Author: Barbara Ewoenam Afua Kukah
In our day to day lives, we have interactions with others that can be classified as contracts. A contract has been defined as a set of promises enforceable by law. At its core, a contract is a legally enforceable agreement between two or more parties where each party makes a promise (to provide services, goods, etc) to the other in exchange for a consideration from the other person (payment, goods, service, etc).
Everyday examples of contracts include buying groceries, downloading and using mobile applications, enrolling in schools and courses, and purchasing bus tickets. Even though we enter into various agreements and transactions on a daily basis, not all of them will be classified as contracts. For an agreement to be considered a contract, it must meet certain requirements. An agreement will be classified as a contract if it involves an offer which has been accepted, is made by parties who have the legal capacity to enter into contracts, is meant to be legally enforceable, and adequate consideration is given for it.
For many transactions, most people do not sign formal contract documents. However, there are still a number of transactions for which a written contract is either required or highly advisable – whether for employment, purchase of property, sale of goods, or contract for services among others. It is also advisable to have a lawyer draft the contract in order to ensure that it fully covers the scope of the agreement, protects the interests of the parties, and complies with necessary legal requirements. Regardless of whether you are signing an already drafted contract, or drafting an agreement, there are certain important elements that you should ensure are included in it.
The Parties
Who are the parties to this agreement? What are their names and addresses? It is important to clearly define who the people entering into the contract are. Ideally, the contract should state the names and addresses of the parties. Clearly stating who the parties are helps to determine who has obligations under the contract, who has liabilities and who can enforce the contract (privity of contract).
Privity of contracts is a common law doctrine that provides that only a person who is a party to a contract can enforce the contract and also benefit from it. In the case of Tweddle v Atkinson [1861] EHWC QB J57, two men (John Tweddle and William Guy), agreed to pay some money to Tweddle’s son (William Tweddle) who was getting married to Guy’s daughter. Guy died before making the payment, and his estate refused to make the promised payment. William Tweddle sued Mr. Atkinson who was the executor of Guy’s estate, but the court held that he was not a party to the original contract and could not sue to enforce it, even if he was the beneficiary under that contract.
It is however true that in Ghana, the Contracts Act, 1960 (Act 25) has abolished the common law rule on privity of contracts subject to certain exceptions. Sections 5 and 6 of Act 25 permit a party who is entitled to a benefit under a contract to enforce that contract even without being a party to that contract.
In spite of this, it is always advisable to ensure that the parties to a contract are clearly stated before entering into the contract.
Effective date, termination and duration
When does the contract take effect? How long will it last, and when will it end? It is very important to define this before entering into the contract. Some contracts may stipulate that it commences on a date specified within the contract agreement, while others may commence on the date of the last signature. Yet others may commence once an action or condition is performed, such as payment being made.
With regards to the duration and termination of contracts, some contracts have no expiration date and will continue in force until either party takes an action, terminates it or until some other occurrence terminates it. Others will terminate after the performance of the contracts while others have a fixed period (1 year, six months, etc) and will automatically terminate at the end of that period.
Being clear on when a contract commences and terminates helps to know when liability commences and ends. It also helps to determine whether a party is within the period of performance or has breached a term of the contract, as well as when a party can cease performance without incurring legal liability.
The Scope of the Agreement
The scope of a contract refers to the expected services or work agreed to be done under the contract. It is important for a contract to fully set out the duties each party is expected to perform. For instance in a tenancy agreement, it is important to set out which party is responsible for maintenance and repairs, as well as payment of taxes and duties. Similarly, in a contract for renting of equipment, it is important to state which party would be responsible for cleaning and maintaining the apartment and repair of the equipment in the event of damage.
Outlining the scope of a contract guides the parties in the performance of their duties, removes ambiguities concerning performance of duties, and identifies who bears liability for a breach.
Consideration
One of the main features of a contract is the exchange of consideration. Consideration is anything given in exchange for the promise of another party. In the case of Thomas v. Thomas (1842), 2 QB 851, it was defined as follows: “Consideration means something which is of value in the eye of the law, moving from the plaintiff; it may be some detriment to the plaintiff or some benefit to the defendant, but at all events it must be moving from the plaintiff.”
The meaning of consideration has evolved over time to simply mean a promise, act, or forbearance, which is given in exchange for the promise of another person. Act 25 of Ghana has specified that consideration does not need to flow from the promisee. This means that a party to a contract may perform an act in exchange for consideration offered by a person who is not a party to the contract. Also, consideration need not be adequate, but it must be sufficient. The courts will not concern themselves with whether the promise given by one party is equal in value to the promise given by the other party. As long as there is no vitiating factor and each party receives what they want, the consideration will be deemed to be sufficient. Thus in the case of Adjabeng v. Kwabla [1960] 7 GLR 37, where a man sold his land for £40 but his son felt it should have been worth £200, the court held that in the absence of fraud or misrepresentation, inadequacy of consideration cannot be grounds for avoiding a validly made sale.
Consideration can take many shapes and forms. It is therefore very important to clarify what you are giving and what you are receiving in return before entering into a contract.
Liabilities and force majeure
Liability refers to the responsibility that is placed on a contractual party for claims, obligations, losses, or damage that may arise out of the contract. Liability clauses are placed in contracts to outline the circumstances in which liability will arise, which parties will bear liability and the extent of the liability each party may face. In some circumstances, limitation of liability clauses will also be inserted to place a cap on the liability to be incurred by a party and protect individuals or businesses from severe losses arising from liability claims. It is essential to have a well written clause that sets out such liabilities clearly in order to avoid disputes and litigation later.
Force majeure is a clause in a contract that protects a party from obligation or liability for a breach that is caused by extraordinary events beyond the control of that party. These events could be a fire, earthquake, flood, tornado, storm, pandemic, war, labour strike, and terrorism, among others. Predictable events (such as seasonal weather), self-induced frustration (eg. intentionally burning down a building), and negligence will usually not be covered by force majeure clauses.
The COVID-19 pandemic affected several businesses and individuals and made it impossible for several contract obligations to be fulfilled. Having a force majeure clause in a contract protects parties from such unforeseen circumstances and encourages renegotiation and flexibility in such events.
It is thus highly advisable to have clauses in a contract that cover liability and obligations in events of default.
Capacity of Each Party to Contract
This is the most fundamental element that determines whether the contract will be valid and enforceable or not. Capacity refers to the ability or competency of a party to enter into a contract. Generally, infants (persons who have not reached the age of majority), mentally incompetent persons, and/or intoxicated persons cannot enter into contracts except under certain circumstances.
That notwithstanding, there are other factors and statutory provisions that may also prevent otherwise legally capable persons from entering into certain contracts. In Ghana, a person who is an undischarged bankrupt cannot serve as a director of a company. After the insolvency order is made, a bankrupt person can neither enter into a hire-purchase agreement nor operate an account with a bank or other financial institution, among others. Thus, a bankrupt person lacks the capacity to enter into certain contracts, and hence contracts made with such a person will not be legally enforceable.
Additionally, the Companies Act, 2019 (Act 992), prevents persons who have been convicted of an offence involving fraud or dishonesty, insider dealing, an offence in connection with the promotion, formation or management of a body corporate or any offence which is not a misdemeanour whether in or out of Ghana from managing companies except with leave of a court. Such persons lack the capacity to enter into an agreement to offer their services as directors of companies.
A person may be prevented by a non-compete agreement with a previous employer from working with a competing company for a certain number of years. A non-compete agreement is an agreement that prevents an employee from competing with an employer for a certain period of time after the employment ends and from revealing the employer’s trade secrets. Such a person may thus lack capacity to enter an employment agreement with a rival company during the pendency of the agreement.
A person may also be prevented from selling or renting out a property which has a lien or other encumbrance on it. In order to avoid and/or mitigate potentially damaging losses, it is helpful to not only carry out the required due diligence before entering into a contract, but to also insert a clause that allows parties to declare any known lien, encumbrance, or restriction that would prevent them from entering the contract.
Governing Law
In order for a contract to be legally enforceable, it must comply with the laws of a jurisdiction and be subject to the courts of that jurisdiction. The governing law clause determines which law shall apply in the event of a dispute. It is very important because the outcome of a dispute can be influenced by the choice of law. Usually when parties are from the same jurisdiction, they tend to choose that jurisdiction’s laws as the governing law for their contract. However when the parties have different jurisdictions, it becomes even more important to specify a jurisdiction in the contract.
Dispute Resolution
Almost everyone enters into an agreement with the hope that the contract will be successfully executed and that no breach or hindrance occurs. However, this is not always the case. From parties failing to perform their obligations, to accidents and force majeure events, and even the death of parties, there are many reasons why disputes may arise from a contract. That is why it is important to have a dispute resolution clause which specifies how disputes between the parties will be resolved should they arise. Would the parties attempt to resolve disputes by themselves? Would they seek external help such as mediation or arbitration? Will they simply let the courts decide?
Deciding on this before the contract is signed will provide clarity, guidance, and save both money and time while also regulating the behaviour of parties once they know the repercussions of breaches and other dispute-causing events.
Conclusion
Ultimately, the clauses in a contract will depend on the nature of the contract, the parties to the contract, specific laws to the subject contract and the bargaining power of each party. It is important to note that in spite of all precautions, contracts may not always have the intended outcome. Nevertheless, ensuring the clauses addressed in this article are present in a contract before execution will provide adequate protection, clarity , save time and guard against avoidable disputes for the parties to the contract.
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Nartey Law Firm is a leading corporate and commercial law firm in Ghana providing legal services to individuals, domestic and international businesses. Ensuring the success of our clients’ objectives is at the core of what we do. Comprised of a dedicated team of lawyers with extensive experience in corporate, commercial and international law and litigation, we pride ourselves with the diligent execution of all client matters, whilst guaranteeing an uncompromising standard with respect to excellence in service delivery. Some of our focus areas are Real Estate, Trade and Commerce, Banking and Finance, Regulatory Advisory, Capital Markets and Mergers and Acquisitions.
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