TAXATION, INFLATION & CONTRACTS IN NIGERIA Why Many “Valid” Contracts Are Quietly Bleeding Businesses

INTRODUCTION

In Nigeria today, taxation is no longer selective.
Almost everyone is being taxed, businesses, professionals, contractors, startups, even informal operators.
Yet most contracts are still drafted as if:
tax policy is stable,
inflation is mild,
and economic conditions are predictable.
That assumption is dangerous.
This article examines how taxation and inflation affect contracts, who bears the risk when contracts are silent, and why Nigerian businesses, especially construction and service companies, are losing money legally.

1. TAXATION IS NO LONGER A BACKGROUND ISSUE
Traditionally, tax was treated as an accounting matter, separate from contract drafting.
That distinction no longer works.
Today, businesses face:
Value Added Tax (VAT),
Withholding Tax (WHT),
Company Income Tax,
sector-specific levies,
state and local government charges,
and newly introduced regulatory fees.
The key legal question in contracts is no longer whether tax applies, but:
Which party bears it?
The danger of silence
Where a contract does not clearly allocate tax responsibility:
one party ends up absorbing unplanned costs,
margins disappear,
disputes arise over deductions and gross payments.
Courts will not “share” tax burdens for parties.
They interpret contracts as written, not as expected.
Legal reality:
If a contract is silent on tax, the party receiving payment often suffers the deduction, even where it was never priced into the deal.

2. “EVERYBODY IS BEING TAXED” ;SO WHO PAYS?
This is where many Nigerian contracts fail.
A well-drafted commercial contract should answer:
• Who bears VAT?
• Who bears WHT?
• What happens if tax rates increase?
• What if a new tax or levy is introduced mid-contract?
Without these answers, businesses operate in uncertainty.
For long-term contracts, especially construction, supply, and infrastructure projects, this uncertainty becomes financially destructive.

3. INFLATION: THE ISSUE MOST CONTRACTS PRETEND DOES NOT EXIST
Inflation in Nigeria is not abstract.
It affects:
• building materials,
• fuel,
• transportation,
• labour,
• foreign exchange exposure.
Yet many contracts remain fixed-price, sometimes for years.
What inflation does to contracts
A contract signed under one economic reality may become commercially unreasonable under another.
For construction companies, this often results in:
cost overruns,
project abandonment,
quality reduction,
disputes with clients.
Legally, however, inflation alone does not automatically excuse performance.
This is a hard truth many businesses discover too late.

4. THE MISTAKE: CONFUSING ECONOMIC HARDSHIP WITH FORCE MAJEURE
Many parties assume inflation or economic difficulty qualifies as force majeure.
It usually does not.
• Force majeure traditionally covers:
• Acts of God,
• war,
• natural disasters,
• government shutdowns/change in government and political party.
• Economic hardship, currency depreciation, or rising costs often fall outside it, unless expressly provided for.
Result:
A contractor may suffer heavy losses yet remain legally bound to perform.

5. THE CLAUSES THAT ACTUALLY MATTER (AND WHY)
This is where serious contract drafting begins.
(a) Tax Allocation Clause
This clause clearly defines:
which party bears specific taxes,
how deductions are handled,
responsibility for new or increased taxes.
It prevents disputes and protects pricing assumptions.
(b) Price Adjustment / Inflation Clause
This allows:
contract price review when inflation exceeds a defined threshold,
adjustment based on agreed indices,
renegotiation where costs become excessive.
Without it, inflation risk rests entirely on one party, usually the contractor.
(c) Change-in-Law Clause
Laws change. Tax regimes change. Regulations expand.
This clause addresses:
who bears additional compliance costs,
whether timelines or prices may be adjusted,
whether termination is allowed if compliance becomes commercially unreasonable.
(d) Hardship or Renegotiation Clause
This goes beyond force majeure.
It recognises that extreme economic changes may:
fundamentally alter the balance of the contract,
make performance unfair or oppressive.
It allows parties to renegotiate rather than litigate or collapse.

6. WHY CONSTRUCTION COMPANIES ARE MOST EXPOSED
Construction contracts are:
• long-term,
• capital-intensive,
• heavily affected by inflation and taxation.
Yet many are still signed using templates that • • ignore economic volatility.
• The result is predictable:
• stalled projects,
• legal disputes,
• bankrupt contractors,
• unfinished developments.
This is not always bad business.
Often, it is bad contracting.

7. COURTS WILL NOT SAVE A BAD CONTRACT
One uncomfortable truth must be stated clearly:
Courts do not rewrite contracts for parties.
Judges may sympathise, but sympathy is not law.
If parties freely agreed to terms, even foolish ones, courts enforce them unless illegality or fraud is shown.
This is why contract drafting is not a formality.
It is risk management.

• CONCLUSION: CONTRACTS MUST NOW ANTICIPATE PRESSURE
In an economy marked by:
aggressive taxation,
persistent inflation,
unstable policy direction,
contracts must be drafted to anticipate pressure, not comfort.
A contract that works only in good times is not a business tool.
it is a future dispute waiting to happen.

Legal wisdom:
If your contract does not answer who pays, what happens when costs rise, and what changes when the law changes,
then it is not protecting your business.
It is exposing it.