10 Ways to Avoid a Joint Venture Fail

10 Ways to Avoid a Joint Venture Fail

10 Ways to Avoid a Joint Venture Fail

Joint Ventures are great for collaboration

Working together with another like minded entrepreneur is a clever way to accelerate business growth, which is why joint ventures remain a popular way for individuals or organisations to collaborate. But before you ‘Give it Away’ (as there’s always room for a Red Hot Chilli Peppers reference in a legal consideration blog), it’s critical to shore up your joint venture’s credentials to ensure a smooth, surprise-free partnership from beginning to end. In this Onyx Legal blog , we highlight 10 ways to avoid joint venture fails. [Ok, so we ended up with 11 – Ed.]

Joint Ventures are usually for a specific and limited project, goal or purpose and may also be limited by time.

1. Who is party to the joint venture?

Establishing a joint venture is no time to be carefree with the details.

Before entering into a joint venture, establish the legal identity of all parties. This means performing ABN and other similar regulatory checks. It might also mean checking driver’s licence details of individuals. 

A client recently came to us with a proposed joint venture, and we could not establish who would pay him the $400k that he expected to receive as his share of profits. The deal fell over when the other party also failed to establish who would pay that sum.

2. How Should You Structure a Joint Venture?

It is important to understand that joint ventures and partnerships are different structures.

A partnership is a long-term working proposition with full legal liability – a commitment to working together into the future.

A joint venture is project or purpose-focused, and facilitates separate parties to continue working on other businesses simultaneously. Joint ventures can be done by contract with each party paying their own tax, but one of the parties must hold the assets relating to that venture (paperwork, accounts, assets) unless it is established in its own identity.

3. What do you want to achieve with your joint venture? 

It’s easy to get caught up in the potential of success and innovation at the beginning of a joint venture, which is why understanding what you want to achieve from the collaboration is so valuable.

We’ve observed web designers, marketers and programmers enter joint ventures expecting to receive a share in profits at the end of the build, only to have ‘goal posts’ moved so regularly they exit the venture – leaving thousands of hours of unpaid labour in their wake.

Failing to understand – or formalise – expectations in a joint venture regularly leads to disappointment.

Put together a clear written agreement covering all the moving parts of your proposed joint venture, and allowing some flexibility for change as your venture grows. 

have a written Joint Venture agreement

Failing to understand – or formalise – expectations in a joint venture regularly leads to disappointment

4. How long should your joint venture last?

How long is a piece of string?

There’s no single answer to this question; the duration of your joint venture is based on the purpose of the project.

Will you be building something – a house or a piece of technology?

Are you going to be running a developing a piece of software or an education program together?

If you are building or developing something together the period of the joint venture might be the development period, and once you have a completed MVP (minimum viable product) you might roll it over into a company and start building a team to run it. 

Where you’re entering a revenue share deal, it might be a two year focused time frame for growing the base income of the business. 

Whilst you do not need to define a hard ‘end date’ to your joint venture in documentation, it’s useful for all parties to understand the purpose of the relationship, and a general timeline to completion of the project, and what completion looks like.

We regularly write in rolling successive terms, such as a one year agreement that rolls over for another year unless someone terminates before the end of the year. 

5. How can disagreements be dealt with or avoided? 

A joint venture agreement should be robust, providing options should parties fail to perform their role, or decide to walk away from the project.

In collaboration with your lawyer and with your project’s specific risks and opportunities in mind, carefully identify pressure points that require clarification and consider an approach to realistic exit should your working relationship end unexpectedly before the project is completed.

Good joint venture agreements remove the element of surprise from projects, leading to higher rates of completion and reduced conflict.

For a two party joint venture, it is a great idea to have some way of independently breaking deadlocked decisions. You could use a trusted third party as a referee, such as a mentor or board adviser. You could also allocated areas of decision making to each party that give one person a try breaking vote on those issues.

6. What if someone wants out if the joint venture early?

Build the possibility of a party leaving the joint venture into the structure of the joint venture to avoid future problems.

The best laid plans of mice and men often go awry, and a party may need to exit the joint venture for any number of reasons. Family life may be under pressure, there could be financial considerations, or health issues to address.

Fairness is key when devising a graceful exit from a joint venture. 

7. What if you want someone else to join in the venture part way through? 

Joint ventures can be created to allow for the possibility of other experts parties joining the project. Sales professionals are typically invited to join in after an MVP is achieved. 

It’s important that you’re working with a lawyer to structure your joint venture for all possible contingencies … which could  include growing your collaborative group.

8. Who will do what in your joint venture?

Formalising a joint venture is no time for pussyfooting around responsibilities or making assumptions about role workloads.

Success in your project relies on clear delegation of work, as all parties will have other responsibilities that could take their attention, in addition to the joint venture.

It’s important to know exactly who will be paying the bills and who will be responsible for particular milestones.

Having difficult conversations early on about the work or outcomes due for completion by exact parties of the venture will save plenty of strife when life gets busy or timelines become blown-out. 

9. What happens if someone fails to live up to their responsibilities in the joint venture?

As with any project, it’s possible that the whole thing could become scrambled eggs.

Of course you don’t anticipate that will be the outcome, but it’s prudent to plan for unlikely circumstances. Think about COVID-19, a virus which has changed the trajectory of the global economy in the space of months. It was nigh on impossible to imagine the world shutting down a year before the corona virus; but there it is.

People can fail to live up to the responsibilities in a joint venture for a variety of reasons, including circumstances beyond their control.

Build into your joint venture contingencies around ‘failure to perform’ and decide what the dissolution of the relationship should look like. Who gets what? What will trigger the dissolution? How will any debts be paid?

These are important matters to discuss with your collaborative partners and your lawyer.

10. Who retains any intellectual property created during the venture, once it ends?  

Often a complex matter to consider, the ownership of intellectual property is the cause of many disagreements.

If the joint venture does fail, there is likely to be an argument about intellectual property and who owns what. If you can work out IP ownership at the commencement of your joint venture, you’ll design a logical way of dealing with the matter if you fall out.

Maybe each party only walks away with what they contributed; maybe each party walks away with one complete copy of the created intellectual property.

Certainty around what will happen at the time of the exit gives everyone confidence and reduces the risk of legal action. 

11. How will the project be managed?

A joint venture teaches entrepreneurs a whole lot about project management and communication. There are many moving pieces you and your partners will need to consider:

  • planning
  • stakeholder relationships
  • reporting
  • regular meetings and agendas
  • cashflow 

While it is appropriate for different roles to be attributed, a single party needs to be appointed to ensure accountability across the whole of the joint venture. You will need someone with the energy and drive to ensure that things happen. 

Flexibility must be built into this role, and an allowance to break ‘deadlocks’ in decision making.

Many’s the time we have observed joint ventures fall apart when the directors of the governing entity failed to design a mechanism for change, independent of the warring parties. 

Joint ventures are a terrific way for business owners to collaborate, to stretch their skills, test ideas, and to innovate. A well-designed joint venture allows for the clear division of work and responsibility, provides safeguards for failure and disappointment, and deals with the sticky stuff of business relationships before they become complex.

At Onyx Legal we support business owners to come together with like-minded partners in joint ventures, creating structures that respond to your unique projects, packed with safeguards to keep you as confident and safe as possible.

Our key takeaway for joint ventures?

Think on it.

Clarity at the beginning of a project leads to better results in a joint venture, and the chance everyone will meet or exceed their expectations. 

How can Onyx Legal help you?

Joint ventures have a contractual foundation.
You can form a joint venture with a handshake, or you can put a little thought into your expectations and negotiate an agreement that clearly sets out each party’s rights and obligations, as well as exit opportunities. We also highly recommend incorporating sensible dispute resolution mechanisms that will support the joint venture moving forward. If you are already in a joint venture, we can review the contract and clarify any legal rights and obligations you don’t understand.
Joint Venture Advantages and Disadvantages

Joint Venture Advantages and Disadvantages

Joint Venture Advantages and Disadvantages

What is a Joint Venture?

Possibly your first question will be “What is a joint venture?” and then possibly “How is that different from a partnership?”. And yes, it is commonly referred to as a “JV”, but first question first.

A joint venture is an alliance between parties for mutual benefit. Still doesn’t really explain things, does it?

Where different companies that might not even be in the same industries see an opportunity to work together for mutual benefit without giving up any of their core business, that is a joint venture.

Joint Ventures are usually for a specific and limited project, goal or purpose and may also be limited by time. They allow each of the parties to leverage the resources, technology, finance or markets of other parties, for mutual benefit.

Property developments are often completed by joint ventures, where each party contributes different resources or expertise to complete the project. One party might have all the knowledge necessary to set up, manage and complete the project, another party might own the land and the third party might be a builder. By forming a joint venture, they all limit their risks to the areas where they have knowledge and experience and get to participate in a project that would otherwise be out of their league.

Telecommunications companies might form joint ventures to construct and use infrastructure that is costly to build and maintain and would otherwise be underutilised. They each gain access to a necessary resource, but at a reduced cost.

Its also common for joint ventures to form between foreign companies wanting to break into a new market where there is an allied provider who already has their customers in that territory. Consider a home and contents insurance company that teams up with a car insurance provider in a market where they don’t currently have a foothold, being able to increase the variety of insurance products offered to the car insurer’s customer base.   

Joint ventures can involve more than two parties and can involve different types of entities, such as a mix of individuals, companies and trusts. There is no specific formula. Some joint ventures are formed by contract and some are formed as companies where each joint venture party owns shares. An incorporated joint venture is more likely to become a saleable asset in the future than an unincorporated joint venture.

Famous Joint Ventures You Might Not Have Heard About

Some recent international joint ventures include the following:

Haven – This health care focused joint venture was formed in 2018 between Amazon, Berkshire Hathaway and JPMorgan Chase. Think about the benefits each party might be contributing to the venture. Amazon has amassed huge amounts of data on consumer spending and is increasing its data collection into our homes with Alexa and Amazon Prime. Berkshire Hathaway has been around for 180 years accumulating incredible knowledge and experience in operating successful businesses and understanding market changes. JPMorgan Chase is an investment bank. The stated goal of Havel is to simplify insurance benefits, improve healthcare services and reduce the cost of health care services and prescription drugs.  

Self-driving cars – Google’s Waymo self-driving division has joint ventured with Jaguar Land Rover and Chrysler rather than building cars themselves and the car manufacturer doesn’t have to start its self-drive tech from scratch. Volvo and Uber, Honda and General Motors’ Cruise Unit and most recently, Hyundai and Aptiv have teamed up, all for similar reasons. Predictions are that the motor vehicle industry will be dominated by tech companies in the not too distant future.

Cosmotec – is a joint venture between the Sumitomo Corporation Group and a Brazilian based cosmetics company, with a view to gaining access to one of the world’s largest cosmetics markets.

Joint Venture Examples

For small business we see a lot of joint ventures where parties collaborate to develop a product or service they couldn’t offer on their own. Some very common joint ventures include collaborations between:

  • software developer + industry expert
  • web or app developer + industry expert
  • digital marketers + tradies
  • digital marketers + professional services
  • digital marketers + any business that needs leads
  • salesperson + any business that needs to convert leads
  • professional onboarding or training + any business with a high demand for bringing on new staff
  • international company + local distributor
  • industry expert + allied industry expert
  • property owner + property developer
  • financier + any business needing capital

We’ve already talked about some joint venture examples, so perhaps we should also look at the characteristics of a joint venture, or examples of the kind of provisions you’d expect to see covered in a joint venture agreement.

Governance/ Setup

  • there is usually a joint venture agreement setting out each party’s rights and obligations, as well as what will happen to any venture assets at the end of the project
  • the proportionate interests of the parties are described in the joint venture agreement, sometimes 50/50 and sometimes a different proportion
  • the joint venture agreement should set out how decisions will be made and any deadlocks broken and also provide for prompt dispute resolution to avoid holding up the project

Control

  • each party has a proportionate interest in the revenue or profits of the joint venture, but that may be different from their level of authority in decision making – investment partners are sometimes silent partners to a joint venture, meaning they don’t have a say in how the project is conducted
  • each party to a joint venture continues to control and operate their own business independently to the project
  • transactions may be recorded separately by the parties involved and invoiced back to the venture, or accounts will be maintained so that each of the joint venture parties can separately account for their contributions and any distributions they receive

Termination

  • what happens to the assets of the venture, particularly intellectual property when the project ends?
  • are the parties restrained from competing with the joint venture for a period?

What is the Difference Between a Joint Venture and a Partnership

Partnerships are generally long-term whole of business ventures whereas joint ventures are often project specific side gigs. In a partnership you also agree to take full responsibility for the partnership liabilities, whether you created them or not, and even if you didn’t know they were created by one of the other partners.

We generally discourage people from calling a party a joint venture partner or calling their venture a joint venture partnership. In fact, we prefer joint venture and partnership not to be mentioned in relation to the same project.

Some comparisons between a joint venture vs partnership

Benefits of a Joint Venture

The benefits to a party in a joint venture will depend upon their goal in entering the arrangement in the first place. Some common benefits of joint ventures include:

  • business diversification
  • entry into new markets
  • new distribution channels
  • leverage expertise of another party
  • flexibility
  • limited scope
  • defined risks
  • defined rewards
  • potential to create saleable asset
  • reduced costs
  • economy of scale
  • strategic information sharing

Risks of a Joint Venture

One of the scariest parts of going into a joint venture for small business owners is that the other party won’t be as committed to the project as you are, and you end up doing everything yourself. We’ve seen it happen.

One of our digital marketing clients stopped joint venturing when they realised that they were doing everything for the venture and the other party was sitting back and doing nothing. Our client had the team and the methodology and the impatience to get things moving, but each joint venture became a project where they should have simply been paid for their digital marketing services and ended the relationship after delivery. While we were able to exit them from all agreements without too much fall out, it put their business back 12 months and impacted their revenue goals.

Your main risks are the same as any business venture, loss of time, loss of money, loss of trade secrets or other intellectual property, loss of staff and reputational risk. Weigh up the benefits against the risks, mitigate your risks and consider your options. 

How can Onyx Legal help you?

Joint ventures have a contractual foundation.
You can form a joint venture with a handshake, or you can put a little thought into your expectations and negotiate an agreement that clearly sets out each party’s rights and obligations, as well as exit opportunities. We also highly recommend incorporating sensible dispute resolution mechanisms that will support the joint venture moving forward. If you are already in a joint venture, we can review the contract and clarify any legal rights and obligations you don’t understand.
Contracts don’t have to be in Writing to make them Binding

Contracts don’t have to be in Writing to make them Binding

Contracts don’t have to be in Writing to make them Binding

Not all contracts are in writing, and they don’t have to be

A contract, in its most basic form, is an agreement between parties that legally binds them. Even without a handshake to seal it.

People bind themselves to contracts every day, sometimes without even realising it, and as a result also acquire certain legal rights and responsibilities.

It is commonly thought that a contract can’t be binding unless it is put in writing. While this is true in some cases, generally speaking – unwritten contracts ARE enforceable.

There are only a very small number of contracts that have to be in writing – like the sale of land.

You can form a contract through an exchange of emails or private messages, through a telephone call or a combination of those activities. It is helpful to think of a contract as a bargain and when a dispute arises, the law aims to determine whether or not the bargain made can be enforced.

So whether a bargain is based on a verbal agreement, written agreement or a combination of the two, remember that actions can speak louder than words. However, its the written words you will want to rely on if something goes wrong.

It is always wise to write down the details of an agreement, especially if large sums of money are involved and where there are no reliable witnesses or other evidence of the details. I’ve seen business partners waste all of their profits in legal disputes because they didn’t put their agreement in writing 10 years earlier while they were still friends. The beauty of having something in writing is for reference, when people have forgotten the details, or remember different things.

 

Making a Contract

A contract must have three identifiable features, whether it is written, verbal or partly verbal and partly in writing:

  1. Agreement (offer and acceptance)
  2. Intention
  3. Consideration

A contract is formed when there is an agreement between the parties to undertake certain obligations.

Agreement

The point at which negotiations have been concluded and the agreement is reached is not always easily worked out, but there must have been a clear indication (offer) by one party of a willingness to be bound on certain terms and an unqualified acceptance of that offer.

‘Unqualified’ means that it shouldn’t be subject to conditions. Anything subject to conditions is not acceptance, it is further negotiation. This is where counter-offers and acceptance can become confused.

If you offer to sell 1800 widgets at $40 each, with a discount of 30% for volume, and the buyer says ‘okay, I’ll take 600 at the discounted price‘, then the buyer has made a counter-offer, not accepted your original offer. You may not agree to that level of discount at the reduced volume.

There are legal cases debating the point at which agreements are eventually reached, and whether or not an agreement was even made.

Intention

For there to be a legally enforceable contract the parties must have intended to enter into a legally binding agreement.

Intention is seldom something you say out loud, but is usually inferred from the circumstances surrounding the agreement.

This is where the bet in the pub becomes the primary example. Someone making an off-hand bet is unlikely to be serious.

Another good example is where someone promises something you know they simply can’t deliver – for example ‘I’ll give you a million bucks if you …‘ when you know the person simply doesn’t have that money to spare.

Consideration

Before there can be a contract there must be an agreement to exchange. Each party must provide something in return for what the other is providing. The item or action exchanged is called the consideration.

It does not matter if the consideration given by each side is of unequal value. The law requires only that something is given by each party.

So consideration can be money, or actions, or property. Swapping items (like sports uniforms at international sporting events) is treated no differently than money being exchanged for an item.

Donations are not the same thing. Only one party has the benefit of a donation, so a pledge to donate is usually unenforceable. However, where something is offered in exchange for a donation – like a red nose, or a yellow daffodil – then that may be sufficient consideration to create a binding contract.

Nominal consideration is usually enough. So when a seller says you need to pay a substantial deposit to secure the deal, their actions may be capable of being considered misleading. There are many cases where $1, or similar small amount have been found to be sufficient to secure a deal.

Signing a Contract

You should also be aware that a contract or agreement need not necessarily be signed to be enforceable. The circumstances surrounding the contract can be enough to demonstrate that something in writing has accurately set out the parties’ intentions. A signature is usually relied upon as evidence that a person has read the document and agrees to be bound by its terms, but clicking an ‘I agree‘ check box on an electronic form or web page can have the same effect.

A person who signs a contract or click a check box is generally bound by any terms it contains regardless of whether they have read the document, and legislation like the Electronic Transactions Act 1999 (Cth) allows for that.

It was commented in the explanatory memorandum that ‘An addressee who actually knows, or should reasonably know in the circumstances, of the existence of the communication should be considered to have received the communication. For example, an addressee who is aware that the communication is in their electronic mail ‘box’, but who refuses to read it should be considered to have received the communication.

Despite this rule, in some circumstances a person may still be able to withdraw a contract, start a court action to enforce it, or apply to a court to have the contract voided.

These are technical legal arguments that generally only arise at the point of dispute.

Remember, if you do find yourself in a dispute, the enforceability of an agreement or contract will depend on what law applies. For example – people buying or selling products or services online could be anywhere in the World. The law in Victoria, Australia is not the same as the law in Singapore. Different rules apply, not to mention different courts. But that is a conversation for another day.

The final word on Contracts

Contract law can be extremely complex, and there are different nuances in all legal systems. Look at the type of contracts you are entering into and consider the risks involved in doing so.

If you plan on entering into a deal that is worth more than you can afford to lose, then it is highly advisable to invest in legal assistance to ensure the point of agreement, and the terms of the agreement are clear. If the contract doesn’t make sense to you, how do you know what deal you are getting involved in?

We’re happy to assist you with a short advice, a quick review or drafting a whole new contract.

How can Onyx Legal help you?

Let us help you craft a contract that suits your business. With a written contract, you have a clear record of what is agreed rather than having to relay only on memory. Contact us to draft your agreements. 

Types of Contracts

Types of Contracts

Types of Contracts

Types of Contracts in Business

Sometimes the type of contract you are looking for in business is not the type of contract you need.

Just this last week I had a client come to me with a template contract they had downloaded, and a business proposal they wanted to pursue. The problem was, the type of contract they had downloaded was a partnership agreement, and it really wasn’t suitable for what they wanted to achieve.

You see, a partnership agreement creates all sorts of interesting obligations on the people involved and is really only suitable for a long-term collaborative business and not for the development of a side hustle or project. Traditionally legal, accounting and medical practices were set up as partnerships. In a partnership, you can become personally liable to pay for the obligations of the business, even if you didn’t know they had been created. In a professional partnership, if someone takes off with client money, the other partners can be made to replace those funds, even though they did nothing wrong. Not the type of contract you want for a short-term collaboration.

For a side hustle, or collaboration to develop a digital product like an App, or a live product like a training program, or a physical product like an artificial hand, you are looking to create a joint venture. So, the type of contract your after will be different from a partnership agreement and can keep the obligations of the parties separate.

There are all sorts of different types of contracts, and downloadable template might cover what you need, but it also might not. We like to work with our clients to identify the solution they are looking for and then craft a document to fit, rather than assuming your business is just like everyone else’s.

Here are some of the variables in different types of contracts:

Written, verbal or partly written and partly verbal contracts

Contracts don’t necessarily need to be in writing to be binding. You might have created a binding contract simply through a video conference, an exchange of messages on a platform like Slack, or a combination of emails and phone calls.

The beauty of having a written contract is keeping a record of what you agreed in the first place, so that if any questions arise a year down the track, you can check back and see how you covered off that scenario.

There are definitely some contracts that do need to be in writing to be binding. A type of contract you might have come across in business is a personal guarantee. Personal guarantees do need to be in writing, and properly signed to be enforceable.

Standard form contracts

Love them or hate them, standard form contracts are designed to help make business easier for everyone, not harder. At least, they should be designed to make business easier.

As a business owner, its time consuming and unproductive to create unique contracts every time you deliver the same product or service. Standard terms give you a level of comfort so that you are clear on your obligations, and your expectations of your customer, every time you complete a similar transaction.

For customers, if standard terms are easy to understand, they know what to expect each time they deal with you. Just keep in mind that a standard form contract can still be open to negotiations. You need not lose a customer just because they don’t like your standard terms. You can be flexible, and we can help you with that.

Click-wrap contracts

You might not pay too much attention to all the ‘I agree’ check boxes you find online, but perhaps you should. Each time you check one of those boxes, you are entering into a contract, whether you read the terms or not.

There have been court decisions where people have protested that they should not be bound by terms attached to check box because they didn’t read them. The courts have, to date, been in favour of pointing out that you had the chance to read them, and if you didn’t take that chance at the time, that is your responsibility and your problem.

Click-wrap contracts are simply standard form contracts that you agree to electronically, although they are generally not negotiable.

Doing business online is a convenience for everyone, and the volume of transactions that can be processed that way, and the variety of products and services you can access online, means it’s not unreasonable for a business to suggest you agree to their contract terms, or go elsewhere.

Purpose of a Contract

The purpose of your contract is likely to influence how it is structured.

If you want something from someone, the contract will be structure to achieve that, and if someone wants something from you, the contract will be structured differently.

We had prepared a contract for a client’s business to meet their needs. They received feedback from a business consultant (not a lawyer) that they could save money and simply copy the consultant’s contract and it would be fine.

It wasn’t.

The client was good enough to send us the consultant’s contract with his feedback.

Our client wanted to employ contractors so that they could expand the area where they delivered services. Things like the protection of their intellectual property and the quality of service delivery were really important to them. We wrote the contract to fit.

The consultant’s contract was written to favour the way he delivered services to people and protected his interests, including limiting his responsibility for the services he delivered.

That was the opposite of our client’s needs.

They needed their contractors to be responsible for the services delivered, and to fix problems promptly if they arose. If they had copied the consultant’s contract, they would not have been able to demand the level of quality they needed from their contractors.

Not all Contracts are Legal

It is worth keeping in mind that not all contracts are legal. A contract that amounts to human slavery is not going to be enforceable. A bet between mates in the pub is unlikely to form a binding contract. Contracts between businesses might include terms that heavily favour the stronger party, and those terms might be open to challenge as ‘unfair contract terms’ at law.

How can Onyx Legal help you?

If you are not sure what type of contract you are looking for, book a short advice session with us so we can help you work out what you need and give you peace of mind.

Is a scanned Contract legally binding in Australia?

Is a scanned Contract legally binding in Australia?

Is a scanned Contract legally binding in Australia?

The short answer is YES, it can be. But first let’s cover off some other frequently asked questions surrounding contracts.

Do different countries have different preferences for scanned contracts?

In a recent LinkedIn group discussion with other lawyers around the world, different countries appeared to have different preferences regarding hard copies versus scanned/electronic copies of contracts.

Those countries happy with a Scanned or Electronic copy of a contract were:

  • Australia
  • France
  • India
  • Netherlands
  • Philippines
  • UK
  • USA

Those countries who preferred a hard copy signed contract were:

  • Chile
  • Indonesia
  • Nigeria
  • Mexico
  • Pakistan
  • Singapore

So, depending on where you are in the world, a scanned copy of a contract might not be your best form of contract.

Does a Contract Have to Be In Writing?

No.

Most of the time a contract doesn’t have to be in writing, as much as anyone might tell you otherwise. This includes those people who decide they can’t afford to pay for your services and say ‘I never signed the contract‘.

We’ve covered this question in more detail in another article about contracts.

Do you need a lawyer to write a valid Contract?

No.

Some people are very capable of identifying the core issues in a deal and documenting that clearly. Lawyers are trained to do this, but that doesn’t mean they are the only people capable, and in fact, we’ve seen some poor contracts written by lawyers as well.

Most contracts only need to contain three components to be legally valid:

  1. All parties must be in agreement (after an offer has been made by one party and accepted by the other).
  2. Something of value must be exchanged (such as money, services, goods or a promise to exchange such an item) for something else of value.
  3. All parties intend to create a legal relationship (rather than a joke or a bet in the pub).

It is legally valid to simply keep a written record of what has been agreed, preferably dated, keeping the following in mind:

  • There is less chance of arguments in the future if everyone involved checks that the words correctly state their agreement.
  • Getting a signature on a page can be used to demonstrate that the person signing agreed to what has been written down.
  • When writing your own agreements keep the words as straight forward as possible and avoid leaving blanks that could be filled in by other people at a later date.
  • Never sign a contract unless you completely understand what you are getting into (even lawyers can make this mistake).
  • Write down your initials next to any changes that are made to the contract.
  • Everyone involved should get a copy of the final contract, whether or not it is signed.
  • Get legal advice if you are not sure whether the contract properly reflects your agreement, or if you have any concerns about the agreement.
  • Don’t assume something is okay if you don’t understand what it means. It is better to be clear than confused and have problems later.

CAUTION

We have seen contracts written by people who do not have legal training. Sometimes they are good, sometimes they are bad.

Some consultants get hold of precedents and think they know how to amend them. This can create legal problems, rather than solutions.

We have seen a contract cobbled together by a marketing or business consultant that was overly complicated, contradictory and contained terms that simply weren’t relevant to the purpose of the contract.

Beware if the language is old fashioned with lots of Latin references or ‘heretofores‘ etc, then it’s probably an old document someone has copied and may contain references to law that has changed over the years.

 

Does a Contract have to be Signed to be binding?

No.

Some contracts – for instance where someone guarantees the repayment of another’s obligation – have legislation that requires signatures to prove that the contract is valid, but most common contracts can be completed without an original signature, particularly after the adoption of Electronic Transaction Legislation which provides for the enforcement of click wrap agreements and electronically signed agreements.

How can you tell if a person agrees when they haven’t Signed a Contract?

A party must be seen to agree to the terms of a contract in order for it to become legally binding.

You can be seen to agree to the terms of a contract even if you haven’t read it. Click wrap agreements – those links to terms and conditions with an ‘I agree’ check box online – are a prime example of contracts that people enter into every day without reading them. How many of you have read all of the terms and conditions applicable to your Facebook account? Not many for sure.

If you take an action that has been anticipated in the contract, even if you haven’t signed it, you may be seen to have acted consistently with the contract, and in compliance with it.

Though agreement can be demonstrated by the signatures of the parties, it is generally accepted that parties can enter into a contract by following the course of action set out in the agreement, which ‘proves’ their consent.

When drafting a service agreement for a business we will usually include a paragraph that makes the services terms binding, whether or not the agreement is signed by the client. This is because it is often difficult for businesses to get clients to return signed documents before starting work.

An example of the type of clause used might be:

This agreement will be binding on you as soon as you ask us to start work, unless you immediately ask us to stop providing Services to you, whether or not you sign it.

For contracts that do need a signature (like guarantees) it is highly unlikely that the contract will be found to be binding on a party if it is not signed.

Contract formalities

As a general rule contracts do not need to comply with any sort of formalities. Even if you have a written document that has been signed, a signature can be challenged with evidence from a handwriting expert, and we have been involved in a court case where this was done.

Court matters – litigation – are costly processes and one of the most costly phases of litigation is the called ‘discovery‘. During the discovery process, each party to a court matter is required to create a list of all documents that might have anything to do with the dispute, and prepare those documents in a format that the other parties can read.

Thirty years ago all the documents presented to court tended to be in paper form. Now, they are mainly electronic. Think of all those short ‘thanks‘ emails you have sent in the last year. If created as part of a conversation that is now related to a dispute, they are each separately discoverable in court proceedings. 

With the proliferation of email and other electronic messaging, electronic discovery has become almost essential to court proceedings. Electronic discovery is now an industry in its own right with analytics and processing to avoid human beings having to read every electronic document ever produced.

So, coming back to scanned copies of contracts and whether or not they are enforceable. The real question is –

Is the scanned copy of the document the best available evidence that the parties entered into a contract in the first place?

While having an original printed contract with hand written signatures available to prove the parties were involved would arguably provide the best evidence, it’s not the only method to prove that a legally binding agreement can be formed, and proven, between parties. If a paper copy is not available, the scanned copy probably is the best evidence.

How can Onyx Legal help you?

If your contracts need review, update, or you don’t have one yet, let us help you to create the best contract for your style of business to avoid unnecessary delays. We love writing contracts. Contact us so we can help you with your contract today.

Unfair Contract Terms – B2B Contracts Under Investigation

Unfair Contract Terms – B2B Contracts Under Investigation

Unfair Contract Terms – B2B Contracts Under Investigation

Is your business in line for an ACCC investigation?

From November 2016, business to business transactions came within the coverage of some provisions of the Australian Consumer Law. The big change was the application of unfair contract terms to business to business contracts involving small businesses, with the intention of helping small business. 

Although the law doesn’t currently make the inclusion of unfair contract terms in a contract illegal, the ACCC is pushing for updates in the law to specify that unfair contract terms are illegal, and to empower the ACCC to issue penalty notices. Until those changes are introduced, either the ACCC or a small business suffering loss, must apply to the court to seek to have the unfair contract term declared void and unenforceable – a slow and cumbersome process. 

Not every B2B contract is covered. The core elements are:

  • the contract is for goods, services or the sale or grant of interest in land
  • one party will be a small business with less than 20 employees
  • the value of the contract involved will be less than $300,000 or, if for more than 12 months duration, have an up front price of less than $1,000,000
  • the contract is a standard form contract rather than something specifically negotiated between the parties.  

Clauses highlighted as potentially unfair include:

  • the ability to end or cancel an agreement unilaterally
  • broad indemnities or excessive limitations of liability
  • unilateral right to change contract terms, including pricing
  • limits on a small businesses ability to exit a contract, including penalties for early termination
  • extended payment terms which may be of detriment to the recipient 

The ACCC has investigated the standard contracts adopted by companies in industries such as car hire, waste removal, telecommunications and agriculture and a number of businesses have agreed to change their contract terms as a result.

This is possibly also the reason for Coles and other large retailers announcing in 2017 that they would start paying small suppliers within 14 days, a big change from the 30-90 days or more some suppliers had experienced.

At present, only a court or tribunal (not the ACCC) can decide that a term is unfair. As at early 2020, the legislation was under review.  ACCC can ask for enforceable undertakings and start court action if it investigates the contract terms of a business and forms an opinion that those terms are unfair. If a court or tribunal does find a term ‘unfair’, the term will be void – this means it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

The ACCC sets annual priorities for investigation and successfully took action against Ashley & Martin Hair Studios and Mitolo Group potato traders in 2019. Don’t let your business become that example.

The ACCC website includes updates of recent prosecutions and enforceable agreements when made. 

How can Onyx Legal help you?

If your standard form contract hasn’t been reviewed in a few years, call us to arrange a fixed price review and update of those terms. If your standard form contracts are very old (they might still refer to the Trade Practices Act 1974 or retention of title) then we might suggest a whole new contract, starting from scratch. Either way, we can provide you a fixed price before we get started.