In our everyday lives, we are always making contracts, whether it be for a new mobile phone plan, to have electricity connected, or arranging for a plumber to fix a broken pipe. In this guide, we will look at what a small business needs to know about contracts and how to write or agree to one that is legally binding.
A contract is an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. Contracts are at the heart of most business dealings. The agreement may be enforced in court.
WHY should I have a written contract?
A conversation and a handshake is indeed a contract. If a tradesperson writes a price on the back of a business card and you agree to go ahead with the work then that is a contract. This is all fine until something goes wrong and a dispute arises. A handshake cannot be enforced by a court.
A written contract, on the other hand, provides certainty to both parties and should set out what has been agreed. Typical items set out in a contract would include payment, timeframes and materials.
WHAT do I need to know about contracts?
A court will not enforce a non-written contract as they will be unable to prove the existence of a contract or its terms.
Depending on the type of contract being created or agreed to it may be a good idea to have a professional such as a lawyer or business advisor review or write it.
A written contract should always be used when:
- The contract price is significant enough to affect your business if you don’t get paid.
- Quality requirements, specifications or specific materials that have to be used.
- Doubt that the hirer may not be able to pay you.
- Insurance required for the type of work you are doing.
- Key terms are used, such as a critical date for the completion of the work before payment.
- Information must be kept confidential. See our guide on NDA’s
- Legal obligation requires to have a written contract.
Beyond written and verbal contracts other contact types include:
Standard Form Contracts – is a pre-prepared contract that has most sections already filled out and there is minimal or no negotiation between the parties. Includes employment contract or insurance agreement.
Period Contracts– is used for business engagements where work is performed from time to time. Popular in building industry for contractors.
HOW do I create a legally binding contract?
For a written contract to be legally binding it must contain four essential elements:
- an offer
- an acceptance
- an intention to create a legal relationship
- a consideration (usually money).
However, it may still be considered invalid if it:
- entices someone to commit a crime, or is illegal
- is entered into by someone that lacks capacity, such as a minor or bankrupt
- was agreed through misleading or deceptive conduct, duress, unconscionable conduct or undue influence.
A written contract will include conditions that if not met are grounds to terminate the contract and seek compensation or damages.
When negotiating the contract terms make sure the conditions of the contract are clearly defined and agreed to by all parties.
Contracts may follow a structure that can include, but are not limited to, the following conditions:
- details of the parties, including ABN’s, ACN’s and any sub-contracting arrangements
- description of the goods and/or services that your business will receive or provide, including key deliverables
- payment details and dates, including whether interest will be applied to late payments
- duration or period
- definitions of key terms
- ownership of intellectual property rights.
- treatment of confidential information
- key dates and milestones
- required insurance and indemnity provisions
- exclusivity agreements and restraint of trade
- damages or penalty provisions
- renegotiation or renewal options
- complaints and dispute resolution process
- termination conditions
- special conditions
HINTS
Even if a contract is a low value, if it is in writing it removes risk.
You should read every word, cross out blank spaces, negotiate if appropriate and keep a copy of the contract. When negotiating be clear and remain professional.
If you are having some design work done like a logo created, the copyright remains with the designer unless the contract specifies the copyright passes to you.
Small businesses are protected from unfair terms in a standard form contract where it is for the supply of goods or services, the sale or grant of an interest in land, at least one of the businesses employs fewer than 20 people, and the price of the contract is no more than $300,000 or $1 million if the contract is for more than 12 months. https://www.accc.gov.au/business/business-rights-protections/unfair-contract-terms
More details on how to prepare a contract can be found here https://www.business.gov.au/products-and-services/contracts-and-tenders/how-to-prepare-a-contract
SUMMARY – contracts must be accepted
A written contract is a legally binding document that can be used in a court of law. It must contain an offer, an acceptance, an intention to create a legal relationship, and a consideration (usually money). The contract will include various conditions that should clearly define the agreement between the parties so there is no confusion on what will occur. If these agreed conditions are not met it is ground for termination and possibly damages.