The importance of contracts
Over the years, in my professional capacity, as well as in my personal life, I have seen extremely ugly disputes erupt amongst people who would have once referred to themselves as close friends or family; all because they attempted to do business or engage in a project together which subsequently went pear shaped. I often tell people ‘even if you are going into business with your mum, make sure you sign something setting out, in clear terms, exactly what is expected from each party’.
The importance of formally documenting proposed business obligations cannot be over stated. Some people believe it might be insulting to the other party if seemingly out of nowhere they bring a document for that party to review and sign; but I always stress that prevention is better than cure, and in most instances, to actually save a friendship one has to be objective and follow due process. If you were doing business with a stranger, you would certainly mandate that the two of you sign something to show each-others clear intentions…. So why should this change because you are dealing with your “best friend”.
The Principals Behind Legally Binding Contracts
The foundations of legally binding contracts are premised on intention, an offer, acceptance of that offer and valid consideration. Each party to a contract acquires rights and duties relative to the rights and duties of the other parties.
Key elements for the formation of a legal contract include: -
a. Intention – all parties must have intended to create relations by entering into the contract;
b. Offer – there must be a valid, definite and clearly stated offer to do something;
c. Acceptance – this must be unequivocal and unconditional, and must be in accordance with the terms of the initial offer; and
d. Consideration – this may be in any form accepted by both parties, aside from a monetary consideration, it can also take the form of physical objects, promised actions, services, absence from future actions and the list goes on.
The general position of legal authorities is that any contract is legally binding and enforceable where the parties to the contract, at the time of entering into the contract, had the intention to be bound to the terms of the contract. All courts around the world appreciate that the sole objective of a legal contract is to define the agreement that the parties have consented to enter into, thus fixing their rights, duties and obligations in-line with what has been clearly set out in the contract. There is no legal body empowered to enforce the terms of a contract which does not exist.
Capacity to Contract
In saying this, I must stress that there are instances where a party to a contract may be deemed as lacking the capacity to enter into the contract, thus the contract regarded as unenforceable where some laws which relate to that nature of person are not duly complied with.
These persons include: -
a. An Illiterate – this is generally a person who cannot read or write in the language in which the contract has been executed;
b. An Infant – this is persons under the age of 21 (with an exception being contracts for the sale of goods)
c. A Lunatic or Person of Unsound Mind – however in these instances, a contract entered into with a lunatic at lucid intervals is valid (here the test for determining whether someone is a lunatic is not quite clear under Nigerian law, as we often see “many are mad but few are raving”)
d. A Drunkard – again the test for differentiating a drunkard from someone who likes to drink often is somewhat grey, however where it can be proved that the drunkard was sober at the time of entering into the contract then the contract would be binding.
Parties to a contract are bound by the terms of that contract, even in instances where the terms are more favorable to of the parties; as long as the contract is not the result of duress, undue influence or fraud, it is not the duty of the courts to determine the business viability of the contract terms.
I must empathize that the contract does not have to perfectly drafted to be binding, although advise from a professional would always be a best case scenario, in the event that this is not possible, parties may simply google the applicable template and adapt to suit their needs, or write out some pivotal points on a sheet of paper and sign.
The following are some vital clauses I would advised to be included in every contract: -
1. Commencement Date – this is the date upon which the contract will be deemed as validly existing;
2. Parties – here you list the names and addresses of the parties to the contract, where any of the parties is a company, one may also include the company registration number, and the country in which the company was registered;
3. Recital – this is a clause which details briefly the facts surrounding the transaction, and may be narrative or introductory by nature. For example, in a contract for the sale of goods it would be narrative and would tend to specifically state how the seller came about possession of the goods;
4. Consideration clause – as titled, this clause details the consideration for the transaction;
5. Receipt clause – here the party receiving the consideration accepts receipt of same, or where the consideration is not of a tangible nature confirms acceptance of whatever consideration has been proposed;
6. Capacity – this clause confirms the party’s capacity to enter into the contract;
7. Termination clause – this usually details what constitutes a significant breach or several events which could lead to termination if not rectified within a specified period of time;
8. Choice of law clause – this clause details which laws will govern the contract, there must be a rational reason for the choice of law specified, as the laws of different jurisdictions may affect the parties differently;
9. Alternative dispute resolution clause – this clause creates an obligation for the parties to submit their dispute to any of the alternative dispute resolution options. It may also detail a course of actions both parties need to take in order to rectify any possible discrepancies; and
10. Signature – parties should bear in mind the signatory requirements of a company.
The truth is, there are several multi billion naira industries, which have been successfully operating in Nigeria over several decades, established by a simple gentleman’s handshake. Many people believe that in an attempt to be over diligent one can end up over complicating the matter and set the foundation for distrust; akin to getting a prenup before entering into a marriage.
Many people, especially in the Nigerian jurisdiction, because of the difficulties experienced or the tedious nature of the litigation procedure, believe that most contracts are not worth the paper they are written on. They believe that in most instances when one or more of the parties involved purposely and disrespectfully rescinds on their contractual obligations, little to nothing can be done to immediately rectify the situation. The truth is the Nigerian court system is over saturated, with final judgment often taking several years from the date of the initial application. However, where the dispute is amongst related parties, any mutual friend may intervene and give their objective interpretation of the terms of the contract.
Ivie is a commercial lawyer, with experience and keen interest in projects and transactions work within the Sub Saharan African region. She is called to practice in England and Wales and Nigeria.
Ed's Note - This article was originally published here.