10 Contract Clauses Every Small Business Owner Should Be Aware Of:
One good thing about social media (and particularly Instagram) is that it has helped showcase how enterprising and resourceful the average person is. Small and medium scale businesses are springing up daily, hustling and succeeding.
For these businesses, either at the early or later stages, they may need to enter into some sort of contractual agreements relating to the sale of their goods or provision of their services.
Larger businesses will typically resort to legal counsel in drafting their documentation, while smaller scale entrepreneurs (if they remember to enter into legal contracts) tend to either use templates from the internet without understanding the contract clauses, or simply agree to the documentation provided by the other party, without negotiating any of the clauses.
While the nature and purpose of each agreement will obviously determine the clauses to be included, there are a few generic clauses that are particularly important, and which every small and medium business owner should take note of.
1. Parties: Basically, be certain that you are entering into the contract with the right person. This ensures that if necessary, you can bring a claim against the appropriate person to comply with the obligations under the agreement. Note that in law, a company is a different person, separate from its owners. So, if entering into a contract with a company, make sure it is clearly stated XYZ Limited and also signed appropriately by the Company (see point 10 below). In Nigeria, registered business names and un-incorporated entities have no legal personality and cannot enter into contracts. In this case therefore, you should ensure that the owner of the business personally enters the contract for and on behalf of the business. i.e. John Snow, for and on behalf of John Snow Ventures.
2. Term and Termination: How long is your contract valid for? This has to be a clear and definite period. Six months, 1 year, 5 years etc. An agreement that fails to state a definite period is uncertain, and can lead to unnecessary problems. A typical example usually given is "This agreement will last for the duration of the war". That's too uncertain because no one can tell when the war will end. It's helpful to also state when and how such agreement will be renewed. i.e. This contract will be for an initial period of six months, and will be automatically renewed unless terminated. Flowing from this, your agreement should contain termination rights. Who can call the agreement to an end? Under what circumstances? What happens when the contract is terminated?
3 Consideration: A contract without a consideration is void. Consideration is simply legalese for 'what are you giving me for doing this for you?' So basically, if you agree to provide a service to someone, and the person agrees to pay you N5,000, the amount to be paid is the consideration. Price is often the most common form of consideration. Please ensure your agreement states this clearly, as well as when and how such consideration will be provided.
4. Party Obligations: This is probably the entire essence of the contract. What are the obligations of the parties? When are they to be performed? Who will perform them? These should be clear so the parties to the contract are aware of their roles and responsibilities, and more importantly so that it is easy to spot when a party has failed to perform its obligations leading to a breach.
5. Limitation of Liability: This is slightly technical but quite useful. If for any reason, you breach the agreement and the other party files a claim, you basically want to ensure that your liability is limited in terms of the amount you can pay back. So for example, the clause will provide that "in the event of any claim by party B, party A will only be liable to the sum of N200,000". If you are providing a service, it's typical to limit your liability to the price paid by the other party for that service.
6 Confidentiality: If in the course of your dealings with the other party, you will be providing or sharing confidential information, it is vital that such information is not shared to unnecessary third parties. Usual exceptions will be that it may be shared to the other party's employers or agents as necessary, or it may also be shared if required by law. If you've developed a recipe or software, and you are entering into a contract with a manufacturer or developer, you would need a confidentiality clause. Clauses regulating ownership of Intellectual Property should also be included, if required.
7. Governing Law: It's important to state what law governs your contract. If issues arise, and have to be settled in a law court (or via arbitration), the law the parties have chosen will apply. Parties are generally free to choose any law of their choice to govern their agreements, although it is advised that the law chosen has some correlation with the Agreement. So, Nigerian law would typically be chosen for a contract between two Nigerian parties to be implemented in Nigeria. Be particularly careful if you use templates from the internet, as these may refer to a foreign law.
8 Alternative Dispute Resolution (ADR): At the time of entering into the contract, no one really expects any issues to arise. But the sad reality is that they do, and small business owners typically do not want to waste resources on court matters (especially in Nigeria!). An advisable approach is to provide at first instance for an independent third party mediator who will resolve any disputes. Such mediator could be agreed by the parties before hand. For e.g "In the case of any dispute between A and B, the Chairperson of Women in Management, Business and Public Service (WIMBIZ) shall resolve such disputes, and her decision shall be final". Arbitration may be employed as well, but this still involves rules of evidence, procedure and legal expertise.
9 Entire Agreement Clause: In most cases, before the final contract is concluded, parties may have exchanged several draft contracts and/or other written or oral correspondence discussing the terms of the agreement. The purpose of an entire agreement clause is to ensure that only the obligations and clauses contained in the final agreement bind the parties. Hence, all previous negotiations are irrelevant. This is important because many times, discussions during negotiations are way off from the final agreement. It is also useful to include to variation clause which states that the agreement may not be varied except with the consent of both parties.
10 Execution: Ultimately your contract should be signed. Ensure that the party signing is the party that has entered into the contract, particularly in the case of sister/parent companies. If individuals are signing the contract on behalf of a company, please ensure that such persons are directors /authorised representatives who have the power to bind the company.
Hope this helps, but please always seek legal counsel where necessary.
This post was originally published on BellaNaija on 17/05/2016