The law affects us all from the moment we are born…we live in a society that is bound by
rules”

Yet another writer has this to say:

“ Many of the things people do day in day out, obligate them to contracts without them
realising”.

Think of when you go for shopping in a supermarket, or when you drive, sign an
employment contract etc. all these acts involve legal issues, more so if these are carried
out by a firm, company, or partnership.

The world of business is full of such terms as Partnerships, companies, contracts,

accounts, auditing and many other related terms to mention a few.

All these terms suggest a long list of things that can be found in business practices in our
daily lives. All of these need to be legally valid and therefore enforceable so that they be
of value to the general goodwill of the particular business. The law is one of the vehicles,
through whose objectives, businesses may prosper if they abide.

OBJECTIVES OF THE LAW IN BUSINESS

i. Personal protection; originally law developed to protect an individual from being
injured or killed. In criminal law any person who harms another may be penalized by

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These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

fine or imprisonment. In civil law any person who has been injured may claim a payment
of compensation from the one who injured him. This personal protection ensures a
reasonable confidence in the business persons and their business operations. The law
inculcates an environment in which people engage in businesses without worries or
fears.

ii. Property protection; The law also has developed to protect property form damage,
destruction, and any other subversive act. Property used in business results in
maximized profits for its owners if they are safe. Sensitive properties that may be
protected include intellectual property rights. Examples of laws that protect property
are the insurance law, Trade and Service Marks Act etc. The importance of these laws in
the business area can not be accorded an over emphasis.

iii. Enforcement of peoples’ contractual and other intents

(a) Contracts; when parties enter into agreements, the law is used to enforce what
they therein agree. Without this enforcement by the law their agreement is useless.
(b) Other Intents; when a person intends to leave property to a relative, he may
evidence the same by writing a will. To have effect such intent in a will has to be
enforceable by law.

iv. Protection from exploitation, frauds and oppressions; The law seeks to protect
groups of people from exploitation by other groups. One of ways in which people come
in groups is by forming business enterprises such as companies, joint ventures, or
partnerships. When say a partnership which was formed to deal with meat retail
business buys rotten meat from a whole sale company, the partnership as buyers are
given certain rights of protection against the company as the seller. And lastly.

v. Furtherance of trade; the law is important in furtherance of trade. Many actions that
take place in business require legal back up without which they would result in

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These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

catastrophic consequences in business. In this regard, rules are formulated in order to

regulate trade practices and curve out a plain ground for fair trade competition among
businesses. An example of a law in this respect is the Tanzanian Fair Competition Act,
2003.

IMPORTANCE OF LAW IN RELATION TO A BUSINESS ENTERPRISE

The law is important to any business because it governs its various aspects such as:
i. The form of its establishment
ii. The mode of its carrying on
iii. The mode of winding up etc.
Any person involved in operation of business needs to content himself with the range of
rights, powers, privileges and responsibilities of the owners, managers and employees.
To rightly operate all these things so that one’s acts may not at the end of the day be
nullified, there is a need to have a clear understanding of the law so that one becomes
confident in his acts.

Conclusively, without clear knowledge of the law the business establishments would
repeatedly suffer loss, if any profitable business ventures its owners undertake was
done without abiding to legal requirements set for it and at the end of the day the
undertaking was nullified.

SOURCES OF BUSINESS LAW

From the discussion on the nature and development of law in Tanzania you can easily
notice the following as the sources of business laws in Tanzania
i. Statutes/ Legislations
The Law of Contract Act, Cap 345, Volume IX of the Revised Laws (RE: 2002)
The Sale of Goods Ordinance Cap 214
The Companies Act, Cap 212, Volume VI of the Revised Laws 2002
The Bankruptcy Act, Cap 25, Volume I of the Revised Laws 2002

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These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

The Bills of Exchange Act, Cap 215, Volume VI of the Revised Laws 2002
The Insurance Act, Cap 395, Volume 10 of the Revised Laws 2002
The Hire Purchase Act, Cap 14, Volume I of the Revised Laws 2002
Motor Vehicles Insurance Act, Cap. 169, Volume IV of the Revised Laws 2002
The Tanzania Evidence Act no. 6 (R.E 2002)
The Cheques Act, no. 3 of 1969

ii. Case laws

Various cases decided by the higher courts of the land; the High court and the court of
appeal, that relate to business are also sources of business law in Tanzania. There are
various divisions of the High court for instance the Commercial division which decides
various legal disputes relating to business. The decisions of this court are also a good
source of law.

iii. Books, Articles, Journals, government gazettes

Academic materials such as books, articles and journals are also sources of business law
in Tanzania. The government gazette of the United Republic of Tanzania publishes
notices relating to various legal matters some of which may relate to business. Many
laws require that a particular statute comes into force only when the minister
responsible publishes the date for it. Sometimes various subsidiary legislations for
example by-laws are announced in this gazette.

iv. Recognized commercial customs, usages, and good practice of trade

Traders and businessmen usually follow a particular practice of doing a specified type of
business as are widely recognized by the business community in which they conduct
such business. The law recognizes these practices and over time they themselves
become laws. An example of these practices, in medieval Europe culminated in is the
law merchant (lex mercatoria,) which is the body of rules applied to commercial
transactions; derived from the practices of traders rather than from jurisprudence.

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Usually the development of usages is triggered by failure of the civil law to efficiently
provide for some matters of trade2.

REFERENCES UNDER THIS TOPIC

ACCA (2004)., Corporate and Business Law, Foulks Lynch Ltd, UK. pp. 1-5

Akhileshwari Pathak (2007) Legal Aspects of Business, 2nd Ed., Tata Mcgraw-Hill
Publishing Company Limited, India

Denham P., (1999), Law: A modern Introduction, 4th Ed.., Redwood Books, UK. pp. 1- 14

Gregory A., The Origin of Law, available at:

http://www.lawfulpath.com/ref/laworigin.shtml as visited on 3rdmarch 2007. pp. 2-6

Marsh S.B and Soulsby J. (1992), Business Law, 5th Ed., McGraw-Hill Book Company, UK.
pp. 1 – 21

Nditi N.N.N (2004)., General Principles of Contract Law in East Africa, DUP, Dar es
salaam pp. 5-13

Ronald A.A etal (1981) Business Law, 11th Ed., South Western Publishing Company,
Cincinnati, Ohio. pp. 1-39

The Tanganyika Order in Council, 1920

http://www.nyulawglobal.org/globalex/tanzania.htm

2
See Wikipedia: The Free Encyclopedia available on line at http://en.wikipedia.org/wiki/Law_Merchant.
accessed on 17 January 2008, 1500 PM

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Law of Contract
Meaning and Nature of Contract
The second topic of our course deals with the Law of contract. Contracts do touch on
every aspect of human life i.e. the contract is every where; more often than not every
human act would involve a contract or series of contracts. A contract is present, for
instance, where there is an employer and employee relationship, or where you buy
something from a market, or where you have paid tuition fees to your college for
studies, or when you take a room in a guest house or even when you board a bus to
take you somewhere. The contract is there even when you do not expect it and
sometimes you live in it, for instance in marriage relationships. Due to its omnipresent
nature, the branch of civil law dealing with contracts in any given legal set up is it self
referred to as a “Mini legal system”.
The content of this part mainly revolves around matters concerning the following:
 The concept of contracts: Meaning and nature
 Formation of contract : essentials or elements of legally acceptable contract
 Terms of the contract
 Standard form contract and exemption clauses
 Discharge of contract

NOTE: GIVEN EN PASSANT

Common Sources of Law for Contracts

It is my hope that you remember and thus you have now a clear picture of the nature of
the general laws that apply in business in Tanzania. Just to refresh your mind and for the
purposes of being specific to this topic, the sources of contract law in Tanzania are:
i. Customary laws: will apply to customary contracts,
ii. Legislation: the principle legislation that provides for the general
principles of contract law in Tanzania is the Law of Contract Ordinance,

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Cap 433 or as renamed in the revised laws as the Law of Contract Act,
Cap 345 ( RE: 2002)
iii. Case laws: cases that have been decided by the Supreme Courts of
Tanzania i.e. the High Court (H.C) and the Court of Appeal (C.A) and
which have established various principles on contract law are also
sources of contract law. In this case English cases which, substantially,
have been decided on common law may be used in interpreting the
matters provided in the contract Ordinance 3, subject to reception clauses
(emphasis mine).
iv. Common law: the substance of the Contract Act occasions a number of
lacunas on some aspects of contract law i.e. it means it does not provide
for any principles for some of the matters relating to contracts and when
this happens the applicable law would be the common law of England on
contracts.
________________________________________________________________________
BUT WHAT IS A CONTRACT?
The word contract refers to an agreement which can be enforced by law between one
person and another. The two words: “agreement” and “enforced by law” which are
found in the definition are fundamental to the validity and thence presence of any
contract. It follows therefore, if any purported contract can not be enforced by law it is
not a legally valid contract. When an agreement is enforceable by law, it is said to be
binding and to be binding an agreement has to create legal obligations.

BOX 1.

EXAMPLE 1: Juma agrees with his girlfriend that he would take her to a zoo last

3
Nditti, NN (2004), General Principles of Contract Law in East Africa, DUP, DSM. Pg 12. See also
Banana R.S, Business Law Manual, Institute of Accountancy Arusha p.g. 3

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weekend, but he did not do it. Can she enforce this agreement? or

EXAMPLE 2: A wife agrees with her husband that if he promises to love her whole
heartedly he would buy him a car. Can he enforce this agreement?

Are these two agreements contracts?

All of these are agreements but they are not contracts because they are they are
incapable of being enforced (they do not create legal obligations). In a more general
sense, the question whether an agreement creates or does not create legal obligation
depends on the intention of the parties to it. We shall see herein in which circumstances
an agreement can create legal obligations.

Therefore Enforceability (bindingness), of an agreement, is the condition precedent

before the same can be established as a valid contract.

CATEGORIES OF CONTRACTS AND THEIR FORMS

Contracts come in many faces and different writers have different ways of classifying
them. Different ways of classifying contracts are dependent upon the bases of
classification employed. However, under this part I will only refer to material containing
the most common bases of classifying contracts.

Most Common bases of classifying contracts

i. Mode of creation
ii. Mode of executing
iii. Enforceability and
iv. Formality

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1. TYPES OF CONTRACTS BASING ON MODE OF CREATION

Express Contracts
A contract is said to be express if the parties thereto have made oral or written
expression of their intentions and of the terms of the contract. By words of mouth or by
writing the parties in clear terms define the nature of their agreement, rights and
obligations of either of them in that contract.
Implied contracts
Where the nature of the agreement in the contract is neither defined in writing nor in
spoken words is the contract said to be implied. The nature of the agreement in this
kind of contract is usually inferred from the way the parties act and conduct
themselves4.The conduct of the parties may be said to result to a contract in one of the
following ways;
BOX NO. 2

EXAMPLE 1: When you go to the doctor at a hospital telling him that you are sick, there is an
implied agreement created in this circumstance that the doctor can do any medical act to
make you well.
EXAMPLE 2: When you bring goods to a person telling him that if he does not like them he
should return them to you in a stipulated time; if he does not return them and he happens to
do anything in respect of the goods which is inconsistent with what you had told him then a
contract of sale is created by the conducts of the person to whom the goods have been
brought.

The difference between the express and the implied contract usually relates to the
manner each one of them can be proven to exist in which case an express contract
can be proven by the words either spoken or written while an implied contract can

4
Anderson, Fox & Twomey (1987) Business Law (rev. edn.), Cincinnati, Ohio, South Western Publishing
co. pg.192

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be proven by establishing whether the alleged act is enough to warrant an

emergency of a contract between the parties.

2. TYPES OF CONTRACTS BASING ON EXECUTION

Executed contracts
Usually a contract entails performance of certain obligations by the parties created by
that contract; if a contract has been entirely performed it is referred to as an executed
contract.
Executory contracts
A contract is referred to as an executory contract if either a party or both the parties
thereto have to discharge their obligations later i.e. have to perform the contract later.
BOX NO. 3

EXAMPLE: In a situation where a student pays school fees to an academic institution so that
the latter gives him tuition and upon passing grants him an award, an existence of executory
contract between him and the institution is presupposed in the sense that, the student by
paying fees has discharged his obligation and it remains obligatory on the part of the
institution to finish their side of the contracts

3. TYPES OF CONTRACTS BASING ON ENFORCEABILITY

Valid contract
It is the contract which creates legal obligations that can be enforced by law.

Void contract
It is a contract which is not enforceable by law. Usually a void contract is an agreement
which does not meet criteria for a valid contract i.e. an essential element of a valid
contract besides free consent is missing.

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BOX NO. 4

EXAMPLE: A enters into agreement to sell a bicycle to B. but before the bicycle is
handed to A, it gets stolen.

Voidable contract
It is an agreement which is enforceable by law only at the option of one side to the
contract. This means contracts of this kind are valid unless one side entitled the option
decides to avoid5 (declare invalid) it. Thus a voidable contract is a mid way contract
between a valid and void contract. Contract of this kind can be resulted into for instance
if one party does not enter into it of his own will, i.e. he is forced.

BOX NO. 5

EXAMPLE: Simba, Regional Police Commander threatens to suck Mbuzi, a constable

if the latter does not sell to him the car he was gifted for his heroic moves against
rogues, at shs. 3/= Million.

If Mbuzi sells the car to Simba, it is only because he is threatened so to sell but not
because he wants to sell it. This contract is valid but Mbuzi has in law the option to
avoid this contract. Only when he so declares it invalid that the contract becomes void
in which case Mbuzi shall have to return the money to Simba.

5
The alternative words to the word avoid are: annul, repudiate, rescind, and cancel.

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Illegal contracts
If the object for which the agreement is entered into is unlawful the resulting contract is
illegal contracts.
BOX NO. 5

EXAMPLE: If two parties agree to join efforts to rob people of their properties and
share the money after selling them.

Robbing people is illegal thus the agreement is also illegal and thus void.

Unenforceable Contracts
These are agreements which are unenforceable not because they are void but merely
because they have a technical defect in them such as not being written if writing is a
mandatory, an example of this contract is an oral agreement for arbitration.

4. TYPES OF CONTRACTS BASING ON FORMABILITY

A. Formal contracts
Formal contracts are those which follow a formality in their execution. The formality
usually expresses the intentions of the parties to be bound by that contract in absence
of any other evidence to the same. Enforcing this kind of contract is therefore is
determined by the formality.
The following are types of formal contracts:
Contracts under seal / Deeds/ specialty contracts
These are those types of contracts that are executed by affixing either a seal or making
an impression on the paper or attaching some wafer material like wax to the
instrument. In short it is a contract that is signed and has the (wax) seal of the signer

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attached to it. Common law courts have recognized contracts under seal as being
enforceable without consideration on two justifications as follows:
i. For the purposes of authenticity of the document; The object (usually a signet
ring) used to imprint the wax identified its owner, thereby providing (at least
some standard of) proof that the owner was party to the contract
ii. The binding effect of the seal was widely understood, providing evidence of

deliberation6
Contracts under seal have lost favour now with most jurisdictions and the law as it
related on seals has been either abolished or modified by statute.
Contracts of record
These are those agreements which have been recorded by court. When one party
agrees before the court that he owes an obligation another party and the court records
the same as a contract under record of the court.
Negotiable instruments
Negotiable instruments are also contracts; these bind the parties there to only if the
legal requirements have been complied with. These are discussed in this work later.

B. Informal / Simple contracts

All other contracts that are not contracts under seal are known as informal or simple
contracts. Unlike the former, simple contracts must be supported by consideration.
Their enforceability is thus based on what the parties agreed.

An example of this contract is a quasi contract

These are those contracts which the law/ courts pretend that they exist while in fact
they do not. Usually these contracts are created by law for reasons of justice without
any expression of assent by the parties. With these contracts a party may not receive an
unjust benefit from another.

6
See Wikipedia: The Free Encyclopedia available on line at
http://en.wikipedia.org/wiki/Seal_(contract_law) accessed on 13 January 2008: 2:55 PM

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There are three situations which can result in quasi contracts

BOX NO. 6

EXAMPLE 1: A situation where there is no contract between the parties but one of them
has enjoyed a benefit under it.
A has sent B to cultivate his farm, B makes a mistake as to the location of the farm and
cultivates C’s farm instead. C has seen B cultivating his farm but he did not tell him that
he was not supposed to do that since they have no contract between them, In this case
C will have to pay B, since the law finds it inequitable that C should keep silent and
gain unjust benefits from B.

EXAMPLE 2: where there is a contract but it has been avoided

A contract between a minor and a major is deemed to be no contract. A minor can
avoid it, but the law does not let minors enjoy the benefits out of these contracts
inequitably thus the law requires them to pay not the contractual price of the benefits
but a reasonable price thereof. This will be discussed in detail later in this work.

EXAMPLE 3: Where there is a contract but it has been held to be void ab initio (void from
the beginning).
This situation may arise when the parties have done everything to enter into the
contract but later on one of them claims that the contract is void for some reason and
thus he does not want to pay for the benefit (s) he has received.

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2.4 FORMATION OF A CONTRACT:

Essentials of a valid contract
We have seen that a contract is pre-existed by an agreement. In the formation of a
contract the law provides for a minimum number of prerequisites or some times are
referred to as essentials of a contract, before an agreement can be a contract. Some of
these are expressly stipulated in the Law of Contract Act, Cap 345 and those which are
not provided can be implied from the English common law of contract.

S. 10 THE LCO, CAP 433 provides that:

All agreements are contracts if they are made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void.

An analysis of this section brings up the following essentials of a contract:

i. Agreement
ii. Free consent of the parties
The principles of contract law require that parties enter into the contracts out of their
own free will, without being forced or influenced by any person. According to s.14 of the
LCO free consent is that which is not caused by such vitiating factors as coercion, undue
influence, fraud, misrepresentation and mistake.
iii. Competency (sometimes is referred to as capacity to contract)
Here the parties must be legally capable of entering into the contract. A person for
instance may not be competent to contract if he falls under one of the following groups:
is of under the age of the majority age.
iv. Lawful consideration – simply means something received under the
contract by a party for what has been offered by him to the other.

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v. Lawful object – object is the purpose why a contract is entered into. The
purpose has to be lawful. According to s. 23 of the LCA any object is
unlawful if it is charecterised by the following, i.e. if

Refer to an example given in box no. 5 above.

vi. Intention to create legal relation- parties must intend to create legal
relationship between them. Intention is presumed to be there in all
commercial agreements unless refused by parties and it is presumed not
to be there unless so declared to be present in all social agreements.
Let us now discuss each one of these essential elements of contracts

THE AGREEMENT: How to make it

Since agreement is the beginning point in the making of a contract, the validity of the
latter will depend largely on the preciseness of the former. An agreement is therefore
one of the fundamentals of a valid contract.
An agreement is made by two things:
 Offer/ proposal- the person who makes it is referred to as the “offeror
 Acceptance - is referred to as the “offeree”

THE OFFER/ PROPOSAL

The meaning of the word proposal is provided by s. 2(1) (a) of the LCO. Any person will
be said to have made an offer/ proposal if:

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He has signified to another person his willingness to do or to abstain from

doing anything, with the view to obtaining the assent of that other person to
such act or abstinence.
The proposal usually contains of a number of terms, which would either take an oral or
written form depending on the nature of a particular contract. Some contracts must be
made in writing only e.g. Bills of exchange, insurance contracts, hire purchase contracts
etc.
BOX NO. 7

EXAMPLE 1: A calls B and tells him, “I would like to sell to you my plot located at
Tengeru” or

EXAMPLE 2: C writes a letter to D telling him that he wants to buy D’s cow at Tshs.
7500/= Instances number one and number two above are examples of how offers/
proposals are made as done by A and C respectively. We will use these examples
later.

THE FEATURES OF A VALID OFFER/ PROPOSAL

To be proper a proposal must conform to legal requirements and the following factors
are essential to make a proposal apposite. There are two bases to classify these
requirements as follows:

(a) The terms must be certain and clear

It means the terms making the proposal must be self explanatory; they should not leave
a question to the (offeree), the person to whom the offer is made. This person must
understand correctly the content of the offer and such things as:

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1. Is the offer for selling or purchasing?

2. What is the item, subject to that sale?
3. What is the price?
The terms are clear and certain if the parties will be in a position to be able to say
exactly upon what is their agreement founded.
Q. Do the examples of the proposals given in the box no. 7 above meet these tests?
Answer: Every proposal must contain terms which are certain e.g. in example number
one the terms that are contained therein are selling a plot only and there is no any other
term. Is there certainty to this proposal? No it is not certain since B would not know
how much is the plot sold.

In example number two, the terms are:

1. Buying D’s cow and 2. The price is mentioned at Tshs. 7500/=.
This is a certain offer since it defines in precise terms what C is willing to do; it also
mentions the price for the same. Offers of this kind do not leave any questions to the
persons to whom the offer is made (offeree).

An offer must be clear for if it is not it is likely to result into an agreement that is
ambiguous. In law uncertain agreements are not legally recognized agreements. S. 29 of
the LCO provides that:
“An agreement, the meaning of which is not certain, or capable of being
made certain, is void”
There are a number of cases decided in Tanzania to this effect:
See Alfi E. Africa Ltd v Themi Industries and Distributors Agency Ltd 1984 TLR 256
See also Nitin Coffee Estates Ltd and 4 others v United Engineering Works Ltd And
another 1988 TLR 203 (CA)

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In these cases there was a conclusion of the agreement, which did not disclose the
price. Price in a contract of sale was held to be a fundamental term and non disclosure
of which renders the agreement uncertain.

(b) The terms of a proposal must be a final expression of intention to make legal
relationship
An offer must be made with an intention to bind its maker to it and thus to law, thus
legal relationship. Once the made, the maker of it the proposal must not change the
terms and his willingness to be bound by the terms of the proposal he has made
otherwise this would change the subject and the essence of their agreement.

However, if a contract is in writing, its content can only be varied (changed) in writing
and there must be a separate agreement whose function is to change that contract. This
agreement must be supported by consideration.

These words are the decision of Lugakingira J., in

Edwin Simon Mamuya v. Adam Jonas Mbala 1983 TLR 410 (HC)

(c) Proposals must be communicated to the offeree. A contract would not be

formed if an offer was not communicated. The meaning of communication of an offer
and the manner in which it can be communicated are discussed herein.
(d) An offer must be different from an invitation to treat. see the acts
resembling offers

ACTS THAT RESEMBLE OFFERS

These are acts that bear resemblance to offers but are not offers themselves. These acts
are not intended to bind those who make them. In the contracts an offer is a firm
promise and a final expression to do or to refrain from doing something as explained
earlier.

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Examples of these acts are such as the following:

(a) A mere supply of information
Usually a person may seek information from another concerning something he wishes
to buy probably for the purpose of acquiring sufficient knowledge about it prior top
such buying. This request for information does not amount to an offer. The following
case illustrates this point.

Harvey v Facey [1893] AC 552

In this case one Harvey sent a telegram, which I will refer to as telegram number 1, to
one Facey in these words; “Will you sell us Bumper Hall Pen? Telegraph the lowest
price”. This means Harvey just sought to know whether or not Facey would be willing to
sell the property.

Reply by Facey: Telegram number 2.

“Lowest cash price for Bumper Hall Pen is 900 pounds”

Harvey’s further response: Telegram number 3.

“We agree to buy Bumper Hall Pen for 900 pounds asked by you…”
Later Facey refused to sell Bumper Hall Pen and Harvey went to court.
The court held that:
There was no contract because of two reasons;
i. Telegram number two was not an offer but rather a mere supply of
information; it merely supplied the price at which if there was an offer, Facey
would be willing to sell.
ii. Telegram number three was a true offer but not an acceptance. This true
offer is no where accepted in their telegram communication.
Due to this you must know how to distinguish when a person makes an offer and when
he merely seeks a supply of information as to the subject matter of the contract.

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(b) Invitations to treat

An invitation to treat happens to be done when a person proposes certain terms for
which he is ready to enter into negotiation but by which he is not willing to be bound. In
other words these are terms that the maker merely intends to invite an offer and set in
motion negotiations with any one who would be interested. Examples of invitations to
treat are:
i. Display of goods for sale
When goods are displayed in a shop for sale together with its price ticket attached to it,
this act does not amount to an offer. By so displaying, the law presumes that this person
only meant to invite offers from the interested persons.

This was held in a famous English case of:

Fisher v. Bell [1960] 3 All E.R. 731 or reported also in [1961] 1 Q.B. 394
Simple facts of the case were: Bell, displayed in the window of his shop a flick knife on
which he attached a price tag bearing description of the knife and the price which was
set at 4s. It was illegal to offer a flick knife for sale under the English law. So he was sued
for so offering such a knife.

The issue before the court was:

Does the display of goods for sale in a shop amount to an offer?
Lord Parker delivered a judgment which resolved this issue in the following statement:

“It is clear that, according to the ordinary law of contract, the display of an article with a price
on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale the
acceptance of which constitutes a contract”.

Lord Parker, further disputing the contention that display of goods constitutes and
offer, observed that:

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“I find it quite impossible to say that an exhibition of goods in a shop window is itself an offer
for sale”.

In an earlier case, Pharmaceutical Society of Great Britain v Boots cash chemists

Southern Ltd [1953] 1 Q.B. 401; also [1953] 1 All E.R. 482 which has more or less similar
facts to Fisher V Bell the court of appeal of England opined that the display of products
in a store is not sufficient to constitute an offer; and the judges, Somervell, Birkett and
Romer, L.JJ. referred to this act as a mere invitation to treat.

Simple facts of this case:

Boots Cash was what I would call a kind of a drugs Super market in which a buyer moved
around with a basket picking whatever drug he wanted presented it at the cashier’s
desk and paid for them.

The law in England made it illegal to sell drugs without supervision of a registered
pharmacist. In this store there was a registered pharmacist but he was usually seated
at the cashier’s desk where the buyers paid for their drugs.

The Pharmaceutical Society argued that:

i. That by displaying the drugs Boots Cash offered them for sale.
ii. That by placing the drugs in the basket, the customer accepted the offer.
iii. That a sale was effected between Boots Cash and the customer, by the
obove two acts, and for this sale Boots Cash violated the law which
prohibited selling of drugs without supervision.

WHEN THEN IS THE OFFER MADE IN SUCH A SITUATION?

The offer is instead made when the customer presents to the cashier the item together
with payment for such an item and the acceptance will be presumed to done when the
cashier accepts the payment.

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ii. Tenders
Advertisements that call for tenders are mere invitation to treaty but they are not
offers. The person who tenders is the one who makes an offer. Acceptance of this offer
is done by the person advertising tenders by considering and accepting one of them.

iii. Declarations of intention

A person may declare an intention to do or to abstain from doing something; this
declaration is not an offer and so is separate from the contract which would result from
it.
In Harris v Nickerson (1873) L.R. 8 Q.B. 286
Nickerson placed an advertisement in newspapers to the effect that he would put up for
auctioning, among other things, some office furniture. The auction was later cancelled.
Harris sued Nickerson for damages because he had traveled from a distant place to
come to the advertised auction. He argued that the advertisement constituted an offer
and by traveling that far he had accepted it.

The court held that the advertisement was not an offer, thus it could not be accepted by
making such a journey.
The principle established in this case:
The three Judges Blackburn, Quain and Archibald, JJ. Who presided over this case
established that an act of advertising that items will be placed up for auction does not
constitute an offer to any person that the goods will actually be put up. The person who
placed the advertisement may withdraw the items for the auction at any time before
the auction.
iv. Mere “puffs or boasts”,
Some commercial advertisements when made can not be taken seriously and thus they
can not be regarded as offers. These are referred to as “mere puffs or boasts”. These
are common in business world especially when a new product is introduced in the
market. Instances of these are a phrase like:

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“Tigo, Mtandao unaokupa zaidi” or “Celtel, makes Life better” you can not claim that
this is an offer for which you can sue the company when you do not find any thing
special in its services.

Advertisements which may be offers

However some of these advertisements can not be categorized as “mere puffs or
boasts”. These are those which take the form of promises which a sensible person may
take into account. An illustration of promises which might be taken seriously is as it
happened in the following case:
Carlill v Carbolic Smoke Ball Co. 1 QB 256
Carbolic Smoke Ball Co. was the company specialized in the manufacture of a drug
which was famed for curing and preventing influenza. They placed an advertisement in
the newspapers that they would pay 100 Pounds to any one who caught influenza
after using their drug. The ad is in the following words:

“£100 reward will be paid by the Carbolic Smoke Ball Company to any person
who contracts the increasing epidemic influenza, colds or any disease caused
by taking cold, after having used the ball three times daily for two weeks
according to the printed directions supplied in each ball. £1000 is deposited
with the Alliance Bank, Regent Street, showing our sincerity in the matter”.

Mrs. Carlill trusted the makers of the promises contained in the advertisement, bought
and used their smoke balls after which she still contracted influenza. She sued the
company.

The court held that the advertisement was a valid offer.

The words “£1000 is deposited with the Alliance Bank, Regent Street, showing our
sincerity in the matter”. Show that these were rigid promises by which the maker of

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these words intended to be bound. Any reasonable man would take them seriously
like Mrs. Carlill did.

OFFERS: How to make them in different situations

There are various ways of making an offer depending on circumstances; for instance it
can either be made to the general public, a particular person or to a class of persons.
Offers can be to these persons through various situations as follows:

(a) 1 st situation : Offers in unilateral contracts

An offer in unilateral contracts is a general offer since it is not made to a definite person
but to the world at large Illustration of an offer made to the whole world is if the offer is
advertised and intended that some one from the public should fulfill it. These are called
offers of unilateral contracts. They are so called because a promise is made by only one
party; there is no reciprocity of promises. This one party would guarantee to do or not
to do something for another party in absence of that other party’s agreement to that
effect.

In this kind of offers if any one person from the public happens to respond to it, he will
be said to have accepted the offer, by his conduct.

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BOX NO. 8

EXAMPLE:
If a company wants to maximize sales for its products and in an advertisement in a
news paper gives a promise in the following words:
“Anyone who buys more than one of our product X at one time
will be given one free Nokia 3310 cell phone on the spot”
This advertisement is a valid offer and the person placing such advertisement has
expressed his willingness to be bound by the terms he has advertised.

If any person buys product X and he is not awarded the promised free Nokia 3310 cell
phone on the spot he has the right to sue the company for breach of a contract.

What distinguishes it from other kinds of contracts is that there are no preceding
negotiations between the two parties prior to acceptance of the offer like there is in
other contracts.

(b) 2nd situation: Offers in auctions

The practice in auctions as to how and who makes an offer is that; contrary to what
most people think, an offer in a n auction is made by any party who bids and the
auctioneer, the person who is in control of the auction accepts the highest offer by the
fall of his hammer.

(c) 3rd situation: Offers in tenders

An advertisement that there will be a tender of any kind does not amount to an offer; it
is just an invitation to treat. Instead the offer is made by the parties who respond to
this advertisement by sending in their tenders in which are contained the specific terms
relating to that particular tender by which he is ready to be bound.

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This offer by the person responding to the advertised tender may or may not be
accepted by the advertiser for the law does not compel him to accept it, it does not also
blame him for not accepting that offer. It is upon him to decide whether or not to accept
it.
However if it was advertised that the highest tender would be the one accepted, the
party inviting the tenders has no option but to accept the same.

In Gbl & Associates Ltd v Director Of Wildlife Ministry Of Lands, Natural Resources
And Tourism And Two Others (1989) TLR 195 (HC)
In this case the Central Tender Board for the government of Tanzania advertised in the
Daily News Paper of February 09 1988 inviting tenders for the sale of elephant ivory.
Various persons sent in their offers and the offer made by the plaintiff Co. was
accepted.
The terms which the advertisement specified for the tenderers to include in their offers
were that payment and collection of the ivory must be done within 30 days.

Rubama J. held in this case that:

(i) The advertisement by the Secretary of the Central Tender Board calling for the
purchase of elephant ivory was not an offer but an invitation to treat. Each of
the tenderers offered to buy at his quoted price and it was upon the
government of the United Republic of Tanzania to accept an offer or reject it;

(ii) ...Central Tender Board was not obliged to accept the highest bid or any of
the tenders…

COMMUNICATION OF A PROPOSAL
To be effective an offer must be communicated by the person making it to the offeree.
An offer can only be accepted after it has come to the knowledge of the person to
whom it is made.

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s. 4 (1) of the LCA provides that:

“Communication of an offer is deemed to be complete when it comes to
the knowledge of the person to whom it is made”

It does not matter therefore, whether communication is made orally or in writing, it

must come to the knowledge of the offeree.
Any one who purports to accept the offer while he has been unaware of its existence,
his acceptance is not legally accepted. This situation has happened in the following case:
R v Clarke (1927)
In this case it was advertised by the government of Australia that if any accomplice of a
specified syndicate of murderers furnished evidence that would help to arrest the
murderers; he would be offered a free Pardon by the government.

One Mr. Clarke gave the information while he was unaware that there was such a
pardon by the government. He only realised later after he gave the information and
claimed that he be given a pardon because he had accepted the offer.
The court held that:
Mr. Clarke could not benefit from the reward because he was not aware of the offer.
It appears therefore that if Mr. Clarke had knowledge of the offer before he tendered
the information to the government, his acceptance would have been valid and he would
have been entitled to benefit from the free government pardon.
Remember therefore that knowledge of the offer is necessary to make ones acceptance
effective.

TERMINATION OF THE OFFER/PROPOSAL

An offer does not stay valid for ever; there is always a point in time when the offer
comes to an end. Usually, before it is accepted, an offer is valid as long as nothing
happens that brings it to an end. There are a number of events, in daily life and as far as

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principles of contract are concerned, whose effect is to end the offer. Generally Such
events are as follows:
i. if the offer is revoked by the offeror
ii. if the offer is rejected by the offeree
iii. if the time set for the offer lapses; for offers which are limited by time.
iv. If the offeror dies or becomes insane.
v. If there is a failure to fulfill a condition; for offers which are contingent upon
fulfillment of such a condition.
vi. If the offer is properly accepted.
vii. Intervening illegality
Termination of an offer is referred to by s. 6 of the Law of Contract Act under one
general word as revocation of a proposal. More or less of the events mentioned above
are enumerated under this section as acts which when done would occasion revocation.
S.6 of the LCA reads as follows:
A proposal is revoked
(a) by the communication of notice of revocation by the proposer to the other
party;
(b) by the lapse of the time prescribed in such proposal for its acceptance, or,
if no time is so prescribed, by the lapse of a reasonable time, without
communication of the acceptance;
(c) by the failure of the acceptor to fulfill a condition precedent to acceptance;
or
(d) by the death or insanity of the proposer, if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance.

Out of all the events that I have mentioned above only two events are not
mentioned in this section; rejection and acceptance of the offer.

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1. TERMINATION OF OFFER BY REVOCATION OF A PROPOSAL

To revoke an offer is simply to cancel it. You are now aware that one of the acts that
cause an offer to terminate is its revocation. An offer must be revoked by the person
who has made the offer or it may be revoked by the person who is authorized to act on
his behalf. Revocation of an offer must be done subject to the following rules
(a) Must be a communicated act
Revocation of a proposal is effected by doing any act that has an effect of
communicating it to the offeree.
By communicating it, it implies that revocation of a proposal must come to the
knowledge of the offeree, otherwise it is ineffective.
s. 3 of the LCA, provides that:
The communication of proposals, the acceptance of proposals, the
revocation of proposals and acceptances, respectively, are deemed to be
made by any act or omission of the party proposing, accepting or
revoking, by which he intends to communicate such proposal, acceptance
or revocation, and which has the effect of communicating it.

This section can be analyzed as follows:

The communication of-
i. proposals
ii. the acceptance of proposals
iii. the revocation of proposals and
iv. acceptances
respectively are deemed to be made by-

i. any act or of the party proposing, accepting or revoking,

ii. omission

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by which he intends to communicate such-

(a) proposal,
(b) acceptance or
(c) Revocation, and
which has the effect of communicating it.

From this thus, the communication of the revocation of the proposal is deemed to be
done when there is any act or omission of the person who revokes. This act or omission
should not only be intended to communicate such revocation but also must have the
effect of communicating it (it must actually come to the knowledge of the offeree).

Case illustration:
In Byrne v Tienhoven [1880] 5 CPD 344
Simple facts of the case:
The facts would be understood well if evaluated in terms of dates specific events
happened as follows:
On October 1st 1880: Vantienhoven, from England by post, sent an offer to sell tin
plates to Byrne in New York

On October 8th 1880: Vantienhoven posted a letter of revocation of offer.

On October 11th 1880: Byrne, telegraphed acceptance
On October 15th 1880: Byrne, confirmed his acceptance by letter
On October 20th 1880: The revocation letter which was sent by Vantienhoven on
October 8th to Byrne reached him.

When van Tienhoven refused to sell the tin plates relying on his revocation, the court
held that there was a valid contract made between them because the revocation letter
had not been effective until it was actually communicated which was after the
acceptance had already arrived.

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If you look at the dates carefully you will realize that the revocation was sent earlier (8th
October) than the acceptance (11th October); under normal circumstances you would
expect the revocation to take priority over the acceptance but the law does not lay
emphasis on time but rather on knowledge of the particular information required to be
known.

(b) Revocation must be done before offer is accepted

To be effective such communication of revocation of an offer must be done at any time
before the same has been accepted.
This is the import of s. 5(1) of the LCA, which reads as follows:
“A proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer”

2. TERMINATION OF OFFER BY REJECTION

Another way in which an offer can be terminated is if the offer is rejected by the offeree
by any of the following acts:
i. if he turns down the offer
here the offeree can simply state that he does not need it.
ii. If he makes a counter offer
A person will be said to have made a counter offer if his acceptance contains new terms
which are different from those which are contained in the original offer.

In Hyde v Wrench [1840]

Simple facts of this case:
i. Wrench offered to sell a farm to Hyde at 1000 £
ii. Hyde, in his purported acceptance, was willing to buy it at 950 £. Wrench
rejected
iii. Then Hyde accepted to buy at 1000 £

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iv. Wrench rejected. Hyde sued him.

Held: Hyde’s acceptance was a counter offer and wrench was not obliged to accept it.

3. TERMINATION OF OFFER BY LAPSE OF TIME

Certain offers do stipulate the specific duration of time beyond which an offer ceases to
be valid i.e. this offer will expire after that time and for offers of this kind any
acceptance after which expiry will be ineffective.
For offers which do not provide for a specific time frame, they will lapse after a certain
period of time referred to as reasonable time.
s. 6 of the LCA provides that:
A proposal is revoked-
(a) by the lapse of time prescribed in such proposal for its acceptance, or, if no
time is prescribed, by the lapse of a reasonable time, without communication
the acceptance;

The statute just mentions the phrase reasonable time without providing for its meaning.
The question is:
What constitutes reasonable time in law?
The reasonable time will be deduced from the circumstances of each particular case. It
is the court that normally decides if there was reasonable time from the facts of a
particular case that have been tendered before it.

The case of Ramsgate Victoria Hotel Co. v. Montefiore [1866] illustrates the instance
where the court construed reasonable time.

Simple facts of the case:

In June Montefiore offered to buy shares from Ramsgate Victoria Hotel. The offer did
not set the time limit for its acceptance.

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In November Ramsgate accepted this offer being five months later. But by this time Mr.
Montefiore did not need the shares any more.
Ramsgate sued him, claiming that he breached the contract since they accepted his
offer while Montefiore maintained that his offer had expired and could no longer be
accepted, so his was not an acceptance in the eyes of the law.

Held: Where an offer is stated to be open for a specific length of time, then the offer
automatically terminates when that time limit expires. Where there is no express time
limit, an offer is normally open only for a reasonable time.
Thus the court was of the view that the company accepted the offer as of too late

4. TERMINATION OF OFFER BY DEATH OR INSANITY OF THE OFFEROR/ PROPOSER

The death of the offeror, as long as it has come into the knowledge of the offeree, will
have an effect of terminating the offer.

s. 6 (d) of the LCA provides that:

A proposal is revoked-
(d) by the death or insanity of the proposer, if the fact if his death or
insanity comes to the knowledge of the acceptor before acceptance.
According to this section, in either case, whether it is death or insanity,
knowledge of it is an important element.

When death of offeror is not known by offeree

If the offeree does not know of the death of the offeror he is entitled to accept the
offer, nonetheless, despite this death except when identity or personality of the
deceased offeror is vital i.e. the offeree will not, under this situation, be entitled to
accept the offer.
BOX NO. 9

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EXAMPLE: An offer that has been given by a professor of Law the University of Dar es
salaam, who happens to die before it is accepted, can not be accepted by the offeree who
does not know of this death, if his identity as the professor of Law the University of Dar es
salaam is vital to the contract.

This means that if the offer was for a performance of something that could be done by
any person other than the professor in his professional capacity, then his personal
representatives can act on his behalf.
TERMINATION OF OFFER BY THE FAILURE TO FULFIL A CONDITION
Some offers are coupled with a condition(s). Offers of this kind are valid only as long as
these conditions are fulfilled.
The nature of these conditions:
The conditions may be of two kinds:
i. express terms- made orally or in writing
ii. Implied- these are neither made orally nor in writing. They are inferred from
studying each particular situation
In Financing Ltd v Stimson [1962]
Stemson offered to buy a car on a hire purchase arrangement from Financing Ltd. prior
to acceptance of this offer the car was stolen. Uninformed of this theft Financing Ltd
“accepted” this offer.

Held: it was held that the company could not accept the offer as they did, since the offer
was subject to the implied condition that the car would there prior to acceptance.
See also s. 6 (c) of the LCA.
A proposal is revoked-
(c) by the failure of the acceptor to fulfill a condition precedent to
acceptance

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ACCEPTANCE OF AN OFFER
Meaning and nature
An acceptance is an unconditional assent to the terms of the proposal. The word
unconditional means that the terms of the acceptance must not set new conditions
apart from those stated in the offer. If the acceptance does so it is termed a counter
offer.
Statutory meaning:
S. 2(1) (b) of the LCA states
(b) When the person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted, and a proposal, when accepted, becomes a promise;

The rules of a valid acceptance

An acceptance has to meet certain legal aspects before it becomes an effective
acceptance.
(a) The Mirror image rule: The rule states that an offer must be accepted
exactly without modifying it i.e. the acceptance must reflect the terms of the offer as
they are made. In other words an acceptance must be absolute and unqualified i.e.
The acceptor must accept an offer as it has been made to him7
An attempt to accept the offer on different terms instead creates a counter-offer -
which constitutes a rejection of the original offer.

E.g. If the offer is for sale of a motor cycle at Tshs. 2/=, the acceptance must not be for
buying a car at Tshs 3/=

EFFECT OF MODIFYING THE TERMS OF THE OFFER

Usually this will result in one or more of the following:
i. Counter offer

7
Nditti p.27. see also s. 7 (a) of the LCA

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I hope you remember what a counter offer is; this happens when the offeree in his
acceptance of the offer either introduces a new term or varies the existing terms of
the offer.
When this case happens the original offeror may or may not accept the counter offer.
A counter offer has two effects:
a. It amounts to rejection of an offer. See Hyde v Wrench Refer to pg. 46 of this work.
b. It cancels the original offer, in which case it is useless even if you accept it later on the
original terms.
ii. Conditional assent
If the offeree places any condition in his acceptance, the acceptance will be shorn of its
central feature which is it should be an unconditional assent to the terms of the
proposal.

BATTLE OF THE FORMS/ LAST SHORT DOCTRINE

However there are exceptions to the general rule that the acceptance must match the
proposal. It is under very limited circumstances to have a contract even without
matching the offer and acceptance as when two companies use standard form contracts
where what is referred to as acceptance may qualify the offer thus resulting in counter
offers. Nevertheless a contract has got to be made on the same terms. Whose terms to
accept?

In Butler Machine Tool Co Ltd v. Ex-Cell-O Corporation (England) Ltd [1979] WLR
401introduced the rule to be applicable in this situation as the traditional offer-
acceptance analysis in which the last counter-offer prior to the beginning of
performance voided all preceding offers. The absence of any additional counter-offer or
refusal by the other party is understood as an implied acceptance.

Lord Denning in Gibson v Manchester City Council [1979] above

Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Rep 25.

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EFFECT OF THE ACCEPTANCE WHEN IT IS PROPERLY MADE

i. Refer back to s. 2(1) (c) that a proposal when accepted becomes a “promise”
ii. According to s. 2(1) (c) the maker of the proposal becomes the “promisor”
iii. The acceptor of the proposal becomes the “promisee”
The promisor and the promisee are the parties to an agreement.

Therefore in order to form an agreement the acceptance is supposed to change the

proposal into the promise.
According to s. 7 (a) (b) of the LCA in order that acceptance changes a proposal into a
promise, it must have the following features:

(b) An offer can only be accepted by the offeree, that is, the person to
whom the offer is made. Except under agency, the offeree is not usually bound if
another person accepts the offer on his behalf without his authorisation,

(c) Acceptance must follow the manner of acceptance stated by the offer;
i. if the proposal prescribes the manner in which it is to be accepted, eg.
by email or post etc. and the acceptance does not follow this manner, the proposer
must insist that his proposal be accepted in the manner prescribed and only that. If he
fails do so he is deemed to have accepted that acceptance. See the case of Yates
Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975) 119 Sol. Jo. 370
ii. . . the proposal does not prescribe the manner in which it is to be
accepted, the acceptance must be expressed in some usual and reasonable manner.
(d) Acceptance must be communicated
The general rule in contract law is that an acceptance must be communicated. Silence
does not amount to acceptance except under certain situations.

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This was stated in the case of Felthouse v Bindley [1862] 11 CB (NS) 869, or 142 ER
1037
Simple facts of the case:
Felthouse offered in writing to buy a horse from his nephew John in which he sated
that: “If I hear no more about him, I consider the horse is mine at £30 15s.’ There was no
reply form his nephew. Later the uncle claimed that there was a binding contract
between the nephew and him.

The court held that there was no contract because silence did not amount to
acceptance.

The fact that an acceptance must be communicated to make it effective is only a general
rule; there are exceptions to this general rule as in the following two circumstance:
Exceptions to requirement to communicate
i. When the offeror dispenses with acceptance.
There are two ways this can be done by the offeror;
(a) Dispensation done expressly i.e. [made orally or in writing]
This is when the offeror states in the terms of the offer to the offeree that, if the latter
wishes to accept this offer he may just undertake to do what it is there in offered
without any prior information to the offeror.
Illustration;
The president of the student organization at IAA offers to hire A’s mini bus on Tuesday
Morning October 2nd 2007 to take ADA I A to Muccobs, for Tshs. 7500/=, if you wish to
accept the offer bring over your bus on the time and specified day. A may accept the
offer by bringing the bus to IAA on that morning.

(b) Implied
This is used generally in unilateral contracts e.g. advertisements which amount to
offer. The offeror need not always expressly prompt the offeree to accept the offer as

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illustrated above; Sometimes dispensation of acceptance can be construed from the

nature of the offer itself. Offers that are made in terms of advertisements are the ones
which fall under this category. The offeree only needs to do the act that has been asked
and he will have formed the contract thereat.
Illustration:
If A advertises that I have lost my passport and that any one who finds and brings it to
me will be rewarded 1 million Tshs.

The acceptor need not tell A he has accepted the offer, he will be deemed to have
accepted the offer only by bringing the lost passport to him.

ii. When communication is done by post [application of post rule/Mail box rule]
The post rule states that a contract is concluded once the acceptance has been posted.
The rule was stated in the English case of Adam v Lindsell [1818] 1B & Ald 681 or 106
ER 250

Simple facts of this case:

On September 2
By post, Lindsell made an offer to sell some wool to Adam. He asked Adam to reply ‘in
course of post’.

On September 5
The letter of offer reached Adam, and he immediately sent his acceptance as asked. By
the time this letter of acceptance arrived Lindsell had sold the wool to another person;
he thought the offer had been rejected.

On a claim by Adam that there was a breach of contract;

The court held that: The contract was made at the time the letter of acceptance was
posted by Adam.

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This means that once the letter of acceptance has been sent whether or not it reaches
the offeror a binding contract is formed and both the proposer and the acceptor
therefore are bound on that spot.

APPLICATION OF POST RULE IN TANZANIA

s. 4 (2) of the LCA slightly modifies the post rule. This section suggests that, unlike in
common law, the proposer and the acceptor will be bound by the contract at different
points of time once the letter of acceptance has been posted.

The section reads as follows:

The communication of an acceptance is complete
(a) as against the proposor, when it is put in a course of transmission to him, so as
to be out of the power of the acceptor;
(b) as against the acceptor, when it comes to the knowledge of the proposer.

This section implies that once the acceptance has been posted and the letter of
acceptance is out of the power of the person sending the acceptance, only the proposer
will be bound but not the acceptor and the acceptor will be bound when it comes to the
knowledge of the proposer.

Q. What do you think is the significance of this slight departure from the common Law
to the proposer and the acceptor?

A. If they change their minds on the contract they revoke the offer or the acceptance
within legal limits.

WHERE POST RULE DOES NOT APPLY

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Exceptions: there are a number of circumstances in which though post is used, post
rule may not apply.
i. It applies only when the parties contemplated it as a means of
communication of acceptance. For instance if all the negotiations have taken place by
telephone post rule may not be said to have been contemplated by the parties.

ii. You know that, in common law, once the letter of acceptance is posted it
binds both the offeror and the offeree; this will not apply if the offeror states clearly
that he is ready to be bound only if he knows of the acceptance.
Eg. If the offeror states that acceptance be made ‘by notice in writing to him’8. If this
notes does not reach him there will be no contract.

iii. Post rule applies exclusively to acceptance of an offer.

Note: Remember our earlier discussion that letters of offer, revocation of offers and
rejection of an offer are not governed by post rule. Remember on these three
knowledge is central and can not be done away with. Refer to s. 3 of the LCA.
Discussed above is the position at common law. Let us delve into the legal stance on
field in Tanzania.

Therefore to be effective, acceptance must be communicated to the offeree. If the

offeror does not specify any special mode by which acceptance should be carried out, it
may done by any normal method such as: by oral means, written means, by phone, by
fax or even by conduct 9. Not only must it be communicated but also the communication
must be complete.

8
see Holwell Securities Ltd v Hughes [1974] 1 All ER 161. in this case Hughes made an offer to sell in
which he stated that an acceptance to this offer should be made “by notice in writing to him” [emphasis
mine]. Holwell Securities, who sought to find cover under post rule, had posted their acceptance by the
prescribed mode but it did not reach Hughes. The court held that there was no contract since Hughes
expressed a clear intention to be bound after he received the notice in writing.
9
see Paul Denham, op cit pg.418

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INSTANTANEOUS COMMUNICATION
Instantaneous communication is done when the speedier means of communication,
than the post office, are employed; such means are like fax, telephone, mobile phones
or the internet.

When electronic approach is used the post rule can not apply and under this situation
a contract is formed only when the acceptance is received by the offeror. The courts in
England have developed the principles regarding this kind of communication in the
famous English of case of:

Entores Ltd v Miles Far East Corporation [1955] 2 All ER 493 or [1955] 2 QB 327

Simple facts of this case:

In London
Entores made an offer by Telex to the agents of Miles Far East Corporation [New York];
who were in Holland. The acceptance of the offer was communicated to the Telex
machine of Entores Ltd in London.

Offeror offer by Telex Acceptor

Entores [London] Agents [Holland]

Acceptance by Telex Agency

Miles Far East Corporation [New York]

The issue that was to be resolved was whether the contract was made in England or
Holland?

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The court held that: The postal rule does not apply to instantaneous communications.
The contract was only complete when the acceptance was received by the offeror.
Q. What if the acceptor has sent his acceptance by say e-mail or fax and the offeror
has not seen it?

Answer.
The answer to this legal issue was provided in the same case by Lord Denning in an
extensive obiter dictum, in which he opined that under this situation a contract can be
formed even if the offeror (through his own fault) does not actually receive the
acceptance.

Application of Lord Denning’s obiter dicta was done in the following case:
The Brimnes: Tenax Steamship Co Ltd v The Brimnes (Owners) [1975] QB 929 (CA)

Simple facts of this case: The Brimnes (Owners) hired a ship from the plaintiff Co. Their
agreement was such that The Brimnes (Owners) could terminate the agreement if the
defendants defaulted in payment of the regular hire charge.

The defendants failed to pay and the plaintiffs sent them a telex to terminate the
contract.

The telex was sent during normal office hours, but the defendants did not see it until
the next day.
It was held that: the termination Telex was effective from the time it arrived, not
the time it was read. Note that this was a case relating to withdrawals of offers, not
acceptances, but it is a useful analogy.

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Another case is: Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34 (HL)

Where a telex of acceptance was sent from London to Vienna, it was held that the
contract was concluded where the telex arrived, not where it was sent from.

Lord Fraser expressly approved the decision in Entores as it ‘seems to have worked
without leading to serious difficulty or complaint from the business community.’

To this point you should be able to distinguish between the communications of an

acceptance by post rule from that which is done by instantaneous means.

REVOCATION OF ACCEPTANCES
Generally the revocation of an acceptance can be done at any time before it binds the
acceptor.
Section 5 (2) reads as follows:
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.

Remember by s. 4 (2) (b) of the LCA, The communication of Acceptance is complete as

against the acceptor when it comes to the knowledge of the proposer.

Therefore, in other words, an acceptance can be revoked at any time before it comes
to the knowledge of the proposer.

ELEMENTS (ESSENTIALS) OF LEGAL CONTRACTS

It has been illustrated earlier in this work that a contract is made up by fulfillment of a
number of legal tests without which a contract becomes unenforceable. These tests are
such as: Free consent, Competency or capacity to contract, Lawful consideration and
object and lastly intention to create legal relation.

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I will discuss them, lightly, in order of their appearance.

FREE CONSENT:
To consent to something, generally, means to agree to it. Remember s. 10 of LCA free
consent is an important element to contract.

S. 13 of the LCA defines consent as follows:

When two or more persons are said to consent when they agree upon the same thing in the
same sense
The following example illustrates the statement above
A has two cars both of them are Nissans (one is pick up and the other is a saloon). A
makes an offer in the following words: “I wish to sell you my car at Tshs. 2/-”. B
accepts this offer in the following statement: “I accept to buy your car at Tshs. 2/-”

The two persons will not be said to have agreed upon the same thing and in the same
sense If A while making the offer has pick-up in mind and B while accepting the offer
has saloon; there will be no consent between them.

This is the import of this section.

Free consent has its special meaning in the law of contract. S. 14 defines it as follows:
(1) Consent is said to be free when it is not caused by coercion, fraud,
misrepresentation, or mistake.
Contracts which are made with taints of the above factors are voidable contracts i.e.
the affected party known as the innocent party may avoid it if he wishes see s. 19 (1).
However according to the same section the contract is not voidable if the innocent party
had the means to discover the truth by due diligence.
Let us examine each one of t hem.

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(a) Coercion,
According to s. 15 of the LCA coercion exists when:
One person commits or threatens to commit
i. any act forbidden by the penal code or
ii the unlawful detaining or
iii threatening to detain any property
With the intention of causing any person to enter into contract
Example:
The Regional Traffic Officer made an offer to buy Ds car at Tshs 1/= to which D did not
accept. He then tells him I will make sure I always find faults in your car and detain it
until you sell it to me.
(b) Undue influence,
According to s. 16 undue influence exists between two persons when:
The relationship between them is such that
i. one of them is in a position to dominate the will of the other
ii. and he uses that position to obtain an unfair advantage over the other
Q. When can a person be said to be in a position to dominate the will of another?
The answer is provided by subsection (2) of the same section as follows:
A person is deemed to be in a position to dominate the will another if:
i. Where he holds a real or apparent (ostensible) authority over the other, or a person
has apparent authority if for example he had power at one point of time and he no
longer has that power but the person with whom he deals does not know of this.

Or, when a person in power does any thing which suggests to the public that the person
under him may do the responsibilities of this person in power.

ii. Where he stands in a fiduciary relation to the other [eg. Doctor and patient, teacher
and student, father and son etc] or

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iii. Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
(c) Fraud,
According to s. 17 fraud exists when one or more of the following acts:
(a) The suggestion, as to a fact, of that which is not true by one who does not believe it
to be true;
(b) The active concealment of a fact by one having knowledge or belief of the fact;
(c) Promise made by the without the intention of performing it;
(d) Any other act fitted to deceive
(e) Or any such act or omission as the law specially declares to be fraudulent

To constitute fraud these acts must have been committed either;

i. by a party to a contract, or

ii. (by any person but) with his connivance (participation/involvement)

iii. Or by his agent

the intention of the party doing these acts must be directed to either;

i. deceive that other party (i.e. to the contract) or his agent, or

ii. induce him to enter into the contract.

The mind of the High Court of Tanzania represented by Msumi J, in Joseph Mapama v.
Republic (1986) at pg. 155, on the meaning of the word “deceive” concurred with that
of Buckley, J. in Re London and Globe Finance Corporation [1903], in which the meaning
of the mentioned word was referred to as:

“…to induce a man to believe that a thing is true which is false, and which the person
practicing the deceit knows and believes to be false…”

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Having put forward a variety of authorities as to the meaning of fraud, it is sensible at

this juncture, to bring forth the meaning of forgery.

(d) Misrepresentation
At the time when the parties to contract are negotiating so much is spoken. Much as
one can speak, there are only three types of talk in law; one can talk of facts, opinions,
and law. Under these types of talk, some statements (only those that fall under facts not
law or opinion)which make part of contract will be termed as misrepresentations if they
are intended to induce the other to enter into a contract and they are not but false.

Misrepresentations may be classified as fraudulent, negligent or innocent.

Misrepresentations are essentially false statements. They are sometimes referred to as
misstatements.

i. innocent misrepresentation: when one gives a statement which is false but you
believe it to be true. One usually does not intend to do this. This kind of
misrepresentation can not render a contract voidable.

ii. Fraudulent misrepresentation: Is a statement of fact that is made without belief

in its truth either recklessly, knowingly or without caring whether it is true or false
with the intention that it should be acted on and it is in fact acted upon.

Therefore when one gives a statement which is not true, or he does not believe it to
be true or recklessly, carelessly as to whether it is true or not; and he knows it10 one is
said to have misrepresented. This is the kind of misrepresentation which renders a
contract voidable.

In both the above types a misrepresentation should be of fact and not of law or opinion.

10
This definition was provided in Derry v Peak [1887]

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Example
For instance you are about to enter into contract to sell chicken and you tell your
offeree that: This specie of chicken lays five eggs per day. While they only lay two. If
you make this statement and it ultimately induces another party to enter into
contract, it is misrepresentation.

If what is said is not true but you believed it to be true, it is innocent misrepresentation
and if it is not true and you knew it, then it falls under fraudulent misrepresentation.

The LCA is a bit more specific on the meaning of misrepresentation.

The import of s. 18 of the LCA is that misrepresentation may be one of the following
three things;
(a) Positive assertion of any thing that is not true
(b) Breach of duty to speak
(c) Causing a party to make mistake about subject matter of contract (whether
innocently or accidentally)
These are hereunder discussed as follows;
(a) Positive assertion (statement of fact) of any thing that is not true but which the
person making it believes it to be true. These statements are usually unwarranted by
the information of the person making it. This is innocent misrepresentation.

See the example given by Nditti at pg. 11611

O who is the owner a cow tells S to sell it for him and in doing so he confides that the
cow gives a lot of milk. S on selling it to B tells him the gives more than 30 litres. Nditti
says the statement by S is not warranted by the information that was given to him.

11
Nditti, opcit 116

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(b) Breach of duty to speak. This is when there is a failure to speak in circumstances
where you has to speak; Generally, though, silence does not amount to
misrepresentation.

S. 17 (2) of the LCA provides:

…..mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud unless the circumstances of the case are such that regard being had
to them it is the duty of the person keeping silence to speak, unless his silence is, in
itself, equivalent to speech.

NOTE: When a duty to speak arises silence can be a misrepresentation.

Breaches of duty to speak may arise in the following circumstances:

i. If you made an untrue statement and later you discover that the statement
you have made is not true. You have the duty to say the truth to the person
whom you told the false thing. silence amounts, in this situation, to
misrepresentation.
ii. If circumstances makes the true statement to be untrue. For instance when
you were convincing a friend to buy your car because it has sport rims but later
thieves still the rims. Theft has made you a liar. In this case you have the duty
to tell your friend the change of circumstances.
iii. When the nature of contract requires utmost good faith eg. Insurance
contract. One who takes life insurance must disclose every material fact, if you
keep silent of a fact you are said to have misrepresented. For example you are
taking out life assurance policy and you do not disclose that you have aids.

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iv. When there is a fiduciary relationship eg. Lawyer-client. This is when one
party is in a position of trust with regard to the other12. The lawyer, on being
asked for legal advice must disclose every thing to his client.
v. When you have given half truth.

Example
You are selling a car whose engine you are expecting to break down any time for some
problem, the buyer asks if the car is running perfectly you say yes. Here you have
given a half truth and under this circumstance you are supposed to tell him that
though it is running the engine has problems.

According to s. 18 the breach of duty to be effective must be such that

i. it benefits either the person who commits it or any one under him
ii. the benefit is gained by misleading another either to his prejudice, or to the
prejudice of any one claiming under him.
(c) Causing a party to an agreement to make a mistake about the subject matter (the
thing that makes you enter into contract) of the agreement. This happens when you
induce a mistake to the other party about the subject matter of the contract.

Example
If a party to contract does not disclose one or more facts about the subject matter so
much so that the other party thinks the subject matter is what it is not. To have effect,
here the party must actually have been induced and must have acted on that
inducement to his disadvantage.

Illustration:
Bugerere Tea Estates v Walji’s Ltd [1967]

12
Denham,475

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Simple facts: Walji made representations which induced a mistake to Bugerere about a
building which they said was a lease for 3 years renewable while it was a lease for 2
years non renewable. Walji wished to exchange this building for Bugerere’s tea estate.
The court held that there was inducement.
(e) Mistake, subject to s. 20, 21, 22.
Mistake happens if both the parties had not entered into an agreement except for a
mistake as to a matter of fact that is essential to an agreement.

MISTAKE GENERALLY
A mistake of fact occurs when a person believes that a condition or event exists when it
does not.

Mistake when existent makes a contract void. BUT For a mistake to affect the validity of
a contract it must be an "operative mistake", i.e., that which operates to make the
contract void.

Types of mistakes:
There are three types of mistake.
i. common mistake
ii. mutual mistake and
iii. Unilateral mistake.

COMMON MISTAKE

A common mistake happens when both parties to an agreement make the same error
with regard to a matter of fact that is essential to the agreement.

Common mistake is provided by section 20 (1) of the LCA.

Where both parties to an agreement are under a mistake as to a matter of fact essential to
the agreement, the agreement is void

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Mistake as to a matter of fact essential to agreement can be illustrated by cases as

follows:

(a) Res extincta (situation where both parties do not know that the subject
matter does not exist)

A contract will be void at common law if the subject matter of the agreement is, in fact,
non-existent. See for example:

Couturier v Hastie (1856) 5 HL Cas 673

Facts of this case:

The case concerned the contract to sell a cargo of wheat/maize which did not at the
time of this contract exist.

Parties entered into contract for sale of maize. Both the parties knew the maize was on
a ship from a place called Solaninka to England where they were. In fact, before they so
made the agreement, the maize had began to deteriorate and so it had been unloaded
and sold at Tunis.

The issue was whether the seller was entitled to recover the purchase price of the maize
from the buyer as agreed in the contract.

The court held that since both parties had contemplated the existence of the subject
matter (maize) to be sold and bought respectively; the seller had nothing to sell and the
buyer had nothing to buy. Thus the contract was held to be void ab initio.

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In addition, s. 8 of the Sale of Goods Act Cap 214 provides that:

Where there is a contract for the sale of specific goods, and the
goods without the knowledge of the seller have perished at the time
when the contract is made, the contract is void.

Other relevant cases include: Griffith v Brymer (1903) 19 TLR 434

At 11am on 24 June 1902 the plaintiff had entered into an oral agreement for the hire of
a room to view the coronation procession on 26 June. A decision to operate on the King,
which rendered the procession impossible, was taken at 10am on 24 June. Wright J held
the contract void. The agreement was made on a missupposition of facts which went to
the whole root of the matter, and the plaintiff was entitled to recover his £100.

McRae v The Commonwealth Disposals Commission (1950) 84 CLR 377

Read some of these cases in Nditti at page 123-124 visit also your portal, I have sent a
collection of cases on mistakes.

(B) Res Sua (common mistake as to title in the subject matter of the contract)

Where a person makes a contract to purchase that which, in fact, belongs to him, the
contract is void. This usually when both parties are mistaken on the fact that ownership
of the goods is to the seller. For example see:

Cooper v Phibbs (1867) LR 2 HL 149

An uncle told his nephew that he owned a fishery. The nephew believed him and after his
uncle’s death, he entered into an agreement to rent the fishery from the uncle's
daughters. However, the fishery actually belonged to the nephew himself, it had only
been left in the uncle’s custody after the boy’s father died.

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Lord Westbury said:

"If parties contract under a mutual mistake and misapprehension as to their relative and
respective rights, the result is that that agreement is liable to be set aside as having
proceeded upon a common mistake"

(c) Mistake as to Quality

A mistake as to the quality of the subject matter of a contract has been confined to very
narrow limits. According to Lord Atkin: "A mistake will not affect assent unless it is;

i. the mistake of both parties, and

ii. it concerns quality without which the subject matter is rendered essentially different
from what the parties believed it to be." See:

Bell v Lever Bros Ltd [1931] All ER 1.

In cases since Bell v Lever Bros the courts have not been over-ready to find a mistake as
to quality to be operative.

See: Solle v Butcher [1949] 2 All ER 1107

Leaf v International Galleries [1950] 1 All ER 693
Harrison & Jones Ltd v Bunten & Lancaster Ltd [1953] 1 All ER 903
Associated Japanese Bank Ltd v Credit du Nord [1988] 3 All ER 902
BCCI v Ali and others [1999] 2 All ER 1005

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EFFECT OF COMMON MISTAKES

IN TANZANIA

When it is evident that there has been a mutual mistake between the parties to contract
s. 20 states that the contract is void. s. 65 of the LCA requires the party who gained
advantage under that void contract to:

i. to restore that advantage

ii. or to compensate the innocent party for it

AT COMMON LAW

Where a contract is void for identical mistake, the court exercising its equitable
jurisdiction, can:

i. Refuse specific performance

ii. Rescind (cancel/ annul) any contractual document between the parties
iii. Impose terms between the parties, in order to do justice.

Relevant cases include:

Cooper v Phibbs (1867) LR 2 HL 149, Solle v Butcher [1949] 2 All ER 1107, Grist v Bailey
[1966] 2 All ER 875, Magee v Pennine Insurance [1969] 2 All ER 891

Rescission for mistake is subject to the same bars as rescission for misrepresentation.

UNILATERAL MISTAKE

Unilateral mistake is said to be present where only one party to the agreement is
mistaken. The categories of mistake may be as follows:

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(A) MISTAKE AS TO THE TERMS OF THE CONTRACT (nature of the contract)

Where one party is mistaken as to the nature of the contract and the other party is
aware of the mistake, or the circumstances are such that he may be taken to be aware
of it, the contract is void.

For the mistake to be operative, the mistake by one party must be as to the terms of the
contract itself.

See the following case:

Hartog v Colin & Shields [1939] 3 All ER 566

The defendants, Colin & Shields, were London hide merchants who were sued by a
Belgian furrier, Herr Hartog. They had discussed selling him 30,000 Argentinian hare
skins at “10d per skin” (which would have come to £1,250), but when they put the final
offer in writing they mistakenly wrote “30,000 skins @ 10d per lb”. As hare skins weigh
around 5oz, this was a third of the price previously discussed and orally agreed upon.
Hartog tried to hold them to it.

A mere error of judgement as to the quality of the subject matter will not suffice to
render the contract void for unilateral mistake.

See for instance: Smith v Hughes (1871) LR 6 QB 597

REMEDY

Equity follows the law and will rescind a contract affected by unilateral mistake or
refuse specific performance as in:

Webster v Cecil (1861) 30 Beav 62

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(B) MISTAKE AS TO IDENTITY

s. 2 (1) (a) and (b)

Here A, one party makes a contract with a C, second party, believing him to be A, third
party (ie, someone else). If you refer to s. 2 (1)(a) and (b) of the LCA there will be no
contract between A and C since his acceptance has no effect in law. The law makes a
distinction between contracts where the parties are inter absentes and where the
parties are inter praesentes.

Contract made inter absentes

Where the parties are not physically in each others presence, eg, they are dealing by
correspondence, and one party is mistaken as to the identity, not the attributes, of the
other and intends instead to deal with some identifiable third party, and the other
knows this, then the contract will be void for mistake. Usually this happens when there
is a thief who poses as a different identity. See:

Cundy v Lindsay (1878) 3 App Cas 459

The rogue here was a man called Blenkarn. He sent an offer to buy some thing from
Cundy which was accepted. The name that appeared in the offer was Blenkiron and
Co., 37 Wood Street. There existed in the same street, a famous a company known as
Blenkiron & Co.

Blenkanrn received the goods and quickly sold them to Lindsay. Having discovered the
trick Cundy sued Lindsay for recovery of goods. He argued that he made a mistake as to
the identity of the person with whom they were dealing.

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Held: since the plaintiffs never knew Blenkarn before, they never intended to deal with
him and between them there is no contract since there was no consensus ad idem
(meeting of the minds)

Mistake as to attributes of a person does not render the contract void but voidable.

King's Norton Metal Co Ltd v Edridge Merrett Co Ltd (1897) TLR 98

The rogue under this case was one Mr. Wallis. He sent an offer to buy some goods in
which he described himself as the owner of a very reputable company going by the
name of Hallam & Co. in fact there was no Co. in the area with that name. Having
believed him King's Norton Metal Co Ltd accepted his offer and sent him goods.
Hallam sold the goods to Edrige Merret Co Ltd.

The plaintiffs claimed that there was no contract since they dealt with Hallam and Co.
under a mistake as to identity.

The court held that: There was a contract between kings and Hallam; this decision was
based on the following two conclusions by the court.

Two conclusions are commonly drawn from these two cases:

i. that to succeed in the case of a mistake as to identity there must be an

identifiable third party with whom one intended to contract; and (here there
was none: if you can not prove there was an identifiable third party with whom
you intended to deal then you are presumed to have intended to deal with this
rogue)

ii. the mistake must be as to identity and not to attributes. (Kings here were so
impressed by the attribute)

Contract made inter praesentes

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Where the parties are inter praesentes (face to face) there is a presumption that the
mistaken party intends to deal with the very person who is physically present and
identifiable by sight and sound, irrespective of the identity which one or other may
assume. For such a mistake to be an operative mistake and to make the agreement void
the mistaken party must show that:

(i) he intended to deal with someone else apart from the one present;
(ii) the party they dealt with knew of this intention;
(iii) he regarded identity as a matter of crucial importance; and
(iv) he took reasonable steps to check the identity of the other person
(see Cheshire & Fifoot, Law of Contract, p257-263).

Even where the contract is not void, it may be voidable for fraudulent misrepresentation
but if the goods which are the subject-matter have passed to an innocent third party
before the contract is avoided, that third party may acquire a good title. The main cases
are as follows:

Phillips v Brooks [1919] 2 KB 243, Ingram v Little [1960] 3 All ER 332 (a controversial
case), Lewis v Avery [1971] 3 All ER 907

The exception to the above rule is that if a party intended to contract only with the
person so identified, such a mistake will render the contract void: Lake v Simmons
[1927] AC 487 and a more recent case is: Citibank v Brown Shipley [1991] 2 All ER 690

MUTUAL MISTAKE

A mutual mistake is one where both parties fail to understand each other. This is
provided by s. 13 of the LCA.

Two or more persons are said to consent when they agree to the same thing and in the
same sense.

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When two persons do not agree to the same thing in the same sense they are said to
be at cross purposes and this is what is referred to as mutual mistake.

WHERE THE PARTIES ARE AT CROSS PURPOSES

In cases where the parties misunderstand each other's intentions and are at cross
purposes, the court will apply an objective test and consider whether a 'reasonable
man' would take the agreement to mean what one party understood it to mean or
what the other party understood it to mean:

Here there are two effects.

i. If the test leads to the conclusion that the contract could be understood in one
sense only, both parties will be bound by the contract in this sense.

ii. If the transaction is totally ambiguous under this objective test then there will
be no consensus ad idem (agreement as to the same thing) and the contract will
be void:

see these on cases on mistake: Wood v Scarth (1858) 1 F&F 293, Raffles v Wichelhaus
(1864) 2 H&C 906 and Scriven Bros v Hindley & Co [1913] 3 KB 564

REMEDY

If the contract is void at law on the ground of mistake, equity "follows the law" and
specific performance will be refused and, in appropriate circumstances, the contract will
be rescinded. However, even where the contract is valid at law, specific performance
will be refused if to grant it would cause hardship. Thus the remedy of specific
performance was refused in Wood v Scarth (above).

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A recent case is: Nutt v Read (1999) The Times, December 3.

SIGNING DOCUMENTS UNDER MISTAKE AND THE DEFENCE OF NON EST FACTUM (it
was not my deed)

As a general rule, a person is bound by their signature to a document, whether or not

they have read or understood the document: L'Estrange v Graucob [1934] 2 KB 394.
However, where a person has been induced to sign a contractual document by fraud or
misrepresentation, the transaction will be voidable.

Sometimes, the plea of non est factum, namely that 'it is not my deed' may be available.
A successful plea makes a document void. The plea was originally used to protect
illiterate persons who were tricked into putting their mark on documents. It eventually
became available to literate persons who had signed a document believing it to be
something totally different from what it actually was. See, for example:

Foster v Mackinnon (1869) LR 4 CP 704

The use of the rule in modern times has been restricted. For a successful plea of non est
factum two factors have to be established:

(i) the signer was not careless in signing; and

(ii) there is a radical (fundamental) difference between the document which
was signed and what the signer thought he was signing.

The following decision of the House of Lords is the leading case on this topic:

Saunders v Anglia Building Society (Gallie v Lee) [1970] 3 All ER 961

Note: Because of the strict requirements, it may be better for the innocent party to
bring a claim based on undue influence.

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CAPACITY TO CONTRACT/ COMPETENCY TO CONTRACT

See s. 10 of the LCA. See also s. 11 of the same law.

According to section 11 a person who is legally allowed to enter into a contract is he

who belongs to the age of majority and who is not insane.

In Tanzania, the age of majority Ordnance, cap 431 age of majority is 18 years.

Q. Who is the person of an unsound mind?

According to s. 12 (1) of the LCA describes a person of unsound mind by way of

syllogism.

The section provides specifically that:

A person is said to be of sound mind for the purpose of making a contract if, at the
time when he makes it he is capable of;

i. Understanding it

ii. capable of forming a rational judgment to its effect upon his interests.

If this is the fact then, the person who is not of sound mind and does not belong
to the age of majority is not competent to contract.

EFFECT IF MINOR OR INSANE ENTERS INTO CONTRACT

By s. 11(2) if the minor or the insane has entered into contract the contract is void.

Though the law restricts these persons to enter into contracts, in the present life
situation we are living, the matter of entering into contracts is unavoidable. People of all
walks of life do get themselves bound in contracts; majors as well as minors, sane as

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well as the insane. Think of a man who is mentally challenged who goes to a shop
offering to buy something. Think too of a small boy who buys an exercise book for
school.

This does not end with the practices of buying only; in present day desperate life
situation where killer diseases such as AIDS leave children orphaned, we see a lot of
them roaming the streets selling various items to elders etc.

The ultimate question is:

What is the legal effect of these contracts?

By s. 11(2) of the LCA the simple answer would be that they are void. But taking a
more concerned look into the matter you may find that, this kind of contracts have a
greater effect just as much as they are irresistible in our daily life. Since the minors and
the insane are not legally allowed to contract, when there is a dispute, the adults who
deal with them would then be economically the losers. The business activities would
always be at this risk of losing when they deal with the forbidden groups.

See for instance in Cowern v Nield (1912) 2 KB 419

Nield was minor who sold hay and straw. He received cash from Cowern in
consideration for his promise to deliver to him the hay and straw but he subsequently
failed to so deliver the goods. Cowern sued him for recovery of the purchase price from
the minor for the goods he failed to deliver.

The court held that: the minor was not liable to repay the money

Q. Should the owners of the shops opt for an absolute refusal to dealing with them?

The law provides for this situation.

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On minors:

Though the minor is completely not liable on contracts, he is, both at common law and
under the law in Tanzania, liable if he enters into the so called arrangements
resembling contracts known as quasi-contracts.

This liability is only when the minor enters into contracts for necessaries (goods suitable
to the condition in life of an infant or minor or other person an to his actual
requirement at the time of sale and deliver y 13) and not other wise.

s. 4 of the Sale of Goods Ordinance provides, among other things, as follows:

“…where necessaries are sold and delivered to an infant, or minor, or to a person by

reason of mental incapacity or drunkenness is incompetent to contract, he must pay a
reasonable price therefore…”

This section does not mean the minor is liable on contract. It only imposes a liability on
the minor to pay a reasonable price for goods he has enjoyed. And by s. 68 of the
contract Act another liability to reimburse the provider from the property of the minor
or any person, is imposed.

This means the person who supplies the goods to the minor is entitled to two things;

i. The reasonable price or

ii. Reimbursement form the property of the minor (if he can not pay the
reasonable price and has this property).

The condition here is that the goods must be necessaries and must be provided
when the minor is actually in requirement of them.

13
see s. 4 of the Sale of Goods Ordinance.

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In Nash v Inman (1908) 2 KB 1

Simple facts of the case:

Inman the minor, whose father was rich, ordered expensive clothes from Nash the
tailor.

Held: The court held that, though the clothes were suitable to the minors condition in
life, these goods were not necessaries because the minor was well provided with
clothes by his rich father.

Therefore according to s. 4 of the sale of goods and s. 68 of the LCA provide a separate
set of liabilities on the minor apart from contractual liability. However always remember
to answer the following things before you decide to deal with a minor;

i. Are the goods or services necessaries?

In order to be necessaries they should be:

(a) suitable for his condition in life

(b) he must be in actual requirement of them at the time you deal with him.

On the insane:

s. 12(2), the law partly allows a person of an unsound mind to enter into contract in
that;

i. if he usually is of unsound mind, but occasionally, of sound mind i.e. for some insane
persons there are times when they are sane, it is during this time that they are allowed
to enter into contract.

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ii. the person who is most of the time of sound mind, at a time when he is of unsound
mind the law does not allow him to enter into contracts. See s. 12(3)

CONSIDERATION

Make reference to Ss. 2(1)(d) s.10 as well as to s. 25 (1) of the same law.

General concept:

It is the price for the promise. Every simple contract must be supported by
consideration and under common law the basis of consideration lies in the legal maxim
known as QUID PRO QUO [nothing should go for nothing].

To understand it better see the following illustration

If A has promised to sell an item to B, B must give or promise to give something (this
something is what is known as consideration) for this promise.

These two promises given by each one of them form a consideration for each others
promise.

The most recent English case to have given the most appropriate definition of the term
consideration is the Dunlop v Selfridge [1915] in which consideration was defined as :

an act or forbearance or the promise of an act or forbearance by one party to the

contract as the price of the promise made to him by the other party.

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By s. 2 (1)(d) consideration is defined as:

When at the desire of the promisor14

i the promisee or

ii any other person

(a) has done or abstained from doing

(b) does or abstains from doing something
(c) promises to do or to abstain from doing

Such an act or abstinence is called consideration for the promise.

TYPES OF CONSIDERATION

There are two types of consideration:

i. executed consideration

This denotes the completed performance by one party to the agreement. This is usually
given when the promise is made in return for such performance of an act. Note the
present perfect tense used in s. 2 (1)(d) of the LCA, “….has done or abstained form
doing…”

The act of buying and using the smoke balls by Mrs. Carlill, for instance, in the case of
Carlill v Carbolic Smoke Ball Co. is an example of executed consideration.

ii. executory consideration

14
Its meaning is given by S. 2(1)(c) of LCA

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Consideration is executory when there is an exchange of promises to do or abstain from

doing some thing in future. Note the wording of s. 2(1) (d) of LCA, “…promises to do or
to abstain from doing…”

Illustration:

Juma offers to sell and deliver goods on 5th of July 2007 and Anthony promises to pay
when these goods are delivered.

RULES OF CONSIDERATION

i. Consideration need not be adequate (plenty) but it should be valuable

(money or its worth no matter how insignificant) and sufficient (in the eyes of
the law: ie it should be legal)

This means consideration need not be enough, it should only be sufficient before the
law. It must be something whose worth can be measured against money. In this case it
does not matter how small this value is.

If you have promised to give your house, which you bought for 2 million shs just for
2000 shs. It does not matter. The 2000 shs is enough for a consideration.

In Chappel & Co v Nestle Co Ltd (1960)

Nestle who were specialists in making chocolates, among other products, offered to
sell some records to the public for 1.6 shillings + three wrappers of their chocolates for
each record.

Held: the chocolate wrappers despite their inferior value formed part of the
consideration for the records, the other part being made by the 1.6 shillings.

ii. Things of no value do not amount to consideration

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If consideration can not be measured in terms of its value it can not amount to
consideration:

See the case of White v Bluett (1853) 23 LJ Ex 36

In this case a son promised to stop complaining to his father. This was held to be no
consideration because it could not be measured in value.

iii. Performance of an existing duty imposed by law does not amount to

consideration.

When a person has a duty under the law to do or to abstain from doing something, he
can not be said to have furnished consideration when he does that duty.

E.g. If you promise a police officer that you will give him some money if he arrests a
person who has committed an offence against you. Your promise to give him some
money can not be a consideration in exchange for the arrest he has done because he
has done what he was legally required to do.

See the case of Collins v Godfrey (1831) 1 B & Ad 950.

Godfrey promised to pay Collins, a witness, who was legally required by court to give
evidence if he so gave that evidence. Collins gave the evidence and sued Godfrey for the
promised money.

Held: the court held that he provided no consideration since what he did was done
under the requirement of law

iv. Performance of an existing contractual duty by one party in a contract can

not be consideration.

Under this arrangement there are two persons

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A B

E.g. Mary and Maria entered into contract in which Mary has to build Maria’s house for
one week. When only 2 days remain and the work does not seem to end, Maria
promises to give Marry extra money to finish the job on time and she so does finish on
time.

Her finishing the job in time is not consideration, since she had that duty under the
contract.

See Stilk v Myrick (1809) 2 Camp 317

Simple facts of the case:

Some sea men deserted a ship. The Captain promised the remaining men an extra pay
if they finished the journey. They were not given the extra pay and they sued

The court held that: they could not be paid the extra money since they did nothing
more than what they were legally required to do.

However, if there was practical benefit on the party offering the money, the act of
building on time by Marry and that of completing the journey by the sea men would be
consideration sufficient in the eyes of the law.

Illustration:

In Hartley v Ponsonby (1857) 1 QB 1 (CA)

Unlike in Myrick, here a number of sea men left the ship so many in number that the
ship was on the brink of subsiding. The remaining crew were offered extra pay if they
did not follow the others who deserted.

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Held: when the journey was completed the seamen could recover extra pay because
they did more than they were contractually obliged to do. Their act was consideration
for the promise of extra pay.

v. Performance of an existing contractual duty owed to a third party, is

consideration

Shadwell v Shadwell (1860) 9 CB NS 159 (Court of Common Bench)

Lancey Shadwell, who was engaged to be married to Ellen Nicholl, was promised a
payment by his uncle Charles Shadwell if he went through with the wedding. When the
uncle died, the executor stopped the payments on the grounds that Lancey, since he
was engaged with Ellen, he was contractually bound to marry her anyway, and thus he
had provided no consideration to the late uncle for his promise only by doing so.

The court held that: the act of promising a third party that you will go through with the
contract is good consideration.

In Scotson v Pegg (1861) 6 H & N 295. the judges applied the principle in Shadwell.

New Zealand Shipping Co Ltd v A M Satterthwaite, The Eurymedon [1975] AC 154 (PC)

A was bound under a contract with B to unload goods from B’s ship. Some of the goods
belonged to C, who promised not to sue A if the goods were damaged during the
unloading. It was held that this promise was bound to unload the goods under his
contract with B.

vi. consideration must not be past i.e. past consideration

Acts or promises by both parties must be exchanged at one time and must form the
same transaction. If Mammilla does an act now and after finishing Alice promises to
give her some money, the act by mammilla does not constitute consideration for Alice

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promise since they happened at different times. This is what is referred to as the past
consideration.

The general rule is that past consideration is insufficient in the eyes of the law.

Illustration: See Re Mc Ardle (1951)

A man and his brothers and sisters were the owners of a building. The man made some
improvements on the building and after he completed his brothers and sisters promised
to repay the costs he had incurred which they did not; the man sued them

Held: Since the work had been undertaken before the promise was made it was past
consideration and past consideration is no consideration.

That past consideration is no consideration is a general rule. There are some exceptions
to it as follows:

i. The rules of past consideration do not apply to Bills of exchange e.g.

negotiable instruments usually a negotiable instrument is issued after a
work has been done.

ii. Where the act done has been requested by the promisor.

This is the essence of s. 2 (i) (d) “when at the desire (request) of the promisor the
promisee or any other person has done (these words suggest that the act has already
been done at the promisor’s request)

See Lampleigh v Brathwaite [1915] Hob 105

vii. Consideration must move from the promisee.

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Any person who seeks to enforce a contract must establish that he personally furnished
consideration to the other in that agreement. This suggests that, though consideration
can be given by a third party on behalf of a party to the contract, this consideration can
not be effective. See illustration below:

Legally effective consideration:

A repairs B’s house in exchange for B’s promise to pay for A’s son college fees for one
year.

There are three parties involved here; A, B and C. the party who has furnished
consideration here is A and it is him only who can sue B for his failure to honour his
promise and not A’s son. This is what it means by the consideration must move from
the promisee. See the following case:

Tweddle v Atkinson (1861) 1 B & S 393

Simple facts of the case:
There were a couple who intended to marry. Their fathers promised each other to pay
the bridegroom (the husband to be) an amount of money. When the bride’s (wife’s to
be) father died without paying the money he promised, the groom sued his executors
for recovery of the money.

The court held that: the groom was unable to enforce the promise since he had not
furnished consideration, even though the promise was made for his benefit.

THE DOCTRINE OF PRIVITY OF CONTRACT

The rule that consideration must move from the promisee, goes hand in hand with
another legal doctrine known as The doctrine of privity of contract. The privity doctrine
concerns the rights the parties under a contract have of suing and being sued on the
contract. Just like in consideration in which a person who has not provided

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consideration can not sue, the person who is not part to the contract (a stranger to the
contract) can not sue also.
The following cases illustrate how the doctrine works:
Beswick v Beswick [1968] AC 58 (HL)
By a written agreement, a nephew contracted with his uncle to pay his aunt £5 a week
after the uncle’s death. When he refused to pay the aunt sued, and The House of Lords
decided the case in favour of the aunt, on the grounds that she was the administratrix of
her husband’s estate. It follows therefore that, if she had not been the administatrix of
her husband estate she would not have won the case i.e. if she had sued as wife of the
uncle, since she was not party to contract.

INTENTION TO CREATE LEGAL RELATION

S. 10 of the LCA does not provide for intention to create legal relation so as we saw
earlier the rules of law employed under this part are coined from common law. An
intention to enter legal relation is one of the elements that mark the nature of the
binding contract. For the purposes of the discussion under this party agreements are
classified under two groups namely;
i. Domestic and Social arrangements and
ii. Commercial arrangements
A. Domestic and social arrangements
These arrangements are usually done by family members and extend to friends. The law
generally presumes that in agreements of this kind there is no, between the parties, any
intention to make a binding contract. To be a contract, an agreement must be made
with the intent that it be legally enforceable
See illustrations below:
Balfour v. Balfour, [1919] 2 K.B. 571 (Engl. C.A.).
Simple facts of the case:

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There was husband and wife. The husband promises the wife an allowance (in amity), in
his absence to Ceylon (Sri Lanka). When the wife divorced the husband, he stopped
effecting further payment and the wife sued him.

The court was primarily concerned with the issue as to whether the promise of the
husband was intended to create legal relations.
It was held that: promises between wife and husband, alongside others, are not
intended to result into the contract, even though they may constitute consideration
because the parties did not intend that they be attended by legal consequences.

Comment: Any thing done out of “Natural love and affection” (i.e. when a couple is at
happy times) can not be said it was intended to make the parties legally bound.

Jones v Padavatton [1969] 2 All ER. 616

It was between mother (Mrs. Johns) and her daughter (Miss Padavatton). The daughter
used to work abroad before the mother called her to return to Trinidad and Tobago and
asked her to pursue bar examinations in England on consideration that the mother
would pay her a monthly allowance during the whole course of her studies there. The
daughter failed and the mother stopped paying the allowances but instead she bought a
house in London and told the daughter to stay therein and collect rent from the tenants.

After sometime the mother took back her house and the daughter sued for the
allowances that the mother had promised but failed to pay.
The court held that: the mother could recover the house because the arrangement was
one falling within the category of domestic arrangements.
The presumption that domestic arrangements are not intended to create legal relation
is in law referred to as a rebuttable presumption i.e. it can be defeated by the
following acts

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i. If the court has a reason to believe that the circumstances and the words
used in the domestic or social arrangement are to the effect that this
intention was intended by the parties.
To be effective the circumstances and or the words must be that clear and unambiguous
so that the court can clearly read from them if there was any intention couched in them.
See the following case:
Parker v. Clark [1960] 1 All ER. 93
Mrs. Clarke asked in writing her niece Mrs. Parker to sell her matrimonial home and go
to live with Mrs. Clarke and her husband which was big enough to accommodate the
two families. The letter carried with it a promise that the Clarks would prepare a will
which would devise the house to Mrs. Parker who accepted the offer in writing also.
They later quarreled and the Parkers left. They sued for the promises
Although this was one of domestic arrangements the court held that:
(a) There was intention to form legal relation evidenced by the act of the Parkers
selling their home while relying on the enforceability of the promises.
(b) The changing of their will by the Clarks had an effect of intending the
agreement to be legally binding.
ii. If there is reliance on and formalization of the arrangement between the
parties i.e. put the arrangement in writing.
Like the Clarks did by offering in writing and the Parkers who had relied on their promise
to do what they had done accepting in writing in the above case.
iii. When a couple are about or have separated.
See Merrit v Merrit [1970] 1W.L.R 1211
The couple had separated while there was an outstanding debt arising out of mortgage
on their matrimonial home. The husband told the wife if she discharged this debt he
would transfer the house to her. When the wife was done with discharging the debt the
husband refused to transfer the house to her as he had promise; he claimed theirs was a
domestic arrangement thus there was no intention to create legal relations.

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The court held that: there was this intention to create legal relations since the general
presumption that there is no this intention is not available for spouses who are not
living together peacefully or are about to separate or have separated already.
iv. where there is evidence of joint enterprise (activity) between the parties.
See Simpkins v pays [1955] 3 All ER. 10
There was an old woman who shared a house with her grand daughter and a lessee.
They collectively entered into a competition in some Sunday news paper using the name
of the old woman. Later when the name of the old woman won she refused to share out
the prize to others. Then the daughter and the lessee sued;

The court held that; the rest were too entitled to share the prize since their agreement
was intended to be legally binding, regard being had of the circumstances of the case.

B. IN COMMERCIAL AGREEMENTS
Unlike in domestic and social arrangements where the law generally, presumes absence
of intention to create legal relation, the parties in commercial arrangements are
presumed to have intended the legal consequences unless the court finds that the
terms of a particular contract suggest otherwise. See the following cases:
Rose and Frank Co. v. J.R. Crompton and Bros. Ltd., [1923] 2 K.B. 261 (Engl. C.A.).
Simple facts of the case:
In this case an English company entered into an agreement to sell carbon paper to a firm
in New York. The agreement, inter alia, expressly provided that:
“ This arrangement is not entered into…as a formal or legal agreement, and shall not
be subject to legal jurisdiction in the law courts…”
later J.R Crompton, the English Company withdrew from the contract and Rose and
Frank sued them for breaching the contract.
The court: the issue which the court dealt with was whether the parties in a
commercial agreement can expressly agree not to form legal relations for business
purposes?

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The answer to this question was provided by the court thus:

An Intent to form legal relations is implied in business matters, unless expressly
otherwise. In the present case the wording of the agreement made it clear that it was
not intended to be binding. It is thus un enforceable.
How ever if before the breach of the contract there were goods that were ordered and
supplied according to the terms of the contract, the ordering and subsequent delivery
are regarded by law as separate enforceable contracts of sale.

STANDARD FORM CONTRACTS/ CONTRACTS OF ADHESION AND EXEMPTION /

EXCLUSION CLAUSES
Definition of a standard form contract
Is a contract entered into between two parties that does not allow for negotiation.
Usually one has either to take it or otherwise leave it. Examples of standard form
contracts are:
i. The terms on the back of a bus ticket, e.g. “take care of your luggage, the
company shall not be responsible for any loss” or “if you do not travel on the
day fixed on the ticket your money shall not be refunded.
ii. The terms and conditions that form the contents of admission forms to colleges
and Universities, e.g. “ you should bring along with your admission the letter of
recommendation from your employer”
iii. Terms which may be found written on a sticker attached to an item, e.g.
“cigarettes cause cancer, no damage shall be paid to any one who suffers from
it” etc.
Once these terms are in place there is no chance for negotiation by any party who wills
to enjoy the benefits of certain contracts which one can not enter unless the terms are
agreed as they are presented.

Unlike in standard form contract, all simple contracts it is possible for the parties
thereto to negotiate as to what should be the terms of a particular contract.

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The negotiation, as revealed above, is however not possible when one party is
economically stronger than the other. The chances that there may be a fair negotiation
and bargaining is so much diminished.
For instance in the following situations:
i. When the one party has a strong monopoly over supply of goods and/ or
services. Take an example of any mobile telephone companies in Tanzania. It may not
be simple for an ordinary citizen to negotiate the terms with them.
ii. Paucity in suppliers may cause the same situation.
iii. The party who needs to borrow money and the lender. Like the banker and
his customer.
Since there is no chance for a fair bargaining with these big, well established economic
ventures the ordinary or less strong folks find themselves entering into contracts based
on the terms that are set by them. You have either to accept or to reject them. These
are what are called standard form contracts.

EXEMPTION/ EXCLUSION CLAUSES

Meaning:
These are the conditions set and included in the standard form contracts and for which
the maker of them intends to achieve one or more of the following purposes:
i. Exclude his liability (e.g. the company will not be liable…)
ii. Partly accept liability while limiting damages
iii. Exclude or restrain remedies (e.g. the money is not refundable)
or any other condition to which the party wishing to enter into contract with them has
no say.
These conditions may either be express or implied and are usually intended to restrict
the rights of the parties to the contract

LEGALITY OF THE EXEMPTION CLAUSES

Originally the legality of exemption clauses is based on two common law tests namely

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(a) if the clauses are incorporated into the contract and

(b) if the clauses are clear and not ambiguous
(a) Incorporation
These terms can be incorporated into a contract in the following three ways:
(i) Incorporation into the contract (by signature)
According to L'Estrange v Graucob, [1934] 2 KB 394 a principle was established that,
“ if the clause is written on a document which has been signed by all parties, then it is
part of the contract”.
Simple facts of the case
She bought a machine by signing a document in which the vendors of the machine
stated in very small print that, ‘any express or implied condition, statement or
warranty…is hereby excluded”
The court held that by signing she was bound by these terms.

This means in order to be legally accepted the exclusion clause must have formed part
of the contract before it was signed and not thereafter. If the terms are contained in
the contract later they are not effective.
See Olley v Marlborough Court [1949]
Olley lodged a room in a hotel. As he entered into the room fixed for him he found a
notice on the wall posted by the management in which they excluded liability arising out
of loss or damage to guests’ belongings. When his property was stolen he sued the
hotel.
The court held that: the exclusion clause was ineffective because the contract between
them had been made and signed at the reception desk.
This means anything that comes ahead of signing the contract is not recognized as being
part of the signed contract.
(ii) Incorporation into the contract (by way of notice)
Parker v. SE Railways (1877) 4 CPD 416 an exclusion clause can be incorporated into
the contract by way of notice if the party relying on it has taken reasonable steps to

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bring it to the other parties attention. The notice according to Olley v Marlborough
(cited above) must be brought to the other party before the contract is signed.
(iii) Incorporation into the contract (by way of drawing inference from
previous course of dealings)

(b) If the clauses are ambiguous

The clause in question must be clear and unambiguous, in any case it is ambiguous it
will be interpreted against the person who created it; this approach of the courts results
in what is what is known as contra proferentem rule (in the manner that guards most
the interests of the victim not the maker)
CIRCUMSTANCES IN WHICH A PARTY CAN FIND HIMSELF FACED WITH EXCLUSION
CLAUSES AND THE LEGAL POSITION:
(i) When his signature is important in order to enter into contract
if he enters into contract by signing a document in which the terms are contained, the
party signing is bound by every thing in it whether or not he read it. See
L’Estrange v Graucob Ltd (1934) (above)
NOTE: but if her signing was induced by fraud she would not have been bound.
See Curtis v Chemical Cleaning co. [1951]
Miss. Curtis took a wedding dress to the defendant Co. for cleaning. She was required to
sign a document which contained an exclusion clause which read “ …the company is not
liable for any damage howsoever…”. The makers of the document told her that it only
excluded liability for damage to beads. When in the process of cleaning the document
was stained she sued.
The court held that the company misrepresented and the woman won.

(ii) When the contract does not need signing

If the terms are in a document that the party affected need not put his signature e.g. if
he is given a bus ticket, or receipts after buying something.

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The legal position

In this case the maker of the terms in that document must prove the following if he
wants them to bind the other party that he (the other party):

i. knew about these terms or

ii. should have known that the document could be expected to
contain such clauses

iii. He must prove that he has done everything possible to bring those terms to
the knowledge of the party he wished the terms to bind.

See Thomson v LMS Railway (1930)

Mrs. Thomson bought a train ticket on which there was a notice directing passengers to
the Railway company travel conditions on the company’s timetable. One of the
conditions excluded the company from liability arising out of injuries to passengers. Mrs.
Thomson could not read, when she was injured she sued the company.
The court held that: a ticket is one of those documents which should be expected to
contain terms and the company had taken reasonable steps to bring the terms to Mrs.
Thomson’s notice by making the terms form part of the document i.e. on the back of the
ticket.

The requirement of doing every reasonable thing to bring the terms to the notice of the
other party is presumed not to exist if the parties have dealt on usual terms for over a
period of time (legally termed as “a course of dealing”) in which there is a similar
exclusion clause. In this case the other party as well as the maker of the clause are
presumed to know its existence thence there is no need to give prior notice.

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DISCHARGING A CONTRACT
Once it has been made the contract is not infinite: it can be brought to an end by
various ways. This is what is referred to as discharge of a contract. In more explicit terms
discharge of a contract happens when the rights and obligations accrued under a
contract are extinguished. There are, thus, various ways by which the contract can be
discharged.
i. by performance (part V of the LCA)
The general rule of contract law is that parties must completely and precisely perform
what they have undertaken to do (promises) or not to do under a particular contract,
unless there is a reason not to so perform it (s. 37 (1) of the LCA).

“The parties to a contract must perform their respective promises, unless such performance is
dispensed with or excused under the provisions of this Act or any other law”

If the party performs a contract in a different way from that by which he promised to
perform, the contract will not be discharged. Performance must be complete and
precise.

See also Re Moore & Co. and Landauer & Co. (1921)
The agreement was to deliver a consignment of canned fruits in cases of 30 tins each.
The seller delivered instead mixed cases packed in 30 tins and others in 24 tins.

The court held that: the buyer was entitled to reject the whole consignment. If it is
rejected, a contract is not discharged.

Death of the promisor does not excuse him from performance unless the contract
itself suggests so; otherwise his representatives will have to finish up his obligations
(see s. 37 (2) of the LCA). Only once a contract is performed correctly the parties are
thus discharged from their liabilities under such contract.

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The words performance must be complete and precise mean that:

The act you promised under a contract must be done at the right time and place as
agreed , short of that the contract of this kind is voidable at the option of the
promisee and the promisor will not be discharged.

See s. 55 (1) (2) of the LCA. See analysis of this section below
Subsection 1
When a party to a contract promises to do
a. a certain thing at or before a specified time or
b. certain things at or before specified times (series of events)
and fails to do any such thing at or before the specified time the contract, or so
much of it as has not been performed, becomes voidable at the option of the
promisee if the intention of the parties was that time should be of essence to
the contract .

Subsection 2
If it was not the intention of the parties that time should be of essence of the contract
i. the contract does not become voidable at the failure to do such thing at or before the
specified time; but
ii. the promisee is entitled to compensation from the promisor for any loss occasioned
to him by such failure.

However, if a contract is comprised of a series of minor contracts (see s. 55 (1); the

words certain things at or before specified times, suggest a series of contracts
promised to be done at specified times), each contract is discharged separately (at the
time it was discharged) e.g. delivery by phases, or construction of buildings by phases.
Each phase is discharged if accomplished completely and precisely.

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See Ritchie v Atkinson (1808)

The contract of carriage was designed in such a way that the Mr. Ritchie, the transporter
was to carry goods and get paid per ton. When he failed to finish the rest of the goods
Mr. Atkinson refused to pay him claiming that he had breached their contract. Ritchie
sued him.

The court held: that he could recover the money for that part of the contract he had
performed.

Under the law in Tanzania (s. 55 (2)) Mr. Atkinson would be entitled to compensation
for any loss occasioned by Mr. Ritchie.

ii. Discharge by breach

Breach of a contract happens when one side repudiates (rejects) his liabilities under that
contract. There are two types of breach classified according to the time the liabilities
are repudiated.
(a) if the repudiation is done at the time when performance of such liabilities is due it is
referred to as actual breach and
(b) if the repudiation is done at the time before performance of such liabilities is due it
is referred to as Anticipatory breach

The innocent party under an anticipatory breach has two courses of action
i. he may treat the contract as at an end and claim for damages for breach or for
compensation for the party he has performed

see Hochster v De La Tour (1853) All ER Rep 12

Simple facts of this case

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When De La Tour who had promised to employ Hochster with effect from 1st june
repudiated the agreement in May, the court held that Hochster had the right to sue
from the date the repudiation was done i.e. from May.

ii. he may continue to press for its performance until the due date arrives, if it passes
without such performance he may sue for damages

see the consequences of breach of contract at s. 73-s. 75 of the LCA.

iii. Discharge by frustration

The contract can be discharged if it is frustrated; by frustration it means it is physically
impossible for a party under the contract to perform his obligations. It is physically
impossible for a party to perform his obligations under a contract if there is an
occurrence of an outside event not caused by any party and which renders the original
agreement radically different from what it was agreed.

s. 56 (2) of the LCA incorporates the doctrine of frustration; it reads

A contract to do an act, which after the contract is made, becomes impossible, or, by reason of
some event which the promisor could not prevent, unlawful, becomes void when the act
becomes impossible or unlawful.

The events which may possibly frustrate contract are as follows:

i. if there is a subsequent physical impossibility
see Taylor v Caldwell [1863]
a music hall which was hired for music shows was burnt, it was held the contract
was frustrated.
ii. Subsequent illegality
see Chandler v. Bowden [1855]

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iii. If the basis of the contract does not occur (if performance of a contract
depends on some event)
see Chandler v. Webster [1904]
The basis of contract was the coronation of the queen; it did not happen thus it
was held the contract was frustrated
iv. Radical change in the commercial purpose of the contract
This is when there is an event which is such that because of which the parties are
forced to perform something that is different from what they originally intended.
See Metropolitan Water Board v Dick, Kerr & Co. [1918]
There was a contract of construction of a dam; the Government ordered them to stop.
The court held that there was frustration of the contract. However according to
Tsakiroglou Ltd v Noblee & Thorl [1962]
A contract is not frustrated merely because it is made more difficult to perform it

Effects of frustration
A frustrated contract is a void contract; thus frustration brings a contract to an end.
The general rule is that, once a contract is frustrated
i. All the sums paid by both parties before the frustration are recoverable
ii. All the sums not yet paid should not be paid
See s. 65 of the LCA provides for the effects of frustration.
When an agreement is discovered to be void, or when a contract becomes void, any
person who has received any advantage under such agreement or contract is bound to
i. restore it or
ii. Make compensation for it to the person under the agreement from whom he received
it. Provided that where a contract becomes void by reason of the provisions of
subsection 2 of s, 56 and a party thereto incurred expenses before the time when that
occurs in , or for the purposes of the performance of the contract, the court may if it
considers it just.

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(a) allow such part to retain the whole or any part of any such advantage as
aforesaid received by him or
(b) Discharge him whole or in part from making compensation therefore or
(c) may make an order that such party recover the whole or any part of any
payments or other advantage which would have been due to him under the
contract if it had not become void.

The advantage or the payment should not be greater than the expenses incurred by that
part.
Read, Business Law, by Marsh & Soulsby (5th edition) Pg. 168-169

iv. Discharge by agreement

There are two ways by which a contract can be discharged by agreement in one of the
following ways:
i. by inclusion of a clause in the contract to that effect
For instance parties may agree that if either of them wishes to terminate the contract
he may do so within an advance of a stipulated time. Take an example of leases.

ii. If there is a new contract entered by the same parties which is to the effect that it
discharges the former contract. This other contract must, however be supported by
consideration. Discharge of this kind is called discharge by accord and satisfaction
(accord refers to agreement and satisfaction refers to consideration)

See D&C Builders Ltd v Rees [1966]

Rees was under an obligation to pay some money to D&C for the construction work
carried out by him. When Rees refused to pay D&C accepted less amount of the money
owed in full satisfaction of the whole debt. Later D&C claimed the arrears and Rees
relied on the agreement by D&C accepting the lesser some in satisfaction of the whole
debt.

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The court held that: since the agreement was not supported by consideration D&C could
claim the arrears.
See also s. 62 of the LCA
If the parties to a contract agree to
i. substitute a new contract for it or
ii. to rescind (cancel/ annul) or
iii. alter (change) it
the original contract need not be performed.

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3.0 SALE OF GOODS

Introduction to sale of goods law in Tanzania

The law of sale of goods in Tanzania is a slightly modified replica of the English law. All
the principles pertaining to sale of goods in Tanzania are reduced to one statute known
as The Sale of Goods Ordinance (Laws of Tanganyika, Revised Laws, 1955 Cap 214.)
However the application of this Law applies only to mainland Tanzania, in Zanzibar the
law applicable is the Contract Decree (Laws of Zanzibar, Revised Edition, 1959, Cap
149). The sale of Goods Ordinance, Cap 214 came into being as a result of application, in
Tanzania, of The English Sale of Goods Act, 1893, Cap 71 which was a statute of general
application in England as at the date of passing of the Tanganyika Order in Council,
1920.

Due to this reason there is a little insignificant difference in the two statutes. The cases
decided in England basing on the English Act are useful under this part.

3.1 Meaning and Nature of Sale of Goods Contract

By s. 3 (1) of the Sale of Goods Act, a contract of sale of goods is defined as:

“A contract of sale of goods is a contract whereby the seller

i. transfers or
ii.agrees to transfer the property in goods to the buyer for a money consideration, called the
price. There may be a contract of sale between one part owner and another”
Thus the central feature marking the contract of sale of goods, according to this section,
is the transfer or agreement to transfer the property by the seller to the buyer.

Since the contacts for sale of goods, as the name it self suggests, are contracts, they are
also subject to the general principles of the law as provided by the Law of Contact Act.

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Thus the legal principles which are provided by the Law of Contract Act are also
applicable in a contract of sale of goods; these principles are as follows:

i. Free consent
ii. Capacity to contract
iii. Lawful consideration and object and lastly
iv. Intention to create legal relation.

The unique aspect as regards capacity to contract under the sale of goods contract can
be traced at S. 4 of the Sale of Goods Ordinance which reads as follows:

“Capacity to buy and sell is regulated by the general law concerning capacity to contract, and to
transfer and acquire property.

Provided that where necessaries are sold and delivered to an infant, or minor, or to a person who
by reason of mental incapacity or drunkenness is incompetent to contract, he must pay a
reasonable price therefore”.
Necessaries in this section mean goods suitable to the condition in life of such infant or
minor or other person, and to his actual requirements at the time of the sale and
delivery”.

However, a contract for sale of goods has certain unique features (that are not provided
in the law of contract Act) such as,
i. transfer of title (ownership) to the goods,
ii. delivery of goods
iii. Rights and duties of the buyer and seller,
iv. Remedies for breach of contract of sale,
v. conditions and warranties implied under a contract for sale of goods, etc.

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These unique features are what form the substance of the provisions of the Sale of
Goods Ordinance, Cap 214.

THE EFFECT OF PASSING THE PROPERTY FROM THE SELLER TO THE BUYER IN A
CONTRACT OF SALE
Once the property has passed the contract is known as a sale. If
i. The transfer of such property is to take place later or

ii. If it is subject to some conditions which have to be fulfilled later the contract is called
an agreement to sell.

According to s. 3 (4) the agreement to sell will become a sale once the time elapses or
the conditions have been fulfilled.

s. 3(3) of the Sale of Goods Ordinance provides that:

“Where under a contract of sale the property in the goods is transferred from the seller to the
buyer the contract is called a sale; but where the transfer of the property in the goods is to take
place at a future time or subject to some condition thereafter to be fulfilled the contract is called
an agreement to sell”

Since, according to the above sections it is evident that a sale is a contract just like any
other except for a few unique features; most of the legal tests necessary for a contract
to meet in order that it becomes valid will also apply to sales and agreements to sell.
FORMATION OF A CONTRACT OF SALE
Just like an ordinary contract, a contract of sale can be made by the following ways:
i. it can be made in writing with or without seal or
ii. The whole of it may be made orally or
iii. Part of it may be made orally and another part may be made in writing or

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iv. It may be implied from the conduct of the parties

See s. 5 of the Sale of Goods Ordinance.

THE CONSIDERATION OF THE CONTRACT OF SALE

The definition of consideration is that provided under s. 2(1) (d) of the contract
ordinance. However, the specific name for a consideration under the current law is
provided under s. 3 (1) as a money consideration, otherwise known as the price.
HOW IS THE PRICE FIXED AND WHO FIXES IT?
According to s. 10 (1) and (2) of the Sale of Goods Ordinance
There are various ways by which a price can be fixed
i. by the contract or
ii. may be left to be fixed in the manner there by agreed (eg. by valuation of a third
party)
iii. may be determined by the course of dealing between the parties (in the usual way
they do business)
Subsection 2 provides another way in which price can be fixed if the above three are not
used;
The buyer must pay a reasonable price, and what is a reasonable price is a question of
fact depending on circumstances of each particular case.

This is how the consideration in a contract of sale of goods can be fixed.

NATURE OF GOODS SUBJECT TO A CONTRACT OF SALE
According to s. 7 (1) & (2),
The goods which form the subject of a contract of sale may be
i. existing goods that are owned or possessed by the seller or
ii. goods to be manufactured or acquired by the seller after the making of the contract
of sale (future goods)

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3.2 TERMS OF THE CONTRACT OF SALE: condition, warranties and innominate terms
A contract of sale is usually present with a number of terms some of which are set in by
the parties to such contract while others are implied by the law.

The word condition refers to any one of these terms which is fundamental to that
contract so that if it is breached the right to repudiate (reject) the contract and claim
for damages accrues to the promisee

Warranties: these are ancillary (supplementary) terms in the contract which if they are
breached only the right to claim for damages accrues to the promisee.

Innominate terms are terms of the contract that fall mid way between conditions and
warranties with the outcome of any breach being uncertain. In this situation the court
has the ability to render the contract terminated or alternatively to award damages
whichever is the most appropriate remedy given the effect of the breach and this will in
most cases depend on whether the injured party has effectively been denied the benefit
of the contract. See Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd (1962)

See the definition as provided by s. 2 the sale of goods act of Tanzania.

A warranty means an agreement with reference to goods which are the subject of
contract of sale, but collateral to the main purpose of that contract, the breach of
which gives rise to a claim for damages, but not a right to reject the goods and treat a
contract as repudiated.

WARRANTIES in the Sale of goods Act

S. 14 (b) and (c) of the SGA implies warranties as follows;
In a contract of sale, unless the circumstances of the contract are such as to show a
different intention, there is -

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(b) An implied warranty that the buyer shall have and enjoy quiet possession of the
goods:
(c) An implied warranty that the goods shall be free from any charge or encumbrance
in favour of any third party, not declared or known to the buyer before or at the time
when the contract is made.

All these warranties are concerned with the importance of the seller to have a good
title to the goods he is selling.

OTHER WARRANTIES under

Apart from the above two warranties mentioned by section 14, other warranties are
provided by s. 13 of SGA.

By subsection 1 warranties mentioned under this part are originally conditions to a

contract but they become warranties if the buyer either
i. Waive s (puts them aside/ ignores) them or
ii. Decides to treat the breach of such condition as the breach of warranty (remember
when there is a breach of a warrant one can only claim damages; he can not repudiate
the contract)

CONDITIONS IN A CONTRACT OF SALE OF GOODS

Under the Sale of Goods Act of Tanzania, there are certain conditions implied by Ss. 14 –
17

Section 15 (deals with implied conditions as to description of goods)

S. 15 reads thus:

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Where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with the description; and if the sale be by
sample, as well as by description, it is not sufficient that the bulk of the goods
corresponds with the sample if the goods do not also correspond with the description.
Here sample and description of the goods have equal importance.

If, according to the contract of sale, the goods ordered were to be of a particular
description the goods delivered must not be otherwise than described.

Illustration:
i. If, say you ordered a black car and red was delivered; or
ii. Seven cars and six were delivered or
iii. 1000 bags of maize of, say 100 kgs each, and 600 bags of maize weighing 100 kgs and
400 bags weighing 80 kgs each were delivered.

Under this circumstance if what is delivered does not correspond with the description
it is a breach of an implied condition (as per s. 15) therefore, you may repudiate the
contract.

SECTION 16 (PROVIDES FOR AN IMPLIED CONDITION AS TO QUALITY OR FITNESS OF

THE GOODS)
The section provides for the following two qualities:
i. that which is referred to as quality of fitness and
ii. merchantable quality
i. Quality or fitness
Meaning:
Quality or fitness of the goods may mean any of the following
(a) Fitness for all purposes for which goods of the kind in question are commonly
supplied;

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(b) Good appearance and finishing;

(c) Freedom of the goods from any minor defects;
(d) Safety; and
(e) Durability.

General rule as to quality of goods or their fitness

The first point of consideration with respect to quality is the maxim caveat emptor
(buyer beware). As such, there is generally no implied condition or warranty as to
quality or fitness of goods for any particular purpose.
However there are the following exceptions i.e. there will be such implied conditions
in presence of the following:
i. Course of dealing: The seller sells goods in the course of dealing in which
goods of a particular quality and of the same nature have been sold, that the
goods in the subsequent dealing must correspond with the goods in the
previous dealings.

ii. Buyer’s prior disclosure of a particular purpose: If the buyer knows nothing
of the goods for his particular purpose but brings to the knowledge of the
seller, either expressly or impliedly, the purpose for which the goods are
required so that due to his lack of knowledge the buyer relies on the seller’s
skills of judgment. See section 16 (a) (i) of the SGA.

iii. Evidence of usage of trade: s. 16 (c) of the SGA there may be implied
conditions as to quality or fitness that are annexed by usage of trade15

15
Any system, custom, or practice of doing business used commonly in a given place so that an
expectation arises that it will be observed in a particular transaction. The concept of trade usage
recognizes that words and practices in that area have specialized meanings in different areas of
business. Though these common understandings may not be set out explicitly in a written sales or
service agreement, the courts will generally employ them when construing a commercial contract.

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COMMENT ON THE BUYER’S INTIMATION OF PARTICULAR PURPOSE OF THE GOODS

TO THE SELLER
The seller may not be required to disclose, however, when the purpose for which a
particular product is required is apparent (clear). In this case the purpose is implied.
(There is no need for the buyer to provide it expressly)

The essence of this statement is that some goods do not have many uses so it is not
difficulty to know what their specific use is, think of bottled water (say Kilimanjaro
brand), food varieties, clothes etc.

See an illustration in the following cases

In Godley v Perry [1960] 1 ER 36
A small child bought a toy plastic catapult which broke as he used it causing him to lose
his eye. He sued the seller, who argued that the boy was not entitled to damages since
he had not disclosed the purpose for which he bought the catapult.
The trial court held that there was no need for the boy to make known to the seller the
purpose for which he required the catapult because it could simply be implied.

Grant v Australian Knitting Mills [1936] AC 85

The buyer bought underpants the use of which caused him dermatitis (inflammation of
the skin). The pants contained a chemical substance which the manufacturers were
supposed to wash away.
The court held that the buyer had impliedly made known to the seller the purpose for
which he bought the underpants (i.e. It was intended to be worn), the pants was held
to be not reasonably fit for that purpose.

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ii. s. 16 (b) provides for an implied condition as to Merchantable quality.

Meaning of merchantable quality:
Simply goods of merchantable quality means , ‘ goods which are of a reasonable
standard taking into account their price and what they are meant to do, they must be as
fit for purpose or purposes for which goods of that kind are commonly bought as it is
reasonable to expect having regard to that means that they must be
i. any description applied to them
ii. The price if it is relevant and
iii. Any relevant circumstances see Marsh and Soulsby pg. 188

Examples of goods which are not of merchantable quality

i. A car that is not drivable,
ii. An air condition that does not work.
iii. A washing machine that does not wash,
iv. Any kind of food that is inedible - these are all examples of goods not being fit for
their purpose. A product that breaks down in an unreasonably short time may not be of
merchantable quality too.

Unlike with the quality of fitness, there is an implied condition that the goods shall be of
merchantable quality if the goods are bought by description from a seller who deals in
goods of that description (whether he manufactures them or not).

The obligation that the goods shall be of merchantable quality does not bind the seller
if
i. he brought the defects in the goods into the notice of the buyer before the contract is
concluded
see Bartlett v Sidney Marcus Ltd [1965] All ER 753

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a car which was sold with a defective clutch, of which the seller informed the buyer,
was held to be of merchantable quality , though it cost the buyer more than he had
contemplated only

ii. if the buyer examines the goods before the contract is made as regards defects which
that examination ought to reveal.

Note if he does not examine the goods, the buyer according to this section will be
bound by the obligation that the goods will be of merchantable quality.

Note: section 16 en bloc is a sweeping provision; it includes all the goods that form the
basis of the contract as well as those which are supplied together with those goods
under the same contract of sale.

This means the implied conditions will include these other goods too.
See the following illustrations:
The soda companies usually supply soda in bottles which the buyer is supposed to
return to the company later, unless he buys them too. In this case the company is said
to supply soda and the bottles though the bottle is just used to simplify the delivery of
soda which is the subject matter of the contract of sale.

If the bottle is defective there can be breach of a contract, despite the fact that the soda
is just in good order.
See the case of Geddling v. Marsh [1920] 1 KB 668
Mineral water was sold to the buyer so that the buyer was required to return the
bottles to the manufacturer. When one of the bottles was defective (it burst) the buyer
was injured. He sued the manufacturers

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The court held that the buyer could recover damages under s. 14 of the Sale of Goods
Act of England, 1893 (equivalent to s. 16 of the Sale of Goods Act of Tanzania) the
contract even though the bottle was not sold under the contract of sale.
See also Wilson v Rickett &Co. [1954] 1QB 598
In this case a bomb was supplied together with goods delivered under a contract of
sale of goods. When the bomb exploded the buyer sued the suppliers for damages.

Suppliers: claimed that they supplied the bomb by mistake, since it was not part of the
goods sold.
The court held that the bomb had been supplied under that very contract, no matter
how erroneously.

Section 17 provides for a number of implied conditions under a contract of sale by

sample.
The section provides as follows
A contract of sale is a contract for sale by sample where there is a term in the contract,
express or implied, to that effect.

According to subsection (2) of this section, when there is a contract for sale by sample
there are the following implied conditions:

(a) There is an implied condition that the bulk (the whole mass of goods) shall
correspond with the sample in quality;

(b) There is an implied condition that the buyer shall have a reasonable opportunity of
comparing the bulk with the sample;

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(c) There is an implied condition that the goods shall be free from any defect, rendering
them unmerchantable, which would not be apparent on reasonable examination of
the sample.

In Godley v Perry [1960]1 All ER 36

A boy bought a catapult which snapped and took out his eye on his first use. The
shopkeeper from whom the boy bought the catapult had purchased the bulk by sample
from a whole seller, before he bought he had tested the sample, there was no defect.
The court held that:
i. the boy could recover damages from the retailer for breach of ss. 14 (2) and (3) of the
Sale of Goods Act of England (equivalent to ss. 16 (b) and (c) in our Act.)
ii. also the court held that the retailer could recover damages from the wholesaler for
breach of s. 15 (2) (equivalent to s. 17 (2) of our Act)

3.3 Transferring Property in the goods

As it has been noted earlier that the contract of sale of goods is a contract by which the
transfer of property in the goods is effected from the seller to the buyer. This part
therefore is intended to establish the moment when this transfer of ownership happens
in a contract of sale of goods.

For this purpose the goods are categorized into two groups and thus the transfer shall
be discussed under those groups:
i. transfer of property in specific goods16 The general rule as to how this transfer is
done is provided by s. 19 of the SGA. There are two situations here:
(a) Title in the specific goods will pass at the intention of the parties
According to this section

16
These are goods which at the time the contract of sale is made the buyer has seen and on which he has
agreed to buy.

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Where there is a contract for the sale of specific or ascertained goods, the property in
them is transferred to the buyer at such time as the parties to the contract intend it to
be transferred.
Subsection 2 of the same section states the factors that are useful in determining the
intention of the parties; these are terms of the contract, the conduct of the parties and
the circumstances of the case.

(b) When there is no clear intention of the parties.

There are times when the parties do not, in the contract of sale, show at which time
they wish ownership in the goods to pass, when this happens s. 20 of the SGA becomes
useful. It provides rules which are useful to determine their intention
s. 20 (a) provides for the first rule
Rule I: When the goods are in deliverable state (when they are ready to be delivered to
the buyer)
Here the property will pass to the buyer at the time the contract is made
The rule reads:
Where there is an unconditional contract for the sale of specific goods, in a deliverable
state, the property in the goods passes to the buyer when the contract is made, and it is
immaterial whether the time of payment or the time of delivery, or both, be postponed.
S. 20 (b) provides the second rule
Rule II: when goods have to be made into deliverable state.
Here the property will not pass until some thing is done to put the goods in a
deliverable state.

Note: any time such thing is not done yet the goods will remain at the sellers risk until
the thing is done.
The rule thus reads

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Where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods, for the purpose of putting them into a deliverable state, the
property does not pass until such thing be done, and the buyer has notice thereof.

S. 20 (c) provides the third rule

Rule III: When the seller is bound to weigh, measure, test or do any thing to the goods
for determining the price of them

The property does not pass unless such thing has been done.
The rule thus reads:
Where there is a contract for the sale of specific goods in a deliverable state, but the
seller is bound to weigh, measure, test, or do some other act or thing with reference to
the goods for the purpose of ascertaining the price, the property does not pass until
such act or thing be done, and the buyer has notice thereof.

s. 20 (d) provides for the fourth rule

IV Rule: When goods are delivered to the buyer on approval
This happens when the buyer wants to see first if the goods are suitable to his needs i.e.
wishes to approve them first.

In this case the property will pass only when the buyer
i. The buyer so approves or does any act that has the effect of adopting the goods.
ii. has not approved and keeps retaining the goods, beyond the time allowed for him to
approve, without giving notice of rejecting them to the seller. If the seller had not
allowed him a fixed time for his approving the goods then the property will pass on the
expiration of reasonable time.
The section thus reads
When goods are delivered to the buyer on approval or "on sale or return" or other
similar terms the property therein passes to the buyer:-

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(i) When he signifies his approval or acceptance to the seller or does any other act
adopting the transaction;

(ii) If he does not signify his approval or acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the return of the
goods, on the expiration of such time, and, if no time has been fixed, on the expiration
of a reasonable time. What is a reasonable time is a question of fact.

ii. Transfer of property in unascertained goods17

According to s. 18
Where there is a contract for the sale of unascertained goods no property in the goods
is transferred to the buyer unless and until the goods are ascertained.

s. 20 (e) provides for Rule V

Rule V: Passing of property in unascertained goods.
Property can pass only when the goods are appropriated to the contract18
Read s. 20 (e)

TRANSFER OF RISK IN THE GOODS

At any time the property in the goods has never been transferred to the buyer the
goods remain at the seller’s risk. This means that when the property has been
transferred, it passes with the risks.
The word risk may mean any of the following
i. theft
ii destruction

17
These are those goods which the buyer has not seen and agreed on at the time when the contract of sale is
made.
18
By appropriating goods to the contract it means setting aside or naming the goods after the buyer or do
any thing that will single out the goods as covered by the contract.

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ii damage etc
There are three possible times the mentioned risks may happen:
a. if it happens before the contract is made:
The risk falls upon the seller and the buyer may recover damages if he fails to deliver
unless when the goods have perished and the seller is unaware of it.
See s. 8 of SGA
Where there is a contract for the sale of specific goods, and the goods without the
knowledge of the seller have perished at the time when the contract is made, the
contract is void.

b. if it happens when the contract has been made but before the property passes
(example when there is only an agreement to sell)
The risk falls upon the seller and the buyer may recover damages if the goods are not
delivered

How ever there is protection granted to seller by s. 9 of SGA

Where there is an agreement to sell specific goods and subsequently the goods, without
any fault on the part of the seller or buyer, perish before the risk passes to the buyer,
the agreement is thereby avoided.

Rules of frustration apply to these two situations

c. if it happens after the property has been passed
According to s. 22 (1) the risk falls upon the buyer even when they are still in the
possession of the seller i.e. they have not been delivered. Unless under the following
circumstances:
i. 22 (2) if delivery was delayed by fault of either party; the risk will lie with such party
responsible for such delay

WHO CAN TRANSFER TITLE IN THE GOODS?

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Title is only transferable to the buyer by the owner of the goods and if the seller is not
the owner then for title to pass he must have sold the goods either
i. under the authority of the owner or
ii. with the consent of the owner

Short of this the buyer can not gain a better title than the person who gave him. This
is a common law principle imbedded in the legal maxim nemo dat quod non habet.

Explanation of the rule

The rule, as stated in s.23 of the Sale of Goods Act (Cap 26) (SGA), provides that where
goods are sold by a person who is not their owner and who does not sell the goods
under the authority of the owner, the buyer acquires no better title to the goods than
the seller had. Hence, under a contract for sale of goods, even though possession of the
goods sold under the contract is transferred to the buyer, the buyer is not the owner of
the goods, i.e., he does not have the title or ownership to the goods if the seller is not
the owner or authorised by the owner to sell. The buyer in such case has the physical
possession of the goods only. While s.23 of SGA applies only to sale by a non-owner, the
maxim nemo dat itself has a wider application. Under the maxim, a sale by the owner of
goods cannot sell the goods free from encumbrances or charges on the goods in favour
of a third party.

See s. 23 of SGA reads as follows;

Subject to the provisions of this Act, where goods are sold by a person who is not the
owner thereof, and who does not sell them under the authority or with the consent of
the owner, the buyer acquires no better title to the goods than the seller had, unless the
owner of the goods is by his conduct precluded from denying the seller's authority to
sell.

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Exceptions to nemo dat quod non habet rule:

i. Estoppel : A buyer of goods from a non-owner or from a seller selling the
goods without authority from the owner may acquire title to the goods if the
owner by his conduct is precluded from denying the seller’s authority to sell:
s.23(1) SGA. The aim of the section is to protect the interest of a buyer who is
misled by the conduct of the owner coming into the belief that the seller has
the authority from the owner to sell. The word ‘conduct’ in the section
covers words from the owner. However, the mere act of transferring physical
possession of the goods by the owner does not amount to conduct within
the ambit of the section. The conduct of the owner has to be a
representation to the buyer that the seller has the authority from the owner
to sell: Fanlin Investments Ltd v Hang Seng Finance Ltd (1994) HK. Hence an
owner by his conduct holding out that the seller is his agent or has his
authority to sell or that the seller is the owner of the goods is estopped from
denying so; and title of the goods is transferred to the buyer under the
contract of sale

ii. Goods sold in market overt: Section 24 of SGA provides for another
exception to the nemo dat rule. Under s.24, where goods are openly sold in a
shop or market in Tanzania in the ordinary course of its business, a buyer
who buys the goods in good faith and without knowledge that the seller is
not the true owner acquires ownership of the goods.

To be benefited under s.24, the buyer is rested with the burden to show the existence of
the following conditions:

 The goods must be openly sold;

 The sale must take place in a shop or market;

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 The sale must be in the ordinary course of business of that shop or

market; and
 The purchaser must act in good faith and without any notice of any
defect of title.

3.4 Performance of Contract of Sale of Goods

Performance of a contract of sale of goods is effected by delivery of the goods by the
seller and acceptance and payment for the goods by the buyer. Delivery and acceptance
and payment for goods are duties of the seller and buyer respectively. See s. 29 of SGA
A. DELIVERY
i. Where are goods to be delivered?
The place of delivery is the seller’s place of business See s. 31 of SGA

ii. What if the seller delivers goods in wrong quantity or description?

Read s. 32 of SGA
The buyer shall either reject the whole of it or accept the whole of it. If it is in excess he
may accept the amount he ordered and reject the rest.

iii. can the goods be delivered in installments?

Read s. 33
The buyer is not bound to accept the goods delivered in installments unless they so
agree.
B. ACCEPTANCE
Read s. 37 of SGA
the goods are accepted by the buyer if
i. he intimates to the seller that he has accepted them or
ii. the goods have been delivered to him and he does any thing to the goods such that
the act is inconsistent with the ownership of the seller or

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iii. When after the lapse of time he retains the goods without intimating to the seller
that he has rejected them.

Any thing beyond this is not deemed on the part of the buyer as acceptance.
RIGHTS OF UNPAID SELLER (s. 41 (1) (a) and (b))
As long as the seller is not yet paid he has two rights arising out of the contract of sale of
goods; these rights are follows.
i. s. 41 (1) (a) right of lien on the goods; This is the right to retain the goods for the price
while he is in possession of them.
ii. s. 41 (1) (b): in cases of insolvency of the buyer the seller has the right to stop the
goods in transitu . This may happen, for instance when the seller has handed over the
goods to a transporter to take them to the buyer and before goods reach him it comes
to his knowledge that the buyer is insolvent and can not pay for the goods transported
to him.
iii. s. 41 (1) (c) : the right to resell the goods
iv. s. the right to repossess the goods if there are “Romalpa clauses”
These were established in the case of Aluminum Industrie Vaasen BV v Romalpa
Aluminum LTD [1976] 1 WLR 676 CA.
These clauses are to the effect that, the supplier of goods on credit may express in the
contract of sale that title to the goods will not pass to the purchaser until they are fully
paid for.
This means that as long as the goods are not paid for, they remain the property of the
supplier despite the fact that they are in the possession of the company.

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THE LAW RELATING TO AGENCY

INTRODUCTION
Agency law arose from the desire of people to extend their activities beyond the limits
of their own bodies 19. This means they allow (an) other person (s) to act for them in
various situations when they themselves can not act. It is justifiable in our nature as
human beings that no one man can do all things by himself given the nature of peoples
daily activities. A business, for instance, which has its headquarters in one region and a
branch or branches in another, can not be managed successfully by a distant executive
unless he appoints people to act on his behalf. This is the reason why businesses would
have representatives in different places than the areas they were established. Under
this part various legal aspects of the nature of the relationship between the representer
and the represented are discussed. Agency relations are, generally, covered by Part X of
the Law of Contract Act, Cap 345.

MEANING OF AGENCY
An Agency can be defined as a legal relationship in which one person acts for another in
a business dealing with a third party.

PARTIES TO AGENCY – Agent and Principal

The parties to agency relationship are the agent and the principal. These parties are
defined by section 134 of the LCA as follows;
An agent is any person employed to do any act for another or to represent another in
dealings with third persons. The word ‘another’ in this section refers to any person who
employs or asks to be represented by an agent in dealings with third party. This person
is known as the “Principle”, who is defined under the same section as being the person
for whom an act is done or who is so represented by an agent (emphasis added).

19
Michael B.M [et al], (1986) Business Law and the Regulatory Environment: Concepts and Cases, Irwin
Homewood, USA. Pg. 334

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ELEMENTS OF AGENCY RELATIONSHIP

i. There must be a relationship between persons
ii. One person must employ another to act on his behalf or must ask to be
represented by another.
iii. The employing or representing must be only for business transactions with
third persons

FORMATION OF AGENCY
Appointment of an agent
An agency is created by appointing an agent. The agent is said to have been appointed if
he has been conferred authority to act on behalf of another either expressly or
impliedly. Thus any person who acts for another without his authority is not an agent.
Thus, an agency is created by the principal giving an authority to an agent to do an act
or acts in business dealings with third parties.

WHO MAY APPOINT AN AGENT?

An agent may be appointed by any person who is of the age of majority and who is of
sound mind. This means an agent must have the contractual legal capacity. S. 135 of the
LCA provides that;
“Any person who is of the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent.”

WHO MAY BE AN AGENT?

i. People of majority age and sound mind
The law requires that, in order to be an agent, any person has to be of the age of
majority and of sound mind. Only these can be appointed as agents. In this regard it
means therefore that the agent like the principal must have the legal capacity. See
section 136 of the LCA.

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ii. Minors and people of unsound mind

The law prohibits a principal to appoint these persons as agents. If the principal appoints
them as agents, persons who are not of the age of majority and not of sound mind are
regarded as agents but only as between the principal and the third party. This means
that if an agent flouts the law and moves to appoint an agent who has no legal capacity
he is personally liable to third parties but the minor or the person of unsound mind can
not be responsible either to the principal or to the third party, for his acts. see section
136 of The LCA which reads;

AGENT’S AUTHORITY TO ACT AND ITS LEGAL SIGNIFICANCE

Once authority to act has been granted by principal to an agent, the acts of the agent
under such authority bind the principal. This means that everything that the agent does
within the authority granted are counted to have been done by the principle himself
and the principle will be liable to third party on the consequences of these acts. Thus
any act done by the person who has been asked by another is considered, in law, to
have been done by the latter himself. This finds its base in an old Latin maxim which
reads: Qui facit per alium facit per se, which means he who acts through another,
himself acts.

THE NATURE OF AUTHORITY

According to s. 138 of the LCA agent’s authority is of two types as follows;
i. Actual Authority (As between the principle and agent)
This is when the principal expressly or impliedly gives the agent the right to do an act
on the principle’s behalf and benefits.

(a) Express authority: Under s. 139, authority is express when it is given

by words either spoken or written.

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(b) Implied authority: According to s. 139 of the LCA, authority is implied

if it is inferred from circumstances of the case, from words spoken by
parties or from the course of dealing between them. Implied authority is
also referred to as “usual authority”. This happens when it is usual for a
particular type of agent to carry certain functions, if the principle
appoints an agent of this type he is taken to have authorised such acts.

S. 140 of the LCA provides that an agent who has authority to do an act has authority to
do every lawful thing which is necessary to which is necessary in order to do such act.

Illustration
For instance when you appoint a lawyer to represent you in a court of law, you are
considered to have authorised him to do any act associated with such representation
unless you expressly restrict him to do them. All that he does as they arise from what
you have authorised him to do are said to have been done under implied authority.

ii. Apparent or ostensible Authority (as between the principle and third party)
Ostensible authority arises when at any time the principle gives the agent the
appearance of authority. Thus there will be an apparent/ ostensible authority when an
agent appears to the third party to be acting within his authority. In most cases
ostensible authority arises when agent acts on usual or implied authority. The act of the
agent done in this situation will bind the principal even if he has actually exceeding his
authority.

The following situation shows an example of the circumstances in which an agent may
be caused to appear to the third party to have power in respect of some things and thus
appear to be acting within his authority.

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For instance
When the principle does not want the agent to act on his ‘usual authority’ but he does
not openly restrict him not to act on them.

HOW CAN OSTENSIBLE AUTHORITY BE AVOIDED?

Ostensible authority can be avoided by posing restrictions to the authority granted to
the agent by specifying acts which the principal does not want the agent to do. This
restriction must be communicated to the third party by the principal. If it is not
communicated the principal is liable to third party who acts in good faith.

See the case of Folkes v King [1923]

The agent was given an authority to sell a car for the price not below ₤ 575. When he
sold it at less than the price, the buyer obtained good title because the agent appeared
to the buyer to have authority to sell that car at such price.

Why?
Because the type of agency in which the principle put the agent to act usually, in the
eyes of the public, carries with it the powers to do the main act which is selling plus
certain other associated acts like engaging in negotiations on price.

The principle would not be bound if he disclosed to the world at large his restriction so
that every body has knowledge of it.

NON DELEGABLE OBLIGATIONS

Note that not everything can be delegated to an agent. The principle can not delegate
certain duties for example making statements under oath, voting in public elections not
by proxy in companies; signing of wills etc. these duties are known as non delegable
duties/ obligations.

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CLASSES OF AGENTS:
i. Universal Agents/ General Agent (GA): These are those who are authorized
to transact every kind of business for the principal. They usually hold a broad
authority to act, e.g. they may hold a power of attorney (also known as a
mandate in civil law jurisdictions) or have a professional relationship, say, as
lawyer and client.

ii. Special agent: Are authorized to conduct either only a single transaction or a
specified series of transactions over a limited period of time.

iii. Gratuitous agent: One who is acting without compensation.

iv. Commission agent: is the one who is paid commission for the transactions
done.

v. Del credere agent: One who agrees to guarantee the obligations of a third
party (or parties). Example an agent who sells products for a principal to a
third party undertakes to guarantee to principal that this third party will pay
for the goods. In other words it can be said that a del credere agent, besides
acting for the principal, he also acts for the third party but as his guarantor.

vi. Employee: Agent whose actions are under the direct control of the principal
(employer). Traditionally known as a "servant."

vii. Independent contractor:

Agent who is only liable for delivering a finished product to the principal

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TYPES OF AGENCY
1. Agency by Agreement:
An agency relationship based on an express or implied agreement that the agent will
act for the principal.

2. Agency by Ratification:
Ratification is a process whereby the principle binds himself to unauthorized act done
by an agent or by a person claiming to act as an agent. This happens when the principal
confirms an act or contract performed or entered into by another person on his behalf,
without his authority, to act as his agent. See s. 148 of the LCA.

This implies that when an agent does an act without authority, the Principal may ratify
the transaction and accept liability on the transactions as negotiated. Ratification may
be express or implied (see s. 149 of the LCA) from the Principal's behavior, e.g. if the
Agent has purported to act in a number of situations and the Principal has knowingly
acquiesced, the failure to notify all the concerned of the Agent's lack of authority is an
implied ratification to those transactions and it is regarded also as an implied grant of
authority for future transactions of a similar nature.

CONDITIONS BEFORE UNAUTHORISED ACT CAN BE RATIFIED

Apart from the requirements provided by the section above, other requirements are
such as:
i. The act ratified must not be illegal
ii. The principal must have been in existence when the act was done by
the agent.
iii. The agent must have shown that he was acting for somebody,
whether known or unknown.
iv. The ratifying principle must be legally competent

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v. Ratification must be wholly and not partial. The principal can not
choose those that benefit him and leave those that are not beneficial to
him.

3. Agency by Estoppels:
If a principal holds out to a third party that another is authorized to act on the
principal’s behalf and the third party deals with the other person accordingly, the
principal may not later deny that the other was the principal’s agent for purposes of
dealing with that third party.

4. Agency by Operation of Law: this is when the law presumes that a certain
relation is that of agency.
Agencies recognized by courts – e.g., family relationships, Emergency situations – in the
absence of any formal agreement, confirmation, or act or omission by the principal that
implied the agent’s authority

5. Agency by necessity
Any person may be an agent by acquiring an authority from the pressure arising out of
necessity. This usually happens when the agent has been put in control of other
person’s property. There are four conditions to it
i. The agent must have been placed in control of principal’s property.
ii. There must be a situation which puts the property in danger.

For instance, when a person who has been put in control of the property is a transporter
and the property is perishable goods.
iii. It must be impossible for the person in control to seek instructions from the
owner in time.

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iv. If the person in control of the property does any thing, he must do it in good
faith and it must be done in an attempt to protect the property.

RELATIONSHIP BETWEEN PRINCIPAL AND AGENT

Their relationship is founded on the obligations that each one of them has to the other.
The obligations of the agent are the rights of the principle and vise versa.

AGENT’S DUTIES TO THE PRINCIPAL

i. Duty of Performance:
An agent implicitly agrees to use reasonable diligence and skill (except for a specialist,
who is held to a higher degree of skill) in performing the task in its entirety. See s. 164 of
the LCA.

ii. Duty of Notification:

An agent must notify the principal of all matters that come to the agent’s attention
concerning the subject matter of the agency when ever he faces any difficulty. See s.
166 of the LCA.

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iii. Duty of Loyalty:

An agent must act solely for the benefit of his or her principal, and not in the interest of
the agent or a third party. Moreover, any information or knowledge obtained in the
course of the agency is confidential.

iv. Duty of Obedience:

An agent must follow all lawful and clearly stated instructions of the principal. See s.
163 of the LCA
“ an agent is bound to conduct the business of his principal according to the
directions given by the principal or, in absence of any directions , according
to the custom which prevails in doing business of the same kind at the place
where the agent conducts such business. When the agent acts otherwise, if
any loss be sustained, he must make it good to his principal, and, if any
profit accrues, he must account for it.”

Analysis of this section:

i. An agent must follow his principal’s instruction while doing the business of
the agency. If there is no such instructions then,
ii. He must abide by the custom of his area with regard to the type of business
he is doing (this means he must follow what other people usually do while
conducting business of the same kind)
iii. The effects when the agent acts otherwise than provided by this section.
(a) if in so acting otherwise, the agent incurs loss he must make it good
to his principal.
(b) if in so acting otherwise, the agent makes profit, he must account
for (give an explanation of) such profit to his principal.

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iv. Duty of Accounting:

Unless otherwise agreed, an agent must keep and make available to the principal an
account of all property and money received and paid out on the principal’s behalf,
including gifts received from third persons. See s. 165 of the LCA, see also s. 170.

And s. 170 reads “…the agent is bound to pay to his principal all sums received on his
account”

PRINCIPAL’S DUTIES TO THE AGENT

i. Compensation:
When a principal requests certain services from an agent, the principal must pay the
agent, in a timely manner, for those services rendered. See s. 175 of the LCA.

ii. Reimbursement:
Whenever an agent disburses sums of money to fulfill the principal’s request or to pay
for necessary expenses incurred in the reasonable performance of his or her duties, the
principal must reimburse the agent.

iii. Indemnification:
Subject to the terms of the agency agreement, the principal must compensate, or
indemnify, the agent for liabilities arising from the agent’s lawful and authorized acts on
the principal’s behalf. Indemnification can only be done if the agent does in good faith
lawful acts whose consequences he suffers. It does not matter if the act causes
consequences to third persons. See s. 174 and 175 of the LCA.

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And s. 175 reads

iv. Cooperation:
A principal must cooperate with the agent and assist the agent in performing his or her
duties.
Safe Working Conditions: A principal must:
(a) Provide its agents and employees with safe working premises, equipment,
and conditions, and
(b) Inspect working conditions and warn agents and employees of unsafe areas.

If the agent sustains any injuries at the place of work and in respect of the whole
agreement of agency the principal is liable for neglect to compensate him. See s. see s.
177 of the LCA.
“The principal must make compensation to his agent in respect of injury caused to
such agent by the or want of skill.

AGENT’S REMEDIES
Most principal-agent relationships are governed by some actual or implied contract;
therefore, most of the remedies available to an agent are the same available to any
plaintiff in a breach of contract case. See part VII of the Law of Contract Act on
consequences of breach of contract (s. 73-s.75)

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Additionally, in the event that the principal violates a duty owed to the agent, the agent
may
i. Withhold further performance, and
ii. Demand an accounting.

PRINCIPAL’S REMEDIES
In the event that the agent violates her fiduciary duties to the principal, the principal
may, in addition to any remedies provided for in his contract with the agent, seek:
i. Constructive Trust:
Anything an agent obtains by virtue of the agency relationship belongs to the principal;
therefore, a principal may sue to recover any benefits retained by the agent.
ii. Avoidance:
In the event that the agent breaches her contract with the principal, the principal may
elect to avoid any contract he entered into with the agent. S. 180 LCA when the
principal declines to recognize the agent’s unpermitted act.

iii. Indemnification:
To the extent that the agent’s breach causes harm to some third party, who then sues
the principal, the principal may seek indemnification from the agent. See s. 184 of the
LCA. “ in cases where the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable.
This section is subject to s.185 which bars a person who induces either the principal or
the agent that he will not sue him but the other from suing he whom he so induces.

RELATIONSHIP OF THE PRINCIPLE AND THIRD PARTIES

For the purpose of this discussion, principals can be categorized into
i. Disclosed and
ii. Undisclosed Principals

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(1) Meaning and liability of the disclosed principal

The disclosed principal is the principal whose existence and identity is well known to
third party. A disclosed principal is liable to third party on contracts entered into with
authorized agent as if the contract had been entered into and the acts had been done
by the principal in person. See s. 178 of the LCA.
“Contracts entered into through an agent, and obligations arising from acts
done by an agent, may be enforced in the same manner, and will have the
same legal consequences as if the contracts had been entered into and the
acts done by the principal in person.

(2) Meaning and liability of an undisclosed principal see. S. 183 (1) of the LCA.
Undisclosed principal is the one who the third party, while entering into contract with
the agent, neither knows of his existence nor his identity. Under this circumstance both
the principal and the agent are liable to this third party on contracts. See s. 183 below.

Upon learning of principal’s existence and identity, third party must elect whether to
hold principal or agent liable.

LIABILITY OF AN AGENT ON CONTRACTS WITH THIRD PERSONS

The agent is not normally liable since his acts are presumed to be those of the principal
as long as he acts within the authority. The liability of an agent for contracts with third
parties depends on whether the principle is disclosed or undisclosed. Therefore an agent
can be liable in the following circumstances.

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(1) When the agent acted without disclosing the principal

See s. 183 (2) of the LCA. This can happen when a third party has entered into a contract
with the agent not knowing that he is neither an agent i.e. the third party just thought
he was contracting with an ordinary person in his individual capacity, and the principal
discloses himself before the third party has fulfilled the contract, this section allows the
third party to refuse to fulfill the terms of the contract if he can show that he would not
have entered into the contract had he known that the other party was a mere agent and
not the principal, or rather had he known earlier who was the principal.

Impliedly, the provision suggests that if the third party does not refuse to fulfill the
terms of the contract despite his lack of knowledge of the principal, or even after the
principal has disclosed himself, then he has intended the agent to be a party to that
contract.

i. An analysis of this section is that:

ii. The third party must enter into contract with the agent.
iii. The third party must not have known that the person with whom he
entered into the contract was neither an agent nor the principal.
iv. The principal must disclose himself after the contract has been signed
v. The third party may refuse to honour the terms of the contract.

(2) Where agent acts beyond authority of his principal.

Under this circumstance, there are two or more situations;
(a) when an agent does more than his principal authorizes him to do, if the
whole of the act he has done (which includes that part which is authorized
together with the unauthorized part), is in such a way that the authorized part of
the act can be separated from the unauthorized part, the authorized part that
the agent has done binds between him and his principal. See s.179 of the LCA.
The authorized part will be the act of the principal and the principal will be liable.

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(b) When the agent does any act or omission beyond the authority of his
principal and circumstances are such that the whole of the act comprises of
permitted and an unauthorized act, if the permitted act can not be separated
from the unauthorized act, the principal is not bound to recognize the
transaction. This means if the principal declines to recognize it the agent will
personally be liable. See s. 180 of the LCA.

TERMINATION OF AGENCY
Either party may terminate the agency relationship at any time, even if this breaches a
contract between them. The circumstances that may cause an agency to terminate are
as provided by s. 153 of the LCA as follows: s. 153 of the LCA provides circumstances
under which an agency can be revoked;
“An agency is terminated by the principal revoking his authority; or by the
agent renouncing the business of the agency; or by the business of agency
being completed; or by either the principal or agent dying, becoming of
unsound mind or being adjudged bankrupt under the provisions of any law for
the time being in force relating to bankruptcy”
An analysis of this section discloses that agencies can be terminated by any of the
following ways;

i. By revocation of an agent’s authority by the principal (by the principal

revoking his authority). After the principal has revoked his authority he must
compensate the agent for such revocation.

Note: that revocation of an authority granted to the agent can not be done when the
agent has exercised the authority in partly, see section 156 of the LCA.

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ii. By expiration of the term of the agency. This is true for agencies that have
been created for a specified period of time.

iii. By fulfillment of the purpose of the agency (by the business of agency being
completed) /performance

iv. By renunciation (rejection or abandonment) of authority by the agent (by the

agent renouncing the business of the agency)
Renouncing the business of agency refers to a breach of the agency contract and if it is
done prior to the expiration of its term or contrary to its provisions.

Note:
I. Effect of this breach of agency contract
The victim of such breach has remedies provided by contract law; see section 157 of the
LCA (it provides for compensation for revocation by the principal or renunciation by the
agent.)

II. Requirement of notice before revocation or rejection

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Both revocation and renunciation require the giving of a reasonable notice other wise
the party that renounces or revokes must make good the damages that may be caused
by his act to the other.

v. Death of the principal or agent (by either the principal or agent dying…)

vi. Insanity of the principal or agent (by either the principal or agent… becoming
of unsound mind…)

According to s. 161 LCA When an agency terminates by the death or insanity of the
principal a duty is placed upon the agent to take reasonable steps to protect and
preserve, on behalf of his principal’s representatives, all the interests of his principal
that were entrusted to him.

OTHER CIRCUMSTANCES WHICH CAUSE TERMINATION OF AGENCY

i. Loss or destruction of the subject matter of the agency.
ii. Change in business conditions that would make an agent believe that the
principal would want the agency terminated.
iii. Change in the law that makes the agency relationship illegal.
iv. Disloyalty of the agent – if an agent breaches his duty of loyalty to the
principal, by acquiring, for example, interests adverse (unfavorable) to the
principal without the principal’s knowledge, the agency is terminated.
v. War between the principal’s and agent’s countries.
vi. Impossibility of performance, Frustration.

AGENCIES WHICH CAN NOT BE TERMINATED

Some agencies can not be terminated by the causes that have been mentioned above,
unless there is an express agreement to that effect. These are called Interminable

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agencies or agencies coupled with interest. Usually interminable agencies are those
agencies in whose property (the subject matter of agency) the agent has some interest.

The interest of an agent generally can be either specific or beneficial.

An agency of this type can not be revoked or be terminated by the principal or by the
principal’s death or incapacity.
This is the kind of agency provided under s. 154 of the LCA.
s. 154 reads:
“Where the agent has himself an interest in the property which forms the
subject matter of the agency, the agency can not, in the absence of an express
contract, be terminated to the prejudice (unfairness) of such interest”.
Comment:
The section protects the rights of the person whose interest in the subject matter of
agency is likely to be affected by the termination of such agency. But the law does not
bar such termination only in as far as the parties (principal and agent) have, prior to
termination, entered into an express contract allowing such termination, under this
circumstance it does not matter whether or not such termination will affect the
interests of the agent in the subject matter.

An interminable agency or agency coupled with an interest in a simple analysis,

therefore, has the following elements:
(i) It is first of all a special type of agency relationship.
(ii) This type of agency is irrevocable by the principal.
(iii) Not terminated by the death or incapacity of either the principal or the
agent.
(iv) Terminates only when the agent’s obligations are performed or if the agent
and principal had drawn up an agreement permitting termination despite the
nature of the agency.

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EFFECTS OF TERMINATION OF AGENCY

1. Actual authority of the agent ceases. While actual authority ceases apparent
authority may or may not cease on termination of the agency depending on the
nature of such termination as explained below.

2. Apparent authority of agent may cease or continue:

(a) Where apparent authority ceases: Apparent authority comes to an
end if the agency is terminated by death, insanity, or bankruptcy of the
principal or destruction of the subject matter.

(b) Where apparent authority continues: apparent authority will

continue if the agency is terminated by any other means (besides those
mentioned in (a) above) until the third party receives notice of the
termination. As long as the principal has terminated the agent but he has
not brought notice to third parties the agent will continue to be so (his
authority will be known as ostensible or apparent authority)

See s. 160 of the LCA which states that;

“The termination of the authority of an agent does not, so far as regards the
agent, take effect before it becomes known to him, or so far as it regards
third persons, before it becomes known to them.

See also M/S SOUTHERN HIGHLAND v M/S TANZANIA OXYGEN LIMITED (1989) TLR 187
(HC) it was held in this case that:

“In terms of section 160 of the Law of Contract Act, Cap. 345 termination of
the authority of an agent does not so far as regards the agent, take effect
before it becomes known to him. The onus of proving that such notice of
termination of the agency had come to the knowledge of the agent, in this

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case the plaintiff company, rests with the principal, in this case the
defendant company;

In another case; MERALI HIRJI AND SONS v GENERAL TYRE (E.A.) LTD (1983) TLR 175
(HC)
In this case the respondent had entered into an agency contract with the appellant for
sale of motor vehicle tyres. This relationship persisted for five years but then abruptly,
the respondent, unilaterally terminated the five-year-old commercial relationship
without notice and without giving any reason for doing so.

Makame J. held that, so long as the appellant was not a commission agent, he was
entitled to a reasonable notice of the termination of the contract and that the
respondent was legally obliged to give such notice.

Therefore notice to the agent when the principal terminates the agency is very
important. This notice must come to the knowledge of the agent and in case of any
dispute the principal will be required to prove that this knowledge really came to the
notice of the agent.
i. Actual notice is required for creditors and persons who have at some time
dealt with the agent. Actual notice is that which in order to be properly given
a person is notified by letter or in person.

ii. Constructive notice is required for other third parties (besides creditors or
those who have at some time dealt with the agent). For them notice in a
newspaper or public record is presumed to be legally sufficient notice.

Conclusively these are the general principles relating to agency, therefore when one
acts as an agent he must observe the same principles otherwise they will incur liabilities
as herein discussed.

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5. COMPANY LAW
Definition and Nature of the Company: General
A company is an incorporated association which is an artificial person created by law,
having as separate entity, with a perpetual succession and a common seal20.

It is an association of individuals conducting a commercial or industrial enterprise. In

order for a company to operate legally it must be registered (incorporated) according to
the law of a particular country relating to companies.

Definition and Nature of the Company: Statutory

According to s. 2 of the law relating to companies in Tanzania is the companies act, cap
212 of 2002,
A company formed and registered under this Act or an existing company.
Comment:
To be appropriately constituted as a company, any association must undergo two
processes namely “formation” and “registration” under Cap 212 for a newly formed
company. Otherwise it should have been “formed” and “registered” under any other
law, thus, the term “existing company”.

TYPES OF COMPANIES
Companies are categorised on the following bases;
1. Incorporation
There are three types under this part namely;
i. Statutory company; if it is established by statute or act of parliament e.g. the
Institute of Accountancy Arusha. it is established by the IAA Act, no. 1 of 1990.
ii. Registered company; any company that is registered through the Companies
Act, Cap 212

20
Tulsian, PC (2007) Business and Corporate law: For CA PE-II 2nd edn. Mc Graw-Hill Companies, New
Delhi.

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iii. Licensed Company; if it is a non profit association. See s. 32 of Cap 212

2. LIABILITY
Generally s. 3 of the Companies Act provides for types of companies basing on liability in
that companies may be formed with or without limited liability;

A. Companies with a limited liability may either be:

(a) Companies limited by shares
According to s. 3 (2) (a) these are companies having the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by
them.
This means that if a shareholder has taken shares of nominal value of 30,000/= and has
paid only 20,000/=. His liability will be only as to the amount he has not paid in case a
company is wound up. The share holder will have to pay up his capital to contribute to
the assets of the company. If you pay for all the shares at the time you took them you
will generally not be liable to the company at winding up.
(b) Companies limited by guarantee
According to s. 3 (2) (b) these are companies having the liability of its members limited
by the memorandum to such amount as the members may respectively thereby
undertake to contribute to the assets of the company in the event of its being wound
up. This in most cases are those companies which are formed for non profit purposes.
See paragraph (b) of this section

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B. Unlimited Companies
According to s. 3 (2) (c), these are companies that do not have any limit on the liability
of its members. This means there is no limit on liability of the members to contribute to
the assets of the company on winding up. An unlimited company must be a private
company.

C. Public Companies
According to s. 3 (3), a public company is a company limited by shares or limited by
guarantee and having a share capital, being a company the memorandum of which
states that it is to be a public company,

D. Private Companies
According to s. 27 (1)
A private company means a company which by its articles
(a) Restricts the right to transfer its shares; and
(b) limits the number of its members to fifty, not including persons who are in
the employment of the company and persons who, having been formerly in the
employment of the company, were while in that employment, and have
continued after the determination of that employment to be, members of the
company, and
(c) Prohibits any invitation to the public to subscribe for any shares or
debentures of the company.

3. CONTROL
Companies which acquire their names on basis of control are such as;

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(a) Foreign company; it is any company that has been established outside
Tanzania and which opens up business in Tanzania. Under s. 434 of cap 212To operate
in Tanzania legally this company, 30 days after establishing business in Tanzania, must
deliver to the registrar the following documents for registration;
(1) a certified copy of the charter, statutes or memorandum and articles of
the company or other instrument constituting or defining the constitution of the
company written in the English language, or its certified translation.
(2) a list of the directors and Secretary of the company containing the
particulars mentioned in subsection (2);
(3) a statement of all subsisting charges created by the company, being
charges of the kinds set out in section 99 and not being charges comprising solely
property situate outside Tanzania;
(4) the names and addresses of one or more persons resident in
Tanzania authorised -
(i) to accept on behalf of the company service of process and any
notices required to be served on the company, and
(ii) to represent the company as its permanent representative for
the place of business, and, in the case of subsection (ii), a
statement as to the extent of the authority of the permanent
representative, including whether he is authorised to act alone or
jointly.
(5) the full address of the registered or principal office of the company,
and the full address of the place of business in Tanzania;
(6) a statutory declaration made by a director or Secretary of the company
stating the date on which the company's place of business on Tanzania was established,
the business that is to be carried on and, if different from the registered name of the
company, the name under which that business is to be carried on;
(7) a copy of the most recent accounts and related reports of the
company including, where such are not in English, a translation of the same.

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(b) Holding company and Subsidiary Company; A holding company means any
company that controls another company while a subsidiary company is the one that is
controlled by another company.

Under s. 487 (I) of Cap 212, a company is deemed to be a subsidiary of another only if
(a) that other either-
(i) is a member of it and controls the composition of its board of
directors; or
(ii) holds more than half in nominal value of its equity share capital; or
(b) the first-mentioned company is a subsidiary of any company which is that
other's subsidiary.

HOW TO FORM AN INCORPORATED COMPANY

The company under this Act can be formed by the existence of the following facts;
i. There must be two or more than two persons who wish to establish a company
ii. These persons must subscribe their names to a memorandum of Association of
the company
iii. They must, by following the requirement of the Companies Act, register the
company.

Thus s. 3(1) of the Companies Act provides that:

“Any two or more persons, associated for any lawful purpose may by
subscribing their names to a memorandum of association and otherwise
complying with the requirements of this Act in respect of registration form
an incorporated company, with or without limited liability”.

Formation of company is done by the process of promotion. When this process is

complete there follows the registration process.

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Registration
Registration is subsequent to promotion. After it has been registered a company is
issued with a special certificate known as “certificate of incorporation” and after this
the company is considered incorporated and it is ready to do business.

PROMOTION AND REGISTRATION OF COMPANY (S. 450 OF COMPANIES ACT.)

A. Promotion
The concept of promotion of a company is not provided for in the companies Act, 2002
since it more dwells in business than it does in law. Generally promotion involves the
following functions/activities 21:
i. Conception of an idea with a business dimension or opportunity
ii. Assessing the strengths and weaknesses of the idea
iii. Resources mobilization prior to effecting the idea
iv. Obtainment of requisite number of people who are willing to associate
and form a company
v. Find out who are to be the first directors of the company and obtain their
consent
vi. Applying for the proposed name of the company
vii. Drafting the Memorandum and Articles of Association
viii. Entering into Preliminary contracts with parties who provide services
necessary in the process of formation of the company eg. Legal services.
ix. Filing the necessary documents with the Registrar of companies for
registration.
Any person who does the above functions in respect of forming a company is known as
the “promoter”

In the case of Twycross v Grant (1877)

21
ibid

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A promoter was defined as a person who undertakes to form a company with reference
to a given project and to set it going and who takes the necessary steps to accomplish
that purpose.

This necessarily implies that, before a company is registered, there are a number of
tasks related to such establishment and thus the people who set them going and who
render them accomplished are the ones referred to as the promoters.

THOSE WHO ARE NOT PROMOTERS

Not every person who does something in the formation of a company can be a
promoter. Only those who are serious about forming the company and take part in the
same from the beginning and actually to the time the company is established can be
referred to as promoters. Thus the following categories of persons have been
distinguished as being no promoters;

i. Any persons who act in professional capacity for the persons who are
engaged in procuring the formation of a company such as lawyers for
drafting documents, accountants or bankers who give financial advice.
The contribution of these people is just in helping the main actors who
are the actual promoters in the whole process of forming a company See
s. 50 (7) of the Companies Act.
ii. One can not be a promoter merely by signing the memorandum or by his
having provided money to foot formation costs.

PROMOTERS LEGAL STATUS IN RELATION TO THE COMPANY

It should be understood that the position of a promoter in relation to promotion of a
company is not one of trustee, agent, or employee nor is it one of independent
contractor.

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The promoter in any thing and at any time he engages in promotion of a company he
stands in a fiduciary relationship22 with that company. This specifically begins from the
moment the company commenced to be formed.

OBLIGATIONS OF THE PROMOTER UNDER FIDUCIARY RELATIONSHIP

The fiduciary relationship between the promoter and the company requires the
promoter while dealing with the company to observe the following:

i. He must, always, act in the best interest of the company and not to his own interests.
In what ever he does the welfare of the company must be prioritized.

ii. Though the promoter, in the whole activity of promotion, is not prohibited from
making and retaining profit, he must not make a secret profit from offering for sale to
the company, his own property.

iii. if a promoter has any interest or makes any profit out of any business transactions
has engaged himself with the company, he has one principle duty to disclose to the
independent board of directors and or members of the company such interest or profit.
The disclosure must be such that the promoter’s every interest is made known to the
company.

If the directors or the members complete the purchasing of that property, the law
relating to companies presumes that the company has agreed that the promoter gain
profit from the sale.

NATURE OF DISCLOSURE
i. it must be a full disclosure of interests including the direct and the indirect interests.

22
Is a position which entails utmost trust and competence.

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In Gluckstein v Barnes (1900)

A promoter had two interests out of selling a property to the company. He had once
purchased this property from the same company. While it was in his possession
By reselling it to the company he gained two profits
a. The principal profit arising out of resale at a higher price than he had previously
obtained it.
b. Additional profit arising out of the mortgage that was to be repaid by the
company (i.e. the property passed to the company subject to this mortgage).
The promoter only disclosed the first interest and nothing was disclosed of the second
interest.

The court held that: the promoter failed to make proper disclosure of his interests by
hiding the second interest.

ii. Disclosure of profit does not mean to account for the profit.
The promoter is not required by law to account for (give reasons for) his profit but
merely to disclose it. This was held in the case of;

Omnium Electric Palaces v Baines (1914)

In this case the promoter wished to sell a property to the company. The company was of
the view that the promoter in such sale was duty bound to account for the profit which
he would make.

The court refuted this argument and held that:

The duty of the promoter is only to disclose, he can keep the profits after this disclosure.

iii. Disclosure is required only if the property was acquired during the period of
promotion.

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This duty binds the promoter only when he is selling to the company a property which
he has obtained after the promotion has begun. The promoter is not bound to disclose if
he obtained the property any time before the promotion and the company is, in this
situation, not entitled to claim for disclosure.

It was held in the same case of Omnium Electric Palaces v Baines as cited above that:

If the profit which the promoter gains was made out of selling a property which was
acquired before the promotion began the company can not claim this profit even if the
promoter does not make proper disclosure.

CONSEQUENCES OF NON DISCLOSURE

At any time the promoter fails to make proper disclosure of his interests to the company
the company may have the following remedies.

i. Claim for damages

A claim for damages would only possible if the promoter sold the property at a price
that is more than or above its real value. All these point to breach of duty to the
company. More over the company has to prove their claim that it actually suffered a
loss due to the act of the promoter selling at that price.
See the case of Re Leeds & Hanley theatres of Varieties (1902)

ii. Rescind (annul/cancel) the contract for purchase of the property

Rescission must be done before third parties have gained any interest in the property.

iii. Retain the contract and recover any profit made by the promoter during the currency
of his promotion

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BURDEN OF PROOF
The burden of proof lies with the company i.e. it is the company which is supposed to
provide proof of its claim in order to recover the profit made by the promoter. Such
proof is usually of the following matters
i. That the promoter concealed the fact that he made secret profit it; i.e. he
failed to make proper disclosure of the same to the company.
ii. That the profit that needs to be recovered was obtained by the promoter
during the time of promotion. Refer to the case of Omnius discussed above

LIABILITIES OF PROMOTERS
Promoters have statutory liabilities due to their misconducts as shown below. this is
regardless of what time the misconduct was done;
i. Disqualification from taking part in management of the company; Under s.
197.-(I) (a) of the companies Act, Cap 212, where a person is convicted of any offence in
connection with the promotion, formation or management of a company such person
may be disqualified from being a director of the company or from taking up in any way a
management position, except with leave of court, for a period not exceeding 15 years.
ii. At winding up; Under s. 382.-(I) of Cap 212 a Promoter may be liable (a)
to repay, restore or account for the money or property or any part of it,
with interest at such rate as the court thinks just, or
(b) to contribute such sum to the company's assets by way of compensation
in respect of the misfeasance23 or breach of any fiduciary or other duty as
the court thinks just.
If has misapplied or retained, or become accountable for, any money or other property
of the company, or been guilty of any misfeasance or breach of any fiduciary or other
duty in relation to the company.

23
Doing a proper act in a wrongful or injurious manner

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REMUNERATION FOR WORK DONE BY PROMOTER

When a promoter begins promoting a company he is moved by his inventiveness only
and no contract or any form of obligation from the company wants him to do that since
the company is not yet established. In this sense, promoters are not entitled to be paid
by the company for works that he has directed to it during formation after the same has
began business since the company did not enter into any contract with him. due to this,
thus a promoter can obtain payment in the following ways as shown below.

PAYING A PROMOTER
i. He can be allowed to sell property to company at a higher price than its
value, after disclosing
ii. He may be given fully paid-up shares in the company.
iii. He may be given commission on shares sold

PRE-INCORPORATION/ PRELIMINARY CONTRACTS

Pre-incorporation contracts are contracts entered into by promoters for or on behalf of
the company before the same is formed. A promoter may enter into a contract if, for
instance, he buys say a plot where the office of the company is expected to be built, or
any thing essential to the company.

LEGALITY OF THESE CONTRACTS

Under s. 40.-(l) of Cap 212, A contract which purports to be made by or on behalf of a
company at a time when the company has not been formed has effect, subject to any
agreement to the contrary, as one made with the person purporting to act for the
company or as agent for it, and he is personally liable on the contract accordingly.
Comment;
This section suggests that, the promoter is generally personally liable for this contract.
The company can not be liable simply because it did not exist when the contract
purportedly took effect between the promoter and a third party.

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Thus, the company with reference to these contracts;

i. Is not bound see Re English colonial Produce Ltd (1906)
ii. Can not enforce these contracts and
iii. Can not ratify since promoters were not agents of the company which if it
was there it would be the principal. See (Kelner v Baxter)

B. REGISTRATION OF COMPANY
Meaning:
To register a company and to incorporate a company mean the same thing; they refer to
the act whereby one or more business men would wish to legally formalize their
activities into the form of a company. In short registering a company or incorporating a
company refers to everything done with the view to forming a company.

MANNER OF REGISTERING A COMPANY:

Registration is usually done by the person wishing to register a company delivering to
the registrar of companies a specified number of statutory documents plus paying some
necessary registration fees.

In order to form a company the following documents have to be delivered to the

registrar of companies.

i. Memorandum of Association (M.A)

This is one of the documents, created by the persons who promote a company. The
Memorandum of Association is referred to as the constitution or charter of the
company. It defines limitations of the powers of the company and sets cardinal
conditions on which alone the company is incorporated. it sets out the scope of the
company’s activities beyond which the company is prohibited to act and any act done
beyond the Memorandum is said to be ultravires. Any ultravires act is void.

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Functions of the Memorandum of Association

i. For shareholders: helps those who intend to be shareholders in the company
to determine the scope of the company’s activities i.e. which activities are
permissible and which are not. The scope of activities helps the shareholders
to have requisite knowledge of the activities of the company to which their
funds are directed. It helps also to determine scope of risks they are likely to
take in the company.
ii. For third parties intending to deal with the company; It helps them to
determine if the contract they are about to enter with the company is
accommodated in the company’s objectives.

REQUIREMENT AS TO DATE AND SIGNATURE OF THE MEMORANDUM OF

ASSOCIATION
The memorandum of association has to be dated and signed by each subscriber to the
memorandum. The dating and signatures have to be witnessed by a third person (an
attesting witness, an advocate or magistrate). These persons are called subscribers
because they are required to subscribe for one or more of the shares of the company
they wish to establish. (S. 5 of the Companies Act, Cap 212)

FORM OF MEMORANDUM OF ASSOCIATION

The questions as to what form a Memorandum of Association should take is determined
by s. 12 of the Companies Act. According to s. 12 (i) of the Company’s Act there are two
types of forms a memorandum may take and these are as follows;
1. Statutory forms provided in the Act.
(a) The form provided under Table B: for the memorandum of association of a
company limited by shares;
(b) The form provided under Table C: for the memorandum and articles of
association of a company limited by guarantee and not having a share capital;

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(c) The form provided under Table D: for the memorandum and articles of
association of a company limited by guarantee and having a share capital;
(d) The form provided under Table E: for the memorandum and articles of
association of an unlimited company having a share capital,
NOTE: types of companies are discussed later in this work.
2. Modified forms
If a person who wishes to form a company does not want to use any of the statutory
forms provided above, he may modify them and come up with a different form of
Memorandum of Association provided that the resulting Memorandum is as near to the
statutory forms as possible.

THE CONTENTS OF THE MEMORANDUM OF ASSOCIATION

According to s. 4 (1) of the Companies Act, the memorandum of Association is required
to be printed in English Language and must contain the following clauses:
A. (i) By s. 4 (1) (a) THE NAME CLAUSE- The ending word.
(a) For Public Company: The name of the proposed company must end with the
words “public limited company” or in short plc. E.g. CRDB, Plc.
(b) For company limited by shares or guarantee: The name must end with the
word “limited” e.g. Matemanga Company Ltd.
(c) For Non-Profit Companies: Any company licensed by the registrar may be
registered as a private company without ending with the word LTD, if it is formed for
promoting commerce, art, science, education, religion, charity or any other useful or
social object, and intends to apply its profits, if any, or other income in promoting its
objects, and to prohibit the payment of any dividend to its members. (See s. 32 of the
Act)

On registration, non-profit companies enjoy all the privileges and all the obligations of
limited companies.

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(ii) WHAT NAMES ARE ACCEPTABLE

Under s. 30 of the Act, the name is not acceptable in the following situations i.e. if in the
opinion of the Registrar, is
 The same as the name of a company already registered
 Too like a name appearing in the index of company names: the name to be too
like another it must be such that it causes confusion to people who deal with it.
see Society of Motor Manufacturers and Traders Ltd vs. Motor Manufacturers
and Traders Mutual assurance Co. Ltd (1925) 1 Ch 675
 Undesirable: Under s. 33 of the Act the name of a company may be undesirable
if in the opinion of the minister (Industry and commerce) it gives a misleading
indication as of the nature of its activities as to be likely to cause harm to the
public.
(iii) The name of the company must be published. According to s. 112 of Cap 212
publishing means:
 to affix or paint and keep the affixed or painted name outside of
outside of every office or place in which its business is carried on, in a
conspicuous position, in easily legible letters;
 To have the name engraved in legible letters on its seal
 To have its name and its registered office mentioned in legible letters in
all of the following documents;
i. business letters of the company
ii. in all notices and other official publications of the company,
iii. and in all bills of exchange, promissory notes, endorsements,
cheques and orders for money or goods purporting to be
signed by or on behalf of the company, and
iv. in all invoices, receipts and letters of credit of the company.
(iv) Improper use of “limited” or “Public limited”. There are various restrictions, under
s. 35 of Cap 212 as to the use of these two and these are as follows;

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 Any person who trades or carries on any business or profession is

prohibited to conduct his business under a name or title of which ''limited'' if
the business is not incorporated
 A private company is prohibited to conduct its business under the name
of ''public limited company'' and
 A public company is prohibited to conduct its business as if it were a
private company.

ii. THE REGISTERED OFFICE CLAUSE

Here the memorandum must state that the registered office is situated say in Tanzania.
This clause establishes the nationality of the companies. As you already know that
companies are persons, they have personality of their own. Where their offices are
established is where they are said to have been born and that is where their nationality
is.
According to s. 110. (I) A company at all times must have a registered office to which all
communications and notices may be addressed.

iii. THE OBJECTS CLAUSE

Under s. 4 (1) (b), the memorandum of Association must contain the objects of the
company. This, as seen herein above, is the most important part of the memorandum
since it sets out in express terms the business or businesses of the company. The objects
clause of the memorandum restricts the company from doing any business which is not
therein mentioned.

IV. LIABILITY CLAUSE

Under section 4 (2) of the Companies Act, Any company whose members liability is
limited by shares or by guarantee the memorandum of Association must so state that
the liability of members is so limited
s. 4 (2) provides

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See also s. 4 (3). The liability clause serves to define nature of liability of the members.

V. CAPITAL CLAUSE
If the company has a share capital, under its capital clause, the memorandum of
Association is supposed to state, in respect of the shares the following things;
(a) The total amount of share capital of that company, which is referred to as
Authorised, Nominal or Registered capital.
(b) Division of the total share capital into share units of specified value, known as per or
nominal value of a share. E.g. Total share capital is T shs. 500/= is divided into units of
500 shares, each of which has nominal or per value of Tshs 1/=

See s 4 (4) (a) of the companies Act

For a company limited by guarantee must state that each member of the company
guarantees to contribute to a certain amount not exceeding a mentioned value to the
companies’ assets when it is wound up while he is still a member or one year after he
has ceased to be a member. See section 4 (3)

VI. THE ASSOCIATION CLAUSE/ SUBSCRIPTION CLAUSE

For a company limited by shares the memorandum must show against the name of each
subscriber the amount of shares he takes. The subscribers are not allowed to take less
than one share.

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See s. 4 (4) (b) and (c)

ALTERATION OF THE MEMORANDUM

After it has been made the memorandum of Association can not be altered unless by
the procedures stated by the Companies Act, which is only by special resolution of the
company.
See generally s. 8 of The Companies Act
Alteration envisaged in this section allows for instance a private company to be changed
into a public company by altering its memorandum and vise versa.

ii. ARTICLES OF ASSOCIATION

Is another constitution of the company which regulates relations between the company
and its members in dealings between themselves.
Articles of Association usually outline the duties, rights and powers of the governing
body as between themselves and the company at large, and the mode and form in
which the business of the company is to be carried on and in which changes in its
internal regulations may be made.

Every company must have a memorandum and articles of association. These are
prepared by the company and are delivered to the registrar when the company applies
for registration.

However, companies limited by shares (private or limited), may not have to prepare
articles of association and instead adopt Table A which is provided by the companies
Act.
The articles must contain the regulations of the company.
See s. 9 (1) of the companies Act.

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There may in the case of a company limited by shares, and there shall in the case of a
company limited by guarantee or unlimited, be registered with the memorandum and
articles of association, which shall be signed by the subscribers to the memorandum
and shall contain the regulations for the company.

FORM OF THE ARTICLES

Unless the company adopts table A for its articles, the articles of association must be in
the following form:
(a) in the English Language
(b) must be printed
(c) divided into consecutively numbered paragraphs and lastly
(d) signed by each subscriber to the memorandum of association in the presence
of at least one witness, who shall attest the signature and add his occupation
and postal address.

THE LEGAL EFFECT OF ARTICLES OF ASSOCIATION

The articles after registration have the effects of a valid contract that binds between the
company and its members (whether or not they signed). S.18 (1) of the companies Act
reads;
Subject to the provisions of this Act, the memorandum and articles shall, when
registered, bind the company and the members thereof to the same extent as if
they respectively had been signed and sealed by each member, and contained
covenants on the part of each member to observe all the provisions of the
memorandum and of the articles.
The section implies that:

i. The matters therein included can be enforced by the company against its
members
ii. Members can enforce them against the company.

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iii. Members can enforce them between themselves

Note: the company acts as a contract only as between the company and members. The
articles can not be enforceable by any person who is not a member (e.g. lawyers,
accountants, directors if they are not members etc.) This is so even when these persons
have been named and their rights have alongside their names been mentioned.

Eley v Positive Government Security Life Assurance [1876]

In this case, where one Mr. Eley sought to rely on articles of association of a company
which had named him as its lawyer, to enforce his professional services it was held that,
the mention of his name as a lawyer in the articles did not give him the right to be a
member of the company. Therefore the same principle applies to every person who is
not a member.

ALTERATION OF ARTICLES AND RESTRICTIONS THERETO

Articles of association can only be altered by the company passing a special resolution
for that effect. See s. 13 (1) of the companies Act.

RESTRICTIONS AS TO ALTERATION OF THE ARTICLES

The alteration should not authorise the following things:

i. No more subscription; should not require members to subscribe for more

shares than they used to hold before the alteration was made

ii. No more liability; should not increase liability of the members to contribute to
the share capital to the company.
Section 20 of the Companies Act, 2002 reads;
Notwithstanding anything in the memorandum or articles of a company, no
member of the company shall be bound by an alteration made in the

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memorandum or articles after the date on which he became a member, if and so

far as the alteration:-
(a) requires him to take or subscribe for more shares than the number
held by him at the date on which the alteration is made, or
(b) in any way increases his liability as at that date to contribute to the
share capital of, or otherwise to pay money to, the company:

iii. Any alteration must be made in good faith for the benefit of the company as a
whole: This was held in the case of Sidebottom v Kershaw, Leese & Co [1920] 1
Ch 154, CA.

See also the following cases

 Greenhalgh v Arderne Cinemas [1951] Ch 286 at 291 or [1950] 2 All ER
1120.
 Allen v Gold Reefs of Africa [1900]

These cases suggest that any alteration must be done in good faith and for the benefit
of the company as “an entity” or the company as “an individual hypothetical member”

iv. The articles should not conflict with the memorandum of association
In Guinness v Land Corporation of Ireland Ltd (1882) 22 ChD. 349 at page 376 it was
held that
“The articles are subordinate to the memorandum; any clause in them which is
inconsistent with the memorandum, is overruled”

iii. DECLARATION OF COMPLIANCE

This is evidence to the registrar that the company complied with all the requirements
before it is registered. This declaration of compliance should be prepared by either:

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(a) an advocate of the High Court engaged in the formation of the company,
or
(b) by any person named in the articles as a director or secretary of the
company,

This document has to be delivered to the registrar of companies together with the
memorandum and articles of association.

See s. 16 (2) of the Companies Act

A statutory declaration by an advocate of the High Court engaged in the formation of
the company, or by a person named in the articles as a director or secretary of the
company, of compliance with all or any of the said requirements shall be produced to
the registrar, and the registrar may accept such a declaration as sufficient evidence of
compliance.

IV. PARTICULAS OF THE FIRST DIRECTORS, SECRETARY AND REGISTERED OFFICE

S. 190 of the companies Act requires the director to either himself or through his agent
to deliver to the registrar his consent in writing to act as a director of that company. S.
210 (1) of the companies Act requires the company to keep a register of directors and
secretaries at its registered office. The nature of the content of the register is based on
two cases

ON THE CASE OF INDIVIDUALS (director and secretaries)

By s. 210 (2) (a) the register should contain such things as;
i. his present name and surname,
ii. any former name or surname,
iii. his usual address,
iv. his nationality of origin
v. his business occupation, if any,

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vi. particulars of all other directorships held by him and

vii. the date of his birth;

ON THE CASE OF THE CORPORATION

s. 210 (2) (b) according to this section the register should also contain the
i. corporate name and
ii. registered office

On top of keeping the record of these particulars, the company is under a duty placed
on it by s. 210 (4) to deliver a return that contains these particulars to the Registrar for
registration.
Subsection 4 reads as follows:

PAYMENT OF FEES
S. 452 of Companies Act requires payment of necessary fees for registration purposes.
Once these fees have been paid the registrar then can go forward to register the
company.

INCORPORATION OF A COMPANY
See s. 15 of the Act
On the registration of the memorandum of a company the Registrar shall certify under
his hand that the company is incorporated and, in the case of a limited company, that
the company is limited, and, in the case of a public company, that the company is a
public company.

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CONSEQUENCES OF INCORPORATING A COMPANY

The doctrine of incorporation
Though a company is established by people, it is actually a different and separate entity
from the persons responsible for its establishment. This is what is known as the concept
of corporate personality of a company. This is the effect of incorporating a company and
in company law it is known as “the veil of incorporation”.

Generally the company once incorporated gains a corporate personality. The doctrine of
incorporation of companies states that, once a company is incorporated becomes a
legal person independent from its members.

This doctrine was established in the case of Salomon v Salomon & Co Ltd [1897] AC 22
Facts of Solomon’s case are as follows:
Mr. Solomon had owned a business which he later turned into a company in
which he held more shares. The rest of the shares were owned by his family.
Each member of his family held one share. He loaned some money to the
company on the security of the assets of the company, thus becoming one of
the creditors of the company. When the company was wound up, the other
creditors claimed that they be treated with preference over Mr. Solomon in
repayment of their money from the assets of the company, because Mr.
Salomon was the owner of the company and thus he and his company were one
thing.

The court held that Mr. Salomon could have preference because he and the company
were different persons. Each one of them could have liabilities of ones own and none of
them is responsible for another’s liabilities.

THE EFFECTS OF THE DOCTRINE OF INCORPORATION ARE

i. Perpetual succession

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Existence of the company does not depend on the life of the members to say that if the
members die the company will also die. What ever happens to members will not affect
existence of the company. So the management may be changed, so may the members
but these do not affect the company.

ii. Property ownership

The property of the company belongs to it. It is in no way owned by the members of the
company. Even the person who established it may be convicted of theft of the
company’s property.

Macaura v Northern Life Assurance [1925]

A man sought to claim on an insurance policy cover he had applied in his name for a
property which he sold to a company. He insured the property against fire.

The court held that: he could not claim on it because it was not his property but that of
the company.

iii. Bears own liabilities

The liabilities of the company are its own. The members will not be liable to pay for the
company’s debts or the company, the members’ debts.

iv. Its ownership is separate from its management

The owners are the shareholders; these are separate from the company which is
represented by the corporate board. See s. 15 (2) of the Companies Act.

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v. Gains capacity to sue and be sued in its own name

When a wrong act has been done against the company it is only the company which can
sue. This is decided by a simple majority of the company. No individual member of the
company may sue for the company.
This rule that only the company through simple majority may sue for it was established
in the case of Foss v Harbottle [1843], 2 Hare 461, 67 ER 189

THE DOCTRINE OF ULTRA VIRES

Ultra vires means beyond the powers or authority granted. Usually a company once
incorporated is supposed to act within the powers granted to it by the objects clause of
its memorandum of association. If in any way it acts beyond those powers the company
is said to have acted ultra vires its powers and thus the act becomes void. There many
situations, however, in which a company’s acts may be declared ultra vires, besides
those arising from acting beyond the Memorandum of Association. See the nature of
ultras vires acts generally identified hereunder.

NATURE OF ULTRAVIRES ACTS

i. Statutory ultra vires acts; An act may be ultra vires the Companies Act, cap 212
An act may be ultra vires the law and in most cases the law relating to companies i.e.
the Company’s Act. Any act is ultra vires the companies Act if it has been done in
disregard of its provisions.

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ii. An act may be ultra vires the Memorandum of Association of the company
Any act that has been undertaken while not authorised by the objects clause of the
memorandum of Association is said to be ultra vires the Memorandum of association.
iii. An act may be ultra vires the Articles of Association of the company
An act is ultra vires the Articles of association if it has been done against stipulations of
the Articles.
iv. An act may be ultra vires the directors.
An act is ultra vires directors if it is undertaken while the directors are devoid of power
respecting such act.

CONCEQUENSES OF ULTRA VIRES TRANSACTIONS

When any act done by the company is ultra vires, the following are the legal
consequences as regards liability arising out of that act.
i. All ultra vires acts are void and a company can not sue or be sued on them.
ii. Ultra vires act can not be ratified by the company
iii. Directors may be personally liable on transactions

THE DOCTRINE OF CONSTRUCTIVE NOTICE

This doctrine explains why the company can not be sued for ultra vires acts. The reason
why the company can not be sued for ultra vires acts is because it did not authorise by
its memorandum that the act be done. Also a third party can not sue the company since
in law there is a presumption that he was aware of the powers of the company as
stipulated in the memorandum of association whether he saw it or he did not see it
before entering into the transaction with the company. The presumption that all
persons know of the memorandum and articles of association culminates into what is
known as the Doctrine of Constructive Notice. The doctrine is justified in that, the
memorandum and articles of a company are public documents that upon payment of a
fee to registrar any person can view. It is from this premise that every one is considered

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to be knowledgeable of them and consequently depriving them of the right to claim

against the company except where the doctrine of indoor management applies.

DOCTRINE OF INDOOR MANAGEMENT- exception to doctrine of constructive notice.

According to Royal British bank v Turquand (1856) 6E & B 327, The doctrine of indoor
management states that an outsider to the company is presumed not to know what may
or may not have happened within the company in its day to day activities. The doctrine
seeks to protect the outsider in circumstances when he has entered into a contract for
transactions that though are within the powers of the company, they are not proper
since certain procedures were not followed.

BOX NO. 10

EXAMPLE: when a director of a company has applied for a loan from a bank without company
resolution for the same if the articles requires it. In this case failure to pass a resolution by
the company under the doctrine of indoor management does not concern the outsider and
thus the contract resulting into the transaction for the loan can not be nullified.

Thus, though an outsider is presumed to know what is in the memorandum and articles,
he is not so presumed to know if the same has been followed or not.

WHERE THE DOCTRINE OF INDOOR MANAGEMENT DOES NOT APPLY

 where the outsider has knowledge of the irregularity
 it does not apply to illegalities within the company i.e. it applies to irregularities
only.

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PRINCIPLE OF APPARENT AUTHORITY- why personal liability?

Where a director of a company does an ultravires act, the act can not bind the company
and thus he is personally liable. The liability stems from the principle that, by his
position as a director, any outsider who deals with the company in good faith would
assume that the director has the requisite authority to deal with him in respect of the
transaction.

LIFTING THE VEIL OF INCORPORATION: exposing managers to liability

The company acts through the board of directors. Usually what the directors do is
regarded to have been done by the company itself and this is what is referred to as the
Veil of incorporation i.e. the acts of directors are identified with the company. However
there are situations when the directors’ acts are not imputed on the company. This
happens, for instance, when they act ultra vires the memorandum of association,
Articles of Association, the Companies Act, or their powers. In this case the directors are
liable personally and this is what is referred to as lifting the veil of incorporation, by
which the law refuses to identify them with the company.

The following acts may make the directors and all those who manage the company to be
personally liable instead of the company:

I. LIABILITIES ARISING FROM ACTS ULTRA VIRES THE COMPANIES ACT, CAP 212
(a) When company operates with less than minimum number of members
s. 26 of the Act creates a several liability for all the members if the company
operates with the number of members below two for a period of more than six
months. If the company enters into any contracts after the six months the
members will personally be liable. The section reads;

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(b) When there is misuse of the company resources

s.112 (4) (a) (b) and (c) provides for other circumstances in which members may
be personally liable thought they act for the company, as follows: If an officer of
a company or any person on its behalf
(i) Misuse of company seal; Uses or authorises the use of any seal
purporting to be a seal of the company without its name; or

(ii) Misuse of company business letter or official publications; this is if

officer of the company issues or authorises the issues of any business
letter of the company or any notice or other official publication of the
company, or

(iii) Signing negotiable instruments or orders for money or goods on

behalf of the company without mentioning company name or
registered office; if any company officer signs or authorises to be signed
on behalf of the company any bill of exchange, promissory note,
endorsement, negotiable instrument or order for money or goods
wherein its name and registered office are not mentioned in manner
aforesaid; or

(iv) Issuing invoice, receipt or letter of credit without company

mentioning name issues or authorises the issue of any invoice, receipt or
letter of credit of the company wherein its name and registered office is
not mentioned in manner aforesaid,

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The liability
For the acts done in a manner prohibited as in the circumstances above, any officer shall
be liable to;
 a fine and
 shall further be personally liable to the holder of the bill of exchange,
promissory note, negotiable instrument or order for money or
goods for the amount thereof unless it is duly paid by the
company.

(c) When the undertaking done by the officer is fraudulent

S. 383 of the act holds any person who has carried on the business of the
company with intent to defraud creditors of the company or creditors of any
other person, or for any fraudulent purpose, liable to make such contributions to
the company's assets as the court thinks just.
In the case of James v. Lipman (1962) 1 WLR 382, for instance, Mr. Lipman entered into
a contract for the sale of land. However, Mr. Lipman changed his mind and did not want
to complete the sale. He formed a company in order to avoid the transaction and
conveyed the land to the company instead. He then claimed that he no longer owned
the land and could not comply with the contract. The Court found that the company was
but a façade for Mr. Lipman to hide behind and granted an order for specific
performance.

(d) When Trading is wrongful; the directors would be liable if they engage
themselves into any wrongful trading for the company. See s 384 of cap 212.

JUDICIAL LIABILITIES
iv. During wars it is not allowed to trade with the enemy country

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CAPITAL OF THE COMPANY: share capital

Usually companies have one or more definite sources of capital. Some may raise their
capital through issuing of shares and yet others through loan capital or even both. The
shareholder is required to pay to the company for each share that has been allotted to
him. This part shall deal with shares and matters relating thereto only.

WHAT IS A SHARE?
Generally, a share is a unit of the total initial capital of the company. It usually does have
a specific value expressed in terms of money. This is to say a company’s capital is built
up on these shares.

According to Farewell J in the case of Borland’s Trustee v Street (1901) 1 Ch 279 at 288
a share was defined as

"A share is the interest of a shareholder in the company measured by a sum of money,
for the purpose of liability in the first place, and of interest in the second…. A share is
not a sum of money… but is an interest measured by a sum of money and made up of
various rights contained in the contract (the effect of articles is a contract between
shareholders and a company), including the right to a sum of money of a more or less
amount."

HOW CAN A PERSON BECOME A SHAREHOLDER OF A COMPANY?

There are three ways in which a person may become a shareholder.
i. by being a subscriber to the memorandum of association every person is required to
take not less than one share.
ii. the company, after the memorandum has been registered may issue more shares and
invite the public to offer for subscription of shares in the company. The person whose
offer to buy is accepted and subscribes for shares in a company becomes a shareholder.
iii. by acquiring shares from another holder through transfer.

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HOW TO INVITE THE PUBLIC TO OFFER FOR SHARES

The public companies will usually invite the buying of shares through a document
known as an offer document whose meaning is provided by section 2 of the companies
Act as:

“…any document, prospectus, notice, circular, advertisement, or other invitation,

offering to the public for subscription or purchase any shares or debentures of a
company or any interest therein, or any right to acquire any shares or debentures or any
interest therein;

Procedure relating to offer documents

i. DATING: an offer document must be dated, and the date is taken as the date
of publication of that offer document. See section 46 of the Act.

ii. APPROVAL: Before such registration a copy of offer document has to be

delivered and approved by the Capital Markets and Securities Authority. See s.
49 (3) of the Act. And the offer document must so state that the copy was so
delivered see. s. 49 (2) (a) of the Act.

iii. REGISTRATION: Before an offer document is issued it must be delivered to the

registrar for registration on or before the date of its publication. See s. 49 (1) of
the Act.

iv. SIGNED BY DIRECTORS: It must be signed by every person who has been
named therein as the director, or his agent who has been authorised in writing.
See s. 49 (1) of the Act.

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v. REPORTS: it must contain reports as required by the minister of finance from

time to time, or by the Capital Markets and Finance. See section 47 (1) of the
Act.

Only after the above requirements have been met and the offer document registered
then it can be issued to the public to invite them to offer for shares in a particular
company.

NOTE:
The shares offered to the public must not exceed the capital authorised by the capital
clause in the company’s memorandum of Association.

FORMS OF SHARES
A share capital can be expressed in any of the following categories as per each
transaction of issue.

i. Authorised share capital (nominal capital)

This is the amount of share capital which the memorandum of association authorises
the company to issue.
ii. Issued share capital
This is the amount of the company’s share capital which has been so far issued to the
share holders.
BOX NO. 11

EXAMPLE: A nominal capital (authorised capital) of a company is, say, 500 shs divided into
500 shares of shs 1 each. If the company, out of 500 shares, issues 250 shares of 1 sh. each,
the 250 shares amount to issued share capital.

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MODES OF ISSUING SHARES

(a) Issue of shares at Premium
A share is issued at premium if it is issued at a higher price than its face value. s. 59 of
the Companies Act allows companies to issue shares at premium but the proceeds of
such sale must be deposited in a special account known as the share premium account.

APPLICATION OF THE FUNDS IN SHARE PREMIUM ACCOUNT

According to the same section, the funds in a share premium account can be applied in
the following matters;
i. paying up unissued shares of the company to be issued to members of the
company as fully paid bonus shares,
ii. Writing off -
 the preliminary expenses of the company; or
 the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company, or in providing for the
premium payable on redemption of any redeemable shares or of any
debentures of the company.
(b) Issue of shares at Discount
A share is issued at a discount if it is issued at a lower price than its face value. s. 60 of
the Companies Act allows companies to issue shares at discount with the following
limitations;
i. Such shares should be of a class of shares already before
ii. Such issue of the shares must be authorised by resolution passed in general
meeting of the company, and must be sanctioned by the court.
iii. the shares to be issued at a discount must be issued within one month after the
date on which the issue is sanctioned by the court
iv. court or within such extended time as the court may allow.
v. the resolution must specify the maximum rate of discount at which the shares
are to be issued;

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vi. Issue of shares at discount must not be done within a year after the company
commences business. the company was entitled to commence business;

(c) Issue of shares as fully paid up bonus shares eg. Those given to promoters after
establishing the company.
iii. Paid up capital
Once the shares have been issued to a shareholder he may not be required to pay for
them to their full value. E.g. if he has subscribed for 20 shares @ 2 shs, he may pay
initially 1 sh. fore each share he has taken and he may pay for the rest later. Thus he
may pay only 20 shs instead of 40.

iv. Uncalled share capital / reserve capital

This is the amount of share capital which has so far been issued but the share holder has
not paid for it. It is the part remaining unpaid of the total shares allotted to a share
holder. The company has the right to call it up (require payment) at any time.

The uncalled share capital is the liability on the part of the share holder to contribute to
the assets of the company in case it is being wound up. If the share capital is called at
the time of winding up it is referred to as reserve capital and in any other circumstance
it is known as the uncalled share capital.

NATURE OF SHARES
i. a share as an expression of interest of shareholder
Every share represents the interests of its holder (shareholder) in the company which
issued the share or shares. The reason why a share is defined in terms of money is two
fold:

(a) for the purpose of establishing liability of that member to that particular
company

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(b) for the purpose of defining the shareholder’s rights in the company. Refer
to Borland’s case discussed above.
Usually shares carry with it some rights which a member can enforce against a company.
These rights may vary from one share holder to the other depending on their classes of
shares they belong.
iii.. A share as a movable property.
As a movable property as share can be transferred and transmitted.
TRANSFER OF SHARES
A share is transferred when a share holder voluntarily conveyances his ownership rights
to a person who wishes to be a member in the company.
TRANSMISSION OF SHARES
A is transmitted when it is transferred by the operation of law e.g. when a shareholder
dies, become insolvent or liquidated. see regulation 26 of table A to Cap 212.

SHAREHOLDERS RIGHTS
You should understand that class rights and shareholders rights are two different rights
of members in a company.

There is a general presumption of company law subject contrary provision in the

memorandum or articles of association that the rights of shareholders are as follows:

a. equal rights to receive dividend attached on that class of shares.

b. equal rights to vote unless that right is restricted. Usually a certain number of
votes will equal 1 share. Example one vote for each ten shares.
c. equal rights to transfer shares
d. equal right to receive surplus assets
e. equal rights to attend meetings and vote

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These rights are equal to all share holders only if there is only one class of shares and in
a situation where there are in a company more than one class of shares, there could
possibly be varied rights of shareholder determined by a particular class of shares that
they belong to.

So the rights to vote, to dividends and attend meetings will automatically differ from
one class to another. These are what are known as class rights.

CLASS RIGHTS
Class rights, as distinguished from shareholders rights, are derived from different types
of shares a company can offer. Shareholders who take a particular type of shares will
belong to that particular group and automatically the rights obtaining there under are
the rights he can enjoy under his class of shares.

CLASSES OF SHARES
There can be issued by the company, the following types of shares but such provision
must be guided by the memorandum and articles of association.

1. Ordinary shares/ Equity shares

These are the type of shares which only carry normal rights such as the right to vote at
company meetings. The holders of this type of shares are not entitled to dividends
unless otherwise stated in the articles of association.
2. Preference shares
These are types of shares whose holders enjoy preference over all the ordinary
shareholders. These are entitled to a fixed rate of dividends that is only payable out of
earned profits of the company. Preference shareholders have no voting rights.
Preference is in respect of the following:
i. dividends and
ii. return of surplus capital

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A. Dividends
Dividends are calculated out of the paid up share capital e.g. If a shareholder paid up for
250 shares, a percentage for dividend is fixed o n this amount; it may be 10% of the paid
up capital that is 25 shs will be preferential dividend which will be paid out of profit
before any shareholder is paid.

B. return of capital on winding up or when there is a reduction of capital

Here there are two situations:

(a) If priority on preference shares is conferred by the articles of association in respect

of return of capital, such priority is said to be exhaustive in the sense that the holders
of preference shares will enjoy only that priority; they will not participate in any surplus
assets.

(b) If priority is not conferred by the articles (i.e. the articles is silent on such priority)
the preference shares will not have any priority over ordinary shares in return of capital.

Note: so the test is if the priority is conferred by the articles of association to the
preference shareholders. Silence of the articles implies no such right.

Consider the following example

For a company which has two classes of shares:

i. Ordinary share capital of 1000 shs.

ii. Preference share capital of 500 shs

If the articles confer on the preference shares the priority on winding up, how much will
each class receive if the company has assets amounting to:

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(a) 450 shs

(b) 3000 shs.

Solution:
(a) Preference shareholders= 450
Ordinary shareholders= nil

(b) preference shareholders =500/=

Ordinary shareholders = 2500/=

In addition if articles do not say anything on the priority of preference shares then each
of the two cases the assets will be returned on equal basis.

VARIATION OF CLASS RIGHTS

You already know now what class rights are, class rights can not be varied in any way to
the detriment of the share holders who constitute that class.
According to Pender v Lushington [1877] 6 Ch.D 70 , a member is entitled to enforce
these rights as personal rights against the company even if the decision to so alter has
been made by the majority members of the company.
Categories of preference
Preference shares may be in any of the following forms:
i. they may be ‘participating’, if its holders are also entitled to participate in
ordinary dividend, in cases where it exists.
ii. they may be ‘non-participating’; these are those whose shareholders, in
addition to preferential dividends, are restricted to participate in ordinary
dividends. As a general rule preference shares are always non-participating
unless they are expressed by the articles to be participating.

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iii. They can be cumulative, in the sense that, if dividends on preference shares
are at any given time not declared and paid, they will accumulate and be given
later and alongside all the other preference dividends before they are shared out
to any ordinary share holders.

If the dividends have accumulated but not yet paid and the company is liquidated, the
arrears will not be paid unless they had been declared or it is provided in the articles of
association that the arrears can be paid out of existing assets at winding up.

3. REDEEMABLE SHARES
These are the shares to which the right to redeem (buy back) by the company is
attached. Redeemable shares can be made out of ordinary or preference shares, of
importance is that the articles must authorise the issuing of such type of shares.

4. DEFERRED / FOUNDERS SHARES

These are those which stand in priority after ordinary shares. They have more voting
rights than ordinary shares.

REGISTRATION OF CHARGES
Introduction
Capital of the company is not only raised by shares but also by other means. When there
is need to raise money more than by shares the company subject to powers granted to
it by its articles can borrow some money from banks or any other financial institutions.
The borrowing may be done through loans, overdrafts, debentures etc.
A bank can not give an advance unless it is dead sure that the borrower has sufficient
security to offer to the bank. Banker’s securities take many forms but under this part
only a charge as a security is discussed.

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Meaning of a charge
This is an interest that a company creates on its assets in favour of any lender of money
to secure the latter’s loan to the company. To charge is to create a claim (interest)
against ones property in favour of a particular person to secure a loan, which that other
person (a banker or any other person) advances to you.

Therefore a can be defined as a form of security which gives a creditor the right to
receive payment from a specific fund or from the proceeds of the sale of a specific
property or assets of a business, upon default by the borrower.

When the lender has a charge over an asset of a company, he may have the power to
sell that asset and recover his debt upon the borrower’s default on a repayment of such
debt.

A charge may be created out of a mortgage of any property of the company, say, land or
even shares. See s. 97 (5) of the companies Act, it reads

TYPES OF COMPANIES’ CHARGES

Fixed charge
A fixed charge attaches to the specific intended assets upon its creation. A fixed charge
is mostly used for fixed assets that a company retains for a lengthy period of time.

Under a fixed charge the company remains in possession of the company’s assets but it
is restricted by the terms under which the charge was created to be specific the
company can not deal with the charged property in any way unless with the lender’s
consent.
The most important characteristic of a fixed charge is that it attaches to the property
once it has been created.

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FLOATING CHARGE
Any charge is a floating charge if it has the following characteristics:

(i) It is a charge created on a class of assets of a company (both present and

future assets);
(ii) That class of assets should be one which, in the ordinary course of the
business of the company, would be changing from time to time; and

(iii) The company is free to deal with the assets in the ordinary course of its
business until some further step is taken by or on behalf of those in whose
favour the charge was created.
These characteristics were laid down in the milestone case of; Re Yorkshire
Woolcombers Association [1903] 2 Ch. 284

Subsequent cases have determined that the third characteristic is the most significant
feature of a floating charge and which distinguishes a floating charge from a fixed
charge.

Usually, while the company goes on dealing with the assets in their business; buying and
disposing of them, a floating charge does not attach to relevant assets until the charge
crystallizes.
Meaning of crystallization
It refers to a point at which a floating charge can be treated as if it had been created as
a fixed charge, in other words, a floating charge at this point is turned into a specific
charge.

WHEN DOES CRYSTALLIZATION OCCUR?

(i) When the company ceases to carry on its business
(ii) When the company is liquidated (is wound up)

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(iii) When a creditor enforces his security by the appointment of a receiver

(iv) When the holder of the charge acts with authority from the contents of the
debenture to convert the floating charge into fixed charge.

REGISTRATION OF CHARGES
A charge whether fixed or floating that has been created in Tanzania to be effective it
must be registered with the registrar of companies within 42 days of its creation.
S. 96(1) of the companies Act reads; ‘…every charge created by a company registered in
Tanzania shall, so far as any security on the company's …property is conferred thereby,
be void against the liquidator or administrator and any creditor of the company, unless
the prescribed particulars of the charge, together with the instrument, if any, by which
the charge is created or evidenced are delivered to or received by the Registrar for
registration …within forty two days after the date of its creation.

S. 97-(i) identifies charges which may be registered as follows:

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For the purposes of companies Act, the intellectual property is defined at s. 97 (5) (c) as
follows:

Who has the duty to register charges, the company or the chargee?
By s. 100 the duty to register a charge is placed upon the company but in casse the
company fails to so register any interested person may do so with the consequences
upon the company.

however if any person who is interested applies to register himself the company will be
liable to pay him the charges he incurred in respect of such registration see s. 100 (2).

Effect of non registration of charges

See s. 100 (3) of the Act

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1. This section creates liability on the part of any person who has been part to that
default to pay a fine.
2. According to s. 96 (1) the charge becomes void against any creditor whatsoever of
the company.
3. Once a charge is declared void by subsection (1) of s. 96 the money secured
immediately becomes payable. See s. 96 (2)

DUTY TO KEEP REGISTER OF CHARGES BY THE COMPANY

The company after registration of every charge is supposed to keep a register of charges
at its registered office. All the charges that have been created on the assets of the
company must therein be recorded. See the following section of the Act.

These must be made available at any time to creditors of the company as well as
members. Usefulness of this practice is that a lender can know his position in respect of
that property if he decides to give a loan to the company.

5.6 ACCOUNTS, AUDITING AND ANNUAL RETURNS

The company after registration always operates under the philosophy of disclosure of
information. The rationale behind this philosophy is to protect the rights of the third
parties who deal with the company such as the creditors to the company.

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The company to serve this purpose is required to keep statutory registers at its
registered office so that every person can access them. These registers are such as the
following:
i. Register of all members of the company as required by s. 115 of the Act.
ii. Register of debenture holders as required by section 88 (1) of the Act
iii. Register of charges as discussed above, see s. 108 (1) of the Act
iv. Register of directors and secretaries see s. 210 (1) of the Act
v. Register of directors share holding see s. 205 (1) of the Act
vi. Accounts and audit records see chapter V of the companies Act.
These records are subject of this part of the course
Every company is supposed to keep proper books of account in either English or Swahili.
According to s. 151 (4) the period in which the company is so supposed to keep these
books of account is six months after the have been prepared.

According to s. 151 (3) the directors usually determine whether the records have to be
kept at the registered office of the company or any other place but within Tanzania.

BOOKS TO BE PREPARED BY THE COMPANY

The duty to prepare books of accounts is two fold, if a company is only one it should
prepare its accounts known as individual accounts. If it is a parent company with
subsidiary company (ies) then group accounts involving all companies must be prepared.

The company must prepare the following books of account:

i. the profit and loss Account
ii. An income and expenditure Account for a company not trading for profit.
iii. The balance sheet as at the end of accounting period
iv. A cash flow statement.

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By s. 158 (7) these books are also known as “Annual Accounts” of the company
THE NATURE OF THESE BOOKS
These books are supposed to disclose and explain such things as:
i. the company’s transactions
ii. accurate financial position of the company

These records must be capable of helping the directors of the company ensure that the
prepared
i. Company’s balance sheet
ii. Profit and loss account
iii. Cash flow statement
Have complied with the provisions of this Act

See s. 115 (1) of the Act, it provides as follows:

PARTICULAR CONTENTS OF THE BOOKS OF ACCOUNT OF A COMPANY

The books of account of the company must contain, on daily basis, the following:
(a) Every transaction involving money, whether received or expended together with the
facts explaining how the money has been received or so expended.
(b) all the sales of the company
(c) all purchases of the company
(d) all liabilities of the company.

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See section 151 (2) (a) (b) (c)

APPROVAL OF ANNUAL ACCOUNTS BY THE BOARD OF DIRECTORS

Once the accounts have been prepared, they are required to be approved by the Board
of Directors and signed on behalf of the board by any director, the signature must be on
the balance sheet of the company. See section 158 (1) and (2) of the Act

STATUTORY REPORTS
There are two types of reports, relating to affairs of the company during the accounting
period, the company is supposed to prepare:
i. The Directors’ Report
This report is supposed to give an insight into the general affairs of the company. It must
also be approved by the board of directors and signed by any director on behalf of the
company. After approval it shall also be delivered to the registrar of companies for
records.

Read sections 159 and 160 of the Act.

ii. Auditors Report

The company’s auditors are also required to prepare reports on all company’s annual
accounts.

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CONTENTS OF THE AUDITORS REPORTS

According to s. 161 (1) and (2) (a)(b)(c)(d)
i. An opinion on compliance with the Companies Act
The auditors are supposed to establish their opinion as to whether the annual
accounts have been prepared properly in accordance with the Companies Act
ii. An opinion on whether a true and fair view of:
(a) the state of the affairs of the company at the end of the
accounting period is reflected in the balance sheet
(b) the profit or loss of a company is reflected in the profit and loss
Account
(c) the cash flow of the company for the accounting period is reflected
in the cash flow statement.
iii. The auditors must also consider in their report if the report of the directors
for the accounting period is consistent with these accounts s. 161 (3)

The directors have a duty to make investigation to help them get facts to prepare a fair
report. See s. 163.

s. 162 (1) requires the auditors report to bear their names and signatures.

THE COMPANY’S RETURNS

Read generally about annual returns at chapter III, s. 128.

5.7 COMPANY’S MEETINGS

Introduction
The meetings of a company are very essential to the company and the members
generally. This is a platform where various affairs of the company are discussed. The
meetings of a company to the member are an apparatus by which the members of the

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company control their company by way of voting on various resolutions of the

company.

Types of company meetings

There are generally two types of meetings of a company as follows:

1. ANNUAL GENERAL MEETING - AGM

A compulsory yearly meeting of shareholders that allows stakeholders to stay informed
and involved with company decisions and workings.

An Annual General Meeting (commonly abbreviated as AGM) is a meeting that official

bodies, and associations involving the public (including companies with shareholders),
are often required by law or articles of associations to hold.

An AGM is generally held every year to inform their members of previous and future
activities.

When should it be called.

This meeting is supposed to be called every year and no period of more than fifteen
months may pass between one annual meeting and another. See s. 133 (3) of the Act

Business to be conducted at the meeting

The same section, i.e. s. 133 (1) paragraphs (a)(b)(c)(d)(e) lists a number of businesses
which a company can transact at any general meeting as follows:

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Effect if the company does not call an annual general meeting

i. By s. 133 (4), any member may apply to the minister responsible for companies to
call or direct that the meeting be called in such a manner that the director may see fit.

ii. failure to call a meeting as directed by section 4 creates a liability on the company
and every officer of the company who was responsible for calling the meeting, to pay
a fine.

S. 133 (1) of the companies Act requires a company to hold an annual General Meeting
in addition to any other meeting.

2. EXTRAORDINARY GENERAL MEETING - EGM

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An Extraordinary General Meeting, commonly abbreviated as EGM, is a meeting of

members of a company, shareholders of a company, or employees of an official body,
which occurs at an irregular time.

The term is usually used where the company would ordinarily hold an AGM, but where
an issue arises which requires the immediate attention of the entire membership and is
too serious or urgent to wait until the next AGM.

Sometimes an EGM is referred to as a Special General Meeting or an Emergency

General Meeting.

Who can summon an extraordinary meeting?

i. Directors

Usually the directors are responsible for calling meetings of the company.

ii. Directors on requisition by members

According to s. 134 (1) a duty is placed upon the directors of a company to call a
meeting at any time members of the company have requested such meeting. This is a
compulsory duty and it does not matter if the articles of association of the company
provides against it.

Qualification of members for calling meetings

Not any bunch of members may require the directors to call a meeting. To qualify for
this the members must be such that:

i. For the company having share capital: at the time they deposit the requisition for a
meeting, the members must be holding not less than 1/10 of all the paid up share

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capital and their shares must carry the right of voting at general meetings of the
company. See s. 134 (2) (a)

ii. For a company not having a share capital: at the time they deposit their request for a
meeting, the members must be representing not less than 1/10 of the total voting rights
of all members having the right to vote at the general meetings of the company. See s.
134 (2) (b)

iii. Auditors of the company when they resign

Auditors may also call an extra ordinary meeting (by filing a signed requisition for a
meeting (s.178 (2)) when they have deposited notice at the company’s registered office
for that purpose as required by section 177 (1).

iv. The court

If the company for any reason has failed to call a meeting at the time when it was
supposed to have called one, the courts of law have powers to convene a meeting upon
application either by the directors or by any member of the company. See s. 137 (1) of
the Act.

Content of the Requisition

The requisition must state the objects of requiring such meeting be called. It must also
be signed by all the members of the company who required such requisition and be
deposited at the registered office of the company. See subsection (3) f the same
section.

Duty of the directors after deposit of requisition

They are supposed to call the demanded meeting within a period of 21 days after
deposit of the requisition and if they fail the members (either all of them or those who

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represent more than ½ of all the voting rights of all the requisitionists) who required the
meeting may proceed to call the meeting on their own within a period not exceeding
three months after the 21 days.

Note: of importance is that you should always note that any meeting can not be called
unless sufficient notice has been given to all the members of the company. The length of
notice for calling meetings should always be not less than 21 days. See s. 135 (1) of the
Company Act.

RESOLUTIONS OF THE COMPANY MEETEINGS

There are three types of resolutions that a company can arrive at in any meeting be it
an AGM or EGM.

The resolutions are:

i. Ordinary resolution

Is the resolution which can be passed by a simple majority (more than half of the valid
votes cast but less than ¾ ) of the members having voting rights. Usually every one
share carries one vote.

ii. Extraordinary resolution

iii. Special resolution

According to s. 142 (1) of the Companies Act a resolution is special if it has been passed
by a majority of not less than ¾ of member having voting rights.

The voting must be done at the general meeting whose notice contained an intention to
propose the resolution as a special resolution.

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5.7.1 WINDING UP OF COMPANIES

A process that entails selling all the assets of a business entity, paying off creditors,
distributing any remaining assets to the principals, and then dissolving the business.

There are two types of winding up

i. voluntary winding up
ii.compulsory
iii. Winding up by court

(This part is in progress)

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Law of Partnerships
The law regulating partnerships in Tanzania is the LCA and by s. section 190
the same is defined as:

As stated in the provision above, a partnership is an association of two or more persons

to carry on as co-owners a business for profit. From this definition, it follows that the
essential elements of a partnership are:

(1) It is a business carried on in common.

A business can be any form of activity which involves buying, producing and selling. It is
not necessary that it should be a permanent activity; it may be only a single business/
commercial transaction. What matters is it should be a business. The moment such
business transaction takes place marks the beginning of the partnership.

In Winsor v Shroeder (1979) 129 NLJ 1266 a woman who wished to establish a business
in which she would buy and sell real property but did not have enough money, engaged
Winsor, a property dealer, to purchase the property and share the profits jointly.
Though it was only one transaction the court declared that there was partnership
between them and went further to point out that the factor determining existence of
partnership is not whether it is a single venture but whether it is a commercial
venture.

In Keith Spicer Ltd v Mansell (1970) 1 All ER 462 the court defeated a purported
partnership because there was no evidence that there was a business carried on in
common with the view of making profit. So there was no partnership.

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The facts of the case were as follows:

Mr Mansell and Mr. Bishop decided to form a company together which would carry on a
restaurant business. Mr. Bishop ordered goods from the Mr. Keith Spicer so that they
could be used by the company after it had been formed. When the goods were not paid
for Mr. Spicer sued Mr Mansell and Bishop for the price on the ground that a
partnership existed between them.

Facts illustrated:

Mansel + Bishop (intended to form a business by establishing a company)

Goods, which were not paid for, were ordered by

Bishop from Spicer

Spicer (sued both Mansel and Bishop because he thought

there was a partnership between them)

Holding of the court:

The Court of Appeal held that there was no evidence that Mansell and Bishop were
carrying on business together with a view to profit. Harman, LJ found evidence that the
parties "…were (only) preparing to carry on business as a company as soon as they
could. I think…therefore they were not partners because they never carried on business
as such." (emphasis mine)

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(2) With the view of profit

The members must be doing the business with the view to sharing profits, and it should
not be for any other purpose.

See Stewart v Buchanan (1903) 6 F 15; Scottish Cases on Partnerships and Companies

Facts of the case:

Stewart sold goods to a firm known by the name City Stock rooms Company, which was
owned by two men; Saunders and Buchanan. There was an agreement between the
owners of the company that the latter would not be liable for any debts or obligations
but he would share in the profits of the company. When Stewart was not paid for the
goods he supplied he sued both of them for the price of the goods. Buchanan sought to
rely on the agreement to show that he was not liable.

Facts Illustrated:
The city Stockroom Co
Stewart (was not
paid and he sued both) &
Saunders and Buchanan** (the owners)

**Buchanan claimed that he was released from debts and obligations by an agreement
he entered into with Saunders though he shared profits.

The holding of the court: The court said that He was liable for the price of the goods, on
the ground that he was sharing in the profit of the business which makes him a partner
in that business.

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Formation of Partnership
Partnerships are in most cases created by agreement among the prospective
partners. The agreement can be either
i. oral or
ii. written
if the agreement of partnership is in writing the partners must do it by preparing
a document known as a partnership deed

CONTENTS OF A PARTNERSHIP DEED

i. Name of the firm
ii. Names and addresses of partners
iii. Nature of business and area of operation of business
iv. The date on which partnership begins
v. Duration of such partnership
vi. Provision of capital (the manner)
vii. Rights and limitations
viii. Rules for admitting, retiring, and death of a partner.
ix. Contributions of capital by each partner
x. The manner of sharing profits and agreed ratio
xi. Name of bank account
xii. Duties of partners
xiii. methods of dispute settlement
xiv. Methods of dissolution of such partnership

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ESSENTIALS OF A PARTNERSHIP AGREEMENT

Since a partnership is established by an agreement (partnership deed), all the
essentials of a contract must exist to make it valid. The following things as they
are applicable in contract law must exist in order to have a legally acceptable
partnership.
i. Free consent of parties
ii. Competency
iii. Consideration
iv. Intention to make legal relations
v. lawful object

NAMING A PARTNERSHIP
In the formation process partners decide on a name for partnership. They can
use the collective surnames or any other name of their choice. If they use any
other name they must make sure that the names of all partners and an address
for legal correspondence is quoted on all stationery and displayed prominently at
the business address of the partnership.

CLASSIFICATION OF /TYPES OF PARTNERS

i. General partners,

This is the type of partnership in which each partner has the right to participate in the
management of the partnership and a right to share its profits. He partakes in the day
to day activities of running a business. In general partnership the general partner is
liable up to the full extent of his personal assets.

ii. Limited partners,

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A limited partner has the right to share the profit, but has no right to participate in the
management of the firm or entering into contracts with third parties on behalf of the
firm. His liability is limited to the amount of capital he originally agreed to contribute.

iii. Sleeping partner (dormant partner)

According to Mercantile Credit Ltd v Garrod (1962) 3 All ER 103 a sleeping partner is a
general partner who wishes to have no active role in the management of the firm.
However he has a right to a share of profits and responsible for liabilities of the firm.

iv. Salary/ salaried Partner

This is a kind of partner who contributes nothing to the capital of the firm and has no
right to a share of profits but only entitled to a fixed amount of wages or salary. They do
not have a say in the decision making of a company.

According to the case of Stikel v Ellice this partnership is only for professional parties
such as accountants and solicitors (lawyers)

v. Quasi partner/ partner by holding out / partner by estoppels/ apparent

partner

If a person either by words spoken or written or by conduct represents himself, or who

knowingly suffers himself to be represented as a partner in a particular firm, is liable as
a partner to any one who has been on the faith of such representation given credit to
the firm, whether the representation has or has not been made or communicated to
the person so giving credit

See Tower Cabinet Co. Ltd v Ingram (1949) 2 KB 397; [1949] 1 All ER 1033

Ingram and Christmas were partners for some time. Later Ingram resigned but
Christmass did not give notice of this resignation to all the public. When Christmass

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ordered goods from tower cabinet company and failed to pay, the latter sued the
partnership.

The question before the court was whether Ingram was liable to the debt to which the
answer was he was not because he did not suffer to represent himself as a partner
after retirement.

It follows therefore that had he done so he would have been liable and, in this case,
would have been referred to as an apparent partner.

See also the following section 206 of the LCA

HOW DO PARTNERS RELATE TO ONE ANOTHER?

Partners have certain duties and rights towards one another and towards the
partnership. These duties ands rights define the partners relationship. This relationship
between partners entails fulfilling those duties on the one hand and enjoy the rights on
the other.

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DUTIES OF PARTNERS TO ONE ANOTHER

The duties of partners in a partnership are determined either by a contract between the
partners or by the LCA. If the duties are imposed by law, they are known as absolute
duties and if they are imposed by contract they are known as qualified duties. Absolute
duties can not be varied by partners.

ABSOLUTE DUTIES
In case there is no contract the duties provided by the LCA prevail and thus according to
s. 192 of the LCA the general duties of partners are in a partnership are as follows;
i. To carry on the business of the partnership for the greatest common
advantage of all partners.
The duty among partners involves a very high standard of conduct for the best
interest of the firm.

ii. To be just and faithful to each other (fiduciary duty)

Under this duty partners have to act with the utmost good faith and loyalty since
they are not considered to be merely individuals transacting with one another at
arm's length, but rather to be fiduciaries of one another. Therefore

iii. To render true accounts to any partner or his legal representative

iv. Duty to render full information of all things affecting the partnership to any
partner or his legal representative.

See Law v Law [1905] 1 Ch 140

William and James Law were partners. James offered to buy William's share for £21,000.
William later discovered that the business was worth much more; his partner had failed
to disclose a number of assets to him.

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v. Duty not to compete with the partnership, or engage in conduct that is

detrimental to the best interest of the partnership. In conducting business
with individuals who are not partners, every partner is an agent of the
partnership. Therefore, the acts and words of a partner may be imputed to
the partnership.

QUALIFIED DUTIES
These are duties that though they are provided by the law, permission is given under
the same law to qualify them by contract. Upon qualification the duties have the effect
of posing a bar to the operation of all duties provided by law. Likewise if they are not
qualified the law prevails. The qualified duties are;
i. Not to receive remuneration for conducting firms business (s. 194 (d))
ii. Duty to indemnify the firm for losses caused by partner’s fraud or willful
neglect while conducting the firms business (s. 194 (g))
iii. Duty to contribute equally towards the losses sustained by the firm. (s. 194
(e))

RIGHTS OF PARTNERS
Like with the duties of partners, their rights are also determined by a contract or in its
absence by the LCA. When there is no contract to so determine the partners rights then
section 194 of the LCA, enumerates rights and obligations of partners as follows;
i. right to take part in the management of the partnership (s. 194 (a))
ii. right to have access to and to inspect and copy any of the books of the firm
(194 (c))
iii. right to share equally in the capital and profits of the business. (194 (e))
iv. right to be indemnified by the firm for payments and liabilities incurred by
him
(a) in the ordinary and proper course of the business of the partnership

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(b) in anything necessarily done to preserve the business or property of

the firm. (194 (f))

The general section of reference

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PARTNERSHIP PROPERTY
The ultimate question here is whose property is the property brought in to the
partnership? To answer this question there are three instances used to determine
whether the property belongs to the partnership or to the partners as personal
property.
i. If the property was brought in to the partnership at the time of forming it. It
is partnership property.
ii. If it was acquired by the money from the partnership, and it was intended to
be partnership property it will be partnership property. If no such intention it
will be personal property of the partners according to their arrangement.
iii. If the property is land or hereditary (inheritable) interest in land used in the
partnership, it shall be the partnership property if it is so intended, otherwise
it is a personal property of partners.
See section 195 (1) (2)(3) of LCA

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RELATIONSHIP BETWEEN PARTNERS AND THE THIRD PARTIES

A. PARTNERS AUTHORITY TO ACT
According to s. 201 (1) of the LCA at any time any partner enters into contracts intended
to undertake a firms business, each partner is acting as an agent of the firm and all the
partners and his acts will bind them. So if a partner deals with a third party he is
regarded to act as an agent of the firm.

WHAT PARTNERS ACTS BIND THE FIRM?

Not all partners’ acts bind the firm. To bind the firm such acts must be done under the
following conditions;
i. Acts furthering business of the firm; a partner’s act must be intended to carry
on a business in the usual way as the firm and its partners would usually do it.
See s. 201 (1)

ii. Acts done with authority from the firm; a partner must have authority to act
for the firm since some deeds are strictly forbidden for a partner to act in
absence of a mandate from the firm to so act.
s. 201 (2) outlines businesses which can not be carried by a partner in any kind of
partnership, in absence of any express provision in the partnership deed, or
usage of trade or custom.

iii. Acts done through usage or custom of trade; any act done through usage or
custom of trade bind the firm. (s. 201 (2))

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MATTERS FOR WHICH PARTNERS DO NOT GENERALLY HAVE AUTHORITY

S. 201 (2)

In absence of the above conditions the firm and the partners will not be bound by acts
of individual partners.

B. LIABILITIES OF PARTNERS TO THIRD PARTIES

(a) Liability of existing partners
In dealing with third parties a partner who is an agent of the firm may incur liabilities
and or cause loss to them. A third party may sue either any single partner or all of them
for the loss or any injury. When this happens, usually each partner is fully responsible
for all of the firm’s liability. The following are liabilities partners may incur in conducting
firms business;
i. Partners liabilities on debts and contracts
If the act done by a partner under authority of the firm leads to liability on debts or
contracts, all partners are liable for all debts and obligations arising thereby. See s. 203
of the LCA.

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ii. Partners liability on tort (civil wrongdoing)

Acts of partners may sometimes injure the third parties with whom they deal and the
injury may be the basis for a claim of damages or compensation from the partnership.
All partners are liable for this injury or loss caused to third party as provided by s. 204 of
the LCA. The liabilities to third persons are;
(a) Any wrongful act or omission of a partner done in proper
course of business

(b) Any misapplication of money or property from third party by a

partner who acted within the scope of apparent authority.

(c) Any misapplication of money or property received in course of

business from third party by any partner or partners while they
were in custody of the firm.

(b) Liability of Incoming and Outgoing Partners

Generally, the liabilities of partners will depend on the time a particular partner joined
the firm and whether he is still a partner i.e. he is not dead or retired. See the following
section of the LCA.

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PARTNERSHIP DISTINGUISHED FROM COMPANIES

Partnerships are different from companies in the following things
i. Number of members; partnership is not allowed to have members more that
20 but a company may
ii. A company has a separate personality but a partnership does not.
iii. Partnerships have unlimited liability since all partners are personally liable
for all debts and liabilities. A company may or may not have unlimited
liability for its members.
iv. In partnerships each member is an agent of the firm, unlike in the company.
v. In partnerships all partners are generally entitled to take part in the
management of the firm. that is not the case in with the company.
vi. A partnership need not be registered to exit but a company can not exist
without registration.

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DISSOLUTION OF PARTNERSHIP
There are various modes of dissolving partnerships as follows
i. Dissolution by expiration or notice; see section 212 of the LCA

ii. Dissolution by death, bankruptcy or charge; see section 213 of the LCA

iii. Dissolution by illegality of partnership; see section 214 of the LCA

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iv. Dissolution by court; see s. 215 of the LCA

v. When a partnership incurs persistent loss and there is evidence that there is
a practical impossibility that the business would make profit in future.

For this see Handyside v Campbell (1901) 17 TLR 623 in which a partner applied for
dissolution of partnership on basis of loss in business and the court decided as above.

vi. Partnership may be dissolved if its members are citizens of countries between which
war has broken out. See R v Kupfer (1915) 112 LT 1138

EFFECTS OF DISSOLUTION FO PARTNERSHIP

i. Ceasing of the Agency capacity; The partners lose power to act as agents of
the firms and the other partners, though partners retain their authority for
the purposes of winding up.

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ii. Distribution of property; The partnership property is distributed to persons

who formed the partnership after paying off all debts and liabilities of the
firm. The partners have to pay off their own liabilities to the firm before
partaking a share in the surplus property.

The manner in which such distribution is done is provided by s. 219 of the LCA as shown
hereunder.

S. 219 On the dissolution of a partnership, every partner is entitled, as against

the other partners in the firm, and all persons claiming through them in
respect of their interests as partners, to have the property of the partnership
applied in payment of the debts and liabilities of the firm, and to have the
surplus assets after such payment applied in payment of what may be due to
the partners respectively after deducting what may be due from them as
partners to the firm; and for that purpose any partner or his representatives
may, on the termination of the partnership, apply to the court to wind up the
business and affairs of the firm.

TREATMENT OF FIRMS LOSS AT DISSOLUTION (The rule In Garner v Murray I908)

Three persons GARNER, WILKINS & MURRAY started a partnership in which they would
share profits and losses equally. Sometime later the firm was facing loss and Wilkins
became insolvent and nothing amount could be realised from his private estate. On
disagreement on distribution of loss so, they filed a case in the court. A decision was
given in what is to day known as Garner vs. Murray Rule.

The rule: If on dissolution there is a loss and the loss is such that it puts any partner's
capital account into Debit, that partner must bring to that account some cash from his
own resources. If the partner whose capital account is in debit can not bring in the cash
to the amount of his loss, then the other partners must bear the resulting loss in the
ratio of their Capital accounts immediately prior to this settlement.

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7.0 LAW OF INSURANCE

Whenever there are human beings, there are various risks associated with their
productive activities since the day to day activities of human beings necessarily involve
risks. In better words we can say that these risks are inherent in the society; i.e. they are
part and parcel of a human society.

Usually the nature of productive activities a particular society engages itself in will
determine the extent of risks inherent in that society. Risks usually develop in a direct
proportion trend to the development of this society.

It follows therefore that the risks that were common during the primitive societies’
period are in no way similar to those that are in place in present day societies. However
risks, despite discrepancies of levels of development of a society, affect economies in
the same way, big or small.

The law of insurance is all concerned with providing protection for misfortunes such as
fire, accidents, etc. Usually the protection is done by insurance companies and the
protected are the individual persons and business establishments. Evidence of a
relationship between parties is done through a contract known as the contract of
insurance. Insurance law generally concerns itself with providing rules and principles on
how risks in the society can be handled. In the primitive societies they used traditional
methods of handling the risks, but to day, the modern insurance employs economic
devices to handle risks, since to day insurance is a business.

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Laws Instructor, Institute of Accountancy Arusha, 2010

7.1 NATURE OF THE CONTRACT OF INSURANCE

Definition of insurance

Defining what is and is not a contract of insurance, is more difficult than might at first
appear. Most of cases are not clear enough since they tend to reiterate definitions as
provided by statutes that have existed over time. These cases24 are like

i. Nelson v Board of Trade (1901)25,

ii. Hall D’Ath v British Provident Association for Hospital and Additional Services
(1932)26 and

iii. Hampton v Toxteth Co-operative Provident Society Ltd [1915]27. New cases have
taken on the new definitions as they are provided by the new statutes. Some of
definitions only deal with insurance on very specific issues of the discipline. This has
brought into existence a number of definitions which sometimes do tend to conflict with
one another.

ATTEMPTED DEFINITIONS

Fall into two categories as follows here under;

i. Selected legal literary works

ii. Selected cases

I. SELECTED LEGAL LITERARY WORKS

(a) Abbot K et al (2007), Business Law, 8th Ed. Thomson Learning, UK at page 299

24
The Encyclopaedia of Forms and Precedents 5th edn. 1998 (reissue), volume 20.
25
84 LT 565
26
48 TLR 240, 76 Sol Jo 111
27
1 Ch 721, 84 LJ Ch 633, CA

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This book defines insurance as follows;

Insurance is a contract whereby the insurer , in return for a sum of money called the
premium, contracts with the insured to pay a specified sum on the happening of a
specific event, for example death or accident or to indemnify the insured against any
loss caused by the risk insured against, for example fire.

(b) Vance W.R, (1930) Vance on Insurance, 3rd Ed. The West Publishing Company,
Washington at pg. 82

This work defines it as;

“Any contract, by which any party, for a valuable amount known as premium, assumes
risks or liabilities that rest upon the other pursuant to a plan for the distribution of such
risks, is a contract of insurance, what ever the form it takes or the name it bears”.

II. SELECTED CASES

(a) In Lucena v.Crauford, insurance was defined as: ….a contract by which one party in
consideration of a price paid to him adequate to the risk becomes security to the other
that he (the other) shall not suffer loss, damage, or prejudice by the happening, of the
perils specified to certain things which may be exposed to them.

(b) Prudential Insurance Co v IRC [1904] 2 KB 658, 73 LJKB 734 sums it all.

Channel J in Prudential Insurance Co v IRC pointed out in this case that the essential
elements of a contract of insurance are:

i. the periodical payment of sums of money (usually called ‘the premium’) by the
insured;

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ii. a promise by the insurer to pay a sum of money on the happening of a specified
event;

iii. the event must be one which is adverse (undesirable) to the interests of the policy
holder.

CHARACTERISTICS OF AN INSURANCE CONTRACT

i. General characteristics

ii. Distinctive characteristics

GENERAL CHARACTERISTICS

A contract of insurance bears all essential elements of a binding contract such as offer,
acceptance, competence, consideration, legality and free consent. The contract of
insurance also has some features additional to the mentioned ones, which distinguish it
from any other contracts as it will be shown hereunder on the presumption that you are
conversant with the essentials of a valid contract:

i. Offer; in an insurance contract is made by filling out standard forms prepared

by an insurance company. In this form the insured will specify the subject matter
he wishes to insure and he must also specify the risk.

Recent developments

Current practice in insurance business shows that An insurance contract can be made
orally; instances are where proposer and insurer communicate over the phone. Offer
and acceptance are given and accepted respectively in conversation. These policies are
valid however proof of the fact that they were actually made is difficult; the only
manner of proof that an insurance contract exists is the evidence of payment of
premium.

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ii. Acceptance;

Acceptance of the above mentioned offer is done by the insurance company after the
insured has submitted the forms and the company has had enough time to assess the
information therein presented and agreed to them.

iii. Consideration

The consideration for an insurance contract is a premium.

DISTINCTIVE CHARACTERISTICS

The following features are said to be special to a contract of insurance.

i. The insurance contract is an ‘aleatory contract’ (that which is dependent on

chance)

This means it is not a commutative contract (that which the parties exchange equal
values to each other). In an aleatory contract of insurance the contracting parties are
aware that each party will not give equal sums of money; in this contract the insured
pays premium in expectation that if he suffers loss he may receive a much larger
amount from the insurer than he paid in the premium and if he does not suffer any loss,
that he will get nothing. There is therefore in the contract of insurance an element of
chance; first on the happening of the risk and/ or chance to get something or nothing
(to lose the premium)

There is also an element of chance when loss is suffered by insured that he may not
recover because of non observance of the conditions stated in the policy or because
the policy does not cover the loss that he has suffered.

ii. An insurance contract is a contract of ‘adhesion’ (i.e. a standard form contract: one
which an insured person either takes it or leaves it) and therefore distinguishable from a

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bargain contract. An insurance contract provides no room for the insured to bargain on
the terms and conditions stated therein. The insured can not make a counter proposal
or even suggest that the document of insurance should be altered in certain aspects.

There is a reserved right to alteration of a contract of insurance for the insurer only. The
insurer may alter the terms of this contract by way of indorsement, meaning that the
insured has no room to negotiate.

The need to interpret the contract

In case there is any dispute between the parties as to the meaning of the content of the
contract, the court will usually apply the contra preferentum rule; this rule is applicable
generally to contracts and it states as follows:

‘where a contract is drawn up by a party, to the exclusion of the other party, it shall
be construed against the other party that has drawn it where it is vague, i.e. capable
of more than one meaning’.

What is the rationale behind this?

Because an insurance contract is a risk distributive device which is based on strict

calculation. The insurance company has to do this in order to be sure how much funds
should be set aside for the insured risks.

iii. A contract of insurance is an ‘executory contract’

An insurance contract by its nature is always an executory contract, in the sense that,
once the insured has paid his premium he is counted as having done his part and on the
part of the insurer the contract will remain executory until loss occurs or the contract
expires.

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iv. An insurance contract is a ‘unilateral contract’

Unlike in a bilateral contract which binds both parties to the contract and which creates
reciprocal rights and obligations, an insurance contract is a unilateral contract and it
binds only the insurer; i.e. for the insurer it creates obligations and for the insured it
creates rights or privileges.

v. A contract of insurance is a ‘conditional contract’

It usually loaded with a lot of conditions and implied warranties. The insurer has to
include these because these conditions are the only means by which the insured risks
are defined.

Examples of these conditions are as follows:

(a) The policy shall only run from the time the premium is paid.

(b) The condition that notice of loss by the insured must be given forthwith/
immediately/ or as soon as possible to the insurer.

The law has interpreted the words forthwith, immediately and as soon as possible, to
mean within reasonable time. The question as to what is reasonable time is a question
of fact in each particular case.

Examples of these implied warranties are as follows:

(a) There are various terms which are implied by statutory law, common law, doctrines
of equity etc.

There is an implied term that an insurance contract does not cover certainty of events.
It only covers losses. Due to this therefore if:

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i. Goods insured against a risk are transported on board a ship, the

seaworthiness of the vessel is presumed to exist.

In this case if the ship causes the cargo to be destroyed because of defects in the ship
it will not be the problem of the insurer but that of the shipping company.

ii. The same presumption will be applied if the goods are transported by lorry in
which case the road worthiness of the same will be presumed, by rail; the
railworthness and by air the airworthiness etc.

(b) There is an implied warranty that the insured must have in the property he insures
against a risk an interest known as ‘insurable interest’ (discussed herein fore).

vi. A contract of insurance is one full of fundamental principles

Besides the mentioned principles above insurance also operates under the umbrella of
other more specific principles as follows;

i. insurable interest
ii. utmost good faith
iii. indemnity
iv. subrogation
v. contribution

I. INSURABLE INTEREST: determining insurable interest in an insurance policy. no one

can insure anything against a misfortune unless he has an insurable interest in the
property he seeks to protect. Insurable interest is a proprietary value the insured has in
the property.

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For a person to establish he has insurable interest in a given property or in case of a life
insurance in a given life, or venture or any other thing there are rules in respect of real
property insurance and life assurance as follows:

A. In General Insurance:

The insured must show the following three things:

1. Legal/equitable relationship with property: That there is a direct legal or

equitable relationship between the insured person and the property, subject
matter of the insurance. See Macaura v. Northern Assurance Company [1925]
AC 619

In this case Macaura who insured timber against fire was not entitled to benefit
from the insurance when he had sold the property to his company. The court
held that, Macaura ceased to have an insurable interest in the property he had
transferred to the company since he and the company had separate
personalities.

2. Legal or equitable liability: This legal or equitable relationship mentioned

under number 1 above must be one that gives rise to either a legal or equitable
right or liability in favour of or against the person claiming to have an insurable
interest in the property.

3. The liability to be capable of monetary evaluation: The said right or liability

must be capable of economic or monetary evaluation. The explanation for this
was given by Lord Mansfield in the case of Lucena v Grauford in which he stated
that:

‘the continued existence intact of the property, person or venture

would economically benefit the claimant thereof in one way or another,

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while its destruction or damage would economically inconvenience or

give rise to a direct economic loss to the said claimant’

INSTANCES OF INSURABLE INTERESTS IN TERMS OF RELATIONSHIPS:

i. Ownership:

Is there a direct legal or equitable ownership? If the insured has a legal ownership then
he is said to have a right in rem, and if he has an equitable ownership then he has a
right in personam.

ii. Possession:

If the insured has a possession based on a rightful claim, he has an insurable interest
in what he possesses, since loss in possession would be a loss in an advantage. Like
the cases of hirer, builder or contractor.

In the case of North British and Mercantile Insurance Company v Moffat [1871] LR 7 CP
25)

It was held that, possession even when it is improper supports existence of insurable
interest; however in this case possession must be associated with some sort of
responsibility.

iii. Presence of a contract:

Presence of a contract is a good basis for insurable interest. Thus a creditor can claim
insurable interest in any property given to secure a loan

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iv. Equitable relationships:

These relationships can also give rise to insurable interest e.g. trustee vis-à-vis trust
property, or beneficiary vis-à-vis trust property. The cases of bailor and bailees also
apply.

See the case of Waters v Monarch Fire & Life Assurance Company [1856] 5 EL & BL and
Co.

This case made it possible for bailors to insure goods they keep against any loss since
they have an insurable interest in the goods by keeping them.

Not only is this an implied warranty but also a statutory requirement. S. 108 (1) of the
Tanzania Insurance Act, 1996.

This section is to the effect that an insurance made without an insurable interest is ‘null
and void ab initio’

B. IN LIFE POLICIES

i. Insurable interest: life policies on one’s own life

There is always an insurable interest in one’s own life: According to Wainewright (or
Wainwright) v Bland (1835) 1 Mood & R 481, (1836) 1 M & W 32 a person always has
an unlimited insurable interest in his own life. Thus, he may insure his own life for any
amount he chooses, the only constraint being his ability to pay the premiums.

ii. Insurable interest: life policies on the life of another

(a) There is not always an insurable interest in the life of another

The rules on policies insuring the life of another person are more
complex. In a strictly limited class of case there is automatic insurable

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interest, that is to say that the interest exists without the need to prove
any financial loss in the event of the death of the life assured.

(b) Spouses
The only situation in which it has been held that there is automatic
insurable interest is that of husband and wife. Reed and Royal Exchange
Assurance Co (1795) Peake Add Cas 70, NP.is usually treated as
establishing that a wife has an automatic interest in the life of her
husband, though in fact the point never came to be decided in that case.
In Griffiths v Fleming [1909] 1 KB 805, CA. It was held that the converse
also applied. See s. 72 (2) (b) (c) of the Tanzania Insurance Act, 1996
where it provides that
“…insurable interest is deemed to be present in
(b) a husband on the life of his wife;
(c) a wife on the life of the husband;”

(c) Parents, children and siblings

According to Halford v Kymer 10 B & C 724, 109 ER 619 parents do not
have an automatic interest in the lives of their children, nor vice versa,
and siblings do not have automatic interest in each other’s lives (see
Harse v Pearl Life Assurance Co [1904] 1 KB 558, 73 LJKB 373, CA.).
These principles apply even in cases where it might appear that the
assured has a reasonable moral (but not legal) expectation of being
supported by the life assured and therefore stands to lose from the death
of the life assured; this is according to the case of Halford v Kymer 10 B &
C 724, 109 ER 619.

s. 72 of the Tanzania Insurance Act, 1996, as regards insurable interests,

provides that

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“no policy of life insurance shall be issued on the life or lives of

any person or persons other than as provided in subsection (2)”.

According to the Act insurable interest is deemed to be had by–

(a) a parent of a minor or the guardian of minor but only to
the extent as provided by section 82;

Section 82 reads
Life insurance of minors
(1) A minor or a parent or the guardian of a minor may effect a life
insurance and pay the premiums due under the policy with money lawfully at
the disposal of the minor, his parent guardian:
Provided that–
(i) no benefit shall be paid other than as a result of death of the
minor, parent or a guardian if the minor has not attained sixteen years of age;
(ii) the total sums payable against all life insurance policies
outstanding at that time of the life of a minor who dies before he attains the
age of sixteen years shall not exceed one million or the sum of the total of the
premium paid under that policy, whichever is greater, and there are more
policies than one outstanding at that time where a contribution shall be due
against each policy to make up the total sum of one million shillings or any
greater sum as the case may be in proportion to the sum for which the policy is
effected;
(iii) a minor who has attained the age of sixteen years may without
the consent of his parent or guardian effect a life policy upon his own life and
shall be as competent in all respects to be a policy owner and to have and
exercise all the powers as if he were of adult age, except that he shall not while
he is still a minor pledge or cede the policy without the written consent of his
parent or guardian.

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(2) Notwithstanding the provisions of subsection (1) an insurer shall not

pay any sum on the death of child before he attains the age of sixteen years,
except upon production of a certificate of death issued by the authority
responsible for the registration of births and deaths.

(d) Insurable interest In other relationships

s. 72 (2) (d) (e) and (f) allows other categories of persons to take life
policies on lives of others in the following manner;
Insurable interest is deemed to be had by
(d) any person on the life of another upon whom he is wholly or in part
dependent for support or education;
(e) a company or other person, on the life of an officer or employee;
and
(f) a person who has a pecuniary interest in the duration of the life of
another person in the life of that person to the extent only of that
pecuniary interest at the outset.

There fore in life assurance one does not automatically have an insurable interest in the
life of another except in the circumstances provided by cases and the Insurance Act,
1996

II. THE PRINCIPLE OF UTMOST GOOD FAITH

A contract of insurance is uberrimae fidei meaning that an insured person is bound to

disclose all material facts relating to the subject matter of insurance and not to
misrepresent in so doing. The insurer has to know this so that he may be able to asses
the risk against which a party seeks to insure his property. Under this duty the law
presumes that the insurer knows nothing about the subject matter that is why it has to
be disclosed.

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This principle developed from the case of Carter v Boehm (1766) 3 Burr 1905, 1 Wm B1
593 in which it was stated that:

‘Insurance is a contract upon speculation. The special facts, upon which the contingent
chance is to be computed, lie most commonly in the knowledge of the insured only; the
underwriter trusts to his representation, and proceeds upon confidence that he does
not keep back any circumstance in his knowledge, to mislead the underwriter into a
belief that the circumstance does not exist, and to induce him to estimate the risk as if it
did not exist.’

In the case of Rozanes v Bowen [1928] 32 LL.L.R.98, Lord Scrutton stated that;

‘…it is the duty of the assured, the man who desires to have a policy to make a full
disclosure to the underwriter without being asked of all the material circumstances
because the underwriter knows nothing and the assured knows everything…’

CONCEQUENCES OF THE FAILURE TO DISCLOSE

According to the case of Urquhart v Macpherson (1878) 3 App Cas 831 when the
prospective insured misrepresents even innocently, causes the contract to voidable at
the option of the insurer unlike in the ordinary contract where innocent
misrepresentation does not render contract voidable.

This position was reiterated again in the recent case of Pan Atlantic Insurance Co Ltd v
Pine Top Insurance Co Ltd [1995] 1 AC 501, [1994] 3 All ER 581, HL.

III. THE PRINCIPLE OF ‘INDEMNITY’

s. 76 of the LCA defines what a contract of indemnity is as follows:

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The principle of indemnity embraces such doctrines as, insurable interest, subrogation,
contribution and abandonment and salvage.

Every property insurance contract is presumed to be one of indemnity unless the

contrary is proved, except life assurance contracts which are not contracts of
indemnity.

Compensation for loss. In a property and casualty contract, the objective is to restore an
insured to the same financial position after the loss that he or she was in prior to the
loss. But the insured should not be able to profit by damage or destruction of property,
nor should the insured be in a worse financial position after a loss.

IV. THE PRINCIPLE OF SUBROGATION

This is the right of the insurer to step into the shoes of the insured and enforce any
claim, which originally accrued to the insured, against third parties.

Circumstance in which the right of subrogation arises is as follows;

According to Midland Insurance Co v Smith (1881) 6 QBD 561.As a general principle, the
insurer must have complied with his obligation to indemnify the insured. This involves
admitting the legitimacy of the insured’s claim and actually paying the money to him. It
does not follow that the insured must have received a full indemnity for all his losses,
only that the insurer must have done all that he was obliged to do under the contract of
insurance. Thus, the existence of the right of subrogation is not precluded by the fact
that the insured must bear an excess on the policy, nor by the fact that there is an upper
limit on the cover provided.

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DOUBLE INSURANCE AND SUBROGATION

According to the case of Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2
QB 330, [1961] 2 All ER 487 subrogation is the right of any insurer once they have
settled the insured’s claims as seen above. Recovery should be apportioned between
the two insurers and if there is any excess it should be given back to the insured.

V. THE PRINCIPEL OF CONTRIBUTION

Where there is more than one enforceable policy at the time of loss of the same subject
matter the insurer may recover total loss from the either insurer and any insurer who
pays more than his share may claim his contribution from the others in proportion to
the sum insured with each other.

COMMENCEMENT OF OPERATION OF INSURANCE COVER

As a matter of principle when the dully filled out proposal form has been accepted:
We have seen that insurance operates as a contract. As a general rule an insurance
contract is formed by acceptance of a proposal from insured by the insurer in which
case a cover has to begin and both parties to it are bound. The following case is an
authority that a binding contract is resulted to when the proposal has been accepted.

In British Equitable Insurance Co v Great Western Rly Co (1869) 38 LJ Ch 314, 20 LT 422.

Facts of the case: The proposer correctly stated on the proposal form for life assurance
that he had always been in good health. After medical examination he was proved to so
be in good health. When he consulted another doctor he was diagnosed as being
dangerously ill. He nonetheless tendered the first premium without disclosing any of
this and, after a few months’ premiums had been paid, he died. The receipt issued by
the insurer on payment of the first premium stated that the policy would be void if
there had been any material alteration in his health since the proposal form.

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Holding of the court: It was held that there had been fraudulent non-disclosure and that
the policy was void.

Observation: this shows that annulment of the cover from the time of the acceptance of
the proposal means the contract began then not after the payment of the first
premium.

As a matter of practice when the first premium has been paid: most insurance
companies would wait until the first premium has been paid and consider this time as
being the beginning of cover.

In Canning v Farquhar a proposal for life assurance was accepted subject to payment of
the first premium. The proposal form contained a ‘basis of the contract’6 clause. Before
the premium was tendered the life suffered an accident, of which he soon died. The
premium was then tendered but was refused.

Holding: It was held that the company was entitled to refuse the premium because the
circumstances had altered. Where there is a ‘basis of the contract’ clause the
representations must remain true up to the time of contract, and in this case that meant
the tender of premium, since cover was expressly stated not to commence until that
time. The court suggested, obiter, that the position might be different if there had been
no change in material circumstances: it might be that in such a case the company would
be bound to accept the premium when tendered.

TYPES OF INSURANCE CONTRACTS

There are generally two types of insurance contracts, namely
i. Life Insurance and

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ii. General Insurance

LIFE INSURANCE

PARTIES TO A CONTRACT OF INSURANCE

There are four questions which have to be dealt with under this party;

i. who may insure or may be an insurer in Tanzania?

ii. who may take out an insurance contract/ be insured?

iii. Who may enforce an insurance contract?

iv. who may benefit under an insurance contract?

WHO MAY INSURE (BE AN INSURANCE COMPANY) IN TANZANIA?/ INSURANCE

BUSINESS AND REGULATION

At a general level, one may observe that the legislation in Tanzania is characterized by a
number of factors revolving around registration and regulation of the insurance
business under the conditions including:

(a) Legal personality requirement

For a company to qualify to be an insurance company in Tanzania it must be

incorporated. The issue of legal personality of an insurance company is combined with
the issue of residency.

s. 8 of the Insurance Act, 1996 requires that for an insurer to operate legally he must
be a body corporate incorporated under the Companies Act of Tanzania.

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(b) Regulations relating to capital base requirement; (margin of solvency and security
deposit)

An insurer must have a certain amount of capital money to support business locally. The
underwriting business involves paying off of premiums. The margin of solvency is the
amount of money which must be maintained in the business. The company can not
operate below this amount.

The security fund ought to secure the payment of premiums if there are more claims in
a year than the company planned.

The capital of the insurance companies is set by the Minister of finance.

See s. 11 of the Insurance Act, it provides a formula by which a capital can be

determined. To know it you have to go to regulation 13 of the Insurance Regulations of
1998, Part V which deals with the capital requirements for insurers and brokers.

s. 12 of the Insurance Act deals with the margin of solvency and regulation 16 and 17
shows how to calculate it.

(c) Local participation requirement

Since most of insurance business is managed by foreign insurance companies, there is a

danger that capital may heavily be repatriated; due to this the law requires foreign
investors to have partnership in business with the local companies which is the effort to
minimize the impact of foreign investment.

(d) Accounting and reporting requirements

Legislation requires that insurance companies must keep books of accounts plus having
them audited every year.

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There are two principles involved in this requirement:

i. the principle of accountability; in order to help the taxing authorities to

accurate the levy of taxes

ii. The principle of transparency; that which requires the accounts to be audited.

See sections 24 which deals with records and perseveration of records

s. 25; provides for procedure for amendment of accounts

s. 26; provides for auditing of insurers accounts

s. 30; provides for a duty to furnish annual returns to the commissioner

See also s. 31.

Part VI of the Insurance regulations deals with accounts and returns

Regulation of insurance brokers and agents

See s. 46-64 and part V of the regulations.

(e) Regulations relating to the requirement of general observance of the laws of the
country.

If at any time insurance company does not follow the law of the country, license may be
withheld or not granted at all.

See. S. 20 (f) of the insurance Act, 1996. The commissioner may give a notice to the
insurer expressing his intention to cancel his registration certificate.

These are the regulations which govern insurance business in Tanzania.

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WHAT IS THE REGULATORY AUTHORITY FOR INSURANCE

The law governing insurance business in Tanzania is centered on a regulatory

authority. The law sets a regulatory legal regime the centered of which is the chief
executive officer of the authority who is known as the Insurance commissioner who is
appointed by the state. On top of the commissioner is the minister for finance.

WHO MAY BE INSURED?

Only those with requisite insurable interest. Concepts on insurable interest have already
been discussed above.

WHO MAY ENFORCE AN INSURANCE CONTRACT?

This is primarily a question of privity of contract. The general answer would be:

i. The parties to the contract of insurance or

ii. Their agents or legal representatives

iii. or guardians of those who are parties to the contract

iv. Also executors, trustees, assignees or indorsees of a policy of insurance

provided that such assignment is proper.

iv. Also the beneficiary third parties who have expressly been mentioned in the
policy through the party who can enforce it (a policy of this kind is known as
third party insurance policy).

THIRD PARTY INSURANCE

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Third party insurance in Tanzania is expressed in terms of a compulsory third party

motor insurance. The law in Tanzania makes it mandatory that every owner of a motor
vehicle must take out this insurance policy in favour of third parties.

The law that governs the third party motor insurance is known as the Motor Vehicles
Insurance Ordinance, Cap.169.

According to section 4 (1) of the ordinance, there is a duty to every person who owns a
motor vehicle in Tanzania to insure his car. Exceptions are stated in this law as all the
cars belonging to the government of the united republic of Tanzania as well as the
Tanzania Railways Corporation.

The section in particular reads as follows:

‘... it shall not be lawful for any person to use, or to cause or permit any other person to
use, a motor vehicle on a road unless there is in force in relation to the use of the
vehicle by that person or that other person, as the case may be, such a policy of
insurance or such a security in respect of third party risks as complies with the
requirements of this Ordinance’.

This means a third party can enforce this contract.

Who is a third party?

Generally section 5 of the ordinance provides for the categories of third parties who are
the third parties as follows:

i. All users of roads

ii. All persons who get in or out of the vehicle

iii. Those are inside the vehicles which are habitually used for hire.

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The injuries covered are, according to s. 5 are fatal injuries and personal
injuries.

How can a third party enforce a contract of insurance?

Where he is expressly declared to be beneficiary, usually the third party will not recover
payment directly though he is entitled to the same. He has two options:

i. either to sue the holder of a policy of insurance who in turn will sue the
insurance company or

ii. To team up with the owner of the motor vehicle and sue the insurance
company.

See the case of Tarlock Singh Nayar & Another v Sterling General Insurance Co.
Ltd [1966] E.A 144

In this case Tarlock Singh Nayar had taken an insurance policy in which the authorised
drivers were covered. The second plaintiff was the authorised driver who was involved
in accident injuring the passengers; one of the passengers sued the driver in which case
the driver paid damages for such injuries. The driver wanted the insurance company to
indemnify him for the damages he had paid the passenger. As a beneficiary under the
contract, he could not be said to be a party to that contract of insurance.

The court said that the driver could not sue in person; however he could sue if teamed
up with the holder of the policy who is Mr. Tarlock.

DISCHARGE OF CONTRACT OF INSURANCE

A contract of insurance can be discharged most commonly by the following means:

i. By performance when loss occurs/ or risk attaches

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At any time the insured risk occurs the insured is supposed to give immediate notice of
such loss to the insurer and the insurer is supposed to compensate the insured.
However the insurer, prior to compensation studies if the loss is that which had been
insured. Due to this not every loss will be covered by an insurance policy.

CATEGORIES OF RISK

i. ORDINARY WEAR AND TEAR

Ordinary wear and tear is one of the risks that are not covered by an insurance policy.
Instances of wear and tear are not covered because they are not contingent events in
the sense that they occur in the ordinary course of things.

Under common law the reason given for non coverage of wear and tear is that under a
contract of insurance:

‘ the casualty must be a fortuitous one, and not damage such as could be expected to
occur in normal circumstances’ such as ordinary wear and tear through normal use
(emphasis mine)

In Kant & Co. v British Traders Insurance Co. [1965] E.A 108

The insurance contract was one termed as an ‘all risks policy’ i.e. which could cover all
risks; however the court did not imply wear and tear as one of the risks.

An example of all risks policy is a comprehensive motor vehicle insurance policy. As the
name suggests, this policy is supposed to cover all risks except the following;

Lord Herschel in The Xantho [1887] App. CAS. 503 at pg. 509 stated that:

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‘The purpose of a policy is to secure an indemnity against events which may happen
and not against events which must happen’. Wear and tear must happen
(depreciation)

Along those lines it has been held in Hunter v Potts [1815] 4 Camp 203 that, damage to
a ship by rats is not covered by a marine insurance policy. Or

In Austin v Drewel [1814] 4 Camp 360 and in Harris v Poland [1941] 1 K.B 462 that:

Damage of property by smoke and heat as distinct from flames is not included in the
risks covered by a fire insurance policy.

ii. INHERENT VICE

Inherent vice is not covered by insurance contract.

Lord Sumner in British Marine Insurance Co. v Gaunt [1921] AC 41 pg 51, stated that:

‘The risk must be something that happens from without’

INSTANCES OF INHERENT VICE

The following are instances of inherent vice as held by various cases:

(a) In Taylor v Dumbar [1869] L.R 4 CP 206 putrescence of meat through delaying was
held to be an inherent vice which can not be covered by an insurance contract.

(b) In Winspear v Accident Insurance [1880] 6 QB 42 Death by natural disease in respect

of a personal accident policy as opposed to an ordinary life policy was held to be
inherent vice and that not covered by an insurance policy.

See also Issilt v Railway Passengers Association [1889] 22 QB 50

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iii. RISKS THAT ARE UNLAWFUL TO COVER

iv. INTENTIONAL LOSSES OR RISKS are not covered

v. LOSS OF PROFIT

Unless specifically provided in the policy, loss of profit is not covered by an insurance
contract. However loss of value (cost price of goods) can be covered.

In Shelbourne Co. v Law Investment & Insurance Co. [1898] 2 QB 626 where the
insured claimed for loss of profit in a goods policy was informed by the court that loss
of profit is not covered under such a policy.

If loss of profit is mentioned in the policy it is then covered by that policy.

In Brunton v Marshall [1922] KB 10 LL. L.L L.R 689 and in City Taylors v Evans [1921] 91
L.J 379; 38 T.L.R 230 loss of profit was specifically mentioned in the policy thus the
applicants won.

vi. Consequential Loss are not covered: these are discussed herein after soon.

RECOVERY OF THE POLICY MONEY ON ATTACHMENT OF RISK

There are two rules or principles as regards attachment of risk and recovery of insurance
money as follows:

(a) Application of the ‘proximity rule’ (causes and effect)

When loss is suffered and the insured claims to recover from an insurance company a
very basic issue arises; the questions such as

i. What is the cause of the loss?

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ii. Is that cause the risk covered under the policy of insurance?

In determining these two questions the rule used states: causa proxima non remota
spectatur which means that only the proximate cause of a loss is relevant for
consideration and not any remote cause of such a loss.

IMPLICATION OF THE RULE

This is a practical and a discriminatory rule between the losses that are capable of
compensation and those which are not. All losses which are remote or indirect to the
risk insured against are not recoverable.

THEREFORE

As a general rule, losses which are not direct and therefore not proximate to the loss of
property are regarded as consequential losses. Consequential loss is not covered unless
specifically mentioned in any policy.

In Pyralli v Kuverji an insured claimed to recover from the destroyed lorry as well as
the loss he incurred due to the fact that the lorry had not generated money.

In Re Wright and Pole [1834] 1 Ad. & El. 621 where an insured pub was burnt down
the court held that consequential losses such as rent during all the time while the pub
was rebuilt were not recoverable.

WHAT IS THE PROXIMATE CAUSE OF ANY LOSS?

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The meaning of the term proximate cause has been given by decisions made in various
cases. The combination of these cases gives us the following characteristics of a
proximate cause as follows:

i. it should be a direct cause as per Lord Sumner in Becker & Gray v London
Assurance [1918] A.C 101

ii. it must be a dominant cause as per Lord Dunedin in Leyland v Norwich Union
[1918] A.C 350 363

iii. It must be an operative and efficient one as per Viscount Cave in Samuel v
Dumas [1924] A.C

Celebrated writers on insurance by the names Preston and Collinvaux have summed up
these characteristics in one sentence as follows:

‘By proximate cause is not meant the latest, but the direct, dominant, operative and
efficient one. If this cause is within the risks covered, the insurers are liable in respect of
the loss; if it is within the perils excepted the insurers are not liable’.

See it in their book titled:

Sidney Preston and Raoul P. Colinvaux, (1950) The Law of Insurance, Sweet & Maxwell,
Ltd, London. At pg. 74

According to Preston and Colinvaux a loss may have two proximate causes.

THE GENERAL GUIDING RULES REGARDING PROXIMITY OF CAUSES

i. the risk must actually operate
This means that if the risk insured against is fire, fire must have actually started and the
loss must have been caused by that fire and not other reason. Due to this all losses that

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have been suffered because the insured has had to take preemptive measures to
prevent risk insured against from happening are not recoverable because the proximate
cause in this case would not be the risk insured against but the fear of its occurrence.
ii. Once the risk operates, damage to the subject matter due to efforts to check the
progress of the casualty, is covered. Here the proximate cause is the risk insured
against
In Symington v Union Insurance of Canton [1928] 97 L.J.K.B 646, efforts were made to
restrain spread of fire by throwing cork, the subject matter of the insurance policy, into
the sea because fire had already broken out. Loss of cork by throwing into the sea was
held to be compensable.

The test here is:

Is it the fear of something that will happen in the future or has the danger already
happened?

If it has happened, is it so imminent that it is immediately necessary to avoid the danger

by action?
The insurer will be liable if the second question is satisfied.
iii. An accident facilitating the loss must be distinguished from an accident causing the
loss.

iv. Novus actus interverniens (intervention of human acts)

Generally where there is a trace of human action, the cause by human action is the
proximate cause. There are two circumstances in which this may happen; see the
following examples;

i. human action follows a natural cause: where after the occurrence of

the risk that is insured against, human action intervenes and causes the

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loss, such intervention is the proximate cause and not the risk (unless it
was done to mitigate the loss)

In Lawrence v Accidental Insurance [1881] 7 QBD 216, it was held that:

The running down of a man in a fit of death was a proximate cause of his loss of life and
not the fit itself.

ii. Where human action happens at the same time with the natural
cause:
According to Liverpool and London v Ocean S.S. Co. [1948] A.C. 243 it was stated that:
‘ There is a wider rule that where a cause brought about by a human agency is
competing with a cause brought about by a natural cause; the one brought about by
human agency is dominant and therefore the proximate cause since man by his will
dominates the world”.

v. The death- blow cases (where human act begins and is followed by a
natural cause)
The death-blow cases are a reverse of the principle of novus actus interverniens. Under
the death-blow cases where a casualty due to human agency is followed by natural
causes which contribute to the loss, the chain of causation is not broken i.e. it is the
human agency and the natural cause together that are the proximate cause, with the
one completing the loss dominating.

In Leyland v Norwich Union [1918] A.C. 350, therefore, where a ship which was
capsizing due to a storm was hit by a torpedo (a very fast boat) thus facilitating the
destruction it was held that the torpedo gave the boat her death blow i.e. the torpedo
was the proximate cause of the loss boat.

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(b) APPLICATION OF THE PRINCIPLE OF ‘INDEMNITY’ (NATURE OF THE LOSS) AND THE
‘RULE OF THUMB’

Once the loss has been proved to be proximate the insurance company will apply the
principles of indemnity before compensation of the loss.

WHAT IS COMPENSABLE IN THE LOSS?

According to Aubrey Film Productions v Graham [1960] 2 Lloyd’s Rep. 101

The measure of indemnity in respect of the loss of any property is not determined by
its cost but by its value at the date and at the place where loss occurred.

The indemnity grows in a direct proportion to the increase in value of the subject matter
and so does it diminish at the decrease of the value of the subject matter.

All indemnity contracts operate under the following principles

i. insurable interest

The law requires that the insured person must have in the subject matter of insurance
an insurable interest at the time of the loss. No recovery of insurance money if the
insured at this time does not have the interest.

ii. The salvage principle (abandonment principle)

An insured person is entitled only the value of the injury done to the insured property. If
he wants to recover the full value he is supposed to surrender the remains of the
subject matter destroyed to the insurer. The salvage principle runs solely with property.

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According to the case of Rankin v Potter [1873] L.R, 6 H.L. 83, the assured must agree
to treat the subject matter, in cases it is not whole destroyed, as whole destroyed
other wise he can not claim the whole value of it from the insurance company.

According to Brett L.J. in Kaltenbach v Mackenzie [1878] 3 C.P.D 467, this principle
applies to any contract of indemnity and in his own phraseology he said that:

‘…abandonment is part of every contract of indemnity. Whenever, therefore, there is a

contract of indemnity and a claim under it for an absolute indemnity (claim for full value
of the property insured), there must be abandonment on the part of the person
claiming indemnity of all his right in respect of that for which he receives indemnity’

iii. Subrogation (taking over rights of the insured after payment)

Under this principle the insured person is supposed to relinquish every right he has
against third parties to the insured company after he has been compensated.

This usually happens when the risk has been caused by a third party which means the
insured party has the right to claim damages from this third party. The fact that he may
claim from the insured company does not bar him from claiming from this third person;
under this circumstance he has two rights but once the company has paid him he is
supposed to relinquish his rights in respect of the third party to the insurer. This goes
with every other right the insured has from the third party.

Why?

Because the aim of insurance is not to make any person richer than he was before the
loss occurred or to make him any poorer than he used to be prior to such loss.

THE RULE OF THUMB

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The insurance company will employ the rule of thumb principle to measure recovery of
money by the assured.

The rule of thumbs states that:

The measure of recovery is the actual loss suffered or the insured sum whichever is the
less’ i.e one is paid the actual loss so long as it does not exceed the insured sum.

ILLUSTRATION:

I. If A has insured his car against accident for 10, 000/=. If when the car gets accident
and is damaged to the value of 2000/= only then the insured is paid only 2000/= enough
to restore him and not more.

II. If the cost of restoration exceeds 10,000/= say comes to 15000/=, he shall only be
paid 10,000/=

An insurance contract can be any of the following;

(a) i. Over insurance (of valued policies28): this is the situation where an insured person
insures his property at a more sum than the actual value of the same example when a
house of 5 shs/= is insured against fire at 10/= shs; therefore

a. if there is an over insurance and the property has been totally destroyed the
insurance company will compensate for the value agreed.

This will neither make the insured gain more nor lose.

b. If there is partial loss the insured shall recover such proportion of the
agreed value as is represented by the depreciation in the actual value:

28
A policy is a valued one if the parties agreed what should be the value of the subject matter of insurance.

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Depreciation

______________________ X Insured value

Actual Value before loss

ILLUSTRATION:

In Elcock V Thomson (1949) a house was insured against fire. The value of the house in
the policy was agreed to be 106, 850 pounds while its actual value was only 18,000
pounds; the value of the house after the fire came down to 12600/= pounds. The court
held that the recovery was as per the following calculation;

5400 (Depreciation)

__________________ X 106, 850 (insured value) = 32055 Pounds

18000 (actual value)

c. Over insurance (unvalued policy): if the policy is not valued the measure of
indemnity is governed by the following two principles;

i. in case of total loss the insured is paid the market value of the property at
the time and place of loss.

ILLUSTRATION

In Leppard v Excess Insurance Co (1979) the insured who paid 10000 pounds as
insurance against his house could recover only 3000 when it was totally destroyed by
fire.

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ii. in the event of partial loss the insured is paid the cost of repairs

(b) The reverse of over insurance is underinsurance: this is a situation where the
insured sum is less than the actual value of the subject matter. If an application of rule
of thumb is done the insurer will only pay the insured sum.

i. if there is a total loss of the subject matter, the insured will be paid the whole of the
value insured and the remaining part will be a responsibility of the insured person.

ii. If there is partial loss of the subject matter: the rule of thumb will apply.

(d) Full insurance: this is a situation when the value of the subject matter insured is
equal to the insured sum.

i. If there is a total loss, the insurer applying the rule of thumb will pay the 2 million

ii. if there is partial loss the insurer will pay only that part which is equal to the loss
sustained.

ii. Discharge by breach

A contract of insurance is discharged by breach if either of the parties to it fails to fulfill

an obligation, in terms of a warranty or condition, placed on him by the contract. If for
instance the insured breaches a warranty or condition, the insurer withholds the
premium and the contract thereby determines.

iii. Discharge by agreement/ Novation

A contract of insurance can be brought to an end if the parties agree to this effect.
Usually there is a clause in a contract of insurance allowing either party to give notice
seeking to end the contract to the other party within stipulated time. If the notice is

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followed by an agreement to replace the old contract with a new one then this is
refereed to as discharge of the contract of insurance by NOVATION.

iv. Discharge by frustration

Frustration presupposes existence of impossibility of performance of a contract of

insurance. Some of the events which may be frustration in the insurance business are:

i. Liquidation of the company of insurance

ii. The death of the insured person
iii. By operation of law, i.e. coming into force of a law which prohibits the
prolongation of the contract.

Therefore this is a highlight of the law relating to insurance, providing only general
matter. You are advised to read more books for more specific matters on this part.

8.0 NEGOTIABLE INSTRUMENTS

Introduction

The payment system the world over is commonly featured with three agents of
payment as follows:

(a) Payment by cash

(b) Payment by paper (paper base payment)

(c) Electronic transfer of fund.

Negotiable instruments law deals with paper base payment.

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8.1 Meaning and types of negotiable instruments

Negotiable instruments: are instruments which can be negotiated.

Instrument: is a document which entitles someone to the payment of money

To negotiate in the legal sense means: to transfer a title in the document from one
person to the other. Such transfer can be done either by mere delivery (handing over
the instrument to another) or by indorsement and delivery.

To indorse means: to write the name of a person (other than the original owner of the
instrument) to be paid at the back of the instrument and sign it.

The general definition of a negotiable instrument:

Is the instrument whose full and legal title is transferable by mere delivery or
endorsement of the instrument with the legal result that the complete ownership of the
instrument and all the properties it represents passes free from equity to the transferee
providing that the latter takes the instrument in good faith and for value.

8.2 Nature of Negotiability

Negotiability of bills of exchange

Negotiability of a negotiable instrument refers to the effective transfer of a negotiable

instrument to a third party so as to enable him to enforce it in his own name. s. 31(1)
of the BEO is to this effect in that; a bill is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder of the
bill.

Therefore negotiability has to do with transferability of negotiable instruments from

the payee of that negotiable instrument to a third party, in this sense there is no

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negotiation between the drawer of the negotiable instrument and the payee of the
same.

For a negotiable instrument to be fully negotiable the following features have been
noted:

i. It must be such that a complete transfer of it can be made by its mere delivery with or
without endorsement although by the transferor may be necessary.

ii. A full and a legal title in the instrument must pass with such transfer; this implies
that the transferee can sue in his own name as possessing all the rights to the
instrument and to the property it represents.

iii. The title must pass to the transferee, who takes the instrument for value and in good
faith29, free from all equities (interests).

In conclusion these are features that distinguish a negotiable instrument from other
instruments; no need of drawing up a deed or registration of the same to render the
passing of title in a negotiable instrument and other negotiable instruments

Forms of negotiations

(a) It may be by way of indorsement (signing or initialing at the back of the negotiable
instrument) and delivery used in respect of order negotiable instruments.

Types of endorsement

s. 34of the BEO provides two types of endorsement:

29
According to s. 96 of BEA a thing is deemed to be done in good faith,… where it is infact done
honestly… If he takes it honestly and in complete ignorance of any equity affecting the title of the
transferor,it does not matter, according to this section that the thing is done negligently.

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(a) S. 34(1) an endorsement in blank; the one which specifies no indorsee and a
negotiable instrument so indorsed becomes payable to bearer. Here only the signature
of the indorser is seen without the name of the endorsee.

Illustration:

Sangara

(ii) s. 34(2) special indorsement; the one which specifies the one to whom it is payable:

Illustration:

Pay Samaki mbichi or order

Sangara

iii. Irregular indorsement

An indorsement is irregular if it differs from the form of the order to pay e.g. if A has
drawn a negotiable instrument in favour of KISIWA (the name being spelt wrongly, it
was supposed to be KISILWA). In this case KISILWA may indorse this negotiable
instrument as KISIWA the wrongly spelt name and add his right signature. The

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discrepancy between the order to pay and the indorsement results in an irregular
indorsement. See s. 32 (d)

iv. Conditional indorsement

Is an indorsement which is coupled with a condition/conditions, according to s. 33 of

the BEO, the payer may disregard this condition and proceed to pay, the payment will
be valid.

v. Restrictive indorsement

Is an indorsement which restricts further indorsement by the indorsee?

S. 35(1) of the BEO reads that:

an indorsement is restrictive which prohibits the further negotiation of the bill or which
expresses that it is a mere authority to deal with the bill as thereby directed and not a
transfer of the ownership thereof, as, for example, if a bill be indorsed “pay D. only”, or
“pay D for the account of X”, or “pay D or order for collection”

According to s.35 (2) of the BEO, the indorsee in this case acts as an agent and in no
way the owner of the negotiable instrument. He has the right to receive payment to the
bill and the power to sue as that of his employer. However he does not have the power
to transfer such rights as indorsee.

(b) It may be effected by mere delivery to the third party used in respect of bearer
negotiable instruments.

These modes of delivery are provided under s. 31 of the BEO

s. 31(2) a bill payable to a bearer is negotiated by delivery.

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S.31 (3) a bill payable to order is negotiated by the endorsement of the holder
completed by delivery.

Types of negotiable instruments

i. Bills of exchange

Definition: section 3 (1) of BEO

S. 3 (1) of the Bills of Exchange Ordinance, Cap 214 defines a bill of exchange as; an
unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at a
fixed or determinable future time a sum certain in money to or to the order of a
specified person or to bearer.

Analysis of this section results in the following:

That a bill of exchange is;

 An unconditional order
 In writing
 Addressed by one person to another
 Signed by the person giving it
 Requiring the person to whom it is being addressed
 To pay on demand or order at a fixed or determinable future time
 A sum certain in money
 To or to the order of a specified person or to bearer

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ii. A cheque

Section 73 of the BEA defines a cheque as a bill of exchange drawn on a banker payable
on demand.

Differences between a cheque and a bill of exchange

The differences between a cheque and an ordinary bill of exchange are as follows;

i. Drawee; the drawee in a cheque must be the bank while the drawee can be
any person in a bill of exchange.

ii. Time of payment: A cheque is payable on demand only while a bill of exchange
may be payable either on demand or at a fixed or determinable future time.

iii. Acceptance; the bill of exchange is accepted by the drawee on which the bill is
drawn. A cheque does not have to be accepted by the drawee bank before being paid.

iv. Liability on drawer for late presentment for payment; in bills of exchange the
drawer of it is discharged from liability if the holder of it delays in presenting the same
for payment to the acceptor while the drawer of a cheque is liable for six years from the
date of dishonour or from the date it was issued depending on whichever is the later
date.
v. Crossing; Crossing is reserved for cheques only while bills of exchange can not
be crossed.

vi. Relationship between drawer and drawee; between the drawer of a cheque
and the drawee bank there is a contractual relationship, the former being the customer
to the latter. In a bill of exchange there is no such relationship of a banker and
customer.

iii. Promissory Notes

Definition: section 84 of the BEO is an

 unconditional promise, in Writing,

 made by one person to another,

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 signed by the maker,

 engaging to pay on demand or at a fixed or determinable future time,
 a sum certain in money,
 to or to the order of a specified person or to bearer.

8.3 Creation and discharge of bill of exchange

Creation of a bill of exchange will be right only when the features, of the same,
described in the definition are properly reflected. These features are as follows:

i. Unconditional order or promise

When you make this instrument, make sure that it is, first of all, an order. The drawer
must order someone to pay. This order must be unconditional, by being unconditional
means it must be entirely unqualified in its application to a drawee. In more explicit
terms it must not depend on something to happen or circumstances obtaining at the
time of payment.

Illustration of a conditional order:

Paka Mapepe pay Panya Mstaarabu Shs. 2000/= (two thousand only) if you can do that.

Signed: Simba Mzee

Date: 10/07/2007

Here the words if you can do that are conditional; the law requires that the order must
not be coupled with a condition, it must be unqualified.

See the right order in the following illustration:

Paka Mapepe pay Panya Mstaarabu Shs. 2000/= (two thousand only) on demand.

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Signed: Simba Mzee

Date: 10/07/2007

And an order must be distinguished from a request. A bill of exchange must not be a
request as illustrated here under;

Paka Mapepe will you please pay Panya mstaarabu shs. 2000/= (two thousand only) on
demand.

Signed: Simba Mzee

Date: 10/07/2007

The words ‘will you please’ have the effect of making the contents of the instrument a
request.

Legal effect when an order is not unconditional

At any time if the order in an instrument is conditional, the instrument is not recognized
as a bill of exchange. See section 3 (2) of BEO.

The parties must clearly be mentioned in the instrument

If the parties to a bill are not mentioned, the court will usually disqualify it as a bill of
exchange.

Case: In Bickos v Galanos [1924] 1 TLR 599

In this case a bill was drawn as follows:

‘On demand pay to Mrs. Zoi Bickos or Order the sum of 1000/= money received by cash’

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The court held that: this is neither a promissory note, a bill of exchange nor a bill of
exchange.

Why? Not a bill of exchange because it is not drawn on a banker

It is not a bill of exchange because the drawee is not mentioned.

(ii) Addressed by one person to another

(a) The words ‘Addressed by one person’ refer to the drawer

A bill drawn must show certainty as to parties to that instrument. The bill of exchange
must have the drawer according to s. 3 (1) of the BEO.

What makes a person the drawer of a bill/ bill of exchange?

It is his signature; without this signature the instrument is not a bill. The signature is
required by s. 3 (1)

The signature of the drawer determines his liabilities to any person regarding the
instrument – see section 23 of BEO. It follows therefore that if his signature is missing he
has no liability whatsoever.

How does a drawer sign the document?

The following ways can be used in signing:

 The drawer may sign the instrument by using his usual signature.
 If he is a tradesman he can sign using his business name eg. Massawe and
Company Ltd.

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 In case of a firm, the signature of the firm may be used. See section 23 of the
BEO. In case it one person signs, in case of a firm, the signature will bind all the
partners of a firm.
 The drawer may authorise another person to sign in his behalf i.e. procuration
signature.

Effect if signature is not drawn in the ways prescribed above:

If the instrument is not signed by the drawer or under the authority of the drawer the
document can not qualify as a bill of exchange.

This means therefore a signature which is unauthorized is as good as no signature at all.

If a signature is unauthorized it does not qualify as a bill of exchange. S. 24 of BEO gives
effect of the unauthorized or forged signature.

(b) The words ‘to another’ referred to under s. 3(1) refer to the drawee

The drawee is the person to whom the drawer addresses his order.

s. 6 (1) of BEO requires that the drawee must be named or otherwise indicated in the
bill with reasonable certainty.

The section reads as follows:

‘The drawee must be named or otherwise indicated in a bill with reasonable certainty’.

s. 6 (2) allows the drawer to address the bill to more than two drawees but when this
happens it must not be such that the bill is addressed to them in the alternative or in
succession.

In Bickos v Galanos [1924] 1 TLR 599 discussed above

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In this case the drawee was not mentioned in the document that is why the court
disqualified it as a bill of exchange.

(iii) Requiring the person to whom it is addressed to pay some certain in money to or
to the order of a specified person

The words ‘…to or to the order of a specified person’ appearing in the definition refer
to the payee of a bill of exchange.

According to s. 7 (1) where a bill is not payable to bearer the payee must be named or
otherwise indicated therein with reasonable certainty. Therefore the law requires that
the payee must be certain if it is Juma, then Juma must he be.

Types of payees

By s. 7 (3) there are 3 types of payees as follows:

Where the payee is a fictitious or non existing person the bill may be treated as payable
to bearer.

i.e. there are

i. existing payee (K and I)

If the drawer knows of the existence of the payee at the time he signs the bill and in fact
he intends the payee to receive payment, then the payee in this case is referred to as
the existing payee. Knowledge and intention on the party of the drawer must be
present.

ii. Non existing payee (I)

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If the drawer did not know of the existence of the payee when he signs the bill, but
nevertheless intends that the payee should receive the payment, then the payee is
known as the non existing payee.

Clutton and Co. v George Attenborough & Son [1897] A. C. 90

iii. Fictitious payee

Fictitious payee comes into being when the requirement of acceptance of the bill by the
drawee before it is payable is effected. Usually after the drawer has drawn a bill, he has
to present it to the drawee for acceptance of liabilities. Once drawee has accepted the
liability he becomes liable to pay. According to s. 54 of BEA once the acceptor of a bill
has accepted the bill he can not revoke his acceptance.

It follows therefore that if the drawer knows that the payee exists but he does not
intend him to receive payment. The payee under this circumstance is a fictitious
payee.

In Bank of England v Vagliano Bros

There were three persons in this case; Vagliano, a merchant banker who used to accept
foreign bills, Gylka, his cleark who knew how to deal with these bills exactly in the same
way as Vagliano did, Vusina, the purpoted drawer and lastly Petrid, the purpoted
payee.

Gylka, the cleark, making use of the knowledge he had on bills he drew a number of
instruments using Vusina as the name of the drawer and Petrid as the name of the
payee, on Vagliano (i.e. Vagliano was the drawee who was supposed to pay)

See the following illustration: Gylka made the instrument appear as if it had been
drawn by Vusina.

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Vusina Vagliano

Petrid

The document was a forgery in which Vusina, though he existed, had nothing to do with
the preparation of it.

Gylka after drawing it did everything that Vagliano would do in such a situation. i.e. he
made it accepted by Vagliano and made notification to a banker for payment to Petrid.

The bank debited the account of Vagliano, when he discovered the forgery he notified
the bank not to pay but they had already paid and subsequently debited his account.

Gylka who was the drawer of the bill knew the existence of the payee, Petrid but he did
not intend him to receive the money. Petrid was inserted as fiction so that Gylka can
obtain the money for himself.

Therefore Petrid was a fictitious payee.

What is the legal effect where the payee in a bill is a fictitious person?

s. 7 (3) states that; where the payee is a fictitious or non- existing person the bill may
be treated as payable to bearer.

This means any person who presents it may be paid. Why?

Because, By. 54 of BEA until the bill has come all the way to the point of being paid the
drawee is required to accept it first and by accepting it he can not deny his
acceptance.

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iv. Signed by the person giving it/ authenticity of a bill

To be a genuine bill a document is supposed to dully signed by the person who gives or
draws it. According to s. 3 (1) signature is essential, it is this signature which gives
authenticity to a bill of exchange.

Effect if a requirement as to signature is not complied with.

i. By s. 3 (2) the instrument will not qualify as a bill.

ii. By s. 17 (2) of a BEA signature of a drawee is essential to acceptance and by

s. 53 the drawee who does not sign is not liable to pay.

iii. By s. 32 (a) where a bill has to be indorsed, the indorsement must be

authenticated by a signature.

iv. s. 23 generally requires signature for liability.

PRESENTMENT OF A BILL FOR ACCEPTANCE

PRESENTMENT OF A BILL FOR PAYMENT

LIABILITY OF PARTIES TO A FORGED BILL

Under this part before establishing the liabilities it is essential that relevant terms are
introduced as would be used in this discussion:

i. Holder

Section 2 of the BEA defines a holder as the payee/ indorsee in possession of the bill or
bearer thereof

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Drawer Drawee

Payee

If payee or indorsee is in possession

of a bill is called

a holder

Indorsee

ii. Holder in due Course

s. 29 (1) of the BEA defines a holder in due course as;

A holder who had taken a bill, complete and regular on the face of it, under the
following conditions, namely:

(a) that he became the holder of it before it was overdue, and without notice that it had
been previously dishonoured if such was the fact;

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(b) that he took the bill in good faith and for value, and that at the time the bill was
negotiated to him he had no notice of any defect in the title of the person who
negotiated it.

The title of a person who negotiates a bill can be defective if he obtained the bill in one
of the following circumstances;

(i) By fraud

(ii) By duress or

(iii) Force and fear

(iv) any unlawful means e.g. stealing

(v) for an illegal consideration e.g. If it was given in payment of illicit drugs.etc

See s. 96 of the BEA.

Therefore, for a holder to be a “holder in due course” and thus enjoy the full protection
of the law he must have taken a bill that is:

(a) Complete and regular on its face. i.e. if it is given to any

person and asked to notice any irregularities he would fail.

However, it is worth to note that an incomplete bill of exchange is not invalid; s. 20 of

the BEO allows the holder of the instrument to fill in the blanks in accordance with the
authority given within a reasonable time.

(b) Must have taken it before it was over due and he was
unaware that the bill was previously dishonoured.

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(c) He must have taken it in good faith and for value without
notice of any defect in title of his transferor.

ii. Holder for value

Any person who has become the holder of a bill of exchange and who has not himself
given value to the instrument, but previously value had been given to it by some one.

See the following example for illustration;

A B

C PAYEE

D 1 st INDORSEE

E 2nd INDOSEE

Suppose in t his illustration D gave the bill of exchange to E as a gift (which means E has
not given value for it), E is nonetheless a holder for value and not the holder in due
course.

s. 27(2) reads:

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Where value has at any time been given for a bill, the holder is deemed to be a holder
for value as regards the acceptor and all parties to the bill who become parties prior to
such time.

According to this section it is not necessary that value must have been given by him.

FORGERY AND LIABILITY OF PARTIES TO A BILL UNDER FORGED SIGNATURE

A bill is forged if any party to it purports to be any person who did not make it or on
behalf of any person who did not authorise the making of it. This is usually done when a
person signs a bill in the name of another or on his behalf without his authority in order
that the bill may be issued or negotiated, the signature is a forgery.

Example; when a person signs a BILL in the name or on behalf of another without such
other person’s authority in order that the bill may be issued or negotiated, the signature
is the forgery.

Remember the parties to a bill of exchange are drawer; drawee and payee, there may
be indorsers and indorsees. This party discusses liabilities of each one of them when
their signatures have been forged.

A. Liability of drawer (when his signature has been forged)

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A B

D indorser

E indorsee

Under this illustration the last person to whom the bill of exchange is negotiated is E,
suppose the forged bill passed to D unnoticed and finally to E who is denied payment
on the ground that it was forged.

Q.1 is the drawer of this bill of exchange liable on the document?

Answer:

According to s. 3(1), signature on the part of drawer is essential to make the instrument
a bill of exchange. It follows therefore that a person’s liability depends on whether or
not he has signed on the bill of exchange (whoever signs).

s. 3(2) the bill of exchange with a forged signature does not qualify as a bill of exchange.

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s. 23, the drawer is not liable for a forged signature, i.e. he is not liable on the bill of
exchange that he has not signed.

LIABILITY OF THE DRAWER:

As we have seen, the liability of the drawer is dependent on the whether he has put his
signature on the document or not. If his signature is not there then in no way can he
liable.

EFFECTS OF DRAWER’S SIGNATURE:

According to s. 55 (1) the drawer of a bill by drawing it –

(a) Engages that on due presentment it shall be accepted and paid according to its
tenor, and that if it be dishonoured he will compensate the holder or any indorser who
is compelled to pay it…”

(b) he is precluded from denying to a holder in due course the existence of the payee
and his then capacity to indorse.

s. 24 of BEO provides that:

“…where a signature on a bill is forged or placed thereon without authority of the

person whose signature it purports to be, the forged or unauthorized signature is whole
inoperative, and no right to retain the bill or to give a discharge therefore or to enforce
payment thereof against any party thereto can be acquired through or under that
signature, unless the party against whom it is sought to retain or enforce payment of
the bill is precluded from setting up the forgery or want of authority…”

B. LIABILITY OF THE INDORSER WHEN THE SIGNATURE OF THE DRAWER IS FORGED

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Suppose the drawer’s signature on a bill of exchange has been forged, and the indorser
has negotiated it to another person in such state.

We have already seen that the drawer is not liable on the bill of exchange in which his
signature has been forged. What then is the liability of the indorser?

Before answering this question it is worth reminding you the various modes of
negotiating a bill of exchange:

An order bill of exchange is negotiated by indorsement and delivery.

A bearer bill of exchange is indorsed by mere delivery.

I. LIABILITY AS TO BEARER BILL

The indorser will not be liable on a bearer bill of exchange, simply because it does not
bear his signature.

This is the substance of s.58 (1) of the BEO, which reads as follows:

“Where the holder of the bill payable to bearer negotiates it by delivery without
indorsing it, he is called a “transferor by delivery”

Subsection 2 of the same section declares him not liable on the instrument.

Effect of his negotiation

At subsection 3, however, this “transferor by delivery” by negotiating a bill of exchange,

warrants to his immediate transferee being the holder for value that:

(i) the bill of exchange is really a bill of exchange

(ii) that he (the immediate transferee) has the right to transfer it to another person

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(iii) that at the time of such transfer he is unaware of any fact which renders the bill of
exchange valueless.

This implies that the “transferor by delivery” will be liable only to his immediate
transferee and only in respect of the above three guarantees as laid down by sub-
section 3 of this section. The immediate transferee can not claim to all the transferee
prior to the “transferee by delivery”

II. LIABILITY AS TO ORDER BILLS

Problems usually arise with order bill of exchanges which have to be negotiated by
indorsement and delivery.

Coming to the question

No definition of indorser is given in the BEO. How ever ss. 31(3) and 32 of BEO are
important to imply the meaning of indorser.

s. 31(3) defines indorsement. S. 32 lays down conditions for which a valid indorsement
is effected in that it;

‘It must be written on the bill itself and be signed by the indorser. The simple
signature of the indorser without additional words is sufficient’.

This person who signs on the bill to effect an indorsement is thus the indorser.

His signature is, therefore, very essential for without which the bill of exchange will not
have been negotiated.

When the signature of indorser is missing or has been forged, it means then that the bill
of exchange, according to s.32 above mentioned, has not been negotiated and thus title
has not passed from him.

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EFFECT OF INDORSER’S SIGNATURE

But under this circumstance where only the drawer’s signature is a forgery, but that of
the indorser is real (not forged) then the indorser will be liable for the following reason:

By signing a bill of exchange on which a signature of the drawer is forged, he has

presented or given an outlook appearance to the world that the document is a “bill of
exchange”

When the bill of exchange reaches the indorsee, he believes that it is a real bill since it
bears indorsement.

The indorsement by the indorser acts as a guarantee to the subsequent holders that
both the signatures of the drawer and payee are in order.

The effect of this guarantee

This guarantee precludes the indorsers from later denying the truth of their
representation.

This is the general picture provided by s. 55(2) of the BEO, which reads as follows:

The indorser of a bill of exchange by indorsing it-

(a) engages that on due presentment it shall be accepted and paid according to its
tenor, and that if it is dishonoured he will compensate the holder or a subsequent
indorser who is compelled to pay it…”

(b) is precluded from denying to a holder in due course the genuineness and regularity
in all respects of drawer’s signature and all previous indorsements;

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(c) is precluded from denying to his immediate or a subsequent indorsee that the bill
was at the time of his indorsement a valid and subsisting bill, and that he had then a
good title thereto.

Read also s. 24 of the BEO, on the situation where the signature of the indorser is
forged.

Conclusively, the holder in due course will be entitled to sue all those who have
guaranteed the genuineness of the bill of exchange and not those whose signatures
have been forged as we have seen signature if it is not forged is very much essential to
liability of the parties to a bill/bill of exchange.

C. LIABILITY OF ACCEPTOR WHEN DRAWER’S SIGNATURE HAS BEEN FORGED

Assume that the forged bill has been presented to B and he has accepted liability to pay

Will the acceptor be liable?

Answer

According to s. 3 (1) of the BEA signature on the bill is an essential feature without
which a bill is not a bill

According to s. 3 (2) if this and any other essential feature provided under s. 3 (1)

Lacks, then the document would not qualify to be a bill of exchange.

Thus the document is not a bill since the signature is forged

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WHAT IS ACCEPTANCE OF A BILL?

s. 17 (1) of the BEA provides for the definition

The acceptance of a bill is the signification by the drawee of his assent to the order of
the drawer.

Requisites of a valid acceptance

Subsection 2 states that:

An acceptance is invalid unless it complies with the following conditions, namely-

(a) It must be written on the bill and be signed by the drawee and the mere signature of
the drawee without additional word is sufficient

(b) It must not express the drawee will perform his promise by any other means than
the payment of money

Problem

s. 17 says that drawer must write on the bill, but since the signature of drawer is forged
it is not a bill.

What are the legal effects of the instrument of this kind?

1. When the bill was presented to the drawee he understood it to be a “bill”. If he

understood that it is not then he would not have accepted it.

Thus the drawee by accepting it he has given an impression that the document is a real
‘bill’

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The drawee’s signature is not a forgery, by signing it voluntarily, he accepted liability

to pay. That being the case, the acceptor is estopped from denying the truth of his
representation.

The etoppel is provided by ss. 54 and 24 of the BEA

According to s. 54 the acceptor will be liable to a holder in due course

2. Since the document is not a bill thus under it no title has passed

But the guarantee to pay by drawee thereby constitutes him the acceptor made those
who receive the instrument to acquire the rights to be paid. Through the acceptor’s
guarantee all the indorsees were put in a position as if the document was a ‘bill’.

D. A SITUATION WHERE THE INDORSERS SIGNATURE HAS BEEN FORGED

See this illustration

KUKU JOGOO

YAI

KIFARANGA

KUNGURU

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MBUZI

Assume that a valid BILL OF EXCHANGE was drawn by KUKU on JOGOO in favour of
YAI. YAI indorses it to KIFARANGA. After his indorsement KUNGURU steals the bill of
exchange and forges the signature of KIFARANGA and subsequently indorses it to
MBUZI.

Under this situation where the signature of the indorser (KIFARANGA) has been forged
no title will have passed from KIFARANGA to KUNGURU and thus KIFARANGA is still
regarded as the holder of the bill of exchange.

Therefore, since KUNGURU who negotiated the bill of exchange to MBUZI had no title
over it, then MBUZI acquired no title too.

The Legal Position

Though it is in possession of MBUZI after being negotiated to him, the bill is still
payable to KIFARANGA.

What is the liability of the forging indorser? (i.e. KUNGURU)

According to s. 55(2) those who indorse subsequently (i.e. after the forgery) do
guarantee that indorsement is in order. Though MBUZI has given value for it he can

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proceed against KUNGURU and in no way against KIFARANGA since title had not
passed from him.

The fact is, if MBUZI negotiated the defective bill of exchange further to NG’OMBE and
NG’OMBE to FARASI and lastly FARASI to PUNDAMILIA, who presents the bill of
exchange for payment and it is dishonoured, then PUNDAMILIA can proceed only
against all those who guaranteed it to be a bill by negotiating it, of course after the
forgery. This is the substance of s. 55(2)

Therefore liability as to a bill of exchange will depend on two things, presence of a

signature by any party to it whose signature is essential to determine his liability and
any conduct that in the BEA is regarded as a representation from which the party is
precluded to deny the fact that his act has made those to whom the bill has been
negotiated after such representation believe that it is but a valid bill.

DISCHARGE OF BILLS OF EXCHANGE

Generally a bill of exchange is discharged when the purpose for which it had been drawn
has been fulfilled.

There are various ways by which a bill may be discharged according to the Bills of
exchange Act as follows:

i. s. 59 a bill may be discharged by payment in due course where payment is made at

or after the maturity of the bill to the holder in good faith and without notice that
his title to the bill is defective. See further the provisions of the section as here
under.

(1) A bill is discharged by payment in due course by or on behalf of the drawee or

acceptor.

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(2) Subject to the provisions hereinafter contained, when a bill is paid by the
drawer or an indorser it is not discharged; but–

(a) where a bill payable to, or to the order of, a third party is paid by the
drawer, the drawer may enforce payment thereof against the acceptor, but may not
re-issue the bill;

(b) where a bill is paid by an indorser, or where a bill payable to drawer's

order is paid by the drawer, the party paying it is remitted to his former rights as
regards the acceptor or antecedent parties, and he may, if he thinks fit, strike out his
own and subsequent indorsements, and again negotiate the bill.

(3) Where an accommodation bill is paid in due course by the party

accommodated the bill is discharged.

ii. By s. 62 a bill may be discharged by express waiver.

(1) When the holder of a bill at or after its maturity absolutely and
unconditionally renounces his rights against the acceptor the bill is discharged and the
renunciation must be in writing, unless the bill is delivered up to the acceptor.

(2) The liabilities of any party to a bill may in like manner be renounced by the
holder before, at, or after its maturity; but nothing in this section shall affect the rights
of a holder in due course without notice of the renunciation.

iii. By s. 63 a bill may be discharged by cancellation on the part of the holder of it.

(1) Where a bill is intentionally cancelled by the holder or his agent, and the cancellation
is apparent the bill is discharged.

(2) In like manner any party liable on a bill may be discharged by the intentional
cancellation of his signature by the holder or his agent and in such case any indorser

290 Written By Kisilwa, Zaharani

These Lecture Notes have been prepared by: Kisilwa, Zaharani, Business
Laws Instructor, Institute of Accountancy Arusha, 2010

who would have had a right of recourse against the party whose signature is cancelled,
is also discharged.

(3) A cancellation made unintentionally, or under a mistake, or without the

authority of the holder is inoperative; but where a bill or any signature thereon appears
to have been cancelled the burden of proof lies on the party who alleges that the
cancellation was made unintentionally, or under a mistake, or without authority.

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291 Written By Kisilwa, Zaharani