Legal Highlights: Companies Act and Contract Drafting

Part A: Legal Highlight Back in 2020, the Companies Act of Tanzania was amended to require all companies registered in Tanzania to disclose the ultimate beneficial ownership. The deadline to make such disclosure has now been extended for 12 months starting on 1 January 2021. The amendment mandates disclosures on shareholding trust arrangements, the individual shareholders behind corporate bodies etc. Part B: Key Contract Clauses Contracts and agreements are part of the everyday business arrangements. Without them, business relationships will be in jeopardy without clarity of what is to be expected from the other party and what our contractual obligations are. Whilst parties can have a contract, if the contract lacks key clauses as indicated below, such contract can leave parties in head locks rather than helping their contractual relationship.

Below we highlight the key clauses in contracts between private and public entities. Parties These are the entities or individuals who are entering in contractual arrangement. It is critical to identify the person you are contracting because privity of contract will prevent you from enforcing the contractual obligations to a person other than to the contractual party. In some instances, parties believe that even if they are contracting with Party A, they can enforce the contractual obligations on Entity B since Party A owns 100% of entity B. This is never the case. If there is any other party to either be bound by your contractual terms or obligated to do any tasks under the relevant contract, that party must be added as a party to the relevant contract contract or a separate contract should be signed with that other party.

Otherwise it is unlikely that it will be possible to enforce the contractual obligations against such third party. Subject matter & description What is the contract about? Specifics are critical in ensuring that both parties are aware of what is expected from each of them. If it is a contract for supply of goods, state clearly what goods, quantity, quality, manufacturer, intended use of those goods, fit for purpose etc. If it is a supply of service contract, what kind of service, is the party qualified, experienced to provide such service? Any certificates, experience to be attached to the contract? Interpretation clause This is necessary if the parties use terms which are not ordinarily used in the market or if the contract gives those terms a unique meaning other than what that term is ordinarily used in the market.

Also, interpretation clause is useful to avoid repeating the same words throughout in a contract, useful when the parties use some abbreviations and to avoid ambiguity. Dispute resolution mechanism Every contract has a risk of ending up in dispute. It is unrealistic for the contractual parties not to include a dispute resolution clause simply because e.g. they are friends, have done business together for years, it is a simple contract with short duration etc. Regardless of the good will or relationship between the parties, a dispute resolution clause is important. Some court judgements have used the dispute resolution clause to determine whether the parties intended their

contract to be legally binding. If the contract doesn’t have a dispute resolution clause, it is likely that the parties do not intend their contract to be legally binding hence, becomes difficult to enforce if either of them is in breach. Dispute resolution mechanism can be court, arbitration, expert resolution etc. Choice of law This goes hand in hand with the dispute resolution mechanism. The law allows parties to choose a foreign law to govern their contract. The right to choose foreign to govern your contract is regardless of the nationality of the parties to the contract. Something worth keeping in mind is that, the parties must consider the costs of enforcing their contract in a foreign jurisdiction. Tanzanian courts can enforce Tanzanian laws only, not foreign laws.

Worth noting that, whilst we have a law which recognises and allows the High Court of Tanzania to enforce foreign judgment, on the other hand the Contract Act of Tanzania states that, if parties opt for a foreign law, then the parties should use arbitration. There seems to be a conflict of law in this instance because there are several foreign judgements which have so far been recognized and enforced by the High Court of Tanzania. Addresses Whilst some contracts take this clause lightly, it is critical to clearly state in the contract the addresses and contact persons for each party. The addresses become critical when one party wants to serve an official notice to the other party e.g. dispute, force majeure notices etc.

The address clause should clearly indicate the name of the contact person (if the parties are corporate bodies), the postal and physical address, phone number and email address of each of the parties. When the parties are having a dispute, proper service of notice becomes critical and the address to be used is that which is stipulated in the contract unless the relevant party has given a written notice that its address, contact person etc. has changed. Taxes All contracts have tax repercussions, either capital gains, withhold tax, VAT, stamp duty etc. Parties should clearly state what taxes are included and/or excluded from the consideration amount, who pays those taxes etc. Duration & Termination clause This clause is relevant to determine the duration of the contract. Also, it lists the grounds and the manner at which a party can terminate a contract.

A contract can be terminated with or without cause, on giving reasons or otherwise. It is advisable for each contract to have specific termination events and its expiry so that it is clear that each party may opt out of the contract at a specified time or on occurrence of an event or breach. Notices For contracts with a long duration, parties must continue to communicate regularly re: performance of the contract. Notices are meant to keep the other party informed of a particular situation which affects the party’s ability to discharge its contractual duties. It is advisable that the

notice clause elaborate on the manner of issuing notices/official communication between the parties i.e. in writing, manner of delivery, when is the notice deemed to have been received etc. The key questions on this part is if the notice is sent via postal office, when is it deemed to be received? Is service of notice via email acceptable to the parties? What about fax? Should the notice highlight to whom it is directed? If it is delivered to the business premises of the party, should be left with who? Receptionist? Personal assistant? Etc. Without clarity on this part, it is very easy for a party to avoid liability by arguing that it never received the notice or that the notice was not properly served etc. Title There is a rule that, a party cannot give a better title than what he has.

This means that, if a person selling goods to you does not have the title to those goods, he/she cannot pass full legal title/ownership to you. Meaning, except in very few circumstances, the owner of the goods can come along and claim those goods. Passing of risk & title When does the title and risk pass? This is a critical point to consider in contracts for supply of goods or services. Whilst title can pass earlier, passing of risk can be delayed. For example, contracts for supply of goods can clearly state that, the risk passes to the buyer the moment the goods are offloaded into the premises of the buyer. So for as long as the goods are in transit or are yet to be offloaded from the truck, the risk is still with the seller. Breach of contract What amounts to breach of contractual terms?

What act or omission if done by a party warrants the other party to terminate the contract and claim for damages? Assignment This clause covers the right of the parties to assign their rights or obligations or both to third parties (including affiliates). The contract should clearly state if either of the parties have the right to assign any of its rights or obligations, whether prior consent of the other party is required and if not, whether prior notice should be issued and the format/content of that prior notice. Condition precedents This clauses covers all matters which must be performed by a particular party and all licences, permits, consents etc. which must be obtained before the contract becomes binding and enforceable between the parties.

If any of the conditions precedents have not been complied with and the party has not waived it (or it is not possible to legally waive it), then the contract is automatically terminated with or without liability on either of the parties. It is important to set a time limit within which the conditions precedents must be complied with. Without such time limit, it can lead to the relevant party lagging behind in completing the conditions precedents and leave the other party in a disadvantageous position.

Consideration This refers to the payment/compensation payable to the other party in exchange for the service or goods being offered. The Contract Act of Tanzania requires each contract to have consideration to be legally binding. The amount of consideration does not matter as long as consideration is given even if the consideration payable is not equitable to

the market value of the service or goods being supplied. However, from a tax perspective, regardless of what the parties have stated in their contract as the consideration payable, the revenue authority has the right to assess and indicate the valid consideration payable if the parties were trading at an arm’s length and accordingly impose the taxes payable based on the arrived consideration as resolved by the revenue authority. Force majeure Whilst it is not necessary in all contracts, some contracts are sophisticated and have longer duration meaning there is a high risk of force majeure event occurring whilst the contract is still in force. Force majeure refers to events which are likely to occur and which are outside the control of a party. Such events prevents/restricts a party from performing its contractual obligations either partially or fully.

Such clause must define what is considered a force majeure event and what doesn’t e.g. should financial difficulty be considered as a force majeure event – in Covid 19 situation maybe yes. Authorised signatories This is important for contracts between or with corporate bodies. Worth stating within a contract whether the individual signing has authority to sign such contract on behalf of the corporate body. The authorising document should be attached or at least shown to the opposite party. Also, if a party is signing a contract under a power of attorney, such power of attorney should be attached and advisable to have it registered with the Registrar of Documents. Obligations The obligations, duties of each party must be clearly stipulated in the contract. Who is expected to do what, when, how, within what time etc.

Enforceability A clear statement that the parties intend to make the contract legally binding and enforceable between them should be included in the contract. It is useful to have this clause in a contract to avoid a risk of court’s ruling that it was not the intention of the parties to create a binding obligation on each other. Such a clause is important in contracts involving family members. In some circumstances contracts between family members are considered to be unbinding unless the contents bring a presumption that the parties intend to be legally bound by the terms of the contract. PART C Additional points for ‘contracting with the Government and/or its authorities’ Procurement procedures Government authorities are required to observe procurement law when procuring goods and/or services.

Prior to entering into a contract with a government authority, where the government is the party procuring the service or goods, it is advisable to inquire whether the procurement procedures have been followed as required under the law. This will not be necessary if you are entering into such a contract following a competitive bidding. Note that there are solicited and unsolicited bids and each has its requirements under the procurement law. Whilst failure to follow procurement procedures by the

Government authority is not a valid excuse to either terminate the contract or fail to pay for the services/goods, it can in a way hinder or cause unnecessary complications/delay in implementation of the contract or receiving payment. Change of law As of recent, getting stabilization clauses has become next to impossible but it is important to have a clause within the contract which clearly states the position of the parties when there is a change of law. Will the non-governmental party have a grace period to adjust? What happens when the change of law affects the monetary gains of the other party? Or it leads to added expense or additional fees, royalty, costs on the other party? Sovereignty Under this clause, the governmental authority waives its sovereignty and accepts to be subject to the chosen law and be subject to legal proceedings in case of breach.

Time limit for responsiveness This is a common challenge in contracting with the government and its authorities or in shareholding arrangements. It is important for such contracts to clearly set time limits for responsiveness of each of the parties so that there is no lagging or inability to execute the contract. Regulatory authority(ies) Contracts with the government and government authority should clearly indicate the regulatory body which regulates the contract. Whilst in most instances it can be clear which regulatory body has the mandate to regulate the contracted activity, it may occur that there is an overlap which puts the party under obligation to comply with requirements of different regulatory bodies, which complicates contractual obligations of the party, adds costs, time wastage etc.

Repatriation of funds/profit This is a mere statement in the contract that, the respective party has the right to repatriate all its profits and funds outside of Tanzania after payment of the relevant taxes, salaries etc. It is an assurance that the foreign entity contracting with the government authority will be allowed to repatriate its funds and profits. Expatriates Some contracts require hiring of expatriates. There are limitations under the respective immigration laws regarding the number of expatriates to be retained by each company. If a party believes that it will need more than the allowable limit of expatriates, efforts should be made to clearly state as such in the respective contract to avoid refusal of the much needed residence and work permits. Working committee/joint team This is common for construction, engineering, ongoing supply contracts etc.

Such working committees are important to allow the respective parties to meet, discuss and review progress of the contractual duties. Also to iron out any issues which may have arisen during the implementation of the contract. Such working committees tend to avoid unwanted or unnecessary disputes and delays in performance of contracts because it allows parties to discuss and make on the spot decisions on matters which may not have been covered in the contract. Tax exemptions If the contract affords the non-governmental party

exemption from any taxes, fees etc. such exemptions should be clearly stipulated in the respective contract. Also, such clause should set a time limit within which the Minister of Finance should publish such exemption in the Government Gazette. No exemption will be recognized and implemented by the revenue authority based on a contract unless such exemption is published. Our support for your business We are a law firm and readily available to assist in all your legal needs and beyond. Call us for a same day meeting and assistance. Disclaimer The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory or interference of any legislation, laws or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without our express written consent.

It should not be considered as a legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper.