Commercial Contracts in Nigeria: Common Risk Areas Business Owners Should Not Ignore

Commercial contracts are central to business relationships. They define what each party is expected to do, what each party will receive, how risk is allocated, and what remedies may be available if the relationship does not proceed as expected.

For many businesses, contract risk does not arise because there is no agreement at all. It often arises because the agreement is unclear, incomplete, copied from another transaction, poorly adapted to Nigerian commercial realities, or misaligned with the actual business arrangement.

A well-drafted commercial contract should do more than record the parties’ optimism at the start of a relationship. It should anticipate foreseeable risks, allocate responsibility, create accountability, and provide a practical route for enforcement or exit if the relationship breaks down.

This article highlights common contract risk areas that Nigerian business owners, founders, investors and management teams should consider when entering into commercial arrangements.

1. Unclear Scope, Deliverables and Performance Milestones

A contract should clearly describe the goods, services, deliverables, milestones or obligations covered by the arrangement. The scope provision is often one of the most important parts of the agreement because it determines what performance means in practical terms.

The Risk

Vague scope language creates room for avoidable disputes. Parties may disagree over whether work has been completed, whether a delay has occurred, whether a deliverable meets the required standard, or whether additional work should attract additional payment.

In service, technology, construction, consulting, supply and project-based arrangements, poor scope drafting can lead to scope creep, delayed performance, disputed invoices and strained commercial relationships.

Better Drafting Approach

The contract should include a clear description of the required performance. Where the transaction is technical or project-based, the scope should be supported by a schedule, statement of work, specification document, service-level matrix or milestone table.

The parties should also define how completion will be assessed. Instead of relying only on broad language such as “to the satisfaction of the client”, the contract should, where possible, include objective acceptance criteria, review timelines, testing standards, delivery formats or measurable performance indicators.

2. Payment Terms, Taxes and Currency Exposure

Payment provisions should be precise. A contract should address price, currency, invoicing, payment timeline, taxes, withholding, reimbursable expenses, late payment consequences and whether payments are tied to milestones or acceptance.

The Risk

Unclear payment terms can create significant commercial pressure. A supplier may assume that the stated price excludes VAT, while the customer assumes it includes all taxes. A service provider may expect reimbursement of expenses, while the client may consider the agreed fee all-inclusive. A contractor may complete a milestone but remain unpaid because the contract does not clearly state how acceptance is confirmed.

In longer-term arrangements, currency volatility, inflation, import costs and changes in operating expenses may also affect performance. If the contract does not address these issues, one party may bear a level of commercial risk that was not properly priced into the transaction.

Better Drafting Approach

Payment clauses should specify whether amounts are inclusive or exclusive of VAT and other applicable taxes. Where withholding tax applies, the contract should state how deductions will be handled and whether credit notes or supporting documents must be provided.

For milestone-based contracts, the agreement should provide clear acceptance procedures. For example, the contract may state that a deliverable is deemed accepted if the receiving party does not issue a written rejection notice, with specific reasons, within an agreed number of business days.

Where a contract is long-term or exposed to foreign exchange, import costs or inflation, the parties should consider whether a price-adjustment mechanism, review clause or currency-risk allocation provision is appropriate.

3. Intellectual Property Ownership and Usage Rights

Intellectual property is increasingly central to commercial value. It may arise in software, designs, branding, written materials, training content, product documentation, marketing assets, data sets, creative works, technical drawings, inventions, processes or proprietary information.

The Risk

Businesses sometimes assume that payment automatically transfers ownership of all intellectual property created by a contractor, developer, consultant, designer, agency or other service provider. That assumption can create serious problems.

Under the Copyright Act 2022, copyright generally vests initially in the author, except as otherwise provided by agreement or in specified statutory situations. The Act also recognises assignment and licensing as ways in which copyright may be transferred or used.

Where a contract fails to address ownership or usage rights clearly, the paying business may later discover that it has only an implied or limited right to use the work, rather than full ownership. This can affect fundraising, product development, licensing, sale of the business, enforcement against third parties and future commercialisation.

Better Drafting Approach

Contracts involving creative, technical or intellectual work should expressly address ownership, assignment, licensing and permitted use.

If the business requires ownership, the contract should include a written assignment of rights, title and interest in the relevant work product, together with obligations to execute further documents where required.

If full ownership is not commercially necessary or available, the business should obtain a licence that is broad enough for its intended use. The licence should address duration, territory, exclusivity, transferability, modification rights, sublicensing and commercial use.

The contract should also include warranties that the work does not infringe third-party rights and that the service provider has not used unauthorised third-party materials.

4. Confidentiality and Data Protection

Confidentiality clauses protect business-sensitive information. Data protection clauses regulate how personal data is processed. These are related but distinct issues.

The Risk

A generic confidentiality clause may be insufficient where the transaction involves customer data, employee data, user accounts, health information, financial information, identity data or other personal data.

The Nigeria Data Protection Act 2023 established the Nigeria Data Protection Commission and provides the principal statutory framework for data protection in Nigeria. Businesses that process personal data should therefore consider data protection obligations as part of their contracting process.

Where a counterparty processes personal data on behalf of another business, failure to address data-processing obligations can create regulatory, operational and reputational exposure.

Better Drafting Approach

Confidentiality clauses should define confidential information, permitted disclosures, exclusions, duration, return or destruction obligations and consequences of breach.

Where personal data is involved, the contract should also include appropriate data protection terms. These may address processing instructions, security measures, breach notification, sub-processing, retention, deletion, cross-border transfers, audit rights and cooperation with data subject requests or regulatory enquiries.

Businesses should not treat confidentiality clauses as a substitute for data protection provisions where the transaction involves personal data.

5. Termination and Post-Termination Obligations

Termination provisions are often overlooked during the early stages of a commercial relationship, when the parties are focused on performance and commercial upside. However, termination clauses become critical when the relationship deteriorates or the business need changes.

The Risk

A contract may lock a party into a relationship without a clear exit route. It may fail to define what constitutes material breach, whether a breach can be remedied, how much notice must be given, or what happens to outstanding obligations after termination.

This can create uncertainty over unpaid invoices, work in progress, return of documents, access to data, intellectual property rights, confidentiality obligations, handover support, migration of services and dispute resolution.

Better Drafting Approach

A contract should distinguish between termination for convenience and termination for cause where both are commercially appropriate.

Termination for convenience allows a party to exit by giving notice, often after an agreed minimum period. Termination for cause applies where there is material breach, insolvency, regulatory breach, non-payment, unlawful conduct or another specified trigger.

The contract should also identify the clauses that survive termination. These often include confidentiality, intellectual property, payment obligations, indemnities, limitation of liability, governing law, dispute resolution and data-return obligations.

Where the arrangement involves technology, outsourcing, operations, property, infrastructure or long-term services, the parties should also consider handover, transition assistance and exit-management obligations.

6. Liability, Indemnities and Risk Allocation

Liability clauses allocate financial responsibility if something goes wrong. Indemnity clauses may require one party to compensate the other for specified losses, claims or liabilities. These clauses should be negotiated carefully.

The Risk

A business may accept unlimited liability for losses that are disproportionate to the value of the contract. It may also agree to broad indemnities that cover indirect or speculative losses, third-party claims or regulatory penalties without sufficient control over the underlying risk.

On the other hand, a liability cap that is too low may leave the injured party without a meaningful remedy if the breach causes serious commercial harm.

Better Drafting Approach

Liability clauses should reflect the nature of the transaction, the contract value, the risk profile and the parties’ bargaining position.

A contract may cap liability by reference to fees paid or payable under the contract, insurance coverage, a fixed monetary amount or another commercially relevant metric. The parties should also consider whether certain categories of liability should be excluded from the cap, such as fraud, wilful misconduct, confidentiality breach, intellectual property infringement or data protection breach.

Indemnities should be specific. They should identify the trigger, covered losses, claim procedure, defence control, mitigation obligations and any financial limits.

The objective is not simply to reduce liability. It is to allocate risk in a way that is commercially realistic and legally workable.

7. Governing Law, Forum and Dispute Resolution

Dispute resolution clauses determine how disputes will be handled. They can affect cost, timing, confidentiality, enforceability and commercial leverage.

The Risk

Contracts sometimes confuse governing law, jurisdiction, venue and dispute process. For example, a contract may refer to “Lagos courts” without clearly stating the governing law or whether disputes are to be resolved by litigation, arbitration or mediation.

In other cases, the dispute-resolution mechanism may be disproportionate to the contract value. A complex arbitration clause with a three-member tribunal may be excessive for a routine commercial contract. Conversely, a simple court jurisdiction clause may be inadequate for a cross-border or technically complex transaction.

Better Drafting Approach

The contract should clearly identify the governing law and the dispute-resolution forum.

Where court litigation is appropriate, the jurisdiction clause should be clear. Where arbitration is preferred, the clause should address the seat of arbitration, number of arbitrators, appointment process, language, applicable rules, interim relief and enforcement.

The Arbitration and Mediation Act 2023 provides a modern framework for arbitration and mediation in Nigeria. It also recognises party autonomy in the choice of dispute-resolution mechanisms.

Where arbitration is appropriate, parties may also consider whether the optional Award Review Tribunal mechanism under the Act is suitable for the transaction. That decision should be made deliberately and only where commercially justified.

For many business contracts, a staged clause may be useful: senior-level negotiation first, mediation where appropriate, and then litigation or arbitration if settlement fails.

8. Boilerplate Clauses Are Not Merely Formalities

Boilerplate clauses are often treated as routine provisions placed at the end of the contract. In practice, they can become important when a dispute arises.

The Risk

Notices, assignment, force majeure, variation, entire agreement, waiver, severability and counterparts clauses can materially affect the parties’ rights.

For example, a weak notices clause may create uncertainty over whether a termination notice was validly served. A poorly drafted assignment clause may allow a counterparty to transfer obligations to an unsuitable third party. A generic force majeure clause may not address local operating realities. A weak entire agreement clause may leave room for disputes over whether pre-contractual emails, WhatsApp messages or oral assurances form part of the contract.

Better Drafting Approach

Boilerplate clauses should be adapted to the transaction.

The notices clause should specify permitted methods of service and when notice is deemed received. The variation clause should require written amendments signed by authorised representatives. The entire agreement clause should clarify the status of prior negotiations and representations. The assignment clause should state whether consent is required. The force majeure clause should be tailored to the operational risks relevant to the contract.

These clauses may appear standard, but they are often decisive when the relationship is under stress.

Summary: Building Better Commercial Contracts

A strong commercial contract should reflect the actual deal, allocate risk clearly and provide workable mechanisms for performance, payment, termination and dispute resolution.

Functional Area Common Weakness Better Drafting Approach

Scope and Performance Broad descriptions and assumptions about what must be delivered. Clear schedules, specifications, milestones and acceptance procedures.

Pricing and Payment Unclear tax treatment, weak payment triggers and silence on currency or cost changes. Express tax allocation, payment milestones, acceptance windows and review mechanisms where appropriate.

Intellectual Property Assuming that payment automatically transfers ownership. Written assignment or sufficiently broad licence, supported by warranties and IP indemnities.

Confidentiality and Data Generic confidentiality clause without data-processing terms. Confidentiality provisions plus data protection clauses where personal data is involved.

Termination No clear exit route, survival clause or handover process. Defined termination rights, cure periods, survival provisions and post-termination obligations.

Liability and Indemnities Unlimited exposure or unclear indemnity triggers. Proportionate caps, targeted indemnities and carefully defined carve-outs.

Dispute Resolution Unclear governing law, forum or escalation process. Deliberate governing law, jurisdiction or arbitration clause with proportionate procedure.

Boilerplate Copy-and-paste standard clauses. Transaction-specific notices, assignment, force majeure, variation and entire agreement provisions.

For business owners, the question is not simply whether a contract exists. The better question is whether the contract accurately reflects the commercial deal, protects the business’s assets, allocates risk appropriately and can be relied upon when it matters.

Commercial contracts should be treated as business infrastructure. When drafted carefully, they help prevent disputes, support performance, protect value and give the business a clearer path when commercial relationships become difficult.

This article is provided for general information only and does not constitute legal advice. Specific advice should be obtained based on the contract, transaction, parties and applicable regulatory context.