DCK ENTERPRISE NSW PTY LTD

BUSINESS INFORMATION

Contracts and agreements

Entering into contracts is an integral aspect of managing a small business, and it is crucial to handle these agreements and relationships with care. 

A business contract is a legally binding agreement between two or more persons or entities.

whether individuals or entities. Given their complexity, it is essential to thoroughly comprehend the terms before signing. Seeking legal or professional advice beforehand is highly recommended. 

Share

Facebook-f Instagram Youtube Linkedin

Understanding business contracts

Managing contracts is a routine part of operating a small business. You will likely engage in various business relationships that involve contractual commitments or obligations. For instance, you may: 

  • Act as a buyer of goods and services, such as in loan agreements, rental contracts, or franchise arrangements.
  • Serve as a supplier of goods and services, functioning as a retailer, wholesaler, or independent contractor.
  • Enter into partnerships with other businesses, such as joint ventures, consortiums, or other collaborative agreements. 
  • Effectively managing these contracts and relationships is vital for business success. 

Tip

Be mindful that most contracts will have implications related to goods and services tax (GST). 

Verbal and written contracts

Contracts can be spoken (verbal), written, or a mix of both. Certain agreements, such as those involving real estate transactions or financial arrangements, must be in writing. Written contracts can be in the form of a standard agreement or a letter that confirms the agreed terms. 

Verbal agreements depend on the trustworthiness of the involved parties and can be challenging to enforce. Whenever possible, it is advisable to document business arrangements in writing to avoid disputes over the existence or terms of a contract. 

No matter the format, a contract must have four key elements to be legally valid.

Essential elements of a contract

For a contract to be enforceable, it must include the following elements:

  • An offer 
  • An acceptance 
  • An intention to establish a legal relationship 
  • Consideration (typically monetary) 

However, a contract may be deemed invalid if it: 

  • Encourages illegal activity or is itself unlawful. 
  • Involves a party lacking legal capacity, such as a minor or bankrupt individual. 
  • Results from misleading or deceptive behavior, duress, unconscionable conduct, or undue influence. 

General terms and structure of an agreement

Contracts do not have to follow a specific structure but usually include terms that are clearly stated or implied, forming the foundation of the agreement. These terms may include conditions or warranties.

Contract conditions are fundamental to the agreement. Failure to meet these conditions may allow termination of the contract and claims for compensation or damages. 

Contract warranties are less critical and do not form the core of the agreement. Breach of warranties does not permit termination but may allow claims for losses incurred. 

When negotiating terms, ensure all parties clearly define and agree to the conditions. A contract’s structure may include, but is not limited to, the following: 

  • Details of the involved parties, including subcontracting arrangements. 
  • Duration or time frame of the contract. 
  • Definitions of important terms used in the agreement. 
  • Description of goods and/or services to be provided or received, including key deliverables. 
  • Payment details, including due dates and interest for late payments. 
  • Key dates and milestones. 
  • Insurance and indemnity requirements. 
  • Guarantee provisions, such as director’s guarantees. 
  • Provisions for damages or penalties. 
  • Options for renegotiation or renewal. 
  • Processes for complaints and dispute resolution. 
  • Termination conditions. 
  • Special conditions.

Tip

In most cases involving creative work (e.g., a logo design), copyright remains with the creator unless otherwise specified. If you hire a contractor to produce copyright-protected material, ensure the contract includes an assignment of these rights to secure ownership of the work you commissioned. 

Standard form contracts and unfair terms

A standard form contract is a pre-drafted agreement with terms largely fixed in advance, leaving little room for negotiation. These contracts often have blank spaces for names, signatures, dates, and other specific information. 

Examples of standard form contracts include: 

  • Employment agreements 
  • Lease agreements 
  • Insurance agreements
  • Financial agreements 

These contracts are often designed to favor the party offering them. While negotiation is sometimes possible, you may face a “take it or leave it” scenario. Always read the entire contract, including the fine print, before signing. 

If you provide standard form contracts, ensure they do not contain unfair terms. Unfair terms may include those that: 

  • Allow one party (but not the other) to avoid or limit their responsibilities. 
  • Permit one party (but not the other) to end the agreement. 
  • Penalize one party (but not the other) for breaching or terminating the contract. 
  • Enable one party (but not the other) to alter the contract terms. 

Consumer protection laws safeguard against unfair terms in situations where negotiation is limited, such as with standard form contracts.

 

Unfair contract terms and small businesses

A law protecting small businesses from unfair terms in standard form contracts applies to agreements made or renewed on or after 12 November 2016. This law applies if:

  • The contract involves the supply of goods or services, or the sale or transfer of an interest in land.
  • At least one of the parties employs fewer than 20 people.
  • The contract value does not exceed 300,000, or 300,000, or 1 million if the agreement spans more than 12 months.

Read our guide on unfair contract terms for more information.

Before signing a contract

  • Carefully read every section, including the fine print.
  • Confirm that the document accurately reflects the negotiated terms and conditions.
  • Seek legal advice to ensure clarity and fairness.
  • Take sufficient time to review and fully understand the agreement.
  • Avoid feeling pressured to sign if you have doubts.
  • Never leave blank spaces on a signed contract; cross them out if unused to prevent later alterations.
  • Ensure both parties initial any modifications made to the contract.
  • Retain a copy of the signed contract for your records.
  • Once a contract is signed, exiting it may require compensating the other party for their actual losses and expenses. This could include additional court costs if the matter escalates to litigation. Some contracts may permit early termination, with or without compensation. If you wish to include an opt-out clause, consult a legal professional.

Tip

If a written contract is not feasible, maintain other documentation such as emails, quotes, or notes from discussions to clarify agreed terms.

Ending a contract

  • Ending a Contract: Most contracts conclude once the work is completed and payment is made. However, contracts can also end under the following circumstances:
  • By mutual agreement: Both parties agree to terminate the contract before completion.
  • By frustration: The contract cannot proceed due to unforeseen circumstances beyond the parties’ control.
  • For convenience: The contract permits termination at any time with prior notice to the other party.
  • Due to a breach: One party fails to comply with a fundamental term, allowing the other party to terminate and seek compensation or damages.
  • If a breach involves a warranty or minor term, termination may not be possible, though the other party may still claim compensation or damages. Some contracts specify predetermined amounts payable in case of a breach, often referred to as liquidated damages.

In the event of a dispute, clear communication between both parties is essential to resolve the issue. Consider utilizing low-cost dispute resolution service or seeking legal advice to facilitate a resolution.

Action to take

Read our guides on Choosing a lawyer and Unfair contact terms.

More Information

Other helpful resources

  • Financial Management
Scroll to Top