6 Basic Commercial and Legal Issues Affecting a Contract

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Godwin Amadi

This article considers some issues which often need to be addressed in a commercial contract, almost irrespective of the specific subject matter of the contract. Many of these issues are regarded as legal issues by the commercial representatives of the parties and as commercial issues by their lawyers. Either way, they may need to be addressed by the parties to the contract.

1. Who should the parties be?

Anyone who has rights or obligations under the contract should be a party. Sometimes parties are added to the contract who have no rights or obligations under it and this is generally a mistake: either the contract should state what their rights or obligations are, or they should not be parties to the contract at all. Where a company is part of a group of companies, it is not always clear which member of that group should perform the contractual obligations. Sometimes the parent company will be made a contracting party, either (a) instead of the subsidiary (with performance of the contractual obligations being delegated or subcontracted by the parent to the subsidiary), or (b) in addition to the subsidiary, and the parent will undertake to guarantee performance of the contract by the subsidiary.

2. Commencement, duration and extension of terms

Sometimes contracts are signed after performance of the contractual obligations has begun. It may, therefore, be necessary to have a different commencement date to the date of signature of the contract. This should not be done by misstating the date of execution of the agreement. Contracts are sometimes stated to be for a fixed term (eg three years), with a right for each party to terminate on notice to the other party (eg three months). The parties should ensure that it is clearly stated whether such notice may be given (a) at any time during the fixed term, or (b) at any time after two years and nine months (so that the earliest termination is after three years), or (c) only after the fixed term has expired (so that the minimum term is, in effect, three years and three months).

If the contract also allows for termination on breach or insolvency, the clause providing for the fixed term should be stated to be subject to the clause(s) providing for earlier termination. Sometimes contracts are stated to be terminable only at fixed times (e.g at a year end), and provided a minimum period of notice has been given. Again, careful consideration is required.

If the contract does not include any provisions for termination, then it may be terminable on reasonable notice or it may not be terminable at all. In view of these uncertainties, it may be highly desirable to include in the contract a provision stating its duration or allowing a party to terminate the contract at any time.

3. Main commercial obligations

These obligations will be at the heart of the contract and will receive most attention from the commercial parties. The contract should make clear what the obligations are and when they are to be performed (and sometimes it may be necessary to state how, and where they are to be performed). These main commercial obligations include:

4. Payment provisions

If the price is a fixed amount, the payment clause will be relatively easy to draft. If it is calculated by reference to a rate, for example, a rate per task, or for time spent or as a percentage of sales revenue – as with patent royalties, this will generally require more careful drafting. A number of secondary payment issues may also need to be addressed, including the following:

• Does the price stated include VAT?

• When are payments to be made (if periodically, how frequently)?

• How are the payments to be made (by cheque, letter of credit, cash transfer, etc)?

• Is interest payable on late payment?

• Is time of payment ‘of the essence’ i.e., is termination of the contract allowed for late payment?

• The currency in which payments are to be made (in contracts with an international element), any currency conversion method, and who bears any exchange risk.

• Whether deductions or set-offs are allowed, including withholding of taxes and avoiding double taxation (e.g., for royalty payments).

• Whether any payments are refundable or to be treated as an advance against future payments.

• Who bears any ancillary costs, e.g., packing, carriage, insurance?

• Whether any statements, receipts or other documents are required to be provided in support of payment claims.

• Whether there will be “retention sum” and when it would be paid.

5. Warranties

Commercial contracts often include warranties, given by one or more parties. The content of the warranties will vary from contract to contract. Amongst the commercial issues to be considered are as follows:

• Are you willing to give the warranty at all, or does it deal with something for which you should not be responsible, or which the other party should check for himself?

• If you are willing to give a warranty, should it be limited to matters within your knowledge? There are two main types of knowledge warranty, as demonstrated by the following examples:

(i) X warrants that to the best of his knowledge, information and belief he is not a party to any current legal proceedings.

(ii) X warrants that as far as he is aware, but without having conducted any searches or investigations, he is not a party to any current legal proceedings.

With the former type of warranty, the court may consider that it is implicit in the warranty that X has taken steps to establish the truth of the warranted statement. In the latter example, it is made explicit that this is not a part of the warranty being given. It is generally considered unwise merely to use the phrase ‘as far as he is aware’ without an express disclaimer of investigations (or whatever kind of disclaimer is appropriate to the warranty in question), as this might be interpreted as a ‘best of knowledge’ type of warranty.

It is common to exclude from the warranty matters formally disclosed to the other party; such disclosures are often in a ‘disclosure letter’ which is sent by the party giving the warranty to the other party at the time of signing the agreement. Sometimes, time limits or financial limits (lower or upper limit) are agreed in relation to the bringing of claims under the warranty.

6. Liability and Indemnities

Liability and indemnity clauses can be viewed as attempts to apportion commercial risks between the contracting parties. The parties will often wish to consider whether, commercially, those risks are acceptable, whether they can be insured against at a reasonable price, and whether the price to be paid under the contract takes proper account of the risks being borne by each party. Ultimately these are commercial rather than legal issues, but they are often rather remote commercial issues, which the parties’ lawyers may have spent more time considering than their commercial colleagues or clients. Moreover, the contractual language needed to deal with such issues may of necessity be legalistic. Accordingly, this is an area where lawyers are often asked to take the lead in contractual negotiations.

Godwin Amadi is the Lead Counsel at Semper Fidelis Attorneys and Solicitors- a full-service law firm based in Ikoyi Lagos. You can reach him on 08035622578 or email godwin.amadi@semfilaw.com

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