Before You Sign That Contract : How to protect your business and personal interests in simple contracts
With human interactions come commitments, varying from simple, casual, to commercial; these variations qualify as contracts. Studies show that only few people, perhaps men of the orbit have not or will not enter contractual obligations in their lifetime, whether as individuals or on behalf of a business, it is therefore a major and important part of human endeavour.
The importance of contracts cannot be over-emphasised, history shows that contracts are the most popular legal documents and have been in use since the earliest development of legal system. Contracts simply ensure that a party stays true to his/her/its obligations and commitments and when they default, there is a remedy to the other party.
Statistics reveal, about 80 million Nigerians will search the internet for some legal knowledge before entering into a contract, and out of these 80 million, 40 million will not consult a lawyer before executing a contract. Many businesses have borne avoidable risks and many lives have gone awry as a result of misjudged contracts, or even worse, the lack of it. This article will attempt to explore some important features that a standard contract should have to ensure your interests and that of your business are adequately protected.
- Your obligations must be clearly stated and defined. At inception, you must know certainly, what role you are playing in the contract.
- You must identify risks that may arise in the course of fulfilling your obligations in the contract. This will inform the risk mitigation clauses you will look out for (include if you are drafting).
- You must identify punitive clauses in case you default. Are the terms achievable or realistic?
- What remedies are available to you in case the other party defaults? You should look at provisions that can cushion the effect, keeping in mind that “default is a realistic likelihood”
Some important clauses:
- Parties: This sounds cliché isn’t it? But many people have signed contracts which ended up unenforceable due the status and (in)capacity of the other party(ies). For example, if the other party is a minor (under the age of 18), they may not be legally capable of entering into a contract, and you need to ensure that they are doing this through their guardian to avoid unenforceability. If the other party is illiterate, you must include an illiterate jurat, or how else do you prove they understand the contractual terms? Other categories of parties against whom contracts may not be enforced are persons of unsound mind inter alia. The nature and capacity of the other party in your contract should therefore not be ignored.
- Commencement: This also is mostly taken for granted by many but has proven quite important to the success of contractual agreements. Is the commencement date clearly stated in the contract or is contingent upon the fulfilment of a condition? You must know this to understand when your obligations begin.
- Consideration: What is the value exchanged for the performance of your obligation? Is it money or a promise of money, or even the performance of an action? It must be clearly stated. Some things appear to be of no value but seen as sufficient consideration in the eyes of the law. Consideration cannot be from the past.
- Form of contract: If your contract is written, it simply will make things easier as even a novice would be able to see in black and white all the terms binding you and the other party, and your intention to make the commitment legally binding is unlikely to be in doubt. However, if your contract is oral, it is more difficult to prove, except unless there are witnesses willing to give evidence to corroborate your claim. Oral contracts are valid and binding but written contracts are safer, so except it is a domestic arrangement and you have no intention of creating a legal duty, please let your contract be in black and white, 99% of the time, it comes in as a handy reference.
- Risk Management, Allotment, Mitigation or Avoidance. There are clauses that help mitigate your risks in a contract, depending on the nature of the contract, some standard clauses like insurance, indemnity, and frustration are the go-to. You should look at terms that will always keep your risks low, especially if you are drafting it. If you are not, you can always, or almost always negotiate.
- Dispute Resolution: Disputes are an inevitable part of human interaction; therefore, provision must be made for disputes resolution in your contract. Arbitration is largely becoming standard practice in large commercial transactions, while simple non-commercial disputes can be resolved through litigation or mediation. It can get more complicated in commercial transactions, especially if it’s cross border- over choice of law, forum, agreeing on the Arbitrator etc. Lawyers are always more involved so the parties ease into the process. You should look at dispute resolution clauses that will not work against you.
- Remedy in the event of default. This has two edges! On one hand, you are looking at remedies available to you in case the other party defaults. Is it a huge sum of money, is it restoration of whatever you have exchanged or what? You need to know what it is and if it is sufficient to cover your loss. On the other hand, it may mean your responsibilities to the other party if you breach. Are there punitive measures? You should keep in mind that in most cases, the remedy available is uniform to both parties and you may be the one in breach and not the other party!
- Termination: When does the contract end? When all obligations are fulfilled? Maybe Yes. Or maybe if there is a default by one party. Can you just withdraw in the middle of it? What if something happens and you cannot continue to fulfil your part of the contract? Perhaps the subject of your contract has suddenly become illegal in your state or there is a pandemic and it has just become impossible for you to perform? What happens then? There must be certainty in your contract on when it will or can end. What has a beginning, must have an end.
It is quite important to bring your attention to the fact that working with a lawyer before executing a contract will be the best decision, and this article does not in any way replace or take the form of any legal advice offered by a lawyer. This article is intended to proffer some education and guidance to execution of simple contracts and is in no way, legal advice. Please consult your lawyer.
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Centre for Law and Business