The importance of major contractual clauses in law

Drafting contracts is a skill. A person willing to be bound by certain terms and contract must be equally willing to execute his/her duties according to those terms.

This article outlines a few of the major clauses that a standard contract should have for the parties to that contract to fully understand the importance of the activity they are entering.

Recitals

A recital is a major term for the subject matter and the parties involved in a contract.  Recitals precede the gist of the contract.

In recitals, the details of the Parties (names, titles, addresses, telephone contacts etc.) are outlined for specificity. Also, the description of the subject matter is described.  If it is an asset, its ownership measurements, location, etc. are mentioned. Under recitals also, the parties confirm that they agree to be bound by the terms in the contract.

Definitions and interpretations

This clause is optional.

It defines major terms and how they ought to be applied when reading the contract.  E.g. the contract may use the term ‘solicitor’ to mean lawyer, legal representative etc. of either party or one of the parties etc.

Consideration

This is the monetary clause or the mode of payment that the parties agree upon.  In contracts there is an exchange of interests, duties and profits, parties. For instance, a vendor of land sells his valuable land to a buyer who pays the vendor an amount both have agreed upon.  Consideration is the amount paid in exchange for ownership of that land that is received.

Consideration may be in other form.  E.g. barter trade where a land owner may exchange his land for a car or share in a company etc., if such consideration is legal and can be valued to equal the subject matter.

Indemnity

To indemnify means to compensate someone from harm or loss or injury. In law, it means to cover someone’s loss or consequential loss that may result from another’s act.

It may also mean to keep someone from legal action/grit, claims and proceedings, loss or damage, payments, costs or expenses as a consequence of one’s acts or omissions to act. This clause is important for any party to a contract.

Terms and conditions

This clause describes the obligations, rights and entitlements of the parties to a contract.

It may include special conditions like encumbrances on the subject matter and how they are to be applied, their recognition; any overriding interests and how parties have agreed on possession, transfers, duration of the contract, use of subject matter, relationship between the parties and third parties, communication/notice among the parties or with third parties, etc.

NB:        Notice can be a clause on its own. (See below).

Notice

Notice is a major clause in contracts.

All contracts must have a clause on notice for parties to impose an obligation to communicate their duties, rights and expectations in the contract relationship.

In common law and statute, there are provisions for the duration and mode of communication in contracts.  The law provides the minimum and maximum durations and how they are to be applied.

For example, in Uganda’s law on employment, Section 58 of the Employment Act, 2006, provides for notice. Notice is a creature of about three (3) forms.  These are; notice as per the contract, notice as per common law and notice from a statute.

The implication of these three (3) forms is that a contract can only be terminated, or any act can only be legal if it complies with the form the parties agree upon or where it is absent, the common law and statute provisions, as provided.

If notice is expressly provided in the contract, it must be complied with, on condition that it does not contradict the legal provisions of a given statute.  Why?  All contracts must be legal, for legal acts and in compliance with the statutes.

Where there is no express term on notice or how notice is to be affected, parties imply it from common law or by statute as per Section 58 of the Employment Act, 2006.

Even where one party has an upper hand in law, say, where the issue is termination, reason (i.e. Common Law) is implied to create a suitable mode of notice.  The English Court in the case of African Association Ltd vs. Allen [1910] 1 KB 396 reasoned that even when termination was the sole discretion of the employer, the employer still had to give the other party reasonable notice before actual termination.

Ideal notice is written and cannot be revoked unless both parties agree to.  The date of notice is not included in counting notice period. If your one month’s notice is 1st August, effective date of end of contract should be 01st September.

Termination

Termination means to end a contract.

A contract may provide a mutual termination or an individual termination, subject to the mode of notice or act of one or both parties.

The contract must provide the minimum period of notice before actual termination occurs.  If there is no specific period or mode of termination, common law and statute are implied.

In Employment contracts, for example, Section 65 of the Employment Act, 2006 applies for termination.  But on the issue of notice, Parties can create their own periods of notices.  However, these periods are subject to the statutory provisions. Section 58 (3) provides that;

‘(a) not less than two weeks, where the employee has been employed for a period of more than six (6) months but less than a year.’

This provision simply means that a period of notice for purposes of termination of a contract for contracts of employment between (6 – 11) months is (2) weeks or more. The former is mandatory, but the latter is optional.

‘(b) not less than one (1) month, where the employee has been employed for a period of more than twelve (12) months but less than five (5) years.’

This means that where one has been employed for a period of one (1) year to five (5) years, the mandatory period of notice of termination is one (1) month and any more reasonable extension is optional.  The terminating party who has been working for at least twelve (12) months plus one (1) day and before expiry of five (5) years or at end of five (5) years must give that notice.  One (1) months’ notice is sufficient.  It should not be a day, hour or minute or second less than a month.

‘(c) not less than two (2) months, where the employee has been employed for a period of five (5), but less than ten (10) years.’

An employee who has been employed and has worked between five (5) to ten (10) years must give a mandatory notice of two (2) months and may opt to give more time in addition to the mandatory period. However, the required two (2) months’ notice is sufficient.

‘(d) not less than three (3) months, where the service is ten (10) years or more.’

Three (3) months’ notice is sufficient.

Note, however, that sufficiency means the least period of notice allowed.

It may differ in individual contracts, but these periods are what the statute provides.  Parties may choose a lesser duration because they are at discretion to do so.  However, they cannot impose unreasonably longer durations and are not allowed to restrict termination where those longer durations are expressed in the contract.

For instance, an employee can seek Court redress when he has been employed for three (3) years but restricted by the Employment Contract to give a five (5) months’ notice of termination.  His ground will be that the clause in the contract is contrary to Section 58 (b) and therefore illegal.

Confidentiality

Parties must keep the contract and terms of that contract private unless;

  1. Both parties agree to reveal the contract or its contents;
  2. There is a valid Court Order subpoenaing its production;
  • For enforcement of the obligations. Otherwise, a contract is a private document guarded by the parties to it.

Dispute Resolution and Governing Law

Parties must include an agreeable mode of settling misunderstandings arising from the contract.

They must agree to either settle inside or outside of Court; or to settle the matter in Court only after other alternative methods have failed; or seek direct redress from Court without first recourse to alternative dispute resolution mechanisms.

In there, they must choose the law and the area/country which will bind the contract and their roles in the contract.

Execution and Witnessing

A contract is incomplete unless it is signed by all parties involved and may or may not have witnesses.

Witnesses act as testimonies in case either or both parties breach the terms of the contract.  Otherwise, if all parties to a contract are present, agree to and sign the contract that is sufficient evidence to adduce contractual obligations on them.

Conclusion

Contracts are fragile documents and therefore require competence, skill and knowledge of drafting and executing them. Some contracts, regardless of how impeccably they have been drafted, can be cancelled due to lack of the fundamental elements of a contract (offer, acceptance, consideration, capacity etc.)

Please consult a lawyer for professional help on how to draft, execute, interpret or prosecute under a contract.

This article was written by our Feature Columnist, Atuhairwe Agrace for our weekly law newsletter, The Deuteronomy. To contact Agrace, write to her on zoyahirji@gmail.com. To receive The Deuteronomy in real time, click HERE.

 

1 Comment

  1. Eric M says:

    Educative article, I’m well reminded of contract law 1 & 2 my favorite units at KSL. On point

    Like

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