THE TEN ‘MUST HAVE’ CONTRACTUAL CLAUSES!

In this week’s blog, we start on a new series namely ‘Contract Law in Zimbabwe’ where we will discuss various issues of contract law ranging from requirements of a contract, validity of a contract, contract drafting, contract review and interpretation of specific contracts. To kick start this, this blog will mainly detail a broad overview of the ten ‘must have’clauses required in commercial contracts, irrespective of the specific subject matter of the contract.

A basic definition of a contract is an agreement between private parties creating mutual obligations enforceable by law. A contractual clause is a specific provision or section within a written contract. Each clause in a contract addresses a specific aspect related to the overall subject matter of the agreement. Contract clauses are aimed at clearly defining the duties, rights and privileges that each party has under the contract terms and enforceable against either party.

1. The parties

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 in terms of the particular contract. 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. It is very important to state the parties’ names accurately as this affects the legal capacity of a party.  Where a company is part of a group of companies, it must always beclear 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 sub-contracted 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, extension of term. 

It happens that 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. one year), with a right for each party to terminate on notice to the other party (eg. three months). The drafter should ensure that it is clearly stated whether such notice may be given.

3. Main obligations contained within the contract  

These will be at the heart of the contract and will receive most attention from the 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).

4. Price or payment

If the price is a fixed amount, the payment clause will be straight forward to draft. If it is calculated by reference to a rate (eg a rate per task, or for time spent executing the obligation, or as a percentage of sales revenue as would be the case with royalties) this will require careful drafting. If the price is not clear the contract could be void for vagueness.

5. Termination

The parties must agree and set out the basis for any termination of the agreement. This will usually only be for situations where one or other is in breach or default of its obligations as specified in the agreement. This clause will set out what notice is required to be given to the other party and will generally allow a period for the default or breach to be remedied before the other party is entitled to exercise remedies under the agreement. 

It is also important to include a notice clause which willgenerally state that notices to either parties must be given in writing and delivered by hand or sent by registered post to the parties addresses.

6. Guarantees/Warrantees 

Commercial contracts often include warranties. Consider the following issues carefully prior to including such a clause: is the client willing to give the warranty at all, or does it deal with something for which the client should not be responsible or the other party should check themselves? if the client is willing to give the warranty, limit it to matters within his knowledge.

7. Confidentiality 

Parties may wish to provide that information disclosed between them, eg technical or marketing information, be kept confidential and used only for the purposes of the agreement. Amongst the issues commonly covered in confidentiality undertakings are the following: 

8. Applicable law and jurisdiction 

When drafting a contract with an international element it is necessary to state which country’s laws are to apply, as well as which courts are to have jurisdiction eg. where one or more parties are based outside South Africa, or offer or acceptance took place outside South Africa, or work is to be done under the contract or goods are to be delivered outside South Africa.

9. Entire agreement 

It is advisable to include a clause wherein you stipulate that the document is the entire agreement and refer specifically to which schedules if any form part of the contract. This avoids a scenario where one party wants to rely of an oral or written variation of the contract which was not provided for in the agreement.

10. Arbitration 

Arbitration refers to an extra-judicial process in terms of which the parties to a dispute agree to refer the dispute to a third party (an arbitrator) with the intention that the arbitrator will determine the dispute by making an award that binds the parties to the dispute. Arbitration offers the benefit of expert, expeditious, rapid, publicity-free and cheaper adjudication. However, its finality often discourages parties from deciding to include it as a term of their contract. Nevertheless, it is an extremely useful option where the contract deals with issues ofco-operation, research, marketing etc.  

USEFUL TIPS TO KEEP IN MIND WHEN DRAFTING A CONTRACT

These techniques are not formal rules which must always be followed, they are only suggestions to help the draftsman/woman to achieve his or her objectives. There are the following;

1. Use simple, direct language; 

2. Use defined terms where needed;

3. Use correct word order;

4. Make clear who is under an obligation to perform and to whom;

5. Use short sentences; 

6. Sequence clauses in a logical order

7. Use techniques such as headings, numbering, punctuation to make the contract clear.

To avoid litigation process that comes as a result of badly drafted contracts it is highly advisable that contracts be drafted by legal practitioners who have the knowhow of contractual principles that are applicable to the various contracts.

Always remember that a contract, provided that it is valid becomes binding and enforceable the minute that you put your signature on it. Therefore, it is recommended that you thoroughly read through a contract and ensure that all theessential clauses are captured in a manner that you understand.

Disclaimer;

The information and opinions expressed above are for general information only. They are  not intended to constitute legal or other professional advice.