Your business is your main asset, it funds your lifestyle, pays the bills, and will one day support your retirement. Key to protecting and growing your business is the effectiveness of your contractual arrangements. From lease agreements to terms of sale, your understanding of the critical components of a legally binding agreement can mean the difference between you owning a thriving business and spending your time fending off unintended legal challenges and threats to your success.
This article explores the essential elements of a business contract that will protect your business assets and help your business to flourish.
Key elements of a business contract
To be valid, certain elements must be present in every business contract:
Parties
To be enforceable, the parties to the contract must exist, be properly identified, and have the ability and authority to enter the agreement.
There are multiple ways to set up and manage a business, so it is easy to make mistakes in identifying the other party to the contract. For example, you might refer to a non-existent company, not refer to the correct individual or company or refer to a business name, rather than the holder of the business name.
Although courts will attempt to ascertain the correct contracting party by applying a test of what a reasonable person would think, it is preferable not to have to go down that path and to ensure you are contracting with the correct entity in the first place by:
- Having a written contract, not an oral one;
- Asking the other party for their ABN/ACN and confirming it via an ASIC search;
- If the other party uses a business name, confirm via an ASIC search who the holder of the business name is and ensure they are listed as the contracting party; and
- Ensure the signature blocks clearly set out the capacity in which a person signs on behalf of their company, trust, partnership or as a sole trader. If a company is signing, ensure that the execution requirements of the Corporations Act 2001 (Cth) are followed.
Offer
One party must promise to do or not do something in exchange for something else.
An offer must be clear - not ambiguous or vague. It must include the duties and responsibilities of each party, i.e. the terms and conditions. An offer does not technically exist until it reaches the other party. Prior to acceptance it can be revoked or altered. When it is received an offer can be accepted or refused. If a counteroffer is made, the original offer is terminated, and the parties will have to enter negotiation once more.
Acceptance
One party must promise to do or not do something in exchange for something else.
Generally, no particular form is required for acceptance. The test is whether a reasonable bystander would regard the conduct of the offeree, including their silence, as signalling to the offeror that their offer has been accepted. For example, if a contract is left unsigned but both parties perform their roles, a court is likely to find a contract exists.
Consisderation
There must be an exchange of value - be it services, goods, or money - between the parties.
If a supplier fails to provide goods and services after you have paid them, then there has been a failure of consideration on the part of the supplier and the law allows you to pursue a claim to recover your money.
Mutuality
There must be a shared understanding and agreement on the contract terms, signifying intent to create legal relations.
Once this stage has been reached, the contract can only be voided via discharge, vitiating factors, or a mutual amendment.
Capacity
All parties must be lparties must be legally capable of entering into contracts, typically meaning they are of legal age and sound mind.
A court may not find a contract to be valid if it can be shown one of the parties was under 18 years old, inebriated or under some undue influence.
Legality
The purpose of the contract must be lawful; agreements based on illegal activities are void
A contract is illegal if it involves doing something that is a criminal act or a civil wrong, or against the public good. For example, it is an offence to sell a firearm to a person not licensed to hold one, so a contract to sell a firearm in these circumstances is illegal.
By understanding and adhering to these fundamental contract principles, business owners can ensure contracts are not only enforceable but also serve as robust tools for asset protection.
Essential contracts for business asset protection
Each business owner will require different types of contracts to protect various aspects of their business. However, there are some common agreements most businesses need:
Employment Contracts: These must be in place with every worker in your organisation. They define the relationship between the employer and employee and specify duties, key performance indicators, compensation and termination conditions.
Terms and Conditions of Trade: These set out your rights and responsibilities to your customers or clients. They are vital for delineating the scope, quality and delivery of your goods and/or services and crucially, your payment terms.
Lease Agreements: For businesses that rent premises or equipment, having lease terms and conditions that allow you to operate your business efficiently and safely are vital.
Shareholder or Partnership Agreements: These specify who makes decisions and how they are made, including profit sharing and dispute resolution. Well-written and comprehensive agreements also anticipate what happens if one of the owners dies, divorces, retires or wishes to sell their interest in the business.
Confidentiality Agreements: Also known as ‘Non-Disclosure Agreements’ or ‘NDAs’, these agreements protect confidential information crucial for protecting competitive advantage.
Legal Advice
When it comes to contract law, understanding the basics will never go astray but consulting with your trusted legal adviser over the drafting and signing of contracts will ensure they operate to protect your business assets and interests.
Conclusion
Contracts are the bedrock of business operations, providing the security and clarity necessary for smooth relationships and profitable transactions. Having suitable contracts in place for your business must be part of your strategy to protect your business assets and give you peace of mind.
