By Eva Mola
What is a contract? This is simply put, an agreement between two or more people. A contract is an essential part of business. For you to be successful in your business, you must be able to express yourself in a contract and be able to understand the contracts you commit your business into. This is because a good contract can build your business. On the other hand, if you are not keen while signing contracts, you may find yourself in trouble.
A contract may be made orally or it may be in writing. An oral contract is valid but may present challenges when a dispute arises since it’s terms were not recorded in black and white. One party may at the time of conflict suddenly develop selective amnesia, leaving the other party at pains to prove the terms of the oral contract. It is therefore advisable to have a contract for business expressed in writing.
The ten things to look out for before signing a business contract are:
It is important that you properly describe the parties to the contract. It must be crystal clear who you are engaging with. If it is an individual, you may want to take a photocopy of their ID and even a photograph if possible. Have the ID number captured in the description of the parties for avoidance of doubt. Their contact details and address is also very important. There have been cases where con-men have attempted to enter into contracts with legitimate business persons. In such a case, the details provided including photograph may be helpful to trace them. Be certain of the identity of the person you are dealing with. If you do not know them personally, it would be helpful to get reference letters that you can follow up with.
If you are contracting with a company, they should provide a copy of their registration certificate. You may also independently take out a CR12 of the company (a Companies Registry Search of the company’s directors and shareholders). You may also go ahead to request the ID copies of the directors as well as their address and contacts. Further, make sure that the person who you are discussing with and signing the contract with have the full authority of the company to enter into legally binding contracts on behalf of the company. You can request the person signing the contract to produce a Power of Attorney showing that they have authority to make decisions that will affect the company.
In some contracts, you will notice they state that the contract will apply and be binding upon the parties, “their heir,, successors and assigns”. This means that the contract will continue to apply to that party even after it has changed ownership or control. For a long term contract with a company, this could be useful to avoid having to re-negotiate the terms each time the composition of the company occurs which may not affect the subject of the contract.
In a contract there is usually a person who presents an offer to the other party. The other party in turn may elect whether to accept or not accept the offer. However, where you have been offered a deal and you respond by requesting any change to the terms of the deal, that becomes a counter-offer. This is the negotiation portion of the contract. Make sure that when you negotiating the terms of the offer/ acceptance, you have all the facts concerning the deal. It would be a shame to accept an offer that is perhaps overpriced simply because you failed to research on the market rates.
The contract you enter into must be legal. The law of contracts will only apply to legal contracts. A contract for some illegal agenda may not be honoured and will be impossible to enforce. Do your research and due diligence to make sure that there is no term within the contract that bears any illegality. Related to this, consider whether there are laws or regulations that guide the subject matter of the contract. Make sure that the terms of the contract do not contradict the legal requirements of the guiding Acts or regulations.
Consideration means the price of the contract. It may be in form of currency or in form of return of favour. It must be mutual, meaning each party receives some form of price for their time and effort. Indicate when, where and how the consideration is to be paid. If it is payable in instalments, describe as clearly as possible when payment becomes due, and what interest if any accrues due to non-payment.
To avoid doubt and future conflicts, set the duration of the contract. If possible include the exact date when the agreement comes into force and also the exact date when the contract will end. Be very careful about timelines. Sometimes a contract is dependent on timelines, and where the timelines are not met, a breach of contract occurs. Check the contract closely for timelines, breach of timelines could cost you! At the same time, a clause on timelines would be useful where the subject of the contract has sensitivity to time.
The subject matter of the contract is the reason for which the parties are getting into an agreement. The parties are likely to have different interests, but there is that common goal which has made the contract possible. Ensure that you capture the subject matter correctly and that each party’s interest is clear. A contract is only valid where each party voluntarily agrees to its terms. The items that after negotiations could not be agreed by both sides should not be in the contract.
Whether the subject matter is a service or a product, it must be adequately described in detail. Leave no room for doubt. If possible, provide registration documents, photographs or other means of detailing what the subject matter is, and its extent.
The role of each party to the contract must be clearly defined. If possible, list down each party’s obligations as much as possible. This determines the expectations that the parties will have of each other, preventing conflict. This also helps to track progress.
Define who among the parties bears liability in the event liabilities occur. Based on the nature of the business, you can consider the risks and discuss who will bear what responsibility when the risk occurs. This will go hand in hand with insurance, since one can only take insurance over that which one has insurable interest in. Consider and divide up the risks accordingly, then sign off on it at the time of negotiating the contract.
This is where many companies fail at. It is important to discuss what would entitle a party to terminate the contract before it ends, what the process of termination will be like, discuss modalities of returning each other’s property, discuss what happens to jointly acquired property at termination and what consequences should met by the party who breaches it.
It is inevitable that at some point, the parties to a contract disagree. The dispute resolution clause is helpful in setting the tone for conflict resolution. The clause will dictate the process to be followed in the event of dispute. Usually, it would begin with an attempt at reconciliation by the senior managers of the parties, escalate to structured Alternative Dispute Resolution methods such as mediation, before finally escalating into either arbitration or litigation. This section may indicate time-lines during which each method may be attempted, how communication should be handled during the period of conflict including how to choose the forum, place and arbiter.
Keeping your interest protected
It is advisable to have your contract drafted or reviewed by an advocate. This gives you the security that your best interest has been protected through the keen eyes of your lawyer. You can engage an advocate on a one-off basis or on retainer. It is also important to consult or seek legal opinion before terminating a contract prematurely. You should be well aware of the legal risks as well as the financial consequences of your actions.
(This is an excerpt from a presentation made by Eva Mola to members of the Association of Kenya Entrepreneurs on 7th April 2018 at Koblenz Hall, Mombasa from 2pm – 4pm. To invite Lawquery to make presentation on any legal issue, email us on [email protected])
CEO, Lawquery Limited.
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