Ituah Imhanze, ACArb

INTERPRETATION OF CLAUSES IN AGREEMENTS/CONTRACTS: RISK INVOLVED IN COMMERCIAL

TRANSACTIONS.

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Interpretation of Clauses in Agreements/Contracts: Risk Involved in Commercial TransactionsAbstract

John Ruskin famously stated that “commerce is the agency by which the power of choice is obtained” and contracts and commercial agreements play intrinsic roles in facilitating commerce and management of relationships between individuals. For it is through contracts that parties can stipulate their choices, rights and obligations in an effective and clear manner. Everyday millions of individuals enter into various forms of contracts and commercial agreements for the provision of services and supplies of different forms for the purpose of satisfaction of choice. The power of contract is understood to be one of the innate rights originating in the people and guaranteed by law and this is evidenced by the enforcement of contract as opposed to the lack of enforcement of mere promises. However, contracting comes with its own risks as there can instances of nonperformance as a result of reluctance of parties or misunderstanding of clauses of the contract. This paper shall seek to analyze some of the intrinsic contractual rules governing commercial agreements and evaluate interpretation rules utilized by Courts and look at some of the associated risks in contracts.

Introduction

Contracts are legally binding agreements that are made between two or more persons for the purpose of the performance or abstention from some obligations with the intention of creating legal relations. The eminent jurist, Professor I.E. Sagay, defines contracts as an agreement which the law will enforce or recognise as affecting the legal rights and duties of the parties1. The two definitions raise certain undeniable elements of a Contract which underpin all that ordinarily ought to be present in any valid and binding contract. Without these elements a contract cannot be binding or enforceable at law.

Furthermore, there are different types of contracts known and recognised by law. Each type brings about its own risks and consideration. For each type has its own characteristics and legal risks. There are parole/unwritten contracts and those that are written. The Court of Appeal in Adeniran v. Olagunju2 stated:

“Generally, a contract may be oral i.e., (by parol) or in writing. There are however some contracts which the law mandatorily imposes a written requirement for the enforceability of such contracts. One of such contracts is a contract for the sale of land.” Per Amaizu, J.C.A. (P. 23, paras. A-B)

Similarly the Supreme Court of Nigeria has also held same, for

1 Itsejuwa Esanjumi Sagay. Nigerian Law of Contract Sweet & Maxwell, 1985 - Law – page 1

2 (2001) LPELR-10520(CA)

3 (2011) 8 NWLR Pt. 1248 P.31@ 108

4 (2011) 8 NWLR Pt. 1248 P.31@ 108

5 (2006) LPELR-11675(CA) Pp. 34-36, paras. G-A

it held in A.G. Rivers State v. A. G. Akwa Ibom State that an agreement need not be in writing nor signed by the parties.3 It can be oral or inferred from the conduct of the parties. What matters is that there must be evidence of consensus ad idem between them.”4 Furthermore, there are also unilateral and bilateral contracts. In Amana Suits Hotels Ltd. V. PDP,5 the Court of Appeal per Aboki, J.C.A stated:

“In a unilateral contract consideration which is an integral part of any binding contract consists of actual performance in return for a promise (reward). The performance is referred to as executed consideration. See Carlill v. Carbolic Smoke Ball Co. (1893) 1 Q.B. 256…Only one party, the offeror or promisor, is under a contractual obligation at any relevant period in a unilateral contract. By contrast a bilateral contract consists of the offeror promising to do something in exchange for the offeree promising to do something else in return. The consideration (the mutual promises) is referred to as Executory consideration.’’

This is premised on the age old principle that a party needs not do any other act other than to perform the act required for a unilateral contract to be binding. For the Supreme Court in Federal Government of Nigeria & Ors. V. Zebra Energy Ltd stated:

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“It is settled law that the offer to enter into a unilateral contract is accepted on commencement of performance, even though completion of performance is a condition precedent to the offeror’s liability to perform his promise.” Per Mohammed, JSC. (P. 15, paras. E-F)6

Conclusively, there are also express and implied contracts. With regards to express contracts, all aspects and terms are stipulated in writing whereas conduct of parties are the necessary indicators in a situation of implied contract.

Elements of a valid contract

The essential elements of a contract are an offer, acceptance, consideration, intention to create legal relations and capacity to contract. An offer is the unequivocal declaration of a person’s willingness to enter into a contract as well as the terms of the contract. Therefore, it is a proposition made by one party (Offeror) to another (Offeree) which specifies the offerors’ willingness to be contractually bound on specific terms provided that those terms are accepted by the other party. An offer may be made expressly from an act or it can be implied from the conduct of a party. It may be made to a particular person or in some cases, to the public at large, where the contract, which eventually comes into being, is a unilateral one. 7

An acceptance is the unequivocal final expression of assent made by the offeree to the terms of the offer as conveyed by the offeror. Once an offer is accepted a valid contract is said to come into existence as it underscores the bilateral nature of a contract. Thus, only varying the terms of acceptance of an offer has been held to create a counteroffer and not a valid acceptance.8 Thus, a valid acceptance under the law must be absolute and unconditional. However, however, where the offeror has prescribed the mode of acceptance but does not insist on any of the mode; the rule at common law is that the offered can accept by any mode that is either as fast as the mode prescribed. Where the offeree adopts another mode of acceptance, the offered must be prepared to bear the risk of acceptance not arriving as fast as it would have been if the offeree had followed the mode prescribed.9 Importantly, there are instances in which there is a valid acceptance but such an acceptance is not binding on parties. Such is the nature of an acceptance made subject to a contract and this means that the parties do not intend to be bound until a formal contract is prepared and signed.10

Another vital element of a contract is consideration provided for by parties. The basis for the requirement of a consideration is because at Common law, a promise not under seal is enforceable only if it is made in return for another promise or an act; whether an affirmative act or forbearance.11 Thus, a contract in which a party is providing no consideration for it will be unenforceable and a consideration is what changes a gratuitous promise that is unenforceable into an enforceable contract. This has seen consideration as a requirement

6 (2002) LPELR-3172(SC)

7 Carlill v. Carbolic Smoke Ball 1893, 1QB 256

8 Orient Bank (Nig) Ltd. v. Bilante International Ltd 1997 8NWLR pt.515

9 Afolabi v. Polymere Industries Ltd 1967 ALLNLR

10 UBN v. Tejumola & Sons Ltd 1983, 2NWLR pt.179

11 Keith, A. (2002). Business law (7th ed). London: Thomson.

12 1875, LR, 10

13 Merritt. v. Merritt (1970, LWLR) M. w.

14 Amadi v. Thomas Aplin Co. Ltd (1972) 4 SC 228, (1972) 7 NSCC 262.

15 Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, para 14.

16 Okonkwo V. Zurmi & Anor (2018) LPELR-46855(CA)

17 Solicitor-General, Western Nigeria Vs. Adebonojo (1971) 1 ANLR 178

18 (2008) 10 NWLR (Pt.1094) 150 at 177, paras. F-G (CA)

for the validity of a contract being described as the requirement of quid pro quid or something for something. Abiola Sanni describes consideration as “price” which one party pays for the promise or act of another side and in Curie v. Misa12 consideration was defined to consist of some rights, interests, profits or benefits accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Thus, Consideration must have some value in the eye of the law; it must be something of value, reasonably ascertainable and definite.

With regards to the requirement of an intention to create legal relationship, the law will not necessarily recognise the existence of a contract enforceable in a Court of law simply because of the presence of mutual promises. It is necessary to establish also that both parties agreed to create legal relations for the purpose of determining and enforcing rights, duties and obligations. This is requirement is important because it that if the agreement was broken, the party offended would be able to exercise legally enforceable remedies. Intention to create legal relations is viewed from the standpoint of whether the agreement is a social, domestic or commercial agreement. There can be no enforcement of a contract made with no intention to create a legal relationship as such a contract will be viewed as a social or domestic agreement. However, the presumption of a domestic or social agreement can be rebutted by ensuring that there is indeed an intention to create legal relationship and same can be evidenced in writing or by conduct of parties. Thus, if a husband and wife are separated and there is a written agreement, such a contract must be treated like agreements between strangers and will have the element of an intention to create a legal relationship.13

Interpretation of contract and contractual clauses

The general approach taken by the Nigerian Courts in the interpretation and construction of a contract is to discover the intention or contemplation of the parties and not to import into the contract, ideas not potent on the face of the document.14 The intention test is premised on an objective test that requires the Court to seek “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”. 15 This position has been affirmed and reaffirmed in a plethora of cases and is taken by the Courts16 because of the contractual principle of pacta suct servanda which translates to “agreement must be kept” and obligates parties to a contract to perform the contract.17 Therefore, the approach of the Courts in situations where the contract is unambiguous is to utilise the plain interpretation of the wordings of the contract. In Wema Bank Plc v. Osilaru,18 the Learned Justices of the Court of Appeal held: “Where the language of an agreement is clear and unambiguous, the only interpretative jurisdiction of the Court is to make pronouncement on the clear and unambiguous agreement and agree with them. The Court is not to interfere at all.” It is the Dictionary definition of words will serve as aids in obtaining the plain and conventional

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meaning of a word.19 Likewise, as correctly stated by Lord Hoffman,20 the Court does not easily accept that people have made linguistic mistakes, particularly in formal documents”

However, in in situations where the contract is ambiguous and an application of the literal meaning of words will defeat the intent of parties, the Courts has to first determine whether the language of the contract is ambiguous as to lead to more than one meaning/ understanding. This is important for intent is determined only from what the contract states, and not from what any party believes it ought to have said. Ambiguities also exist when the language of the contract is difficult to comprehend, is of doubtful import, or lacks clearness and definiteness. Furthermore, the very fact that parties may disagree as to the meaning of a contract does not necessarily mean that the contract is ambiguous or of doubtful, uncertain or obscure meaning.21 In such a situation when the words are ambiguous the courts can take any of the following steps to discipher the intention of parties:

1. Utilise the interpretations of experts in industries where the ambiguous words were technical words that were used strictly in a particular industry.22

2. Utilise the Customs of society applicable when the words are not relate to duties and responsibilities that relate to applications of customs of a communities.23

3. Application of commercial common sense when interpreting the contract. Thus, where there are ambiguities and more than single possible construction, the Court will select an interpretation which makes the most commercial sense, the presumption being that the parties would not have intended an uncommercial result.24

4. Application of the “ejusdem generis” rule where the other words are each part of a common genus or category, subsequent words. 25 Therefore, the words will be read as being part of that same class as general words, in the absence of a contrary indication. For example, the words “or other inevitable accident” in a clause referring to “fire, flood, storm, tempest” means other accidents of a similar kind and will not be interpreted to mean “car accident” or “gunshot.”

5. Application of the “contra proferentem” maxim which translates to “against the offeror” and means that the clause being construed will be interpreted against the party that drafted the contract. This is mostly used in situations of interpretation of a contract involving parties with unequal bargaining powers or a standard form (boiler plate) contract. The use of the language is to encourage the drafter to utilise clear and unambiguous words.

6. Reference to the facts and circumstances known or assumed by the parties at the time the contract was executed.

19 Ezeadukwa v. Maduka (1997) 8 NWLR (Pt.518)635

20  Investors Compensation Scheme –v- West Bromwich Building Society [1998] 1 WLR 896 (ICS) at 913.

21 Michie’s Jurisprudence, Statutes, p. 310. 9-2.

22 Aondo v. Benue Links (Nig) Ltd (2019) LPELR-46876(CA)

23 Olatunji v. Unity Bank Plc (2016) LPELR-41597(CA)

24 Interpretation of contracts under English law, Ashurst. at https://www.ashurst.com/en/news-and-insights/legal-updates/interpretation-of-contracts-under-english-law/ ac-cessed on December 2, 2019

25 Kabirikim v Emefor and Ors (2009) LPELR -902 (SC) 18 - 21, A-G, Onnoghen JSC, threw further light on the meaning and application of the principle thus: Black’s Law Dictio-nary 8th Edition, defines the rule thus: Under ejusdem generis cannon of statutory construction where general words follow the enumeration of particular classes of things, the general words will be construed as applying only to things of the same general class as those enumerated

26 Union Bank of Nig. Ltd. Vs. Sax (Nig) Ltd. & 2 Ors. (1994) 9 SCNJ 1 at 12 - per Adio JSC (of blessed memory) and Mrs. Layode Vs. Panalpina World Transport Nig. Ltd. (1996) 7 SCNJ 1 at 14-15.

27 (1939) 2 KB 206 at p. 227, CA

28 1919, 2KB

7. Application of the implied meaning. As previously noted the Courts are very reluctant to depart from the express wordings as it cannot write a new contract for the parties.26 However, where the contract cannot be interpreted with any of the above means the provisions can be implied in order to give effect to the intention of parties. Implied interpretation can guided and utilised with any of the other interpretation mechanisms. Likewise, some types of contracts have industrial standard or statutorily provided meanings that the Court can utilise to impliedly give meaning to the clause required to be interpreted. On the application of the implied meaning to a contract Mackinnon, L.J. in Shirlaw v. Southern Foundries Ltd stated:

“...that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that if while the parties were making their bargain, an officious by-stander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘oh, of course.”27

Analysis of major Contractual risks

1. Mistaking an Invitation to Treat for an Offer

An offer can and is often mistaken for invitation to treat. However, it is important to note that an offer must be definite, precise and unequivocal an invitation to treat remains a mere offer to negotiate and is therefore a prelude to the making of an offer. In Payne v Cave28 it was held that an advertisement stating that an auction did not qualify as an offer. The advertisement was classified as an invitation to treat. Therefore, parties must constantly be aware of whether or not the representation is an offer or an invitation to treat for the purported acceptance of an invitation to treat will result in an offer and not an enforceable contract.

2. Absence of a Dispute Resolution Clause

Generally, parties enter into a contract with the intention to effect its provisions. However, where there is dispute relating to the execution of the agreement, there is a need for the settlement of the disputes. Thus, it is a common error and a risk to not insert the manner of settlement of disputes. The most effective means to settle disputes will be to insert an arbitration clause. In Metroline (Nig) Ltd & Ors V. Dikko, the Court of Appeal elucidate don’t the import of arbitration clauses:

“The modern day commercial practice allows room for arbitration of dispute clause in a contract agreement. This arbitral clause is usually treated separately from the core contract. It is inserted in a contract to make room for compulsory arbitration in case of disputes and contentions over the right and obligations of the parties…When parties on their own enter into an agreement to submit any dispute arising from their transaction to arbitration, it is a choice that is absolutely theirs and the Court will not interfere to block the chances of the parties to enter into any agreement they wish

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to make save that such agreement must be legal and must not be for any illicit purposes. When the agreement is finalized, the agreement takes over and it is not the business of the Court to find out whether it is a transaction that can be heard by same Courts or the other.” Per ADAH, J.C.A.29 

Therefore, any agreement containing an arbitration clause is an indication that the contract requires the parties to resolve their disputes through an arbitration process and in keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts.30

3. Overlooking of a Sunset Clause.

A sunset clause stipules when a thing or condition in the contract is to end.31 An example of a sunset clause will be the time when an insurance policy will elapse in relation to third party coverage or coverage to a certain type of incidents. Therefore, when parties do not avert their minds to a sunset clause that is deeply embedded in a contract it can bring about several liabilities.

4. Application of unsuitable Boiler plate Clauses

As a result of the use of templates and standard form contracts (boiler plate contracts) there are monumental risks in the application of a boiler plate clause that was not intended to apply to the contract agreed by parties. Thus, it is necessary for there to be thorough review and editing of templates utilised. Boiler plate clauses often contain limitations of liability, indemnity, choice of law, dispute resolution, the payment of legal fees, issue of notice, and other core contractual terms.

5. Absence of Financial Risk Analysis

A party might have a good contract but might have contracted with the wrong individual. Thus, it is necessary for a party to minimize the financial risk it is exposed to when contracting by ascertaining the credit worthiness of the other party. The credit score of the other party should dictate whether the contract should be entered into and also the payment structure contained in the terms of the contract.

29 (2018) LPELR-46853(CA)

30 Sino-Afric Agriculture & Ind Company Ltd & Ors V. Ministry Of Finance Incorporation Anor (2013) LPELR-22370(CA)

31 Cambridge Dictionary at <https://dictionary.cambridge.org/dictionary/english/sunset-clause> accessed on December 2, 2019

6. Mistake as to the Applicable Version

When entering into a contract the parties need to ensure that at the signing of the documents, the final and conclusive version of the documents are signed and agreed to by parties. A party that signs a version not intended to be signed will have an uphill task of disputing the accuracy of such a contract especially when there are no ambiguities in it. Thus, it is important to run a comparison between the agreed contract and the copy that is to be signed.

7. Misunderstanding of parties and lack of consensus

A contract presupposes that there is consensus ad idem amongst parties especially when in writing. However, there can be an issue of misunderstanding of a word and same shall in turn pass on a misunderstanding of liabilities, rights and duties. For example in

Conclusion

In conclusion, contracts are invaluable tool to carrying out trade and commerce and the Courts have continued to recognise and uphold and interpret them with the sole aim of executing the intentions of the parties. Therefore, it is important that the true intensions of parties is clearly captured and fully contained in the agreement to avoid the risk of being bound to an agreement that is not intended to be executed. Thus, from the initial stage of creation to the stage of execution, care must be taken to proof read and understand the document in order to mitigate risks. Likewise, it is important for contracting parties to know what they desire for the contract to convey their intentions for once executed contracts and commercial agreements will remain binding unless fraud is proved.

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About Ituah Imhanze, ACArb

Ituah Imhanze is a Partner in Kenna Partners. He co-ordinates the various practice areas of the Firm whilst driving the Dispute Resolution and Energy practice areas. He has a thorough understanding of the Nigerian judicial system and business landscape with extensive experience in Commercial Litigation and Arbitration.

Ituah Imhanze has successfully represented financial institutions, regulators, governments and multinationals,

in several high profile disputes. He continues to represent oil majors and indigenous oil companies in a wide range of disputes, including oil spill matters and compensation claims, at the Appellate and ECOWAS courts. His experience in Commercial Arbitration in several jurisdictions has led him to sit as arbitrator on different panels over various disputes. He has also successfully mediated settlements in company disputes in Nigeria and abroad.

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