Why Every Business in Kenya Needs Properly Drafted Contracts

Running a business involves making agreements every day.

A business may enter into an agreement with a supplier, customer, employee, consultant, landlord, distributor, investor or business partner. Some of these arrangements may be worth a few thousand shillings, while others may involve millions of shillings and long-term obligations.

Yet, despite the importance of these relationships, many businesses still rely on verbal promises, informal messages or generic contracts downloaded from the internet.

This approach can become expensive when something goes wrong.

A properly drafted contract does more than record an agreement. It establishes the rights and obligations of the parties, reduces uncertainty and provides a framework for resolving disagreements when they arise.

For a Kenyan business, having appropriate contracts in place should therefore be regarded as part of good business management rather than an unnecessary legal expense.

What Is a Business Contract?

A contract is essentially an agreement that creates legally enforceable obligations between parties.

In a business environment, contracts can take many forms. They may include supply agreements, service agreements, employment contracts, leases, partnership agreements, shareholder agreements, distribution agreements, loan agreements, consultancy agreements and many others.

The form of the contract depends on the nature of the relationship.

For example, a business purchasing goods from a supplier has different legal concerns from a company bringing in an investor. Similarly, an agreement between two shareholders requires different protections from a contract between a company and a customer.

This is why using the same generic contract for every business relationship can be problematic.

Why Is a Written Contract Important?

One of the greatest advantages of a written contract is that it creates clarity.

Business relationships often begin on the basis of trust. The parties may know each other personally, have worked together for years or have confidence that everything will work out.

But circumstances can change.

A supplier may increase prices. A customer may delay payment. A business partner may disagree about responsibilities. A consultant may claim they were promised a larger fee. A customer may argue that a service was supposed to include work that the business does not believe was part of the agreement.

When the parties have a clear written contract, there is a reference point for determining what was actually agreed.

Without one, a dispute may become a disagreement about whose version of events should be believed.

A Contract Should Clearly Define the Parties' Obligations

One of the most important functions of a commercial contract is to explain what each party is expected to do.

Consider a company engaging a consultant.

It is not enough to state that the consultant will "provide business advisory services." The parties may later disagree about what that phrase means.

A properly drafted agreement can define the scope of the services, the expected deliverables, deadlines, reporting requirements and payment arrangements.

This creates measurable obligations.

The same principle applies to suppliers. A supply agreement can specify the products to be supplied, quality requirements, delivery dates, pricing, payment terms and what happens when goods do not meet the agreed standards.

The more important the obligation, the more carefully it should be defined.

Payment Terms Should Not Be Left Unclear

Money is one of the most common sources of commercial disputes.

A contract should therefore clearly establish how much is payable, when payment is due and the consequences of late or non-payment.

For example, if a business provides services on credit, the agreement should establish the payment period rather than leaving the matter to an informal understanding.

It may also be appropriate to address interest, recovery costs, suspension of services or other consequences of non-payment, depending on the nature of the transaction and what the law permits.

A business should not have to negotiate the payment terms again after it has already delivered the goods or performed the services.

What Happens If Something Goes Wrong?

No business enters into a contract expecting a dispute.

However, good commercial drafting anticipates the possibility that something may go wrong.

A contract can establish what happens if a party fails to perform its obligations.

For example, the agreement may provide for notice of breach and an opportunity to remedy the breach before further action is taken.

It may also specify circumstances in which the contract can be terminated.

Without such provisions, parties may find themselves arguing about whether the contract can be terminated and what consequences follow.

Good drafting therefore involves thinking about problems before they happen.

Protecting Confidential Business Information

Businesses routinely share information that they do not want competitors or third parties to access.

This may include customer information, pricing structures, financial information, business strategies, technical information, supplier arrangements or other commercially sensitive material.

Where a business relationship requires confidential information to be shared, the contract should appropriately address confidentiality.

Depending on the circumstances, the parties may enter into a confidentiality or non-disclosure arrangement or include confidentiality obligations within the main commercial agreement.

The precise protection required will depend on the nature of the information and relationship.

Intellectual Property Should Be Addressed

Another issue businesses sometimes overlook is intellectual property.

Suppose a company hires a designer to create a logo, a software developer to build an application or a marketing agency to produce original content.

Who owns the resulting work?

The answer should not simply be assumed.

The contract should clearly address intellectual property rights and, where appropriate, the ownership or licensing of materials created during the engagement.

This can prevent disputes later about who is entitled to use, reproduce, modify or commercially exploit the work.

Contracts Can Protect Business Relationships

Contracts are not only about preparing for disputes. They can actually help preserve commercial relationships.

When the parties understand their respective obligations, there is less room for misunderstanding.

For example, a distribution agreement can establish territories, pricing responsibilities, marketing obligations and performance expectations.

Instead of repeatedly negotiating these issues, the parties have an agreed framework for their relationship.

This can make the business relationship more predictable and professional.

What About Verbal Agreements?

Verbal agreements can create legal obligations in appropriate circumstances, but relying on verbal arrangements can create evidentiary and practical difficulties.

The problem is often not simply whether an agreement existed.

The problem is determining exactly what the parties agreed.

One person may remember that payment was due within 30 days, while another remembers 60 days. One party may believe that certain services were included, while the other believes they were excluded.

A written agreement reduces this uncertainty by recording the terms.

For significant commercial transactions, businesses should generally avoid relying solely on informal discussions.

Why Generic Online Contracts Can Be Risky

The internet provides access to countless contract templates.

While templates can sometimes be useful as starting points, a document created for another jurisdiction, industry or commercial arrangement may not adequately address a Kenyan business's circumstances.

For example, a template may use foreign legal concepts, refer to laws that do not apply in Kenya, omit important provisions or contain terms that do not reflect the actual transaction.

A contract should be designed around the relationship it is intended to regulate.

What Happens When a Business Partner Breaches an Agreement?

A commercial dispute can arise even between people who started a business together with the best intentions.

A partner may fail to contribute agreed capital, misuse company resources, refuse to perform agreed responsibilities or enter into transactions without the necessary authority.

Where the parties have a properly drafted agreement, it may provide a mechanism for dealing with such conduct.

Depending on the relationship, this may involve provisions dealing with decision-making, dispute resolution, transfer of interests, exit arrangements and other matters.

This is why shareholders' and partnership agreements can be particularly important for businesses with multiple owners.

Dispute Resolution Should Be Considered in Advance

A well-drafted contract should consider how disputes will be handled.

Not every commercial dispute needs to proceed directly to court.

Depending on the nature of the agreement, the parties may agree to negotiate, mediate, arbitrate or pursue litigation where appropriate.

Having a dispute-resolution mechanism in the contract can provide greater clarity when a disagreement arises.

However, the appropriate mechanism depends on the transaction. A clause that works well for one commercial relationship may not necessarily be suitable for another.

When Should a Business Seek Legal Advice?

Businesses often seek legal advice after a dispute has already developed.

At that stage, the available options may be more limited and the cost of resolving the matter may be significantly higher.

Legal advice can be particularly valuable before signing a significant commercial contract.

An advocate can review the proposed terms, identify potential risks, explain obligations, negotiate provisions and ensure that the agreement reflects the client's commercial objectives.

Businesses can also benefit from periodically reviewing their existing contracts as their operations change.

A contract that was appropriate when a business had five employees and a handful of customers may not adequately address the risks faced after the business expands.

Contracts Are Part of Good Business Governance

Good corporate governance is not limited to board meetings and financial reporting.

It also involves ensuring that the business's legal relationships are properly documented and managed.

Clear contracts can help establish accountability, protect company assets, manage commercial relationships and reduce unnecessary disputes.

For growing businesses, putting appropriate contractual systems in place early can be considerably easier than attempting to reconstruct agreements after a dispute has already arisen.

Conclusion

A contract should not be viewed simply as a document that lawyers prepare when two parties do not trust each other.

A good contract is a business tool.

It establishes expectations, allocates responsibilities, protects important interests and provides a framework for dealing with problems when circumstances change.

For Kenyan businesses, this is particularly important as commercial relationships become more complex and transactions increasingly involve significant financial and legal obligations.

At G.K. Kimani & Associates Advocates, we assist businesses with commercial contracts, corporate advisory matters, negotiations and dispute resolution.

Whether you are starting a business, entering into a major commercial transaction or reviewing agreements already in place, obtaining legal advice before signing can help you understand the risks and ensure that your contractual arrangements support your business objectives.

This article is intended for general informational purposes and does not constitute legal advice. The appropriate terms of a contract depend on the nature of the transaction, the parties involved and the applicable law. Professional legal advice should be obtained before entering into significant commercial agreements.