LAW AND ENTREPRENEURSHIP: CONTRACTS AND AGREEMENTS

Introduction

As a business, you will come across and need various contracts to guide your business activities and interactions with others; ranging from employment, service, and partnership, to sales contracts/agreements. However, understanding the content of these contracts and their implications can sometimes feel overwhelming. Therefore, It is important to be acquainted with the knowledge of what makes a contract valid, the key terms to look out for and how a contractual relationship generally operates. This installment in the "Law and Entrepreneurship" series aims to address contracts in general terms. Since, each contract is unique, making it impractical to cover all possible variations, this piece will highlight some general concepts you should understand and key terms to look out for.

What is a Contract?

A contract is simply an agreement between two or more persons or businesses to do or not to do a thing, with the intention that it is enforceable at law, usually with monetary or other economic or non-economic gain moving from one party to the other in exchange for what the receiving party has agreed to do. A contract can be entered into either orally or in writing. However, the advantages of a written contract overshadow the ease of and costless oral contract form. It is highly advisable to always opt for written contracts/ agreements.

What makes a contract Valid?

A contract comes into existence when parties have conclusively reached an agreement and the resultant rights and obligations are considered enforceable by law. The following essential elements are crucial to the validity of a contract.

1.     Offer and Acceptance:

An offer is a clear proposal, made by one party (the offeror) to another (the offeree) while acceptance is the unequivocal agreement to the terms of the offer by the offeree. This creates a binding contract, provided all other essential elements are present.

2.     Consideration:

Consideration is a legal term used to describe the benefit each party to a contract receives. Consideration in a contract is essentially the "give and take" or the "something of value" exchanged between parties to an agreement. It can be money, services, goods, or a promise to act or refrain from acting. Consideration is essential for a contract to be legally enforceable.

3.     Capacity:

The parties entering the contract must have the legal ability to do so. This generally means they must be of legal age and have a sound mind. If they are entering into the contract on behalf of an entity or another individual, they must have the authority to do so.

4.     Legality:

The subject matter of the contract must be lawful. Contracts involving illegal activities are void and unenforceable. An example is a contract for sharing the proceeds of a crime.

5.     Mutual Assent and intention to create a binding contract:

Both parties must have a mutual understanding and agreement on the terms of the contract, often referred to as a "meeting of the minds."  The parties must intend that their interaction of offer and acceptance creates a legally binding agreement between the parties which could be enforced by law. In business agreements, the law always presumes that the parties intended for the agreement to have legal consequences, however, this can be rebutted by express terms in the agreement saying otherwise.

Asides the above listed elements; it is important that whatever is agreed upon, that is, the basis of the contract, is performable and legal.

Key Items to look out for in a contract

1.     Parties Clause: all parties involved in the contract need to be clearly identified, including their legal names and addresses. Also, ensure that the parties have the legal capacity and authority to contract. Where a party is misidentified or does not have the legal capacity and authority to enter into a contract, this affects the validity and enforceability of such contract.  

2.     Term and Termination Clause: this specifies the duration of the contract and when it will lapse as well as how parties can end or exit the contract before the agreed end date. The termination clause typically specifies the procedures, notice periods, and any requirement involved in the termination of the contract.

3.     Scope of the contract Clause: a contract is usually in respect of a subject matter. It must stipulate the extent of the subject matter that it covers in clear terms. This clause defines the service, product, deliverable, and obligations of each party to the contract. A breach would mean non-performance for which the non-breaching party can seek specific performance or damages.  

4.     Payment terms Clause: payment terms should be clear. The payment amounts, due dates, and methods of payment should be outline, including any penalties for late payments. A breach of this term makes the breaching party liable to an action to recover an unpaid sum.  

5.     Warranties and Representations: this would usually contain statements of facts of promises made to induce a party into a contract. They do not however guarantee performance. Warranties are promises that certain things will be true, while representations are factual statements. Where a warranty is breached, the other person can claim damages but typically cannot end the contract. However, where a representation is found to be false, the other party can end the contract and also seek damages for any loss resulting from the misrepresentation.

6.     Confidentiality Clause: this clause contains provisions to protect sensitive information from being disclosed to unauthorized parties without the permission of either party. Breaching this clause can expose a party to reputational damage and legal action. The non-breaching party can seek damages or terminate the contract.

7.     Dispute Resolution Clause: this clause sets out how disputes arising between the parties are resolved. It sets out the preferred procedure to be adopted, whether through arbitration, mediation, or litigation. It also specifies the venue for resolution and jurisdiction.

8.     Force Majeure Clause: it is necessary to specify the events that qualify as force majeure on which basis the party would be exonerated from liability of non-performance. They usually cover events beyond the control of parties, like, natural disasters, war, etc.  

9.     Indemnity Clause:  this clause outlines the responsibility of each party to compensate the other for damage or liabilities caused by the actions of the other. It usually relates to third-party claims like lawsuits for negligence, etc. Where a party fails to indemnify the other, the injured party can pursue a legal action to recover the cost.

10. Governing Law Clause: this clause determines which jurisdiction’s law covers the contract. It is advisable to always ensure that the desired jurisdiction is clearly stipulated taking into consideration the territorial location of each party.

11. Intellectual Property Clause: this clause stipulates the ownership, use, and protection of Intellectual Property created In the course of the contract. Where the contract involves some sort of creation or collaboration, it is important to include this clause.

Contractual Breaches

Breach of contract occurs when a party, fails, refuses, or neglects to carry out his obligations under the contract, without lawful excuse; or performs it defectively (where a party is required to do something under the contract but instead does another which differs, for instance, in quantity or quality or time) or is incapacitated from performing (for example, a vendor is in breach of a contract for the sale of a specific thing if he sells that specific thing to a third party).

A breach could either be a minor breach, where there is a breach of a minor term, allowing the contract to continue but possibly resulting in damages against the breaching party; or a material breach which involves a significant failure to perform or a breach of a fundamental term. A material breach often justifies termination of the contract and a claim for damages by the non-breaching party.

Remedies

Where there is a breach, the non-breaching/injured party has the following remedies:

1.     Damages: an injured party can claim financial compensation for losses that have been caused by the breach.

2.     Specific Performance: An order of specific performance is one that compels the person against whom it is made to carry out his obligations under the contract. Where damages would be inadequate, and where it would be just and equitable to do so, the Court may make an order requiring the breaching party to fulfill their contractual obligations.

3.     Rescission and restitution: upon a breach, the injured party can elect to terminate the contract. The majority of the time, the jurisdiction of the court is always invoked rather than settlement out of court because of fear that the other party may subsequently bring an action on the agreement and also because restitution (restoring parties to their position before the contract)  which is essential to this remedy can only be properly carried out by a court. The remedy of rescission is available to a party where there has been fraud, misrepresentation, misdescription, or mistake.  where the remedy is granted, the contract is no longer in existence, accordingly, the question of claiming damages for its breach does not arise since the full effect of rescission is to treat the contract as if it has never been entered into.

Ending a contract

A contract can typically be brought to an end through any of the following ways:

1.     Expiration: here the contract comes to an end following set or agreed duration or where there is a right to terminate the contract.

2.     Termination (for breach): here an injured party can elect to end a contract where there is a breach, usually a material breach of the contract by the other party. The termination must be unequivocally communicated to the breaching party. Also, subsequent performance should be refused or the injured party may be held to have affirmed the breach and cannot later terminate the contract.

3.     Vitiation: this arises where parties have reached an agreement but the existence or non-existence of some material fact, occurrence or non-occurrence of some event impairs the validity of the agreement. Vitiating factors include misrepresentation (which could be fraudulent, negligent, or innocent), Mistake, undue influence, illegality, and duress.

4.     Frustration: a contract may be discharged if, after its formation, an unforeseen event occurs that makes the performance of the contract impossible, illegal, or essentially different from what was contemplated.

Closing Thoughts

It is important to understand the importance of contracts in business or personal dealings, as they are the foundation of any agreement. By understanding the fundamentals; you can better manage your business relationships and mitigate potential risks, ensuring that your contractual dealings are as smooth and beneficial as possible.

Key Takeaways

1.     It is highly advisable to always document every form of agreement or business interaction.

2.     Always read contracts thoroughly.

3.     It is important to engage a legal practitioner when reviewing contracts, especially ones that might have an economic impact on you or your business.

Note: If you need legal advice or further clarification on this or any of the topics discussed in this series, feel free to direct message me or reach out via email at Lifeernest@nigerianbar.ng!

Disclaimer: This article does not constitute legal advice. The information provided is general in nature and should not be relied upon as a substitute for consulting with a qualified legal professional regarding your specific circumstances. Always seek tailored legal counsel when addressing legal issues related to your business or entrepreneurial ventures.