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How to Complete a Quick Legal Audit of Your Business

How to Complete a Quick Legal Audit of Your Business

How to Complete a Quick Legal Audit of Your Business

Running your own business can be a juggle. So how do you know if you are putting yourself at risk? Consider doing a quick legal audit of your business to find out whether there are any potential cracks that you may need to fix.

We’re going to focus on structure, relationships and risk management.

Start with your Business Structure

When was the last time you thought about what business structure you have and if it still works for you?

Many people start small businesses as sole traders and continue that way until something bad happens, like a threat of court action or an unexpectedly large tax bill. Other people set up multiple companies or trusts and then lose track of them. Some people change the style of delivery of their business and then need to review how everything is done.

Some recent examples for our clients have been:

  • A client selling a business discovered that the business trade mark was registered to a company they had forgotten about. They had moved and hadn’t updated their contact details with the company register. The company had ‘strike- off action in progress’ recorded against it in the register. The quick fix there was to pay outstanding invoices to the register and update contact details.
  • Another client set up a second company in the US and separated its business delivery by area, some under its Australian company and some under the US company. Customers are now able to choose their area before checkout. Taxes had to be accounted for in each different country and in Australia that meant the invoicing had to identify the Australian company and the GST paid, which initially it didn’t. A few technical tweaks in the delivery software fixed the problem.
  • A couple started a business as a hobby as a sole trader under the name of one of them. Twelve months later they came to us asking about asset protection. Initially, it appeared that the structure didn’t need to change because they hadn’t really started generating any income. A little further in the conversation disclosed that one of the partners held shares, an investment property and crypto-currency in their own name and it became clear that a different structure was needed to isolate those assets from any potential risks in the business.

Audit questions for you

  1. What legal structure do I use for my business? Can I find the documentation?
  2. When was the last time I reviewed that structure?
  3. Are my business contact details up to date with all regulators?
  4. Do I know my business identification number (in Australia it is an ABN)?
  5. Are my invoices correctly set out for compliance purposes?

Then Think About All Your Business Relationships

Mind mapping might help you identify all the different types of business relationships you have. Think about your business from the inside out, starting with you and ending with the general public.

You might have relationships with some or all of the following groups:

  • Business partners
  • Investors
  • Employees
  • Contractors
  • Suppliers
  • Affiliates
  • Sponsors
  • Advertisers
  • Joint venture partners
  • Clients
  • Customers
  • Subscribers
  • General public

Each different relationship potentially has different risks, obligations and responsibilities, and those things are much easier to keep track of if they are documented.

Lots of people who come to us have operated their businesses on verbal agreements or exchanges of emails successfully for years. There is nothing wrong with that, but if something goes wrong, your options are likely to be more limited than if you had a written agreement to refer back to when resolving the problem.

Most people can’t remember what they did a week ago. Don’t expect to be able to remember exactly what was agreed with someone months or years ago.

Some recent examples for our clients have been:

  • A business break-up. The parties had not documented their relationship or what would happen if the business came to an end. They had a meeting with their accountant to agree on how to close the business, but then one party decided not to follow that plan, and it hadn’t been documented and agreed in writing on the day, so became a dispute. The simple fix would have been to have a shareholder agreement in place within a short time before or after starting their business, whilst relationships were still good, and the parties were able to speak sensibly and logically to each other.
  • Another client had been operating their business without any hassles for years. The nature of their business meant that there was always a sponsor between them and their end customer. For the first time, a sponsor acted as gatekeeper and stopped the supply of products from our client to the end customer based on their assessment of the quality of the product. Each product was developed by our client’s labour, unique to the client, and our client could not be paid if the products were never put in front of their clients. Difficult situation. We prepare terms and conditions of service between our client and their sponsors to ensure that sponsors who behaved in that way would have to pay our client and amount equivalent to their lost income.

Consider whether you have anything in writing to help you manage all of the relationships in your business. Some examples are as follows:

Business Partners

A business partnership works well when both parties are on the ‘same page’. A clear and transparent agreement will help you quickly resolve any potential issues in the future, regardless of the structure you are using to operate.

Business relationships will be covered to a limited extent in founding documents, like constitutions or trust deeds, but those documents are designed more for setting out the rules of governance of an entity, than managing the relationships of the people involved. For older businesses, governing documents might be completely outdated and no longer compliant with changes in law.

Types of documents you may already have in place or like to have in place could include a partnership agreement, or a shareholder’s agreement, or a unitholders agreement. If you’re working with someone on a side gig, you might need a contractor’s agreement or a joint venture agreement.

Employees

Whenever you employ someone, you will have certain information you need to collect and compliance obligations you need to meet, before even considering whether you want to create company policies to help guide your workers.

Consider the following:

  • notices required under regulation (in Australia we are required to give a Fair Work Information Statement to employees before they start work)
  • information that needs to be securely collected and protected, like tax information
  • an employment agreement
  • a position description
  • health and safety information
  • company policies – social media policies and work from home have been important recently

Also think about any insurances you are legally required to have in place for your employees, in Australia that will be Workcover insurance.

Contractors

Engaging a contractor without a written agreement is not an ideal position to be in if something goes wrong. Even if you have a written agreement, sometimes it isn’t sufficiently clear.

The biggest issue we’ve managed for clients when contractor agreements have gone wrong is clearly identifying the required deliverables and whether they were met or not.

If you engage a contractor on their terms and cannot measure what was to be delivered by the end of the month before you pay them, then don’t be surprised if you don’t get what you expected. Be clear before you engage a contractor what you want them to deliver, and if you can’t, at least have the ability to set measurable results you expect on a weekly or monthly basis. If you don’t, make sure you can end the agreement at any time without penalty.

In some industries there are minimum legal requirements for contractor agreements which can include terms of payment including frequency.

Clients

Your clients are an integral part of your business, and it is essential that you have agreements in place with them appropriate to the type of business you operate.

There is an increasing level of awareness of what happens when you hand over personal information and an expectation that it should be protected. Platforms like Facebook and Google require advertisers to have a privacy policy before they can publish any adds. Most importantly, a privacy policy gives you the opportunity to show you clients how you care for their information. Do you have one? Is it on your website or otherwise easily available to your clients?

For online businesses, your agreements are usually contained in the terms and conditions you have published on your website or shopping cart.

If you’re delivering consulting, coaching, mentoring or similar services, you want something documented to ensure you get paid. We usually encourage an element of upfront payment for coaching or consulting services to ensure you don’t deliver services then have to chase to get paid.

Suppliers

If you have credit arrangements with any of your suppliers, you will be purchasing their goods or services under their contract terms. Often people don’t review those terms until they want to end the services and then check the terms to find out how to make that happen.

When was the last time you reviewed your supply agreements? Are you happy with your suppliers, and if not, have you told them? It is possible to change the terms of an agreement in writing between the parties, so that your business relationship can continue, but in a way you are satisfied with, rather than being an unhappy customer.

 

Audit questions for you

  1. Do we know where our founding/ governing documents the establish our business are kept? When did we last look at them?
  2. How many different business relationships do we have?
  3. Are those relationships documented in agreements?
  4. Do we know where our agreements and contracts are?
  5. Do we have written employment agreements or policies?
  6. Do we have a privacy policy on our website?
  7. Do we have a contract register so we know what agreements we have, with who, who on our team is responsible, when the agreements end and where they are?

Now Think About Your Risk Management

Have you thought about what the biggest risks might be for your business? COVID certainly surprised most people. Whilst some businesses were impacted by SARS and thought about adding in ‘pandemic’ as a risk factor in their risk management and business continuity, that was a very limited number of businesses. If you don’t stop occasionally and work out where the risks are to your business, you don’t give yourself the opportunity to lessen the potential impact on your business before they occur.

Even if you have a written business plan, and a written business continuity plan (a set of actions to be taken when events or circumstances have an adverse impact on the business), if you haven’t reviewed them for some time then they might not be relevant.

The key to risk management is thinking about what matters most in your business, how that might be threatened, and what you can put in place to reduce the impact of that potential threat happening.

A great example is considering cyber risk to your business and then having all staff complete training as a result. The training is a way of raising awareness of the potential problems and helping people understand what they can do to reduce the risk. 

If you have a business plan, that may help you identify the main areas of potential risk to your business. Consider –

  • Financials – processing payments; invoicing; paying employees, contractors, suppliers; tax changes; loss through theft or other means etc
  • People – what would happen if anyone in your team was gone for any reason?
  • Key Resources – physical, intellectual, human, network
  • Offering – competitors, changing environment, legal compliance
  • Key activities – what would impact your ability to deliver your product or service to your clients?

Once you’ve identified your risks, then consider the likely chance of it happening, and the likely impact, to calculate a risk score. Typically, businesses identify 4-5 levels of risk for likelihood and impact. So, the likelihood might be from ‘rare’ to ‘almost certain’ and the impact might be from ‘minor’ to ‘catastrophic’. For a large proportion of business, if they’d had the chance to do this exercise with knowledge that COVID was coming, would probably have assessed a pandemic as ‘rare’ and ‘catastrophic’. That may have given it a risk rating in the HIGH range and ensured that measures were in place (like the ability to work remotely) before COVID happened.

Hindsight is a wonderful thing.

 

Audit questions for you

  1. Have we ever considered risks to our business?
  2. Do we know whether we have compliance obligations in our industry?
  3. Do we understand risk management?
  4. Do we have a risk register?
  5. Do we have risk mitigation in place for identified risks?
  6. What insurances do we have in place?
  7. Have we scheduled staff training to help identify and manage risks?

Is it time for a refresh?

If you’ve read through the audit questions and think it sounds all to hard, consider the future of your business. If at any time you want to apply for finance, look for an investor or sell your business, all these things will need to be sorted out to get the best value.

If it seems overwhelming, consider working with us to help prioritise what is most important to support your future objectives, and then to work through the process with someone in your team to help you get organised and on top of everything.

Onyx Legal offers cost effective day rate services to help you get on top of big projects that support the future value of your business. Let us know if you’d like a hand with identifying and understanding your structure, contracts or risk management. Make an appointment now

How can Onyx Legal help you?

Book an appointment to talk with one of our team about your business structure and whether it is still the most appropriate structure for what you are doing and what you’d like to achieve.

How to Deal with Unfair Contract Terms

How to Deal with Unfair Contract Terms

How to Deal with Unfair Contract Terms

Rules Against Unfair Contract Terms Apply to B2B Transactions

As you can see, I’m on the road today visiting some clients and business meetings, and that is a plane I can hear in the background.

One thing I wanted to talk to you about today is we’ve got a client who has been involved in a business-to-business relationship. The relationship started early in 2017, so after the changes to Australian Consumer Law in November 2016, and some of the provisions in the contract that our client has entered into are unfair contract terms.

Under Australian Consumer Law, unfair contract terms are terms that, for example, will give one party the right to do something but not the other party. So for example, only one party being able to end the agreement.

In this particular instance, our client was signed up to do a certain thing for a certain period of time. The other party didn’t deliver, so they cancelled and they exited. But the person they signed up with is still trying to charge them money. It’s just not going to be enforceable under the changes to Australian Consumer Law, unfair business terms because it matches all the indicators that would enable the court to determine the provision void and unenforceable. As a business owner, you should be aware that unfair contract terms now apply in business-to-business transactions involving small business. 

How can Onyx Legal help you?

Contact us to review your contracts and bring them up to date for ease of understanding and legal compliance. If you worried that your contracts include unfair terms that affect you, or affect your customers, we can let you know your available options. 

Australian Standard Contracts Need Updating

Australian Standard Contracts Need Updating

Australian Standard Contracts Need Updating

Do your eyes glaze over when presented with a written contract for review? Do your hit the ‘I agree’ button and hope the contract terms are fairly standard? You are not the only one. A survey by The Guardian back in 2011 identified that only about 7% of consumers read terms and conditions before agreeing to them.

If so few people read contracts, then why should you bother to get your Australian Standard Contracts reviewed or updated?

Quick Answer: Update your contracts to avoid $100,000 in penalties and corrective advertising costs –

  • in April 2016 Europcar was ordered to pay $100,000 in penalties to ACCC and spend more in corrective advertising
  • in December 2016 Valve Corporation (online gaming) was ordered to pay penalties of $3 million to ACCC, publish corrective information and implement compliance programs

…Not to mention avoiding having to deal with customer complaints and potentially being sued.

Its also a good opportunity to have your contracts converted to plain English and presented in a language that makes sense to both you, and your customers. I’ve had clients give feedback that their customers have been impressed with how easy it is to understand their contracts. The Virgin brand has done it for years – using real language to help people manage the legal issues instead of exhausting customers with legalese.

But getting back to Unfair Contract Terms….

If you work B2B and use standard form contracts, you’re business now falls within the Australian Consumer Law. If your business customers have less than 20 employees, or the face value of the contract is less than $300,000, then you have to comply. Companies with more employees and higher transaction values are expected to get legal advice on their contracts as a matter of course. Its considered sensible business practice. Interestingly, there are still a lot of businesses who wait until the sh*t hits the fan before they ask for help, and by that stage, its a whole lot more expensive to manage.

So, what are the key areas of your standard contracts that need review?

The courts look at a variety of different things but some of the most frequently considered –

  • whether the terms are negotiable or just ‘take it or leave it’ (click wrap agreements for software are ‘take it or leave it’ contracts)
  • if the contract was prepared by one party before any discussion between the parties
  • who has all or most of the bargaining power
  • the effect of an offending term on the rights of the affected party
  • the actual risk or damage to the contract writer
  • whether the terms of the contract are altered to take into account the specific characteristics of the other party or the particular transaction.

The Europcar case focused on the disproportionate liability to the person hiring a vehicle. In that case Europcar attempted to hold a hirer responsible whether or not they were at fault. Europcar also required the hirer to pay a damage liability fee of $3650 regardless of the actual value of damage, unless the hirer bought extra insurance. So theft of the vehicle could cost a hirer $3650, but so could a dented bumper. The court decided in that case that the contract terms were not reasonably necessary to protect the legitimate interests of Europcar, as well as being disproportionate.

It is also important that standard contract terms are ‘transparent’. This means your contracts need to be –

  • expressed in reasonably plain language
  • legible
  • presented clearly
  • readily available to any party affected before they buy

Some common contract terms that will need review are:

  • clauses that give one party the right to make changes, but not the other – like software agreements that allow the software provider to increase fees automatically
  • clauses that roll over automatically, regardless of the customers wishes
  • clauses that make it hard or impossible for one party to terminate or get out of the agreement
  • clauses that require a buyer to forfeit there deposit, even if you cannot supply the product or service
  • one sided indemnity provisions
  • clauses that disclaim all liability, including negligence
  • clauses that limit the damages a buyer can claim, but don’t limit the damage the seller can claim
  • penalty provisions – like advertising agencies that want a two year agreement with no right to terminate and claim a right to charge whether or not they provide any advertising

If you are one of the 7% of people who read contracts before you agree to the terms, you might have seen some of these provisions. If you haven’t looked at your own business standard contract for a while, NOW is a great time to review and update. We generally recommend that Australian Standard Contract forms, including terms and conditions and privacy on your website or App, should be reviewed and updated at least every two years to ensure your business remains compliant and you avoid the risk of hefting fines and time consuming legal actions.

When reviewing and updating your standard contracts, consider what is most important to your business, where you have the most issues with customers and how you’d like to communicate with your existing customers and leads. We can assist you with a strategy for implementation as well as helping you review, update or refresh your legal contracts.

Contact us now to request a contract review or to update or create your standard contract terms.

How can Onyx Legal help you?

We love writing contracts. Weird, we know. But hey, some people love mountain climbing, so go figure!