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Revenue Share Deals for Online Business – the Legal Side

Revenue Share Deals for Online Business – the Legal Side

Revenue Share Deals for Online Business – the Legal Side

Revenue Share Deals for Online Business

What is a Revenue Share Deal?

Revenue share deals are a type of business agreement in which two parties agree to share the revenue generated by a specific product or service. The revenue is typically generated by sales, but it can also come from other sources such as advertising or subscriptions.

Revenue share agreements work well in the online business environment  and are subtly different from a joint venture, although share many of the same features.

Whilst a joint venture might be intended for a specific project, and may also be time or project limited, revenue share deals can be perpetual and unending, provided the parties maintain their good working relationship.

Generally speaking, in a revenue share deal one partner has unique skills which can enhance the performance of a business beyond its current state (eg. strategy), and the other party has a business they want to improve, without the knowledge or experience to do so (eg. operations). As the operations person, the strategic partner often becomes your objective, trusted advisor and promoter, without having any control, ownership or decision making in the business.

This makes revenue share deals attractive to business owners who do not want to give up control or equity in what they have created, don’t have the immediate capital or cashflow to pay a high level advisor, but still want to leverage the knowledge and skills of an advisor.

It’s important to note that in a revenue share deal, both parties are sharing the risk as well as the rewards. If the product or service doesn’t sell well, both parties will earn less revenue.

Revenue Sharing Business Model Examples

1.  Revenue sharing companies

Employee share schemes or other incentive programs, bonus payments to high performing distributors and distributions to shareholders are all forms of revenue sharing in companies. Whilst having an underlying performance base, typically the company retains control over the decision making around whether or not a distribution is made.

2.  Sports and entertainment industries commonly use revenue sharing arrangements

Coaches and managers might take a share of the revenue a player or an entertainer receives from participating in an event. By way of example, for the popular sport of Australian Rules Football, the AFL Players’ Association requires agents to be accredited with them and publishes as a guide

Typically agents won’t charge a fee during a player’s first season or if they are on a rookie contract. From their second year on a list, it’s usually in the 2% to five per cent range on any football payments a player earns. In relation to any commercial or promotional activities, the typical rate is 20 per cent.”

The league generates its revenue from the promotion of the game. Player salaries typically come from the revenue distribution to their club received from the governing league. This was highlighted in early 2023 when the association for rugby players rejected the salary cap issued by the NRL.

3.  Commission and affiliate based arrangements

Straight commission or affiliate agreements without underlying retainers are really a revenue share model. Payment is calculated on each sale over a threshold, even if that threshold is only one sale. Sales are dependent on the efforts of the salesperson and the work of the salesperson only costs the business a percentage of the sale made. Provided that costs of the product or service are not excessive, both parties benefit. 

4.  Revenue Share in Ecommerce

Cost per click advertising is a form of revenue sharing, provided the click converts to a sale!

Advantages and Disadvantages of Revenue Sharing

Some Pros:

  • equal risk to the parties, which can mitigate potential financial losses for either party
  • revenue sharing is performance based – if either party stops performing, revenue decreases
  • both parties can benefit from increased sales and revenue
  • generally speaking, the contributions of the revenue share party extend the business beyond what the business owner could achieve on their own
  • the revenue share party doesn’t have to acquire ownership or liability for businesses it partners with, but can generate a steady stream of revenue from the relationship
  • easier calculation than profit share, as cost of sales is not taken into consideration

Some Challenges:

  • revenue sharing arrangement require a high level of trust
  • if a revenue party is brought in to improve strategy, the operations partner needs to be willing to change existing business practices
  • it can have a slow start – strategic changes may take time to produce tangible increases in revenue
  • an operations partner may not still see the value in the arrangement after the strategic implementations are completed and there is less input from the strategic party

Cons:

  • revenue share works best where the product or service being sold has an identified market and demand
  • revenue share works best with standard products and services, rather than bespoke offerings
  • both parties are likely to be dependent on each other for revenue and success, which can create tension in the relationship
  • the terms of the agreement may be difficult to renegotiate if one party is not satisfied with the arrangement
  • revenue sharing arrangements are generally not attractive to strategic partners when the business is not ready for sales, or is ready, but hasn’t made any sales
  • regulatory, environmental or social changes that significantly impact a business (think COVID impact on hospitality) can ruin a revenue share opportunity

Someone looking to rapidly scale may be seeking a significant involvement of the revenue share partner from the beginning, with feedback potentially reducing over time. It is important to understand that this is different from a standard coaching relationship and that the time contribution of the strategic partner may vary significantly over the life of the relationship, without changing their impact on the business, and therefore entitlement to revenue share.

 

Example Revenue Share Formula

Before establishing a revenue share model, it will be useful for you to consider what it is you want to achieve.

Consider an education and coaching business offering online programs with some live video coaching sessions.

The creator of the business has the knowledge and experience in the subject matter, but would like to increase sales, their current sales are $500,000 per year, which returns a profit. The creator enters into a revenue sharing agreement with a specialist online marketer for the purpose of increasing earnings from their existing products and services.

The revenue share formula might look like this:
– 12% of all sales revenue over $500,000 per annum
– sales are calculated 30 days after purchase and exclude any refunds or cancellations
– distribution of revenue share is made once per quarter for sales occurring in the 90 days ending 30 days before the end of the quarter

In this model, any additional costs incurred by the business do not need to be taken into consideration. The cost of changes in marketing recommended by the specialist online marketer will be covered in the balance (88%) of increase in revenue.

What to Think About Before Entering a Revenue Share Deal

Some things you might like to consider are:

  1. your role and expectations in the revenue share
  2. are you starting from a zero base, or is there existing revenue?
  3. what skills or attributes you are looking for in a revenue share partner
  4. the other party’s role and expectations
  5. structuring the deal
  6. the amount of revenue share
  7. what happens when the revenue share is not paid?
  8. what is the business is sold?
  9. what happens if one party wants out?
  10. meeting and reporting obligations

 

Ending a Revenue Share Agreement

It is important that you are clear on expectations and what will happen if the agreement ends. You will find the proposed revenue share agreement more useful if you can clearly identify any areas where there is potential for dispute and address those things in the agreement, up front.

Open and frank negotiation should always be the first resort (having some tough conversations) but that can stop being feasible if the relationship between the parties has broken down. It is important to have a quick and effective dispute resolution process to avoid damaging the business – the revenue source for each party. With international transactions, international commercial arbitration is often the most accessible and sensible course, but if the parties are in the same country, other options may be preferred.

It is common for there to be a form of earn out included when a revenue share agreement comes to an end by the operations partner. This is in recognition of the contribution of the strategic party’s efforts at the start of the relationship when the changes suggested took time before showing results. If the strategic partner wants out, depending on the reasons, the earn out might or might not come into effect.

It is also not unusual for a strategic partner to request an entitlement to a share of the revenue on a sale of the business, in place of that earn out arrangement. This is because revenue share agreements are so dependent on the relationship between the parties and are unlikely to be transferred to a new owner of the business.

How can Onyx Legal help you?

Make an appointment with one of our team to discuss how to implement a revenue share model for your business.
If you are considering a revenue share deal, download our Revenue Share Questionnaire here to help you get started.

What Are Shareholder Agreements and Why Are They Important?

What Are Shareholder Agreements and Why Are They Important?

What Are Shareholder Agreements and Why Are They Important?

What Are Shareholder Agreements and Why Are They Important?

As with all business relationships, it is important for all parties to understand their rights and responsibilities, contributions, and entitlements. 

This is the same for the shareholders of a company.

If you have the chance to think through how you want to structure the company, what you want for the business, and the future in case unexpected events (like a death or disability) occur, and document those expectations, you create a situation where dispute is unlikely. 

Documenting these expectations in some form (usually a shareholder agreement) is important because even if there is a dispute, you will still be able to use the terms of the shareholder agreement to resolve it with the least amount of time, effort and fuss.

 

Why Do You Need Shareholders Agreement?

 

Clients spend considerable time and money with us to resolve disputes about what they are each entitled and not entitled to, how to exit or remove someone from the company, and what will happen to those shares, IF no shareholder agreement was ever entered into. 

When people stop agreeing and there is no effective mechanism to rely on to resolve the disagreement, they can be stuck in a deadlock that can only be resolved by a court.

A shareholder agreement can include a mechanism for dispute resolution that is quicker, easier and cheaper than court. Not to mention private. 

Think about it. 

If there are two shareholders who are also both directors (which is not an uncommon situation), then every decision about the company will have to be unanimous. It is rare for business partners to be on the same page 100% of the time, so situations will arise where the parties are deadlocked on a decision and there is no clear way forward. 

A shareholder agreement can provide the way forward. 

Without a shareholder agreement, court may be the only option. 

Does it make sense to ‘save’ $5,000 now to lose $100,000, or your house, later?

What Is The Difference Between a Shareholder Agreement, Partnership Agreement, and Joint Venture Agreement?

 

There are many different types of business structures –

1. Partnership

If you are a sole trader and have decided to collaborate with another individual without setting up a company or trust, that formation is a partnership. Different sorts of entities can set up in partnership, but it tends to be most common between individuals, or their family trusts. 

A partnership is not a separate legal entity, which means each partner is exposed to liabilities the partnership incurs. For example, if one partner commits fraud by stealing money from clients, whether the other partners know about it or not, the innocent partners may be required to repay the stolen money. The people who have suffered the loss don’t even have to pursue the defrauding partner first! 

You would need a Partnership Agreement to clearly set out the rights and obligations of each partner, and how to exit or dissolve the partnership.

If you wish to pool resources and share expertise with another person or entity, that formation is a joint venture. A joint venture is very similar to a partnership. It may also not be a separate legal entity by itself, but it does not have the disadvantage of liability for the actions of the other parties.

You would need a Joint Venture Agreement to define each joint venture partner’s roles and responsibilities, and entitlements. 

Sometimes, a successful joint venture can lead to incorporation, or be established as a company from the start.

3. Company

A company is an incorporated entity which is separate to the people behind it (shareholders and directors). The most common structure for a company is a proprietary limited company, which means each shareholder is only liable up to the amount unpaid on their shares.

Here is the typical structure of a company:

 

Company

TitleRole
ShareholderOwner
DirectorLegal liability + strategy
WorkerDaily operations

In a company, the director is legally responsible for the company and its strategic direction, the people who work in the business are responsible for daily operations, and the shareholders own the company. 

Even with legal responsibility, there are some decisions a director or board of directors cannot make without approval of the shareholders. Some powers are reserved to the shareholders (eg. the power to replace directors) even though they rarely have any involvement in the day-to-day business activities. 

It is important to understand what ‘hat’ you are wearing in a small business and try and focus on the responsibilities of that role only, rather than trying to be everything all of the time. 

As an owner of the business, you should be interested in the finances and the risks the business is taking and feel confident the board has it managed. 

As a director, you should feel confident you understand your legal liability, and that the company is operating within the kind of risk tolerance appropriate to your industry, and you have a plan for where the business is headed.

Workers need to get the jobs done.

As an aside – 

What is the difference between a ‘board’ and a ‘director’ or ‘the directors’? 

Nothing. 

The ‘board’ is just the collective name for the directors working together. In a shareholder agreement, even if there is only one director at the time it is initially signed, the document will usually refer to the board, rather than a director alone to avoid having to make changes once another director is appointed. 

Whether your company has a sole director or a board, they each are responsible for making the same decisions and all members are legally responsible for the company.

What Is In a Shareholder Agreement?

 

As with all business relationships, it is important for all parties to understand the proposed arrangement, their contributions, entitlements, and rights and responsibilities. 

Essentially, a shareholder agreement is more specific than a constitution and can cover a broader range of topics such as:

  • the business activity to be carried out
  • what each shareholder owns
  • whether, and if so, how new shareholders can become involved
  • what rights shareholders have in appointing directors
  • whether directors can act in the interests of their appointing shareholder
  • dealing with shareholder loans
  • outlining specific requirements for business operations, eg. business plans and budgets
  • when distributions can be made
  • how shares can be transferred
  • valuing the company
  • what happens if a director or shareholder exits
  • what happens if a director or shareholder does something wrong
  • rights if a buyer comes along
  • what happens to assets and intellectual property if the company is wound up
  • dispute resolution

How Do You Write a Shareholders Agreement?

 

A shareholder agreement needs to set out important matters relating to the shareholders including how they make decisions, their entitlement to dividends, and how they can exit the company or vary their interest in the company. 

Other important factors include bad leaver provisions, restraint provisions and funding provisions.

Consider a scenario where you no longer wish to collaborate with the other shareholder (say, if they have acted recklessly or even fraudulently) and you want to either exit the company or remove the other person from the company, how do you do that? We have seen many situations where the lack of a Shareholders Agreement (or an effective mechanism within the Shareholders Agreement) caused stress and detriment to the shareholders as well as the company which may have to cease operations

Who writes a shareholder agreement?

We strongly recommend you go to a lawyer to help you draft your shareholders agreement.

This is a document that needs to be tailored to your situation and is not a standard form document like the company constitution which can usually be prepared by accountants when setting up the company.

Is a Shareholders Agreement a Contract?

Yes. It is a contract between the company and the shareholders, as well as between each shareholder. 

It is possible, and common, to set different rights and obligations for each shareholder. For example, for a shareholder who has the knowledge and expertise to run the business or steer it in the right direction, it may be good for them to have the power to vote and make decisions for the company. On the other hand, if you have a shareholder who is an investor shareholder and purely contributes funds to the company, you may want to restrict their control over the company by giving them no voting power and only entitlement to dividends.

Does a Shareholder Agreement Need to be Signed?

Signatures are often the easiest way to prove that someone has had the opportunity to read and agree to the terms of a document. 

Shareholder agreements can be signed, or a resolution (also in writing) passed unanimously by all shareholders at the time, can be passed to prove agreement and approval of the terms of the shareholder agreement. This requires a poll of shareholders. 

Every shareholder, and the company, sign the shareholder agreement. If it is a resolution, then it is not passed without the unanimous approval of every shareholder.  

Is a Shareholder Agreement Legally Binding?

Yes, provided that it is either signed by the company and each shareholder, or adopted by unanimous agreement of the shareholders by passing a resolution.

What Happens If You Don’t Have a Shareholder Agreement?

Your business could still operate smoothly in the absence of a shareholder agreement.

Case STUDY

Two builders set up business together on a handshake. They establish a company where they and their respective life partners are directors (4 people all together) and their respective family trusts are the shareholders. Each family trust holds 50% of the shares. The shareholders must vote on the appointment or removal of directors and a decision must be a majority decision. Because each family trust holds 50% of the shares, that means every decision has to be unanimous. 

They each contribute equipment to the company. 

They buy computers and motor vehicles through the company. The vehicles are expensive, under finance and registered in the name of the company, even though each builder takes one for their exclusive use and one builder puts personalised number plates on the vehicle they use.  

A meeting with the company’s accountant highlights that there are unexplained transactions by one of the builders. The parties get into a dispute. As a result of the dispute, each of the life partners resign.

It takes 12 months for the builders to come to an agreement about the vehicles, equipment and jobs in the business. They cannot reach an agreement about the $300,000 + sitting in the business bank account, which was frozen by the bank pending their agreement. 

To resolve the dispute, it is likely the parties will have to go to court, with the likely result that the company is wound up and the money in the bank is used to pay legal fees in getting to that decision. 

If the parties had a written shareholder agreement, that dispute could have been resolved in a few short months, at a significantly lower cost.

However, not having a shareholder agreement would be problematic IF the shareholders cannot agree on a particular matter. It would be more difficult to resolve the dispute without a binding contract to rely on.

We strongly encourage you to put a Shareholders’ Agreement in place if you have not already done so, and have it regularly reviewed by a legal professional to ensure it remains up to date and compliant with regulatory requirements. 

How can Onyx Legal help you?

If you have been in business with someone for a little while and everyone is still friends, or you are contemplating setting up a new company to run a business with someone new and would like to understand your legal risks, make an appointment with a member of our team.

The 7 Key Legal Issues in Buying a Business

The 7 Key Legal Issues in Buying a Business

The 7 Key Legal Issues in Buying a Business

The 7 Key Legal Issues in Buying a Business

1. Not Rushing In

You might be incredibly excited about buying a business, and we have come across people who have decided they want to work from home, have a look on Facebook marketplace and agree to spend money they don’t have, all in one day. No consultation with a lawyer or accountant, no real understanding of what is involved in the business. It did not last and it cost them money. 

We’ve also come across people who buy a business with unrealistic expectations of the work involved and an expectation that if the bank is prepared to lend them the money, they would be able to make a success of it. 

A business purchase is a big commitment. It is not just the cost involved, but running the business afterwards. The next three case studies to show why it is important not to rush into a purchase.

Case Study 1 

A young lady came to us with an offer from her employer to purchase the hairdressing business she was working in ‘cheap’, and to take over the lease for the business. She was keen to sign the agreement, as the seller (her boss) wanted to get out of the business before the end of financial year and it was already June. 

A quick review of the deal suggested that our client would be taking on a business that was only still operating because of her work, a lease that had three years remaining and was not cheap, and the need for some refurbishment of the salon. The landlord was offering a $5,000 incentive for fitout, but the likely cost was probably going to be higher. 

Fortunately, we were able to get our client to slow down and get accounting advice on the business, and to identify to our client that the seller would benefit to the tune of $30,000 per annum by being out of the lease. We encouraged our client to get an estimate of fitout renovations, which came in at a little under $70,000. 

Our client decided there was no benefit in the deal to her and other opportunities were out there. 

Case Study 2

A client came to us after having already taken over a beauty spa business. She thought she had a good deal because the replacement cost of the relatively new equipment in the business was significantly higher than the requested purchase price, and the vendor was providing finance. 

By already being in the business and having paid a deposit of $5,000 to the seller, our client was committed, and there was nothing in writing. The client came to us desperate to get a sale agreement documented because the seller had said they would do it and hadn’t. Our client was already paying the rent, COVID restrictions came into effect and the seller was suddenly very cooperative in getting the paperwork complete. The landlord was fortunately agreeable to transferring the lease, but our client did not want us to advise on the lease, which was very basic. 

Two years down the track it became apparent that the appropriate council certifications had not been obtained for the plumbing work on the premises and the premises were non-compliant. The lease and assignment of lease were silent on responsibilities and our client ended up footing the bill. 

Difficulties with the lease could have been resolved before the purchase was completed if the client had not already been in the premises and operating the business before getting advice. 

Case Study 3

Our client was looking to buy his first business at around $200,000 and had found a business through a broker that he was keen to buy. He arranged the finance, did his own due diligence and asked us to become involved at contract stage. The broker had prepared the contract on behalf of the seller. 

When we received the business purchase contract, it was unclear from the contract what exactly our client was buying. On talking to the broker, they had moved from selling residential property into business broking and were inexperienced in the area. They were also quite frustrated that our client hadn’t simply signed the agreement and sent it back. 

Without the business sale contract clearly setting out what was being sold, we couldn’t assure our client about what they would receive. In addition, the landlord wanted the buyer to enter into a new lease at a rent $10,000 per annum more than the seller had disclosed to our client. 

Fortunately, our client did not rush to sign and when answers to our questions were not forthcoming, and his circumstances changed, he decided not to go ahead. In that instance he had invested in getting legal and accounting advice and told us he had a very valuable learning experience.

2. Knowing What you Are Buying

So, what are you buying? If the contract isn’t clear, then you might be handing over money and not getting what you expected. You need to know what is important to the day-to-day operations of the business and how much of that is being transferred to you. You don’t want to purchase a cafe and upon settlement, find out that the seller cleaned out all the cupboards and fridges the day before and you have to restock before you can trade. 

Case Study 4

Our client was looking to buy his first business at around $200,000 and had found what he thought was a printing business and that everything was done onsite. He had no experience in printing and was planning to hire someone to run the business. He arranged the finance, and asked us to become involved at contract stage. 

When we received the business purchase contract, it was unclear from the contract what exactly our client was buying. There was no mention of printing equipment, paper, card, inks or other stock. We also suggested our client carefully go through the accounts with their accountant to ensure there were sufficient profits in the business to be able to hire someone to run it. The seller was an owner/operator. 

Without the business sale contract clearly setting out what was being sold, we couldn’t assure our client about what they would receive, what equipment was in the business, or even if the seller owned the equipment being used and had the right and ability to sell it. 

Without ensuring the contract was clear, it is possible that our client could have only received business branding, a client list and the liability for a lease – expenses without immediate income.  He would then have also had to immediately spend additional money purchasing the necessary equipment to operate the business. 

Fortunately, our client did not rush to sign and when answers to our questions were not clear, and he was offered a role interstate, he decided not to go ahead. That client is looking to purchase a business for income without him having to be involved in the day to day. He hasn’t done that before and said that it had been a very worthwhile investment in getting legal and accounting advice before signing anything. He now feels better prepared to assess potential deals in the future. 

3. Profit is in the Purchase

When you are buying a business, it is very important to get appropriate accounting and financial advice. It is possible to buy a business that needs to be turned around, but only if you can do so at the right price. 

The profit is in the purchase. 

What opportunities do you have to increase revenue immediately or very soon after you buy the business? It is not uncommon that people who are ready to sell are at that point because they have lost real interest in the business and there is lots of room for improvement. If you can see the opportunities, and know how to leverage them, then you might be looking at a good deal. 

A lawyer who had bought a law practice on the Gold Coast once applied to work with Onyx Legal. They claimed they had been misled about the value of the business, paid too much and there was no opportunity to make money because the Gold Coast was a low socioeconomic area! Naturally, they didn’t get the job. You attitude to the business you are buying can influence your ability to make a success of it. 

When you go into business, success or failure is up to you. Know what the business is worth once the owner walks away (are customers attached to the owner and likely to follow them?) and understand what you are willing to pay to secure that opportunity. 

It is not unusual for cafes and restaurants to be sold for nominal amounts (like $1) because the owner is losing money and is better off getting out. Someone who understand the area, likely clientele, available workforce and marketing can potentially come in and make a success of it. There are stories of a Gold Coast restaurateur selling and buying back a restaurant a couple of times because he knew how to make it a success, but the purchasers didn’t. 

One of the early Australian online tipping platforms was bought from the founders by a larger company, and then bought back by the founders 18 months later at a much lower cost because that company didn’t know how to make a success of it.

4. Assets vs Entities

When you buy a business, you are either buying shares in a company, in which case you are buying the history, or you are buying assets – which is everything necessary to operate a business. Assets can be tangible (like a desk) or intangible (like a website). 

When you buy shares, everything in the company comes with it, so you must understand what loans or other liabilities are sitting in the company, and how they will be dealt with at settlement. Things like tax debts, overdue superannuation, bad credit ratings, court proceedings, embarrassing media stories and so on are all associated with the entity, and that is what you are buying. 

When you are buying assets, you need to understand what is transferrable and what is not. Not all supply contracts are transferable without the prior approval of the customer. So if the profits in the business are in one or two large contracts and it is not clear if they are transferable, you may be losing money as soon as the purchase is completed. 

These sorts of things need to be checked. 

5. Transferring Intellectual Property

Intellectual property – copyright, trade marks, patents etc, need to be transferred in writing, by the owners. It is important to check who owns what when buying a business. In particular, copyright belongs to the creator unless transferred in writing. Software, graphic design, website copy etc all belong to the creator. If the creator is an employee it is ok, the copyright vests in the company, but if they started as a contractor before becoming an employee, there can be uncertainty about what they company owns and is able to sell. 

Case Study 5

Our client was buying a health business and searches showed that the domain name and the website (separate things) used to advertise the business were not actually owned by the seller. A lot of patients found the business through the website. It was essential to have the sale of business contract adjusted to ensure that transfer of the domain name and website occurred as part of the sale. 

Case Study 6

A client was interested in buying a business which used a particular bespoke software for all of its main operations. The due diligence process disclosed that the software developer had been contracting to the business for years and there was nothing in writing about the ownership of that software, or its ongoing use by the company. The seller was unable to produce anything in writing to show that it owned the software, even though it believed it did. 

The buyer of the business walked away. 

6. Competition by the Seller

Online businesses are a big area where competition is a concern after settlement. Most business sale contracts contain some form of restraint on the seller about what they can do in an area that will compete with the business you are buying after the date of the sale. 

A restraint provision in an employment agreement is more likely to be enforceable when it is structured to protect the interests of the buyer, and not likely to be enforceable if it puts the seller in a position where they cannot earn a living. 

Tougher restraint provisions are likely to be enforceable for commercial agreements than they are in employment situations, because the courts will also expect the parties to have made a commercial decision about what is acceptable to them, or not. This is an issue for sellers who do not carefully consider what they plan to do after completion, and how they may be limited by a restraint. 

Different things that restraint provisions can cover are:

  • Area: Does the business operate locally, nationally, in a region like Oceania, or worldwide? Does the seller plan to expand the area of service, or combine it into an existing business that covers a larger area? Is it fair? 
  • Industry: A bug-bear we have is when a buyer attempts to include ‘a similar business’ without defining what that is, or to include the businesses operated by a group of companies related to the buyer, whether or not those businesses are in the same industry or something completely different. Restraints should focus on the business being sold, not something broader.
  • People: It makes sense to restrain a seller from working with existing or potential customers already known in the business being sold, however, we have assisted sellers in being permitted to retain a client list for the purpose of communicating a new business, where that business does not compete with or adversely affect the buyer. 
  • Key contacts: It can be also worthwhile include a restraint against poaching staff, suppliers or distributors for a period of time after completion. 
  • Time: Periods of restraint can vary significantly, anywhere from months to years. Times and areas of restraint vary depending on the type of business and the reach of that business. It is also common to have cascading provisions, which leave it to a court to decide what is fair if a restraint is breached. We encourage our clients to consider the period of time it would take a knowledgeable competitor to set up a similar business, and to be reasonable in setting the time for restraint. Where a large infrastructure investment is likely to be threated by competition from the seller, then a longer restraint period is likely to be considered fair and reasonable. 

7. The Limits of Each Adviser

It’s tempting to think that your advisers will have all the answers when you are buying a business and be able to tell you what to do if you end up in a situation where you feel a little lost. This can happen for people who have never bought a business before. 

As legal advisers, we can review the contracts and check that the contracts properly describe what you think you are buying and what your obligations, and the obligations of the seller will be, after purchase. We can highlight potential rights and flag decisions you must make – but we cannot make those decisions for you. 

The truth is, it is your responsibility.

Your accountant, lender or financial adviser are all in the same boat. They can highlight information for you, but they cannot make the decision whether or not to buy, and they cannot determine how much importance you place on any piece of information. 

Case Study 7

Many years ago when working in a national firm, a client who had borrowed significantly (millions) to fund a purchase was part way through the due diligence process and wondering whether or not the purchase was going to be worthwhile. It got to a point where the client was saying “we’ve spent too much (around $300k) now not to go ahead.” 

There was an element of wilful blindness on the part of the purchaser in that transaction. They had put their reputation, and their house, on the line to fund a purchase that was looking more and more questionable the more they learnt about the business. Going through with the purchase was more about their ego and being ‘clever’ at getting the deal done. 

About 6 months after settlement, the business failed and was placed into liquidation and the director was forced into bankruptcy.   

It is your money. It could be your reputation, your family and your future that you are staking on this purchase. As much as professional advisers can provide you with advice, advisers cannot tell you what to do and all the important decisions are up to you. This makes it important to be up front with your advisers, whether legal, financial, accounting or otherwise, and ensure they understand your priorities and concerns. 

A binding contract requires offer, acceptance and consideration. Consideration can be the doing of some thing or the payment of money. 

At every point before consideration has passed, you are likely to have the opportunity to exit from a transaction, no matter how much has been spent getting to that point. Sometimes, a small loss can be better than taking a risk that doesn’t feel right.  

When you are buying a business, you will also have a period of time to complete due diligence and should use that time to ensure that your assumptions about the business are correct, and if not, whether you still want to go ahead, negotiate further, or walk away. 

As we said at the start – don’t rush in.

    How can Onyx Legal help you?

    If you are interested in buying a business, whether this is your first time or your tenth, and you know you need help in the process, make an appointment now to talk it through with one of our team.

    What Does A Standard Signing Clause Look Like and What Does It Apply To?

    What Does A Standard Signing Clause Look Like and What Does It Apply To?

    What Does A Standard Signing Clause Look Like and What Does It Apply To?

    What does a standard signing clause look like and what does it apply to?

    Generally

    A person will be bound by the terms of an agreement they sign whether or not they have read it, and whether or not they understand its terms. So, a signing clause can be very simple. The main purpose is to prove that a person has agreed to the contract they have signed.

    In most cases in business, a person is entitled to reasonably rely upon the signature of the person signing as being authorised to bind the company they work for. This is not always the case. If you are dealing with a very junior person in a business, it is unlikely they have the required authority to sign something that binds the business, but the signature of a senior manager or director should be able to be relied upon.

    For the purpose of proof, the best style of basic signing clause should include:

    • the name of the person signing, in a legible form, which is why signing clause sometimes say ‘print name’ or ‘block print name’;
    • a signature
    • the date.

    The reason to include a date is to easily track when the agreement was made. It is very common for signing parties to forget to enter a date on the first page of an agreement (where there is usually a space for the date) and then years later, anyone trying to work out when the document should be dated is trawling through emails and other records to try and figure it out. At least if the person signing has to also date the document, if it is missed on the first page, there will still be an easy reference within the document.

    If you’ve been following our recent articles, you would probably know that although not all documents need to be signed to be legally binding, it is always a good idea to use a signature to indicate that an agreement was entered into between the parties. The signature can be a reliable form of proof of agreement.

    Different types of documents have different execution requirements. (Execution in this context means the performance of something in a planned way, not the killing by legal punishment meaning.) For example, deeds have different execution requirements than agreements, and we will discuss those differences below. Other documents such as wills, powers of attorney or court documents also have different rules around proper signing.

    Having an appropriate signing clause can help ensure that your document is correctly executed and is valid and enforceable.

    So, what does a standard signing clause look like? Let’s start by looking at signing clauses for agreements.

    Standard signing clause – agreements

    A standard signing clause applies to all kinds of agreements (but not deeds). For example, services agreements, licence agreements, contractor agreements, and loan agreements.

    The elements of a signing clause would need to be slightly adjusted depending on who is signing.

    1. Individual

    If you are signing as an individual, nothing more is required than your name and signature.

    Although not legally required, it is good practice to have your signature witnessed by a third party. This is good evidence in case a dispute arises as to whether the agreement was properly signed, and particularly if the person signing argues that they did not intend to sign it.

    An example signing clause would look like this:

    When a signature does not need to be witnessed to be legally binding, then even though there is a section for a witness, the document will still be binding without it.

    If someone signs a document without a witness, it is too late for their signature to be witnessed. A person can only witness a signature if they are present and watching as the person signs the document. We sometimes have people ask us to witness their already signed documents, and the answer is always, ‘no, we will have to reprint the page and do it again’.

    2. Company

    If it is your company that is executing an agreement, you should comply with the Corporations Act 2001 (Act); in particular, section 127 of the Act.

    The signing clause for companies usually contains the words ‘signed on behalf of [company name] in accordance with s 127 of the Corporations Act 2001 (Cth)’.

    Signing pursuant to that provision means that a person can rely upon the Corporations Act to state that the document was properly signed, however, if a document is not signed correctly in accordance with that section, it may still be binding on the company.

                 a) With common seal

    If your company has a common seal (which is basically an ink stamp that you can press onto an agreement as the company’s signature), that stamping must be witnessed by:

    • 2 directors of the company;
    • 1 director and 1 company secretary; or
    • the sole director and secretary of a proprietary company.

    The use of a common seal is becoming less common. Most companies execute without a common seal. Companies such as registered training organisations, that provide certificates of completion for students, are the types of companies that still adopt a common seal.

                 b) Without common seal

    Executing without a common seal is a very similar procedure, with the only difference being you do not have to stamp the agreement with a common seal.

    It simply requires the signature of:

    • 2 directors of the company;
    • 1 director and 1 company secretary; or
    • the sole director and secretary of a proprietary company.

    These signatures do not need to be witnessed.

    3. Trust

    A trust is not a legal entity on its own and cannot execute agreements. Trustees are the ones that sign on behalf of the trust.

    A trustee can be an individual or a company. The execution method is exactly the same as mentioned above, except that the signing clause would need to specify the signatory is signing in his/her/its capacity as trustee for (ATF) the trust.

    If you are an individual trustee (witness is not legally required but is good practice):

    If you are a corporate trustee:

    4. Partnership

    If you are in a partnership, you can sign an agreement on behalf of the partnership and bind the entire partnership to it.  Ideally you would have a very clear partnership agreement which identifies who is authorised to sign what type of document, rather than every person in a partnership signing without the knowledge of the other parties.

    Again, witnesses are not legally required but it is good practice to have your signature witnessed by a third-party.

    Signing clause for deeds

    Different to an agreement, a deed will take effect from the time it is delivered (not physical delivery but where the executing party intends to be bound – ie. at the time of signing).

    This is why the signing clause to a deed would need to contain the words ‘signed, sealed and delivered’.

    Other than this, executing a deed is very similar to executing an agreement, with the only exception being if you are signing as an individual, you must have your signature witnessed by a person who is not a party to the deed.

    There are some exceptions for signing documents under COVID legislation

    It is important to also note that if you are a partner and want to sign a deed to bind the entire partnership, you must be given authority to do that under a deed (ie. partnership deed). A verbal or other type of written acknowledgement is not sufficient to give you that power. In addition, your signature must be witnessed by a person who is not a party to the deed.

    To find out more about deeds, please read our article about Deeds v Agreements.

    Need help?

    If you need help or have questions about how to correctly sign your documents, please contact us.

    Coaches and Consultants – 3 Legal Case Studies

    Coaches and Consultants – 3 Legal Case Studies

    Coaches and Consultants – 3 Legal Case Studies

    Coaches and Consultants – 3 Legal Case Studies

    The challenge with coaching or mentoring, whether that’s life coaching or business coaching, is that your students often expect you to do it for them instead of them doing it themselves.

    This is completely contradictory to the sports setting where people understand that the coach is the person who does not end up on the field, who is not part of the game, and who supports the players get the best out of themselves.

    As a coach you are likely to have a variety of offerings for your clients, which might include any one or more of:

    • downloadable, self-paced individual programs
    • moderation of online forums
    • facilitation of mastermind groups, online or offline
    • individual coaching sessions, in person or via technology
    • a combination of individual and group coaching sessions, in person or via technology 
    • face-to-face events 
    • consultancy 

    Some of the coaches we work with have limited number high end programs which provide a combination of the different offerings above.

    Due to the variety of different offerings the coaches we work with provide, rather than one case study, we will share three snap shots of the problems some of our coaches have encountered, and the solutions we provided.

    We would also like to thank Si Harris, Business Strategist, for requesting these case studies.

    PROBLEM 1 – managing expectations

    Your advertising, and your Coaching Services Agreement should manage the expectations of your client. You should be clear before coaching commences that it is the client’s responsibility to get what they can out of the coaching program, and if the client does not participate fully, they will not get the results they expect.

    It is also important that you carefully assess the capabilities of your potential client before agreeing to provide services to them. If it were obvious before coaching commenced that your potential client could not afford your services, you run the risk of ending up in dispute over payment. Similarly, if you recognise that your potential client has a particular personality trait or disorder that you do not want to manage, or do not have the qualifications or experience to manage, it is best not to start the relationship at all.  

    CASE STUDY 1 – Complaint about Services

    We have a coach who focuses on assisting their clients to develop a business plan. Business planning is not an easy process. It requires time and effort. This coach provides a 13-week program with the promise that at the end of the program their client would have a completed business plan.

    The problem they faced was clients seeking refunds at the end of the program if they were not happy with their business plan.

    We restructured the coach’s Coaching Services Agreement to clearly set out and include what the coach provided, what they did not provide and what actions the client was responsible for undertaking throughout the coaching program. The client had to sign up to their responsibilities and was responsible for completing different sections of a template business plan from the start of the coaching relationship. We also prepared a disclaimer for our coaching client’s website which clearly set out the limits of their services, and the obligations of the participant. The disclaimer was easily accessible through the footer of the website, reflected the terms of the Coaching Services Agreement and was in unambiguous plain English terms.

    This agreement was tested by almost the first client who signed it.

    That client turned up every week for thirteen weeks and consumed more than the allocated 90 min window of time allowed by the coach but failed to do any homework in between sessions and made no effort to prepare their own business plan.

    The coach, just like the coach on a playing field, was there each week, supporting from the sidelines, encouraging the client to play, but the client consumed the attention only, and failed to play the game.

    At the end of the program the client demanded a refund because they did not have a completed business plan that they were happy with, or at all.

    The client had signed the Coaching Services Agreement, in that instance in wet ink, and was bound by its terms. They had also claimed they relied on representations on the website, enabling our client to also point to the disclaimer.

    The coach was able to simply direct the client back to the plain English, unambiguous responsibilities the client had agreed to at the start of the relationship through the Coaching Services Agreement and disclaimer, and the complaint about services and demand for refund was not pursued. 

    Note that it is important you fulfil on the promises you make about the delivery of your programs.

    A 2011 Queensland QCAT series of cases involving Venzin Danielli Pty Ltd as defendant, required the coaching services provider to refund to four participants 77.5% of their program fees after the participants withdrew part way through the program for the provider’s “failure to provide the various benefits that were represented as flowing from participation in the Inspire Series program”. 

    In that case, the coaching service provider over promised and under-delivered. Make sure your advertising is accurate and does not over promise what you can deliver. 

    PROBLEM 2 – REFUNDS

    Australian Consumer Law Guarantees

    Before looking at case studies, it is important you know that a ‘no refunds’ policy is not supportable under Australian Consumer Law.  You CAN advise clients that a refund will not be provided if they change their mind about completing the program, there is a difference. 

    If a provider of services with a value of less than AU$40,000 does not meet the following consumer guarantees:

    • provision of services with due care and skill
    • provision of services in a timely manner
    • provision of services that are fit for purpose

    then the purchaser has a right to request a refund or replacement of the services.

    For a major fault (an irreparable fault or collection of faults that would have influenced the purchaser not to buy in the first place if they had known about those faults), the purchaser is entitled to a refund.

    High-end Coaching Programs

    High end coaching programs are often year long programs with limited places and application processes before acceptance. It is not uncommon for coaches offering high end programs to allow participants to pay by instalment over time, rather than require the full amount up front.

    So, what happens when someone gets part way through a coaching program and discovers they just do not want to finish it?

    The first risk mitigation strategy we recommend for high end coaching programs is a clear application process, including a written, signed application accepting the terms and conditions of the program, and a face-to-face interview process. Applications and interviews can be conducted electronically. Applications can be signed electronically.

    During the application process, as a coach, you can validly ask that your potential client tell you that they have considered the cost of the program and that participating in the program is not going to affect them badly financially.

    Some providers we work with may it clear that to get the most out of the program, the participant will need to have further money to invest – say in set up costs for a new business or development costs in a property purchase – and the coach will also ask for confirmation that the possible further investment is affordable for the potential client.

    CASE STUDY 2 – Refund request, or stop payment request, part way through program

    So, what do you do when you get a request for release from a program that has not been paid in full, or a refund part way through a program? This happens for our coaching clients once or twice a year. 

    When it comes to the Coaching Services Agreement, we make it clear that participation is limited, and the place purchased means someone else misses out. On that basis and taking into consideration the costs attributable to their participation, the whole of the program must be paid, whether paid by instalment or in full up front.

    We ensure the wording is very clear regarding instalments and cannot be mistaken for a monthly fee. We also suggest a provision that makes the full balance of course fees payable if an instalment is not made on time. This allows for immediate debt recovery instead of having to wait until the end of the period for payment of the instalments.

    If your Coaching Services Agreement has clear terms about the payment for a program, you will not be obliged to refund any amount received, or to forgive any payments still outstanding.

    A 2015 Victorian VCAT case of Quick Coach Pty Ltd v Papalia made it clear that return of signed terms and conditions and a deposit, together with receipt of materials, attendance at some workshops and access to a website built for the client (although not the whole of the program), were sufficient to support an order that the client pay for the program in full.  

    However, if your client is in genuine personal difficulty (such as having lost income due to a downturn resulting from COVID, or been diagnosed with cancer) then, regardless of the terms of your Coaching Services Agreement, you might consider releasing the person from the program without further payment, or partial refund of the program, or deferral of participation until a later date. Any agreement not to require full payment, or to defer participation, must be documented in a deed signed by you and the client.  

    We have assisted our coaching clients to recover unpaid fees, and have also assisted clients to prepare a deed of release of a person from their program.

    We have also had a client have to refund a portion of fees for a program where a tribunal expressed a view that the cost of the program was disproportionate to the benefits received, and where there were allegations of undue influence or high pressure sales tactics used in the sign up process. 

    PROBLEM 3 – Protecting intellectual property

    It is important to document your ideas and create tangible material as part of your programs. This can include printable materials like workbooks, or downloadable materials like PowerPoint presentations, or materials for online consumption like video or audio materials.  

    Once you have any sort of material that can be reproduced, you can protect it under copyright law. Enforcing protection of your work may require you to start legal proceedings, but if you have already included specific terms in your Coaching Services Agreement about the use of your copyright material, you can specifically include all of the materials you use in your coaching delivery. 

    Yes, someone can still take your ideas and run with them, but they won’t be able to closely copy what you have created, or you will be able to pursue them for infringement of your rights. If you can apply catch-phrases to what you have created, like Porter’s Five Forces Framework, then it can be easier to protect your ideas.

    CASE STUDY 3 – What can you do with Coaching clients, or consultants who steal your stuff?

    We had a new client who had developed and delivered a leadership program to an organisation without receiving payment of any part of the $15,000 fee up front, and without a clear agreement with the organisation. The head of the organisation refused to pay for the training delivered, rebranded the slides used in delivery of the program and started offering the program as something developed by the organisation.

    Our client did have the option to start legal proceedings to recover payment for delivering the training, and for copyright infringement but was concerned about taking action to the expense and fear that the head of organisation’s partner was also a lawyer, and the organisation would probably not incur legal fees in defending that claim.

    Unfortunately, our client decided not to take action and treated the event as an expensive lesson in business.

    How could our coaching client have done it better? Our coaching client’s position would have been stronger:

    1. with a clear Coaching Services Agreement including specific provisions regarding copyright,
    2. if a wet ink or electronic signature was required on the Coaching Services Agreement before the booking was confirmed, or the agreement included other provisions to make it binding upon receipt of payment of deposit,
    3. if the Coaching Services agreement included a specific provision limiting the number of people to receive that coaching for the specified fee,
    4. if the Coaching Services Agreement required payment up-front of expenses (travel was involved) and a deposit before delivery, and
    5. if the Coaching Services Agreement included fixed dates for payment of the balance of fees, and provision for the application of interest and recovery of costs if debt recovery had to be pursued.

    TAKE AWAY POINTS FOR COACHES AND CONSULTANTS –

    • Share a clear Coaching Services Agreement with your clients before the point of purchase
    • Ensure your agreement and advertising are consistent and accurate
    • Protect your intellectual property
    • Seek at least part payment up front
    • Ensure that payment terms are clear around the full amount to be paid, due dates for payment and any interest or acceleration of payments that apply if payments are not made when due.
    • Include a disclaimer to explain what you do not do for your clients
    • Seek applications from potential high end clients to check their ability to participate fully, and your ability to work with them.

    Need Support as a Coach?

    Would you like to improve your Coaching Services Agreement, your Online Program Terms & Conditions, your Disclaimer or  your Privacy procedures?  Make an appointment to see how we can help. 

    Legally Binding Contracts: What You Need To Know

    Legally Binding Contracts: What You Need To Know

    Legally Binding Contracts: What You Need To Know

    LEGALLY BINDING CONTRACTS: WHAT YOU NEED TO KNOW

    There is no doubt that running a business has risks. These risks may come from your employees, your contractors, your suppliers or customers.

    As a business owner, you need to take control of your business by assessing these risks and determining how to reduce these risks. One of the best ways to protect your business is to understand contracts. The terms and conditions on your website document the contract between you and every user of your website. If you don’t have any written terms and conditions, you are guessing about the agreement you have with your website users. 

    When you sell your product or services, you need a written sales contract to be certain that you are protecting your interests. If you operate an online platform to market or sell your products or services, you need a contract for use of your website (usually terms and conditions). Or, if you want to protect your confidential information such as your client list and trade secrets, then you need a confidentiality deed.

    Contracts are an essential part of all businesses as they form the basis of the majority of business relationships and transactions. It is, therefore, crucial for you to know when you do and do not have a binding contract. A binding contract is something that is legally enforceable. So for example, having fun with your friends in a pub is not going to be a binding contract, it’s going to be a bit of a joke and a bit of fun. In order to get a binding contract, you have to have all of the essential terms agreed and an intent to create legal relations. You also need to be able to give evidence of the terms of the agreement.

    CASE STUDY

    We recently had a client who entered into a contra deal with another service provider, each expecting to complete between $3,000 – $5,000 of work for the other party. Our client wasn’t able to, or wasn’t prepared to trawl through historical emails to specify the details of what they had committed to provide, and they had not invoiced periodically. (An invoice with a credit applied can assist in evidencing that an agreement was made.)

    The other party provided a written engagement for services and invoiced regularly. After 12 months, the other party claimed they had received nothing from our client and took legal action to seek payment in full of their invoices. Because our client was not organised, wasn’t able to specify the agreement made or clearly identify the work produced, they ended up in a position of having to either invest in legal services to defend a court matter, or compromise the claim and pay the other party.

    A bitter pill to swallow!

    For a contract to be legally binding in Australia, it must contain at least the following elements:

     

    1. offer

    A contract is essentially a promise between people to do or not do certain things, and it starts with an offer.

    An offer must be clear, unambiguous, and contain the essential terms that are to be agreed upon between the parties. That might include the parties to be involved in the contract, the timing of the contract, payment terms under the contract, and any other essential terms necessary to make sense of the purpose of the contract.

    When you communicate to another person your promise, you are making an offer. For example, if you promote your services in three different packages on your website, then you are making an offer to each person who views that webpage.

    When thinking about business contracts, a company that prepares a proposal is making an offer. If the business looking at that proposal accepts it, that is the first step toward a binding contract, but if they come back and says, “we want something different,” then that offer no longer stands as the offer It’s a counteroffer and the counteroffer takes the place of the original offer.

    This will go on until the parties reach a point where there is an offer that is capable of being accepted, and that’s where you get acceptance.

     

    2. acceptance

    There must also be acceptance of the offer through a clear statement or conduct in response to the offer. Acceptance can be evidenced in a variety of ways, so it could simply be an email, a telephone conversation, or the signing of a formal written contract.

    For online services, acceptance will be when your customer clicks on that button that says, ‘Buy Now’. That is accepting the offer that has been made available on the website.

    Contracts are commonly accepted by signature, or by checking a box next to a statement that says you agree to the terms and conditions.  Many contracts are binding without a signature, but not all contracts can be legally binding without being signed. Contracts for the sale of land must be in writing and signed. Wills must also be in writing and signed to be enforceable without needing court intervention.

    A form of signature is preferred because even if the parties did not read the contract before signing it, their signatures indicate that they have read and understood and are bound by the terms.

    However, this does not mean that if your contract is not signed, it is not valid and therefore not enforceable. Parties can also accept the contract terms through their conduct or other circumstances. It all depends on the circumstances and intention exhibited by the parties. As long as it has been sufficiently communicated, it will be valid acceptance.

    For example, completing work referred to in the contract signals acceptance of the contract terms, and that person will be entitled to seek payment under the contract.

    A counteroffer is not acceptance, it is a new offer that needs acceptance.

     

    3. consideration

    A person must give some value in return for a promise to create a legally binding contract. In other words, each party must receive a benefit.  The most common form of consideration is payment in exchange for goods or services.

    With the online example, you’ve clicked the ‘Buy Now’ button. The consideration is the payment of money, and as soon as that consideration has passed, there is a binding contract in place.

    Using the example of a proposal, once the terms of the proposal are agreed and accepted by one party, either the payment of money or the start of work or both, will be consideration. The essential terms of the contract must be agreed before the point of consideration to be binding.

    So, if you ask a client to pay first and then give them terms and conditions after payment, then the terms and conditions won’t be binding because the consideration has occurred before those elements of the contract are agreed. This can be different where a deposit is conditional upon certain terms being accepted.

    Terms and conditions of a contract given to a purchaser only after the contract was formed will not be binding.

     

    4. Intent to create legal relations

    As entertaining as it might be to dare a friend in a pub to do something, if they do it, your payment to them is only enforceable based on your goodwill and is not legally enforceable.

    This is different to a restaurant promising that a huge meal is free if you can eat it all. That can be enforceable because the restaurant intends people to rely upon that promise in ordering the meal in the first place.

      other elements of a binding contract

      Aspects of contracts that can affect whether or not a contract is binding include capacity, mistake, illegal intent, fraud, misrepresentation, duress or no intent to create a legal contract.

       

      capacity

      Capacity is whether somebody has the legal capacity to make a contract. Only an adult can enter into a contract; that is somebody over the age of 18 years. A person under 18 years does not have legal capacity to form a binding contract.

      A person with a disability or an older person who has lost capacity through dementia or Alzheimer’s disease may not have capacity to make a contract, or may have only intermittent capacity.

       

      mistake

      A mistake in a contract can sometimes invalidate a contract. Typographical errors are generally not fatal mistakes.

      Usually, a party will be bound by the documents they signed, whether or not they’ve read or understood them. However, where a party signs a contract that they fundamentally believe to be something different to what it is, this may be a mistake sufficient to affect the binding nature of the contract. For example, if a person believes that they are purchasing a copyright work (say a painting) where in fact, what they’re signing is only a limited license to use that copyright work for a limited purpose (hanging  the painting in their office). In those circumstances, there is quite a significant difference between what the first person understands they are paying for, and what they are actually getting under the contract.

      That may give rise to a doctrine of what’s called a non est factum, which means, ‘it’s not my deed’ or ‘it’s not my contract’ or ‘I didn’t agree to this’. It is very rare to argue this type of mistake.

      There are other types of mistakes, for example, one party could be mistaken about what it is they are buying. A party might think they are buying a website with all the existing content and so on, where in fact, what they’ve done is entered into a contract to buy a domain name.

      Now, it is likely that the seller in that circumstance knows that they are only selling a domain name and they probably have a level of awareness that the purchaser is mistaken as to what they are actually getting.

      In those circumstances the purchaser may not be able to end the contract, there might not be a remedy under contract law or common law, but there may be a remedy in equity. In equity, the party who knew the other party was mistaken as to what was involved in the contract, may be required to allow the other party to revoke the contract or to have rectification of the contract.

      Rectification is amendment to the contract to make it reflect what was understood to be the terms of the contract. Occasionally, both parties to a contract have mistaken some aspect of the contract, but different aspects.

      There have been some recent cases in Queensland regarding property development, where two parties to a development contract had different understandings of different aspects of the contract and they were ventilated when it went to court. Again, it is rare to have a circumstance where there is a unilateral mistake by both parties about different issues to the contract.

      A common mistake is where both parties are mistaken about something to do with the contract. A good example is where both parties think a description of a property refers to a visual address they agree upon, only to find in a property title search that the property they thought they were transacting is the property next door.

      For online content, the contracting parties might both think that the website is built with a particular programming language, for example, HTML, when it is built on a different system or with different programming language.

      Where there is common mistake, all party’s expectations around the contract are altered because something has risen that none of them were aware of when they first went into the contract. Again, the remedy is more likely to be an equity in terms of a rescission of contract or rectification of the contract, rather than a specific ability to terminate the contract. However, if all parties are mistaken and they have a mutual agreement to end the contract, then that is not a problem at all. It is only a problem when the parties are in dispute.

       

      illegal purpose

      Another aspect that will affect the binding nature or enforceability of a contract is whether or not it’s for an illegal purpose. A contract for the purpose of committing a crime is not enforceable. There are differences in criminal law in the different states and territories of Australia.  There are also proposed changes around Australia regarding slavery laws at the moment.

      Consider modern slavery, such as people immigrating from overseas and then having their passports taken from them and essentially going into indentured labor services. An offer to find work for someone in exchange for their payment to get help in immigrating will not be enforceable if it results in indentured labor.

       

      fraud or misrepresentation

      If there is misrepresentation or fraud before the contract is made, which influences one party to enter into the contract, then the contract may be challenged. Fraud is a deliberate untruth that can be relied upon to void a contract. Misrepresentation is something less.

      Consider an IT Service Provider. They say that they will be able to provide you a secure computer system and a phone system (being very simplistic, obviously), for a set monthly fee and an installation cost. Then you find out halfway through installation that it simply will not work with your existing systems, unless additional products or services are purchased, or there is some variation to what needs to be done.

      This may be misrepresentation, particularly if you have asked the service provider to review what your requirements are and tender on that basis, then you have accepted the tender and they can’t deliver what they said they would deliver. A remedy for misrepresentation is likely to be damages.

       

      duress

      Coercive control is a form of domestic violence that is very topical at the moment, and difficult for the legal system to articulate. Duress or coercive control is putting someone in a position where they feel they have no choice but to enter into the agreement.

      In a business situation, holding up payment pending an agreement can be a form of duress if the party withholding payment knows that it will have an adverse effect on the party due to be paid, and they intend to use that as leverage for future negotiations. It is effectively holding the company that is owed money to ransom for money it is already owed.

      Although the creditor company might have remedies in terms of taking the debtor to court for recovery of payment, the time involved in recovering that payment may be sufficient to effectively put the creditor out of business without the payment due being received.

      A threat can also form duress, unless there is a term of the contract that was agreed which supports it. “If you don’t sack that person, we will terminate this contract” is a threat unless the contract includes a provision that you can require the contractor to replace people if you are not happy with them.

       

      spoken contracts, or partly spoken and partly written

      An oral contract can also be valid and enforceable. A contract can be partly written, partly verbal and partly included in an exchange of emails. [https://onyx.legal/articles/contract-dont-have-to-be-in-writing/]

      For this reason, you need to be aware of when you’re making promises to other people and when you might be creating binding contracts, whether you intended to or not. Having a formally written contract with signatures on it is proof of the contract that was agreed. The documentation is not what is required to make it binding.

      Evidence obviously becomes an issue when contracts are oral. That is when disputes end up in courts, with different people claiming perfect, and differing, recollection of what was agreed.

       

      contracts and deeds are different things

      There is a difference between deeds and contracts. Contracts need consideration, which is the doing or giving of something in exchange for understanding that the other party to the contract or the other parties to the contract have obligations that they will fulfill in exchange.

      A deed is binding without consideration, and as a result, there are specific rules around the signing of a deed before it can become binding.  

       

      remedies

      Once a contract is formed, the nature of the remedy depends upon the nature of the problem in the contract and can include a variety of remedies from voiding the contract from the beginning through to payment of damages, specific performance, damages for losses occurring within the contract and so on. These all depend on the terms of the contract agreed between the parties.

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