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Do you understand your contract?

In this article, I will try and explain in layman language the basic of a good contract.  This is not legal advice but rather a guide to business people without a legal background to understand what goes into agreements.

Clients I have worked with would rather leave the agreement to the lawyer. I will attempt to explain common terms in contract as lay as possible. Agreements are part of life and it is an agreement because you “agree” to it not your lawyer.

It is essential to get a lawyer to help you draft/review your contract.

What is a contract?

A contract is an agreement between two or more parties that contains wishes of the parties entering into the contract.  Common examples of agreements include:

  1. Shareholder Agreements
  2. Sales Agreements
  3. Letter of Employment
  4. Supplier Agreements
  5. Purchase Agreements
  6. Web design/development Agreements
  7. Software Licensing Agreements
  8. Land Purchase Agreement
  9. Joint Ventures
  10. leases

Prerequisites of a good contract

Good negotiation skills are critical. Negotiated terms are the life of an agreement. Most suppliers/employees agree to a contract from a” point of weakness” and do not even read the terms of the contract as they maybe desperate for the job/contract. A lot of the times things can go wrong and you are quickly referred to “The Contract”.  A bad agreement can even break down a company.

  1. Term- this is the duration of the Agreement.  A contract can be short term e.g. 1 week- 1 month or long term (10-20) years. Leases can be up to 999 years. Be clear as to the period the contract will be in force and if it is automatically renewable state so, give a period for negotiations e.g. 3 months before renewal.
  2. Cost- be clear as to how much money is involved.  If there are taxes, levies, include them. Employees would be salary, allowances, benefits:  land would be purchase price, advocate fees, stamp duty cost, city council rates, land rates etc.
  3. Payments- how will payments be done? In case of an employee, monthly. What about goods? Most companies will pay 30 days after the invoice is delivered.  Be clear as to how payments will be done and what are the consequences if this is not adhered. A good employer, company will pay when payments are due.
  4. Why would this agreement fail, if it failed what would we do about it? What if you are unable to deliver the goods as earlier stated, what if your wife refuses to sell the land. You need to think through this. A good contract has a way out. Avoid punitive clauses.
  5. Governing law is important for multi-jurisdiction agreements. This depends on the jurisdiction where the contract was executed or where the contract is to be performed. Some agreements chose a neutral jurisdiction like London and English law as the governing law. In Kenya we choose the laws of the Republic of Kenya.
  6. Dispute Resolution- a good contract foresees disputes and how they can be solved. This is an example of a good dispute resolution clause.
    1. First level of solving the problem should lie with senior managers of the company who are authorized to make decisions on behalf of the company.
    2. Second level should lie with the Chief Executive/Managing Director of the company.
    3. Third level would involve professional mediators/arbitrators (Alternative Dispute Resolution). I prefer mediation.
    4. Last instance should lie with the Court of Law.
  7. Force Marjeure- these are unforeseen circumstances. For example the recent blast in Westgate was an unforeseen circumstance. You should provide for what happens if there is a force marjeure event and the contract cannot be performed. For example road construction works have to be stopped when it is raining.