By Hansen Advocates
Understanding the Constitution of Kenya, the Law of Contract Act and other applicable laws can help businesses protect their interests, manage risks and make informed commercial decisions.
Introduction
Every business transaction involves some degree of risk. Whether an entrepreneur is entering into a partnership, supplying goods, leasing commercial premises, engaging a consultant or signing a service agreement, the terms of the contract can have lasting financial and legal consequences.
Yet many entrepreneurs focus primarily on the commercial aspects of an agreement, such as the price, expected profits and delivery timelines. They may overlook liability clauses, termination conditions, payment provisions and dispute resolution mechanisms that determine their rights and obligations when a transaction does not proceed as expected.
A contract is not merely a document recording a business arrangement. It establishes obligations that may be legally enforceable and can become the foundation of a claim if one party fails to perform.
In Kenya, contractual relationships are governed by the applicable principles of contract law, legislation and, where relevant, constitutional provisions. The Law of Contract Act (Cap. 23) is a key statute in this area, while other laws may apply depending on the nature of the transaction.
The Constitution of Kenya, 2010, also establishes important protections and principles relevant to commercial activity, including the protection of property rights under Article 40, consumer rights under Article 46 and access to justice under Article 48.
Understanding these legal frameworks is important for entrepreneurs who want to build sustainable businesses and avoid preventable disputes.
This article examines six areas that Kenyan businesses should consider before signing a contract.
1. Contract Formation and Validity: Is the Agreement Legally Sound?
Before examining individual clauses, an entrepreneur should establish whether the proposed agreement adequately identifies the parties, clearly expresses their obligations and satisfies any applicable legal requirements.
The Law of Contract Act provides the general statutory framework for applying contract law in Kenya. Section 2 addresses the application of the common law of contract, subject to applicable Kenyan written law.
The requirements for a legally enforceable agreement depend on the nature of the transaction and the applicable legal rules. An agreement should not be assumed to be enforceable simply because the parties have signed a document.
Entrepreneurs should examine the following issues:
Identity of the parties: Is the agreement being entered into with the correct individual, company or other legal entity? A business trading name may differ from the legal name of the entity responsible for the transaction.
Authority to sign: Does the person signing have authority to bind the company or organisation? This is particularly important in partnerships, companies and transactions involving representatives or agents.
Clarity of obligations: Does the agreement define what each party must do, when performance is due and what constitutes satisfactory performance?
Required formalities: Does the transaction require a written agreement, signatures, witnessing, registration, consent or other statutory formalities?
For example, section 3(3) of the Law of Contract Act prescribes specific requirements for contracts for the disposition of an interest in land, including requirements relating to writing, signatures and attestation. A business acquiring commercial property should therefore not rely solely on informal discussions or an unverified promise.
Electronic agreements also require attention. Section 83J of the Kenya Information and Communications Act recognises that an offer and acceptance may be expressed through electronic messages and that a contract is not invalid merely because electronic messages were used. However, applicable statutory exceptions and transaction-specific formalities must still be observed.
What entrepreneurs should do: Confirm the parties’ identities and authority, ensure the obligations are sufficiently clear, and verify any legal formalities applicable to the transaction before committing to it.
Useful legal references:
2. Liability Clauses: How Much Financial Risk Are You Accepting?
Liability clauses determine when a party may be responsible for losses arising from a contractual relationship. Depending on their wording, these clauses can significantly affect a business’s financial exposure.
Consider a Kenyan company contracted to install an information technology system for a client. The contract specifies the installation fee but does not adequately address responsibility for delays, defective work, additional costs or losses arising from a breach.
If a dispute occurs, the parties may disagree about who bears the resulting losses and the extent of any liability.
A carefully drafted agreement should address foreseeable risks and allocate responsibility in a manner appropriate to the transaction.
Key clauses to examine
Limitation of liability: Does the agreement establish a financial cap on liability? Are there exceptions for particular types of claims, such as fraud, wilful misconduct or confidentiality breaches? The wording and legal enforceability of any limitation must be assessed in context.
Indemnity: Does one party undertake to compensate the other for specified losses, third-party claims or expenses? Entrepreneurs should understand precisely which events trigger an indemnity and whether its scope is proportionate to the transaction.
Warranties and representations: Are you guaranteeing particular results, product standards or service levels? Are those commitments realistic and consistent with what your business can deliver?
Insurance: Does the contract require professional indemnity, public liability or another form of insurance? Can your business obtain the required cover on commercially reasonable terms?
Consequences of breach: Does the agreement explain the remedies available if a party fails to perform?
Kenyan contract law does not mean that every clause labelled a limitation or indemnity will automatically be effective. Its interpretation and enforceability depend on the wording, applicable legislation and relevant legal principles.
The Constitution also protects property rights under Article 40. Although this provision does not determine the outcome of every private contractual dispute, it forms part of the wider constitutional framework governing property and commercial interests.
What entrepreneurs should do: Assess the financial consequences of a potential breach before signing. Ensure that liability, indemnity, insurance and remedy provisions are understood and appropriate to the size and nature of the transaction.
3. Termination Clauses: Can You Exit the Agreement Fairly?
A business agreement may be profitable when it begins but become commercially unsuitable as circumstances change.
A customer may discontinue a project, a supplier may repeatedly miss delivery deadlines, or a business partnership may no longer meet the parties’ objectives.
The termination clause determines the circumstances and procedures under which the contractual relationship can end.
A poorly negotiated clause can leave a business tied to an unprofitable arrangement or expose it to unexpected cancellation costs.
What should you check?
Termination for breach: What happens when one party fails to meet its obligations? Does the agreement require written notice and provide a reasonable opportunity to remedy the breach where appropriate?
Termination for convenience: Can either party end the agreement without proving a breach? What notice period applies, and are there compensation or other financial consequences?
Automatic renewal: Does the contract renew automatically unless a party gives notice within a specified period?
Outstanding obligations: What happens to unpaid invoices, deposits, unfinished work, goods already ordered and services already delivered?
Surviving obligations: Do confidentiality, data protection, intellectual property and other continuing obligations remain effective after termination?
For example, a small supplier may sign a three-year agreement requiring it to maintain stock and staffing levels while allowing the customer to terminate on very short notice. If the customer ends the relationship unexpectedly, the supplier could be left with significant costs.
The supplier should therefore negotiate termination rights that reflect the financial commitments it must make to perform the contract.
The Constitution’s Article 40 protects property rights, but it does not provide an automatic right to cancel a commercial agreement whenever doing so becomes financially inconvenient. Contractual rights and remedies must be assessed under the applicable law and the agreement’s terms.
What entrepreneurs should do: Before signing a long-term agreement, establish the circumstances in which it can be terminated, the notice required and the financial consequences of ending the relationship.
4. Payment Obligations: Protecting Your Business’s Cash Flow
Cash flow is fundamental to business continuity. A company may generate sales and secure profitable contracts yet experience financial difficulties if its customers do not pay on time.
Payment provisions should therefore be among the first clauses entrepreneurs examine.
An agreement that states only the total contract price may leave important questions unanswered. These include when payment falls due, what triggers payment, how invoices are disputed and whether a client can withhold amounts for reasons unrelated to the work performed.
Essential payment provisions
Payment deadlines: Does the agreement specify when invoices must be paid, such as within a defined number of days after receipt or delivery?
Milestone payments: For projects delivered in stages, are payments linked to clearly defined milestones?
Acceptance criteria: Are the standards for accepting goods or services objective and measurable? Can acceptance be delayed indefinitely?
Late payment: Does the contract provide for interest or other remedies for late payment where legally permissible?
Taxes and expenses: Does it specify how applicable taxes, withholding obligations, transport expenses and other charges will be handled?
Disputed invoices: Is there a procedure for raising an invoice dispute, and what happens to any undisputed portion of the amount payable?
Deposits and retention: Are advance payments refundable under particular circumstances? Can the customer retain part of the payment, and if so, for how long and on what basis?
Kenyan legislation may impose additional requirements depending on the transaction. For example, the Sale of Goods Act may be relevant to agreements involving the sale of goods, while the Consumer Protection Act, 2012, may apply to qualifying consumer transactions.
Article 46 of the Constitution protects consumer rights, including the right to goods and services of reasonable quality, necessary information and protection of economic interests. These constitutional protections apply to goods and services offered by public entities and private persons, although the specific legal rights and remedies depend on the relevant legislation and circumstances.
For business-to-business transactions, entrepreneurs should also ensure that payment terms are commercially realistic and that the contract does not create an unreasonable dependence on a customer’s internal approval processes.
What entrepreneurs should do: Define payment dates, amounts, milestones, acceptance procedures and the consequences of late payment. Do not rely solely on verbal promises that payment will be made once a project is completed.
5. Dispute Resolution: What Happens When the Relationship Breaks Down?
Disagreements may arise even where the parties entered into a contract in good faith.
A customer may reject completed work, a supplier may dispute an invoice, or business partners may interpret an obligation differently.
A dispute resolution clause establishes the procedure for dealing with these disagreements.
In Kenya, parties may agree to pursue negotiation, mediation, arbitration or court proceedings, subject to the applicable legal framework.
Negotiation and mediation
Negotiation allows the parties to attempt to resolve a dispute directly. Mediation introduces a neutral third party to facilitate discussions and help the parties explore a possible settlement.
These processes may preserve commercial relationships and avoid some of the costs associated with formal proceedings. However, their suitability depends on the circumstances and whether the parties are willing to participate constructively.
Arbitration
Arbitration is a formal dispute resolution process in which an appointed arbitrator determines the dispute in accordance with the applicable law and procedure.
The Arbitration Act, 1995, provides the statutory framework for domestic and international arbitration in Kenya. It addresses matters including arbitration agreements, the appointment and jurisdiction of arbitral tribunals, court intervention and the recognition and enforcement of arbitral awards.
Before agreeing to arbitration, businesses should consider the seat of arbitration, the applicable rules, the appointment of the arbitrator, costs and the practicalities of enforcing an award.
Arbitration is not necessarily cheaper or faster than court proceedings in every case.
Court proceedings
Article 48 of the Constitution requires the State to ensure access to justice for all persons and provides that, where a fee is required, it must be reasonable and must not impede access to justice.
Article 159(2)(c) further directs courts and tribunals to promote alternative forms of dispute resolution, including reconciliation, mediation, arbitration and traditional dispute resolution mechanisms, subject to the constitutional qualifications.
These provisions establish important principles for the administration of justice. They do not, however, mean that every contractual dispute must go through mediation or arbitration before a court can be approached. The applicable law, the contract and the circumstances of the dispute determine the appropriate process.
A dispute resolution clause should therefore be drafted carefully, taking into account the value of the transaction and the practical needs of the business.
What entrepreneurs should do: Before signing, confirm where and how disputes will be resolved, who bears the costs, whether preliminary procedures are mandatory and whether the selected mechanism is appropriate for the transaction.
Legal reference: Arbitration Act, No. 4 of 1995.
6. Contract Enforcement: Can You Prove Your Case?
A business may have a legitimate claim against a customer or supplier but still face difficulties establishing what was agreed or proving that the other party breached the contract.
The practical strength of a contractual claim often depends on the agreement’s wording, the applicable legal requirements and the quality of the supporting evidence.
Entrepreneurs should avoid relying entirely on informal conversations or assumptions about what the other party intended.
Keep accurate records
Businesses should maintain copies of signed contracts, purchase orders, invoices, delivery notes, emails, payment records, acceptance confirmations and written notices.
Where the parties agree to change the scope, price or delivery date, the variation should be documented in the manner required by the contract and applicable law.
Electronic communications may provide useful evidence of an agreement or its performance. Nevertheless, the legal effect and evidential value of any communication depend on the circumstances, authenticity, applicable rules and any statutory formalities.
Check contractual authority
A company director, employee, agent or other representative may have authority to enter into certain agreements but not others. Businesses should verify that the individual signing has the necessary authority and that any required internal approvals have been obtained.
Protect intellectual property
Entrepreneurs commissioning websites, software, branding, designs or other creative work should establish who owns the resulting intellectual property and what rights each party receives.
Payment for a service should not be assumed, without examining the agreement and applicable law, to transfer every intellectual property right associated with the work.
Consider limitation periods
Legal claims may be subject to statutory time limits. The applicable period depends on the nature of the claim and any relevant statutory provisions or exceptions. Businesses should obtain legal advice promptly when a contractual dispute arises rather than assume that a claim can be brought at any time.
What entrepreneurs should do: Keep complete records, document variations, verify signing authority and obtain legal advice promptly if a party fails to honour its obligations.
7. Data Protection, Confidentiality and Other Regulatory Obligations
Modern business agreements frequently involve customer information, employee records, supplier details, intellectual property and confidential commercial information.
Entrepreneurs should therefore consider whether their contracts adequately address privacy, data security and the permitted use of information.
Article 31 of the Constitution protects the right to privacy. The Data Protection Act, 2019, gives effect to aspects of that right and establishes obligations concerning the processing of personal data.
Under the Act, personal data must be handled in accordance with applicable legal requirements, including principles governing lawful and fair processing, transparency, purpose limitation and data minimisation.
For example, a business that outsources customer support or payroll processing may need to establish the responsibilities of the service provider, the permitted uses of personal data, security measures, incident reporting procedures and arrangements for returning or deleting information when the contract ends.
Depending on the arrangement, the parties may also need to consider whether registration or other obligations under the data protection framework apply.
Other regulatory requirements may arise in sectors such as financial services, construction, healthcare, telecommunications and real estate. A contract cannot simply override applicable statutory obligations because the parties have agreed to particular terms.
What entrepreneurs should do: Identify the legal and regulatory requirements applicable to the transaction, and ensure that the contract clearly allocates responsibilities for compliance.
Legal reference: Data Protection Act, 2019.
A Practical Legal Checklist Before Signing
Before entering into your next business agreement, consider the following questions:
- Have I verified the identity of the parties and the authority of the people signing?
- Are the scope of work, deliverables, deadlines and responsibilities clearly stated?
- Do I understand the liability, indemnity and insurance provisions?
- Are the payment amounts, deadlines and acceptance criteria clearly defined?
- Can I terminate the agreement under specified circumstances, and what will it cost?
- Is the dispute resolution process suitable for the transaction?
- Are confidentiality, data protection and intellectual property adequately addressed?
- Have I checked automatic renewals, penalties, exclusivity and other restrictive provisions?
- Does the agreement satisfy any statutory formalities required for this type of transaction?
- Have I considered the consequences of a breach and the evidence I would need to enforce my rights?
- Have I identified any licences, approvals, tax obligations or sector-specific requirements that may apply?
- Have I obtained independent legal advice where the transaction or its risks warrant it?
If important questions remain unanswered, consider seeking clarification or legal advice before signing.
Why Professional Legal Review Matters
A well-drafted business contract should reflect the parties’ commercial intentions, allocate risks clearly and provide a workable framework for managing disagreements.
Legal review can help identify ambiguous provisions, unfavourable obligations, missing protections and statutory requirements that might otherwise be overlooked.
It can also help entrepreneurs negotiate appropriate payment terms, understand their termination rights and select a dispute resolution mechanism suited to their commercial needs.
The objective is not to eliminate every possible business risk. It is to understand the risks, manage them responsibly and avoid accepting obligations without appreciating their potential consequences.
For Kenyan entrepreneurs, contract review should be viewed as an investment in sound business governance, not merely an expense incurred when a dispute arises.
How Hansen Advocates Can Assist
At Hansen Advocates, businesses can seek legal guidance on the preparation, review and negotiation of commercial agreements, with advice tailored to the nature of the transaction and the applicable law.
Whether you are entering into a supplier agreement, engaging a consultant, forming a business partnership, acquiring property or negotiating a major commercial transaction, understanding your legal obligations before signing can help you make better-informed decisions.
Do not wait until a disagreement arises to discover what your contract requires.
Before you sign, understand your rights, your obligations and the risks you are accepting.
Contact Hansen Advocates to discuss your business contract review and legal advisory needs.
Legal Disclaimer
This article is intended for general informational purposes only and does not constitute legal advice or create an advocate-client relationship. The application and enforceability of contractual provisions depend on the agreement, the facts of the transaction and the applicable law. The legal references are provided as a starting point and should be checked against current legislation and relevant judicial decisions. Businesses should obtain advice from a qualified Kenyan advocate before entering into, varying or terminating a contract.