Distributor Agreements

by Onyx Legal | Mar 30, 2023 | Law for Online Business, Legal, Protecting Small Business Online, Service Agreements

Distributor Agreements

As a small business operator in Australia, entering into a distribution agreement can be a beneficial way to expand your reach and increase sales. Distribution agreements are contracts between two parties where one party agrees to distribute the products or services of the other party in a particular territory or market. They are contracts that define the terms and conditions under which a manufacturer or wholesale supplier allows a distributor to sell or distribute its products. These agreements provide a framework for the relationship between the parties involved, including the roles, responsibilities, and obligations of each party.

For small business operators such as software providers or trade supply wholesalers, distribution agreements are particularly critical, as they provide a means of expanding their reach and increasing their customer base. They outline the terms and conditions under which the distributor is authorised to sell or distribute the manufacturer’s products. These agreements typically cover a wide range of issues, including pricing, payment terms, delivery schedules, marketing and advertising, and territory restrictions.

Key Terms in Distribution Agreements

Before we delve into the specifics of distribution agreements, it’s essential to understand the key terms that are commonly used in these agreements. The following terms are some of the most important ones:

Territory: This refers to the geographic area in which the distributor is authorised to sell the products or services. This will be particularly important to define when distributors use online marketing channels.
Products: This refers to the products or services that are being distributed.
Term: This is the length of time that the distribution agreement will be in effect.
Minimum purchase requirements: This is the minimum amount of products that the distributor is required to purchase during a specified period.
Exclusivity: This refers to the exclusive rights granted to the distributor to sell the products or services in the specified territory. Not all distribution agreements are exclusive.
Termination: This refers to the circumstances under which the distribution agreement can be ended.
Intellectual property: This refers to the ownership and use of any intellectual property, such as trademarks and copyright, associated with the products or services.

Why are Distribution Agreements Important?

Distribution agreements are essential for several reasons. Firstly, they provide a legal framework for the relationship between the parties involved, including the roles and responsibilities of each party. This helps to ensure that both parties are clear on what is expected of them and what they can expect in return.

Secondly, distribution agreements can help to protect the interests of small business operators. By defining the terms and conditions of the relationship, they can help to prevent misunderstandings, disputes, and legal issues down the track. This is particularly important for small business operators who may not have the resources to fight protracted legal battles.

Finally, distribution agreements can help small business operators to expand their reach and increase their revenue. By partnering with distributors, they can reach new markets and customers, without having to invest significant resources in marketing and advertising.

Important Considerations for Small Business Operators

As a small business operator, there are some critical considerations you should take into account when negotiating a distribution agreement. These include:

Territory

It’s important to define the territory clearly in the agreement to avoid any ambiguity. This will ensure that the distributor understands their specific rights and obligations within the designated area and there is no overlap with other distributors.

Where distribution can be promoted online, particularly through platforms like Facebook, it is important to be clear about what distributors can and cannot do, and what happens if a purchaser falls within a different territory.

Minimum Purchase Requirements

Be careful when setting minimum purchase requirements. The requirements should be reasonable and take into account the distributor’s ability to sell the products or services in the designated territory. A failure to meet a minimum can be a trigger for ending the contract.

We’ve had a client in the past who was responsible for maintaining a minimum order on a product imported from overseas. Once COVID hit, the demand for their product decreased and they were in breach of their agreement. The manufacturer provided leeway in the circumstances but has declined to provide an exclusive distribution agreement going forward, which means our client’s business is now of little value for future sale, as a competitor can now import the same thing.

Pricing and Payment Terms

Another important consideration is pricing and payment terms. This may be affected by which party holds stock pending sale. A manufacturer will usually want their production costs covered before allowing product to leave the warehouse, but a distributor may not be required to pay the full wholesale cost until the point of sale. The timing and method of payment, as well as any penalties for late payments or failing to meet minimum order requirements, need to be sufficiently clear that an independent third party (not necessarily an accountant) can work out what needs to be paid, and when just from reading the contract.

Marketing and Advertising

Marketing and advertising are critical to the success of any distribution agreement, and distributors are usually selected on the basis that they have an existing market that will purchase the product. Small business operators need to ensure that the distributor has a clear understanding of their products and target market and that they have the resources to market and advertise the products effectively.

For online retailers, influencers are like distributors. They have an existing market, and that market likes specific products and expects to hear about them from the influencer.

Exclusivity

Small business operators should carefully consider whether or not to grant exclusivity to the distributor. While exclusivity can provide the distributor with a competitive advantage, it can also limit the wholesaler’s ability to enter into agreements with other distributors in the same territory. If a distributor has exclusivity but is failing to meet minimum orders, then it may be possible to renegotiate terms to reduce their territory to open an area up to another distributor.

Termination

Termination provisions in the agreement must be clear and reasonable. This will help to avoid any disputes or legal issues if the agreement is terminated. An area that is often overlooked is the right of the manufacturer or wholesaler to revoke the distribution rights in circumstances with the distributor could bring the manufacturer into disrepute. For example, if a business decides to publicly support a particular viewpoint – eg. Margaret Court opposed the Australian same sex marriage bill and Qantas publicly supported it – and the wholesaler does not agree with that viewpoint and believes it will cast them in a poor light, then the wholesaler should have the right to end the distribution agreement.

Intellectual Property

Small business operators should be clear about their intellectual property rights and how they will be protected in the distribution agreement. The most common thing to be protected is usually a brand. There should be rules around how it can be used and displayed. It should also ensure that only legitimate products are sold and not counterfeits.

Tips for Negotiating Distribution Agreements

Negotiating distribution agreements can be challenging, whether you represent the wholesaler or manufacturer, or represent the distributor. Here are some tips to help you negotiate a fair and beneficial agreement:

Understand Your Market

Before negotiating a distribution agreement, it’s essential to understand your market and the potential demand for your products or services. This will help you to determine the appropriate territory and minimum purchase requirements.

Be Clear About Your Expectations

Be clear about your expectations regarding sales targets and marketing efforts. This will help the distributor to understand what is required of them and ensure that both parties are working towards the same goals.

Seek Legal Advice

It’s important to seek legal advice before entering into a distribution agreement. A lawyer can help you to understand the terms of the agreement and ensure that your intellectual property rights are protected, as well as making sure that any termination provisions are balanced and realistic.

Negotiate The Terms

Don’t be afraid to negotiate the terms of the agreement. Small business operators should be willing to compromise, but they should also ensure that the agreement is fair and beneficial to both parties.

Review The Agreement

Once the agreement has been negotiated, it’s essential to do some worked examples of what the terms provide so that all parties are happy the agreement meets their expectations. It is also important to ensure there are no unfair contract terms which could affect the enforceability and profitability of the agreement.

Distribution agreements are useful for small business operators and work well for businesses such as software providers or trade supply wholesalers. These agreements provide a legal framework for the relationship between a manufacturer or wholesale supplier and a distributor, defining the terms and conditions under which the distributor is authorised to sell or distribute the products. You need to carefully consider the distribution territory, pricing and payment terms, marketing and advertising, exclusivity, and term and termination when entering into a distribution agreement. By doing so, the manufacturer or wholesale supplier can protect their interests and expand their reach, increasing their revenue and success in the market.

How Can Onyx Legal Help You?

Considering becoming a distributor, or finding distributors for your products or services? Make an appointment with a member of the Onyx Legal Team to review your strategy and help create a clear, easy to use contract to support your growing business.

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What the Changes to Unfair Contract Terms Mean for Small Businesses

by Jeanette Jifkins | Feb 24, 2023 | Contracts, Law for Online Business, Legal, Protecting Small Business Online, Service Agreements

What the Changes to Unfair Contract Terms Mean for Small Businesses

Unfair Contract Terms: What Online Businesses Need to Know

Have you ever signed an online contract without fully reading or understanding its terms and conditions?

If so, you’re not alone.

Many people, from those running small businesses to vulnerable individuals, lack the knowledge, ability, time, resources, bargaining power, and patience to effectively review and negotiate terms of standard form contracts.

Some companies flatly refuse to consider changes and respond along the lines of “those are our standard terms, take it or leave it”. That approach is becoming risky.

In an attempt to try and level the playing field a little, the Federal Government recently passed a law (Treasury Laws Amendment (More Competition, Better Prices) Act 2022), which updates the Australian Consumer Law (ACL) to enable the Courts to levy penalties on businesses for including unfair contract terms in standard form and small business contracts.

If you have previously paid very little attention to your standard form contracts, or ‘adopted’ them from someone else, or had them given to you by a well-meaning colleague, now is the time to review. If you don’t review your established business practices you face potentially being held liable for quite severe penalties for seeking to impose, or enforce, any unfair contract terms.

Previously, the Courts could only declare specific terms of a contract unfair and void, but because unfair terms were not prohibited by law, the Court could not impose any penalties. Now they can.

It is expected that individuals and small businesses will have stronger bargaining powers as a result of these changes. A small business is one that employs fewer than 100 people or has an annual turnover of less than $10 million – so the majority of Australian businesses.

This still means you either have to go to court, or be taken to court, for these new penalties to be imposed.

A business will be found to have breached the law (s.23(2A) ACL) if:

(a) the person makes a contract; and

(b) the contract is a consumer contract or small business contract; and

(d) a term of the contract is unfair; and

(e) the person proposed the unfair term.

At the same time the penalties for breaches such as false or misleading representations, coercion, unconscionable conduct, supplying products that do not comply with established standards, and harassment have attracted maximum penalties for individuals of $2,500,000 and for companies at $50,000,000. Other calculations may be applied, as set out below

This means that all businesses, including those businesses mainly online, will need to be more attentive in reviewing and amending their standard form contracts to avoid breaching the revised laws and inadvertently incurring severe penalties.

As a business, you have until 10 November 2023 to review and amend your standard form contracts.

As a business, you have until 10 November 2023 to review and amend your standard form contracts.

But What Exactly Is An Unfair Contract Term?

An unfair contract term, according to the ACL, is one that causes an unreasonable or unnecessary imbalance between the parties’ rights and obligations under the contract. An unfair contract term protects one party whilst the other party bears all or most of the risk and cannot negotiate their position. So, a ‘take it or leave it’ approach to contracts.

Unfair contract terms could also include clauses that are not reasonably necessary to protect one party’s legitimate interests and would cause financial or other detriment to the other party if relied upon.

Examples of unfair contract terms include allowing one party to terminate, amend, or renew the contract while the other cannot. Other examples include allowing one party to vary the price, goods, or services without the other party’s consent or ability to end the contract if they disagree.

Consider an example of an online subscription product where the company providing the product unilaterally decides to increase the monthly plan without your consent. You have a power imbalance, with little ability to negotiate a lesser plan. The increase might even apply without you realising it – even if the business provided notice via email before the change. Not everyone gets through their emails…

Unfair contract terms have always been prohibited and the amendments to the ACL do not change the definitions or considerations of defining unfair contractual terms; instead the amendments affect how those contract terms are dealt with and the increased penalties.

The situation used to be that if you felt there were unfair contract terms in an agreement, you had to go to court to get an order saying the terms were unfair and therefore void. Now, the Court also has the ability to levy penalties.

Contract terms which the courts have previously considered to be unfair include those which:

give rise to an imbalance between the parties’ rights and obligations
are not necessary to protect any one party’s legitimate interests in a contract or project
allow one party but not the other to limit the performance required under the contract
penalise one party but not the other for breaches of the contract
allow one party but not the other to renew the contract
allow one party to vary the contract with the other party having a right to terminate for breach
allow one party to vary the price or goods or services without the other parties’ consent
allow one party to terminate on a wide range of reasons and which may have significantly adverse consequences for the other party

Maximum Penalties

Does your business have the greater of $50 million, or 3x the value of the benefit obtained, or, if the value of the benefit cannot be determined, 30 per cent of your business turnover during the period you engaged in the conduct?

Those are the maximum penalties for a company if it is found to have imposed unfair contract terms.

For individuals, it is $2,500,000.

If you are a sole trader, can you afford $2,500,000?

Fines have also been increased for breaching the Competition and Consumer Act 2010 (CCA). For example, a finding of anti-competitive behaviour can carry maximum penalties of up to $50 million or three times the value of the benefit obtained, or, if the value derived from the breach cannot be determined, 30 per cent of the company’s turnover during the period it engaged in the conduct, whichever is greater. No business can afford to take these unnecessary risks.

In addition to these penalties, the courts have the power to void, amend, or refuse to enforce part or the whole contract to remedy the loss suffered by the wronged party.

If a particular clause is deemed to be unfair, the court may also stop a party from including similar unfair terms in future standard or small business contracts.

Online businesses of all sizes and industries are at risk of breaching the revised legislation, but those that using standard form contracts are particularly exposed. To avoid these risks, all small businesses including online businesses should review their standard form contracts, obtain legal advice if necessary, and amend any outdated or unfair terms before the 12-month respite period ends on 9 November 2023.

These changes to the ACL seek to limit the negotiation power imbalance between parties in the standard form and small business contracts.

They aim to prevent companies or individuals from taking advantage of unfair contract terms and penalising those who do. As an online small business owner, it’s important to be aware of the changes and take action to ensure that your standard form contracts comply with the revised legislation.

Now is the time to review and revise any standard form contracts you may have!

How Can Onyx Legal Help You?

Send us your standard terms and conditions to advice@onyx.legal and ask for a quote to update your contracts or terms and conditions before it is too late.

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Coaches and Consultants – 3 Legal Case Studies

by Jeanette Jifkins | Apr 25, 2021 | Contracts, Copyright, Law for Online Business, Legal, Service Agreements

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:

with a clear Coaching Services Agreement including specific provisions regarding copyright,
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,
if the Coaching Services agreement included a specific provision limiting the number of people to receive that coaching for the specified fee,
if the Coaching Services Agreement required payment up-front of expenses (travel was involved) and a deposit before delivery, and
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.

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Legally Binding Contracts: What You Need To Know

by Alva Li | Mar 11, 2021 | Contracts, Employment, Law for Online Business, Legal, Service Agreements, Website Terms

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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Witnessing a Signature: What You Need to Know

by Alva Li | Feb 10, 2021 | Contracts, Law for Online Business, Legal, Service Agreements

Witnessing a Signature: What You Need to Know

WITNESSING A SIGNATURE: WHAT YOU NEED TO KNOW

Getting a document signed is all about proof. It is a lot easier to show that someone has agreed to a contract if you can show that they applied their signature to that document, and a witness helps to identify the person signing.

Most legal documents do not have to be witnessed. A commercial agreement between businesses does not need to be witnessed to be binding.

For documents that do need a witness, different rules apply as to what type of witness is required, and how they are to do the witnessing. By watching you place your signature on the document and signing their own name next to yours, witnesses help verify the authenticity of your signature and help prove that it was signed willingly.

Signing a document is also called ‘executing’ a document and often you will see that the signing page is called the ‘execution page’. In this usage, ‘execution’ is used in a manner similar to ‘performance’ or ‘giving effect to’ an agreement.

Before we start, it is important for you to first understand the difference between a company and an individual when it comes to signing documents.

COMPANIES VS INDIVIDUALS

In most cases, when a company executes a document, no witnesses are required.

Under s.127 of the Corporations Act 2001, a company without common seal can execute a document by having it signed by 2 directors, or a director and company secretary, or the sole director and secretary of a proprietary company. Their signatures do not need to be witnessed.

For a company with common seal, the fixing of the seal must be witnessed by 2 directors, or a director and company secretary, or the sole director and company secretary of a proprietary company. An independent witness is not required.

Most companies no longer use a common seal.

Be aware also, that even if the document is not signed in accordance with s.127, the signature may still be binding; the parties simply can’t rely upon the provisions of s.127. It does not invalidate the signature.

This is not the case for individuals.

Depending on the type of document, the law sets out different requirements for an individual’s signature to be witnessed. Not all documents require witnessing. Examples of documents that do need witnessing include affidavits, statutory declarations, deeds, Wills and powers of attorney.

Who can be a witness also depends on the type of document. Sometimes it can be any independent party, and sometimes it must be an ‘eligible witness’ who hold specific qualifications.

We will discuss these different requirements below, using Queensland legislation as an example.

Regardless of whether signed by a company or an individual, when a document is signed, whether read or not, or understood or not, the signing party is bound. This principal was reiterated by the Australian High Court in the case of Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52, after reviewing prior case dating back to the 1800s. The Court held that:

“Legal instruments of various kinds take their efficacy from signature or execution. Such instruments are often signed by people who have not read and understood all their terms, but who are nevertheless committed to those terms by the act of signature or execution. It is that commitment which enables third parties to assume the legal efficacy of the instrument. To undermine that assumption would cause serious mischief.”

agreements

You are not legally required to have your signature witnessed on an agreement. However, the agreement itself may contain a clause to require the parties to have their signatures witnessed. This may be beneficial for evidentiary purposes and to avoid dispute later. For example, if one party alleges that they were not the ones who signed the agreement, the witness of their signatures can confirm that they were.

The witness can be any independent party and does not need to hold specific qualifications. A spouse, family member or close friend is unlikely to be considered independent.

deeds

Unlike an agreement, you are legally required to have your signature witnessed if you are signing a deed. You will be able to tell if a document is a deed, because the signing page is likely to be titled ‘Executed as a Deed’.

In Queensland, the Property Law Act 1974 (Qld) sets out the witnessing requirements for a deed. Other Australian states and territories have similar legislation so that execution of deeds in Australia is covered by uniform requirements.

At least one independent party must witness your signature. It is not a requirement that the witness holds specific qualifications. It is a requirement that they are independent.

If your deed is not properly witnessed, it may not be enforceable.

There are flexible signing provisions in place during COVID restrictions, but they all have time limits.

wills and powers of attorney (poa)

The Succession Act 1981 (Qld) governs the signing of Wills.

When the maker of the Will (male – testator/ female – testatrix) signs the Will, two witnesses must be present at the same time to witness their signature. The witnesses can be any independent parties, that is they can not be a beneficiary under the Will. Usually, everyone will use the same pen to sign the Will.

When a Will does not meet the witnessing requirements, it will be invalidly made. You may still apply to the Court to have it declared a valid Will, but it is easier to have the Will properly witnessed the first time, rather than having to go to court to prove it.

The Power of Attorney Act 1998 (Qld) requires an enduring power of attorney to be signed in the presence of an eligible witness.

An ‘eligible witness’ means a person who is:

a justice of the peace
a commissioner for declarations
an Australian lawyer
a notary public.

land registry documents

If you need your signature to be witnessed on a document that is to be registered with the Queensland Land Registry, the witness must be either:

a justice of the peace
a commissioner for declarations
an Australian lawyer
a notary public
a licensed conveyancer from another state
another person approved by the Registrar of Titles.

The Land Title Act 1994 (Qld) and Land Act 1994 (Qld) requires that a witness comply with the following requirements:

take reasonable steps to verify the identity of the signatory;
take reasonable steps to ensure the individual is entitled to sign the document; and
retain records for 7 years (which includes a written record of the steps taken to verify identity and entitlement, and documents or other evidence obtained during the process of verification).

What this means for you as the signatory is that:

you will have to produce evidence that verifies your identity; and
passport, driver’s license
you will have to produce evidence that you are the person entitled to sign the document.
if you are selling a property, a current rate or valuation notice addressed to you and identifying the property, or a current title search
if you are signing under a POA, you must produce the registered POA

covid-19 legislation

There is temporary COVID-19 legislation around the country which has changed some of the witnessing requirements mentioned above by offering greater flexibility.

For example, in Queensland, deeds can now be signed electronically without a witness. Wills and powers of attorney can be witnessed through audio or visual link.

The Queensland COVID-19 legislation will expire on 30 April 2021.

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If you need help with agreements, deeds, Wills and powers of attorney documents and worry about what witnessing requirements apply, please contact us.

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Deeds vs Agreements: What’s the Difference?

by Alva Li | Feb 10, 2021 | Contracts, Law for Online Business, Legal, Service Agreements

Deeds vs Agreements: What’s the Difference?

deeds vs agreements: what’s the difference?

Contracts are an essential part of running a business, and they often come in different forms. You may have noticed that some documents are called ‘agreements’, and some are instead called ‘deeds’. So, what exactly is the difference between the two?

Although both are legally binding documents that indicate a party’s promise to do something, the requirements and effect of these documents are very different.

It is important for you to understand these differences and use the most appropriate one for your commercial transactions. We will highlight some of the key differences below to help you avoid being confused between the two.

what is a deed?

A deed is a special type of binding promise or commitment to do something. It indicates the executing parties’ intention to make a solemn and binding promise.

People often use a deed when substantial interests are at stake, such as when a person passes an interest, right or property. Deeds are also used when a unilateral promise is being made and there is no consideration from another party for that promise. For example, a unilateral confidentiality deed.

Common types of deeds:

Confidentiality Deed/ Non-Disclosure Deed

This is when you want to ensure that another party (for example, a consultant) does not share your confidential information. Typically, no consideration is provided under this type of arrangement because the consultant is not giving you anything in exchange for your disclosure of confidential information.

Deed of Termination

This is a document signed by the parties to confirm that a legally binding contract previously entered into is to be brought to an end.

Deed of Release and Settlement

This is often used in legal proceedings to formalise an agreement between the parties to settle the dispute. Formal legal proceedings need not have been started. A deed of release is often used by parties wanting to avoid a court action starting.

Deed of Indemnity

This is used by one party to protect and hold harmless another party as a result of a specific type of relationship, or for a specific purpose. For example, companies provide an indemnity to their directors against liabilities or legal costs incurred in the directors’ capacity as a director of the company, with some limitations.

Letter of Credit / Guarantee

For example, when you purchase a property through a company or trust, the seller may require you to provide them with a personal financial guarantee to secure the obligations of the buyer.

Another example is where you are asked to provide a bank guarantee to secure the landlord’s rights to recover payment of rent. Your bank may then provide a bank guarantee or letter of credit to the seller on your behalf. There is no consideration between your bank and the seller for this guarantee. So, to ensure that it is binding, the guarantee is set out in the form of a deed.

What is an agreement?

An agreement is another name for a contract.

It is formed when the following elements are met:

offer;
acceptance;
consideration; and
intention to be legally bound.

If you are selling goods or services in exchange for money, then what you need would be an ‘agreement’ instead of a deed because consideration is provided.

If you are providing those goods or services to the other party and does not ask for anything in return, then you should draft the arrangement as a ‘deed’.

So, what are the key differences between a deed and an agreement?

Consideration

The most distinct difference between a deed and an agreement is the commercial exchange between the parties.

Under an agreement, one party must provide ‘consideration’ to the other party to show that they have reached a bargain, and that they have ‘bought’ the promise by providing something of value in return. This is usually in the form of payment but can also be in the form of starting an action, such as starting a design, or construction, or delivery of goods.

However, a deed requires no such payment or consideration to be legally binding.

Formalities

Another significant difference between the two types of documents is the formalities required.

A deed must be:

in writing
signed
expressed to be a deed
delivered to the other party
where an individual (not a company or trust) executes a deed: witnessed by at least one person who is not a party to the deed

However, an agreement can be more flexible in form and does not need to meet the above requirements to be legally binding. An agreement can also be made up of multiple documents. Please see our article [link] on what you need to know about legally binding contracts.

In determining whether a document is a deed or agreement, the Queensland Court of Appeal has found that by using the words ‘executed as a deed’ or ‘by executing this deed’ unequivocally expresses an intention that the document was a deed rather than an agreement.

Another factor is whether or not the signing parties intended for the document to be immediately binding. If the answer is yes, the document is more likely to be construed as a deed.

Execution (Signing)

Importantly, a deed is binding on a party when it has been signed, sealed and delivered to the other party. That is, even if the other party has not yet signed the deed.

On the other hand, an agreement must be signed by both parties before the agreement is formed, although with electronic signing, the actually application of a wet signature to a document may not be necessary, and an exchange of emails with a clearly identifiable and reliable signature on the email may be sufficient.

Different states have different legislation, so you need to ask about your local state requirements to make sure your deed is properly executed.

If you are an individual:

Under the Queensland legislation, you must have your signature witnessed by at least one person who is not a party to the deed.

If you are a company:

S.127 of the Corporations Act 2001 governs execution of documents by corporations. For example, a company without common seal can execute a document by having two directors or the sole director and secretary to sign it. This applies to both deeds and agreements.

Limitation period

Both deeds and agreements are legally enforceable documents but be careful because they have different limitation periods.

‘Limitation period’ is the time frame you have available to enforce your deed or agreement against someone for breaching it. Each state has different limitation periods.

In Queensland, you must action a breach of an agreement within 6 years. In contrast, you have 12 years to action a breach of a deed.

This is the reason why it may be a good idea to draft non-disclosure deeds to protect your confidential information instead of non-disclosure agreements. For example, if your employee breaches a confidentiality agreement written into their employment agreement, you will be able to action against them for breach within 6 years, but if you have a separate confidentiality deed, you will be able to initiate a claim within 12 years instead.

With these core differences between a deed and an agreement in mind, you should be able to carefully consider your needs and figure out the most appropriate document to use for your business.

Want more information?

If you need help with drafting deeds or agreements or figuring out whether a deed or agreement is more appropriate for your use. Then make an appointment to talk to us.

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