Protecting a business' rights and assets when contracting

Top Tips

1. Usually all that is needed to create a valid and enforceable contract are four elements—an offer, acceptance of that offer, a contractual relationship and ‘consideration’.
2. It’s important to ensure that all parties that have obligations under a contract are included as a party to the contract. It is preferable to prepare a written contract to avoid the risk of a dispute later arising as to what the parties agreed. Ensuring that contracts are carefully drafted also reduces the risk of a dispute.
3. To ensure a written contract is enforceable, care must be taken to ensure the contract is executed validly and in accordance with any legislative requirements. When contracting with an Australian company, ensure that the contract has been signed by two directors of the company, by one director and one company secretary, or by the sole director who is also the company secretary. 

Adequately protecting a business’ rights and assets often will depend on having effective business contracts containing the right terms.

In our fifth episode, we outline the key elements of a valid, enforceable contract, explain the terms that comprise the substance of a contract and provide tips on drafting common trading terms included in commercial contracts.

Contracting basics

Elements of a contract

Usually all that is needed to create a valid and enforceable contract is:

• an offer by a party
• acceptance of that offer by the other party
• an intention by the parties to create a legally-binding, contractual relationship with one another, and
• ‘consideration’, meaning something given or promised in exchange for the promise of the other party – usually in the form of money.

Parties

A contract should identify all of the relevant parties with sufficient specificity to ensure that the people or entities bound to the contract are clear and that you can later enforce the contract against those parties. This includes accurately identifying each party’s name and, for a company, its ABN or ACN.

Only the parties to a contract can enforce it or be subject to the obligations under it, and so it is important to ensure that all parties that have obligations under the contract are included as a party.

Form

A contract does not always need to be in writing to be enforceable. Where the elements above are established, a contract will be created whether it has been written down or not.

It is preferable to prepare a written contract—in clear and precise terms, signed and dated—   to avoid the risk of a dispute later arising about what the parties agreed. 

Legislation requires that some types of contracts be made in writing to be enforceable – for example, contracts about interests in land must be in writing and signed by the relevant parties.[1]

Contract terms

The substance of a contract is its terms, which establish what each party has agreed to do or not do under the contract. 

To identify the terms of the contract and what they mean, an objective approach is taken. We look first at the ‘express terms’ – that is, the terms written into the contract – because if the parties recorded those terms, then they will be taken objectively to have intended those terms to form part of the contract. 

If the express terms of the contract are incomplete, then it is possible for the courts to imply terms into the contract. Terms might be implied because the law considers them generally applicable to all contracts, because they are generally accepted to be implied into a particular type of contract, or because they are necessary to give ‘business efficacy’ to the contract – that is, they are necessary to achieve the result that the parties intended the contract to achieve.

Ensuring that contracts are carefully drafted to include clear and complete terms reduces the risk of a dispute about the extent or meaning of the contract terms and of the court implying terms that might not have been what the parties subjectively intended.  

Important trading terms

The following trading terms are mechanisms often used in commercial contracts to protect a business’ rights and assets.

Scope of the supply

Whether the contract relates to goods or services, it is important to be clear about exactly what is being acquired in exchange for payment of the agreed price. In supplies of goods, this means accurately describing the goods and any relevant qualities or quantities. In supplies of services, this means detailing precisely what work will be carried out and when.

Payment clauses

Payment clauses should include terms that clearly state the price, the dates by when payments are to be made, and the permitted method or methods of payment. Such terms should also outline the consequences of a party not complying with its payment obligations. For example, it would be common to provide that the supply of goods or services will stop and that interest may be charged on unpaid invoices.  

Taking security

Particularly where payment will not be due until after goods or services have been provided, it might be appropriate for the contract to provide some form of security. This might be a personal guarantee from a director of the company or the grant of a security interest over its assets.

Historically, it was common for goods supplied in advance of payment to be supplied subject to a ‘retention of title’ clause, under which the supplier sought to retain ownership of the goods until payment had been received as well as the right to retrieve the goods. 

The Personal Property Securities Act 2009 (Cth) has changed the effect and enforceability of retention of title clauses, and they are now likely to be regarded as a ‘security interest’ subject to the Act. This means that clauses must be more carefully drafted than previously and the security interest will need to be registered on the Personal Property Securities Register. That is the subject of our next issue in this Series.

Warranties

Contracts often include warranties giving assurances about the quality or standard of the goods or services supplied, or the way in which services will be performed. These sorts of warranties can be important to the party acquiring the goods or services.

Supplies or goods or services for $100,000 or less, or of a kind ordinarily acquired for personal, domestic, or household use or consumption, will also be subject to consumer guarantees under the Australian Consumer Law, whether or not the contract for those supplies includes any separate warranties.

Default

Default clauses should include terms that specify what actions or events constitute a default under the contract and the rights of the aggrieved party upon default. Default provisions should also specify whether there is a period in which a default may be rectified and, if so, the effect of a default being rectified.

Common types of default events include a failure to fulfil repayment obligations under a contract, or a company being deregistered or becoming insolvent.

Exclusion or limitation of liability

Contracts often contain provisions that exclude or limit a party’s liability to the other party in the event something goes wrong. It is common, for example, to exclude liability for ‘consequential losses’ such as loss of profits, or to specify a maximum amount for which a party will be liable.

Termination

Usually, a default clause will permit an aggrieved party to terminate the contract where a default is not remedied or is not capable of being remedied.

Where a contract has a fixed term, it will end naturally once that term expires.

It may also be appropriate to include rights for a party to terminate without needing a reason, usually be giving notice to the other party.

Execution of contracts

To ensure a written contract is enforceable, care must be taken to ensure the contract is executed validly and in accordance with any legislative requirements that may apply. For example, the Corporations Act 2001 outlines the different ways in which an Australian company can execute documents.[2]

When contracting with an Australian company, you will usually want to ensure that the contract has been signed by two directors of the company, by one director and one company secretary, or by the sole director who is also the company secretary. 

When contracting with third parties that have authorised a specific representative to execute documents on their behalf, such as through a power of attorney or trust deed, it is important to ensure that the person executing the contract is duly authorised to bind the party to the contract under the relevant, authorisation document.

[1] For example, Conveyancing Act 1919 (NSW) s 54A.

[2] s 127.