REVIEWING COMMERCIAL AGREEMENTS

In Kenya’s evolving commercial landscape, contracts are the foundation of business relationships. Whether you’re drafting, reviewing, or signing an agreement, it’s critical to understand the fine print. A poorly negotiated clause can result in major legal and financial consequences. Guided by the Law of Contract Act (Cap 23), a well-drafted agreement serves as a shield against ambiguity and a primary tool for risk mitigation. When reviewing these documents, one must look beyond the surface-level terms to understand the long-term legal and financial implications. The following guide outlines the essential subtopics and clauses that demand rigorous scrutiny during the contract review process.

The first step in reviewing a commercial agreement is to verify the foundation specifically the parties involved, their legal capacity, and the recitals. If corporate bodies, begin by cross-checking the legal identity of all parties through the Business Registration Service portal to confirm that each entity is active and not dissolved. It’s equally important to ensure that the individual signing the contract on behalf of a corporate body has the requisite authority, which may require a Board Resolution or Power of Attorney. Additionally, pay close attention to the recitals the “Whereas” clauses which outline the background and purpose of the agreement. Though often treated as boilerplate, courts may rely on them to interpret the parties’ intent if the operative provisions of the contract are unclear.

Beyond nomenclature, you must verify the “capacity” of the individuals executing the document. In Kenya, this often requires confirming that the signatory has been granted the authority to bind the company through a formal Board Resolution or a Power of Attorney. A contract signed by someone without the requisite authority can be rendered void or unenforceable, leaving your client without legal recourse should the relationship sour.

Precision in Scope and Performance Obligations

Ambiguity in the “Scope of Work” or “Description of Services” is the leading cause of commercial litigation. When reviewing this section, ensure that the obligations of each party are described with absolute precision rather than in broad, aspirational terms. Use “shall” instead of “may” to create mandatory obligations. It is also essential to link these obligations to a clear timeline or a “Schedule of Deliverables.” In the Kenyan context, where infrastructure or supply chain delays are common, the contract must explicitly state whether “time is of the essence,” which allows for termination if deadlines are missed, or if a grace period is permitted.

Financial Mechanics, Payments, Taxes, and Penalties

The payment clause is the lifeblood of a commercial agreement and requires a multi-layered review. Beyond the base price, you must scrutinize the payment triggers are they linked to calendar dates or the successful completion of milestones? Furthermore, the tax implications in Kenya are significant. A robust agreement should specify whether the quoted price is inclusive or exclusive of Value Added Tax (VAT) and who bears the responsibility for Withholding Tax (WHT). Additionally, look for “Late Payment” clauses; these should include a reasonable interest rate to compensate for delayed cash flow, but must not be so high as to be deemed an unenforceable “penalty” under Kenyan common law.

Indemnities and the Limitation of Liability

Risk allocation is perhaps the most critical technical aspect of a contract review. An Indemnity Clause requires one party to compensate the other for specific losses or damages. You must ensure these are “mutual” where possible and restricted to losses directly caused by a breach of the agreement. Conversely, the Limitation of Liability clause is your client’s safety net. It caps the total amount one party can be sued for. Without a cap, a single error could lead to a claim that exceeds the entire value of the contract, potentially bankrupting a business. Ideally, liability should be limited to the total value of the contract or the amount covered by the party’s professional indemnity insurance.

Termination, Exit Strategies, and Survival

Every commercial agreement must have a clear Exit Clause that defines how the relationship ends. Review the distinction between Termination for Convenience which allows a party to exit without a specific reason after a notice period and Termination for Cause, which is triggered by a material breach. Pay close attention to the Survival Clause, which dictates which terms such as confidentiality, non-compete, or intellectual property rights continue to bind the parties even after the contract has ended. A failure to include these can result in the loss of sensitive data or trade secrets once the formal partnership dissolves.

Force Majeure and Hardship

The global disruptions of recent years have highlighted the importance of a robust Force Majeure clause. This provision excuses a party from performing their duties due to Acts of God or events beyond their reasonable control. When reviewing this for a Kenyan client, ensure the definition includes specific local risks such as civil unrest, changes in government policy, or prolonged power outages. It is also wise to include a Hardship or Price Adjustment clause if the contract spans several years, allowing for renegotiation if the economic environment (such as extreme currency fluctuations of the Kenya Shilling) makes the original terms commercially unviable.

Dispute Resolution and Governing Law

Finally, you must plan for the worst-case scenario. The Dispute Resolution Clause should be tailored to the value and complexity of the deal. While the High Court of Kenya is the default, many commercial parties prefer Arbitration under the Arbitration Act, 1995, as it offers confidentiality, speed, and the ability to choose an arbitrator with specific industry expertise. Additionally, ensure the Governing Law is explicitly stated as the Laws of Kenya to avoid the complications of litigating under a foreign legal system. For cross-border agreements, check if Kenya has a treaty for the mutual enforcement of judgments with the other party’s home country to ensure a win in court actually leads to a recovery of assets

Reviewing a commercial agreement is about building a fence around your interests. By focusing on clarity in scope, fairness in risk allocation, and strict adherence to Kenyan tax and data laws, you ensure that the contract serves as a tool for growth rather than a liability.

At A.O. WANGA ADVOCATES we are happy to assist you in all your commercial engagement including drafting, reviewing and general advisory on contracts and other business agreements. Please contact us at info@aowangaadvocates.com or +254794600191.

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