A company is about to sign a ₦500 million commercial agreement. The commercial team has negotiated the price, finance has confirmed that the transaction is profitable, and management is satisfied with the opportunity. The contract is then forwarded to legal for a final review, with a request to approve it before the end of the day. This is a familiar situation in many businesses. Legal review is treated as the final administrative step before execution rather than an integral part of the commercial decision-making process.
The problem is that a contract can be commercially attractive, financially viable, and legally enforceable while still exposing a business to risks it never intended to assume. A ₦500 million transaction, for example, may contain obligations or liabilities that substantially exceed its contract value. The question is therefore not simply whether a lawyer should review the agreement. It is whether the right people have examined the transaction from their respective perspectives before the company becomes legally committed.
Legal Counsel: What Is the Company Actually Agreeing To?
Legal counsel’s responsibility extends beyond confirming that an agreement is enforceable or identifying drafting errors. A commercial contract review should examine how the agreement allocates obligations, rights, and risks between the parties. Consider a contract under which a supplier agrees to deliver products worth ₦500 million. The agreement may require the supplier to indemnify the customer against all losses arising from the transaction without placing a corresponding limit on its liability.
If a dispute occurs, the supplier’s financial exposure may extend well beyond the revenue it expected to earn. Legal counsel should therefore examine the liability framework, indemnification provisions, warranties, termination rights, dispute resolution mechanisms, and other contractual remedies. The review should also establish whether the company’s obligations are sufficiently defined and consistent with the commercial arrangement negotiated by the business team.
However, identifying legal risks is only part of the exercise. Effective commercial counsel should explain their practical consequences and distinguish between risks that must be addressed, those that can be mitigated, and those that management may reasonably decide to accept.
A legal review that identifies twenty issues without explaining their commercial significance may be less useful than one that identifies the five issues that could materially affect the transaction.
Finance: Does the Contract Still Make Economic Sense?
A profitable contract on paper can become an unprofitable transaction if its financial obligations are poorly structured. The finance team should examine the agreement’s payment terms, tax implications, currency exposure, credit arrangements, and working-capital requirements.
For example, a ₦500 million contract may require the company to incur ₦350 million in procurement and operational expenses before receiving its first substantial payment. If the customer is entitled to pay 90 days after delivery, the business may need external financing to perform the contract.
The cost of that financing could significantly reduce the expected profit. Finance should also consider whether the agreement contains price-adjustment mechanisms, deductions, retention payments, financial guarantees or provisions that could affect the timing and certainty of revenue.
Where imported goods, foreign-currency obligations or long-term commitments are involved, the review becomes even more important. A contract that appears commercially viable at execution may produce a very different financial outcome if exchange rates, financing costs or input prices change. The objective is to ensure that the contract’s financial structure supports the commercial assumptions on which the transaction was approved.
Operations and Procurement: Can the Business Actually Deliver?
Legal enforceability and financial viability mean very little if the company cannot fulfill its contractual obligations. The operations or procurement team should review the agreement to confirm that delivery schedules, technical specifications, service levels, inspection procedures, and other performance obligations are achievable.
Suppose a manufacturer agrees to supply 100,000 units within 30 days, but its production capacity and existing commitments make that timeline unrealistic. Signing the agreement without identifying the capacity constraint may expose the company to delivery penalties, termination, or breach claims. Similar risks arise when contracts include performance standards that are not aligned with the company’s actual capabilities.
Operations should also examine dependencies outside the company’s immediate control, including the availability of raw materials, subcontractor performance, logistics arrangements and customer cooperation. Where performance depends on the customer providing access, approvals, information or other resources, those dependencies should be reflected in the contract.
The review should establish not only what the company is promising but also whether it has the resources, processes and third-party support necessary to deliver.
Management and the Board: Who Owns the Final Decision?
Management determines whether the transaction advances the company’s commercial objectives and whether the associated risks are acceptable. A transaction may pass legal, financial and operational review while still being inconsistent with the company’s broader strategy or risk appetite.
For example, a contract may commit a company to supplying one customer with 80% of its production capacity for three years. The arrangement may be profitable and legally sound, but it could also create significant customer concentration and limit the company’s ability to pursue other opportunities. Management must consider such strategic consequences. For transactions requiring board or shareholder approval, the company should also ensure it has obtained the appropriate corporate authorizations.
Under section 308 of the Companies and Allied Matters Act 2020, directors must exercise their powers and discharge their duties honestly, in good faith, and in the company’s best interests, applying the requisite care, diligence, and skill. The company’s Articles of Association, applicable legislation and internal approval policies should therefore be considered when determining who has authority to approve and execute a material transaction.
The Problem With Reviewing Contracts at the Last Minute
One of the most avoidable mistakes in commercial transactions is involving legal counsel only after the principal commercial terms have been agreed. By that stage, the business team may have made commitments that are difficult to renegotiate without affecting the relationship or delaying execution. Legal counsel may discover that the agreed pricing does not account for the liabilities being assumed, that the proposed delivery obligations are unrealistic, or that the contract provides inadequate protection against non-payment.
These issues are much easier to resolve while the transaction is still being negotiated.
For material contracts, businesses should involve legal, finance, and relevant operational teams when reviewing the initial term sheet or commercial proposal. This helps identify material risks before positions become entrenched. Not every agreement requires an extensive review by multiple departments. The level of scrutiny should match the transaction’s value, complexity, and potential consequences.
A routine purchase order should not necessarily follow the same approval process as a major acquisition, long-term outsourcing arrangement, or strategically important supply contract.
A Contract Review Should Produce a Business Decision
The purpose of reviewing a commercial contract is not simply to confirm that the document has been examined. It is to give the company sufficient information to make an informed decision. A useful review should identify the material contractual obligations, explain the principal commercial and legal risks, recommend appropriate changes and make clear which matters require a decision by management. It should also distinguish between provisions that are commercially negotiable and those that may require particular attention because of legal or regulatory requirements.
For a ₦500 million transaction, that process can be considerably more valuable than a last-minute review focused exclusively on drafting. The contract ultimately determines what the company must deliver, when it gets paid, what happens if things go wrong, and how the parties can exit the relationship. Those are not exclusively legal questions. They are business questions with legal consequences.
The right approach is to ensure that legal counsel, finance, operations, and management each examine the transaction before the company signs, not after the risks have materialized.
Negotiating a High-Value Commercial Contract?
Chibasco advises Nigerian and international businesses on structuring, drafting, reviewing, and negotiating commercial agreements. Whether your business is entering a major supply arrangement, technology transaction, distribution agreement, or strategic commercial partnership, our commercial team can help identify material contractual risks and negotiate terms that align with your business objectives.
Speak with Chibasco before committing to your next major transaction.
This publication provides general information only and does not constitute legal advice.