What to look out for when reading a contract

30

BY ELSIE OYOO

You are bound to come across contracts in most of the deals you enter as a businessperson. Developing a basic understanding of how contracts work will help you to tell whether a given contract correctly captures the commercial transaction you have negotiated, even before your lawyer gives it a more in-depth look. In addition, knowing what to look out for in contracts enables you to hold your lawyer to account and ask him/her the right questions. Always look out for the following:

Description of the parties

Does the contract correctly describe the persons it covers? The description should be as recognised by law. For example, the contract should refer to individuals using their names as captured on their national identity card or passport. Likewise, for company names, although the company may be popularly known as XYZ, in contracts, the name and address recorded in the certificate of registration should be used. Furthermore, the contract should contain the registration number and the place of incorporation of the company. Taking our example, the name should be “XYZ Limited, a limited liability company incorporated under the laws of the Republic of Kenya under registration number PVT-XXX111 and of P.O. Box 123 – 00000, Nairobi in the Republic of Kenya”.

The consequences of not naming or naming a party wrongly could be dire. Courts could find that this mistake renders the contract non-existent or that the person you intended to refer to is not part of the contract, therefore is not liable to pay damages. Even where the courts decide to rectify the mistake, you will have to waste valuable time remedying the mistake.

Offer, acceptance, value exchanged and intention to be legally bound

No matter how long or complex a contract is, always ensure you can pinpoint the offer, acceptance and the value exchanged between parties for the benefit given.  One party to the contract must offer to pay money, provide services or supply goods. In response, the other party should accept that offer clearly and unconditionally. The party accepting the offer should also give something valuable in exchange for the offer.

Although it is also a requirement that both persons entering into the contract should intend to be bound legally, Kenyan law presumes this intention in commercial transactions. You therefore do not need to rack your brain about it when reading your agreement.

Timelines and dates

You should pay particular attention to dates and timelines provided for in the contract. For instance, when will the contract take effect? In some contracts, the agreement takes effect on the date of the contract, or the date when the last party signing signs or another date chosen. The other important date is when the contract will end. Will you be able to pay or deliver the goods within the stipulated period? There may also be interim timelines for fulfillment of a certain portion of work, delivery of a given portion of goods or the payment of money once it is invoiced. You should note all key dates and probe whether they are practical.

Beware of contracts that have vague timelines as they make it difficult to hold the other party to account.

Proper signature or execution

After you approve a contract, you should always ensure proper closure of the contract negotiation by signing or executing it correctly and ensuring that the other party does the same. Statutes and your company’s governing documents dictate how contracts from your company should be signed or executed.

For example, to be enforceable, contracts for the transfer of land should be in writing, signed by all the parties and witnessed by a third party. Where a company is involved, the land contract can be signed by an authorised representative who has been given this power under a registered power of attorney. Alternatively, the company could affix its common seal as set out by the company’s governing documents. 

To ascertain the mode of signature or execution required for your company and for the most common types of contracts you come across, please confirm with your lawyer in advance. In some instances, the existence of a correctly signed contract determines whether the law will recognise the agreement and grant relief in case of default by one party. On the other hand, even where not legally required, a fully signed agreement acts as stronger evidence in court.

Remember that a contract exists to capture the commercial relationship between yourself and another party and to protect your interests in the worst-case scenario where a deal falls through. So, in reading any contract, the intention of safeguarding your commercial interests should colour your reading. Always ask yourself whether a particular provision protects or exposes your business. Does it penalise or reward you? And are you willing to live with it if all goes wrong? Having made these basic judgements about the first three points above, engage your lawyer for scrutiny of the finer details. Finally, if you and your lawyer approve of the contract, proceed to correctly sign or execute it and keep it in safe custody.