Introduction
Business relationships are often built on trust, but trust alone is not enough to protect a business when things go wrong.
Whether you are supplying goods, providing professional services, entering into a partnership, renting commercial premises, or engaging a contractor, a properly drafted written agreement can provide clarity about what each party has agreed to do.
A contract does more than record a business arrangement. It can establish the rights and obligations of the parties, set out payment terms, allocate risks, and provide a clear process for dealing with disagreements.
For businesses operating in Nigeria, obtaining appropriate legal advice before signing an important agreement can help identify risks that may not be obvious from a commercial perspective.
Why Should Businesses Have Written Contracts?
1. They clearly define the parties' obligations
A well-drafted contract should explain what each party is expected to do.
For example, a services agreement should ideally identify the services to be provided, the expected standard of performance, important deadlines, deliverables, and the responsibilities of both parties.
Without sufficient detail, parties may have different interpretations of what was originally agreed.
2. They reduce the risk of misunderstandings
Verbal discussions can easily be remembered differently by the people involved.
A written agreement creates a reference point for the parties. Instead of relying entirely on conversations, messages, or recollections, the parties can refer to the terms they agreed upon.
This can be particularly important where a transaction involves substantial sums of money or continues over a long period.
3. They provide clarity on payment.
Payment disputes are among the common problems that can arise in commercial relationships.
A contract should clearly address matters such as:
The amount payable;
When payment is due;
The method of payment;
Whether an initial deposit is required;
What happens if payment is late;
Whether expenses or additional charges apply; and
The circumstances in which payment may be withheld or disputed.
Clear payment provisions can reduce uncertainty and make it easier to identify when a party has failed to meet its obligations.
4. They help manage risk
Businesses should consider what could go wrong before entering into an agreement.
Depending on the nature of the transaction, a contract may address issues such as delays, defective goods, non-performance, confidentiality, intellectual property, liability, insurance, unforeseen events, and termination.
The appropriate provisions will depend on the circumstances and should be drafted with the particular transaction in mind.
What Should You Check Before Signing a Contract?
Before signing an agreement, businesses should take time to review the document carefully.
Consider the following practical checklist.
Confirm the parties.
Make sure the correct individuals or legal entities are named and that the person signing on behalf of a company or organisation has the appropriate authority to do so.
Understand the commercial terms.
Check the price, payment obligations, deliverables, deadlines, and other important business terms. Do not assume that an important agreement is "standard" simply because the other party says it is.
Review termination provisions.
Understand how the agreement can be terminated and whether notice is required. Pay particular attention to what happens after termination, including outstanding payments, continuing obligations, or the return of confidential information or property.
Look at dispute-resolution provisions.
The contract should provide a clear mechanism for addressing disputes. Depending on the transaction, this may involve negotiation, mediation, arbitration, litigation, or another agreed process.
Check applicable law and jurisdiction.
Where a transaction involves parties in different locations, it is particularly important to understand which law governs the agreement and where disputes may be dealt with.
Pay attention to liability provisions.
Liability clauses can significantly affect the financial risk associated with a contract. Businesses should understand what losses they may be responsible for and whether the agreement contains any limitations or exclusions of liability.
Do Not Sign First and Ask Questions Later
One of the most practical pieces of legal advice for a business owner is simple: have important agreements reviewed before signing them.
Once an agreement has been executed, changing its terms may require the consent of the other party. A business may therefore have significantly less negotiating leverage after signing than it had before the agreement was concluded.
Legal review is particularly important where a contract:
Involves significant financial commitments;
Creates long-term obligations;
Contains guarantees or indemnities;
Transfers intellectual property rights;
Includes restrictive or confidentiality obligations;
Involves property or major assets;
Creates a partnership, joint venture, or investment arrangement; or
Allows the other party to terminate the relationship on favourable terms.
What If There Is No Written Contract?
The absence of a formal written contract does not necessarily mean that no legally relevant agreement or obligations exist. Depending on the circumstances, other evidence may become important, including correspondence, invoices, payment records, messages, conduct, and other documents.
However, relying on scattered evidence can make a dispute more difficult to resolve.
This is why businesses should avoid treating written contracts as an unnecessary formality. A properly documented agreement can provide considerably greater clarity about the parties' intentions.
Practical Steps for Businesses
Businesses can adopt a few simple practices to reduce contractual risk:
Use written agreements for important transactions.
Do not sign documents you do not understand.
Keep copies of signed agreements and related correspondence.
Record amendments in writing rather than relying on verbal discussions.
Review long-term contracts periodically.
Seek legal advice before entering into high-value or high-risk transactions.
Make sure employees understand which contracts they are authorized to sign.
Keep evidence of performance, payments, notices, and other important contractual communications.
Conclusion
A written contract is an important risk-management tool for any business. It can help establish expectations, clarify responsibilities, manage commercial risks, and provide a framework for resolving disputes.
However, not every contract should be treated as a one-size-fits-all document. The appropriate terms will depend on the transaction, the parties involved, the commercial risks, and the applicable law.
Before entering into an important business arrangement, consider having the proposed agreement reviewed by a qualified legal professional. A relatively small investment in legal advice at the beginning of a transaction can help a business identify and manage potentially significant risks later.
Legal Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. The application of the law depends on the specific facts and circumstances of each matter. Readers should seek independent legal advice regarding their particular situation.