Year: 2022

THE PRINCIPLE OF SANCTITY OF CONTRACT

THE PRINCIPLE OF SANCTITY OF CONTRACT 

By Constance Awoegbe (Associate)

XYZ Limited in a bid to raise capital to finance its project under a Risk Service Contract (RSC) increased its share capital and offered 70,000,000 million units of its shares to ABC Limited. XYZ Limited entered into a Shareholders Agreement and Subscription Agreement with ABC Limited through which it unconditionally and unequivocally transferred equitable rights and obligations to ABC Limited. As payment for the 70,000,000 million units of shares, ABC Limited was obligated to finance the Risk Service Contract and other obligations contained in the agreement between parties. Parties agreed that their right to rescind or vary the agreement would be subject to the prior written consent of ABC Limited. While ABC Limited was in the process of performing its obligations under the contract, XYZ Limited purported to transfer the same 70,000,000 units of shares it had earlier transferred to ABC Limited to another company without the consent of ABC Limited.

In the scenario above, the law contemplates that parties would adhere strictly to the terms and significant features of the contract given that contracts are written expressions of the free will of parties. In such circumstances, parties are prohibited from unilaterally altering contractual terms even where there is a real apprehension that one of the parties may have been at a disadvantage at the point of negotiating the terms of the contract. There are other remedies the disadvantaged parties may explore but certainly not such that would permit the party to unilaterally alter the terms of a valid contract.