Contracts and agreements

A business contract is a legally binding agreement between two or more persons or entities.

Understanding business contracts

Verbal and written contracts

Essential elements of a contract

General terms and structure of an agreement

Standard form contracts and unfair terms

Before signing a contract

Ending a contract

TIP: Contracts can be complex. It is important that you fully understand the terms of a contract before
signing anything. You are advised to seek legal and professional advice first.

Understanding business contracts

Dealing with contracts is part of running a small business. You will have a number of business
relationships involving some type of contractual commitment or obligation.

You may:

be a purchaser of goods and services - as a borrower of money, in rental agreements and franchise
agreements

be a supplier of goods and services – retailer, wholesaler, independent contractor

have a partnering agreement with other businesses – partnerships, joint ventures, consortium.

Managing your contracts and business relationships is very important.

TIP: You should be aware that the majority of contracts entered into will have goods and services tax
(GST) implications.
Verbal and written contracts

Contracts can be verbal (spoken), written or a combination of both. Some types of contract such as
those for buying or selling real estate or finance agreements must be in writing.

Written contracts may consist of a standard form agreement or a letter confirming the agreement.

Verbal agreements rely on the good faith of all parties and can be difficult to prove.

It is advisable (where possible) to make sure your business arrangements are in writing, to avoid
problems when trying to prove a contract existed.

Regardless of whether the contract is verbal or written, it must contain four essential elements to be
legally binding.

Essential elements of a contract

For a contract to be legally binding it must contain four essential elements:

an offer

an acceptance

an intention to create a legal relationship

a consideration (usually money).

However it may still be considered invalid if it:

entices someone to commit a crime, or is illegal

is entered into by someone that lacks capacity, such as a minor or bankrupt

was agreed through misleading or deceptive conduct, duress, unconscionable conduct or undue
influence.
General terms and structure of an agreement

There is no specific format that a contract must follow. Generally it will include some terms, either
expressed or implied, that will form the basis of the agreement. These terms may outline contract
conditions or contract warranties.

Contract conditions are fundamental to the agreement. If the contract conditions are not met it is
possible to terminate the contract and seek compensation or damages.

Contract warranties are less important terms and not fundamental to the agreement. You cannot
terminate a contract if the warranties are not fulfilled, however, you may be able to seek compensation
for any losses incurred.

When negotiating the contract terms make sure the conditions of the contract are clearly defined and
agreed to by all parties.

Contracts may follow a structure that can include, but are not limited to, the following items:

details of the parties to the contract, including any sub-contracting arrangements

duration or period of the contract

definitions of key terms used within the contract

a description of the goods and/or services that your business will receive or provide, including key
deliverables

payment details and dates, including whether interest will be applied to late payments

key dates and milestones

required insurance and indemnity provisions

guarantee provisions, including director’s guarantees

damages or penalty provisions

renegotiation or renewal options

complaints and dispute resolution process

termination conditions

special conditions

TIP: In almost all cases of creative work (such as a logo you pay to have designed) copyright will remain
with the creator, regardless of whether they created it on your behalf. If you engage a contractor to
produce material that attracts copyright protection make sure the contract includes assignment of these
protections, so that you own all the rights to the materials you paid to have created.

Standard form contracts and unfair terms

A standard form contract is a pre-prepared contract where most of the terms are set in advance with
little or no negotiation between the parties. These contracts are usually printed with only a few blank
spaces for adding names, signatures, dates etc.

Examples of standard form contracts can include:

employment contracts

lease agreements

insurance agreements

financial agreements

Standard form contracts are generally written to benefit the interests of the person offering the
contract. It is possible to negotiate the terms of a standard form contract. However in some cases your
only option may be to ‘take it or leave it’. You should read the entire contract, including the fine print,
before signing.

If you intend to offer standard form contracts you must not include terms that are considered unfair.
This could include terms that:

allow one party (but not another) to avoid or limit their obligations

allow one party (but not the other) to terminate the contract
penalise one party (but not another) for breaching or terminating the contract

allow one party (but not another) to vary the terms of the contract.

There are laws protecting consumers from unfair contract terms in circumstances where they had little
or no opportunity to negotiate with businesses (such as standard form contracts).

Unfair contract terms and small businesses

A law protecting small businesses from unfair contract terms in standard form contracts applies to
contracts entered into or renewed on or after 12 November 2016, where:

it is for the supply of goods or services or the sale or grant of interest in land

at least one of the businesses employs fewer than 20 people

the price of the contract is no more than $300,000 or $1 million if the contract is for more than 12
months.

For more information on unfair contract terms visit the ACCC website.

Before signing a contract

Before you sign a contract:

read every word, including the fine print

ensure that it reflects the terms and conditions that were negotiated

seek legal advice

allow plenty of time to consider and understand the contract

don’t be pressured into signing anything if you are unsure

never leave blank spaces on a signed contract – cross them out if you have nothing to add so they
cannot be altered later

make sure that you and the other party initial any changes to the contract

obtain a copy of the signed contract for your records.

Once you’ve signed a contract you may not be able to get out of it without compensating the other
party for their genuine loss and expenses. Compensation to the other party could include additional
court costs if the other party takes their claim against you to court. Some contracts may allow you to
terminate early, with or without having to pay compensation to the other party. You should seek legal
advice if you want to include an opting-out clause.

TIP: If it is not possible to have a written contract make sure you have other documentation such as
emails, quotes, or notes about your discussions to help you identify what was agreed.

Ending a contract

Most contracts end once the work is complete and payment has been made.

Contracts can also end:

by agreement – both parties agree to end contract before the work is completed.

by frustration – where the contract cannot continue due to some unforeseen circumstances outside the
parties’ control.

for convenience – where the contract allows a party to terminate at any time by providing notice to the
other party.

due to a breach – where one party has not complied with an essential contract condition, the other
party may decide to terminate the contract and seek compensation or damages.

If a contract warranty or minor term has been breached it is unlikely that it can be terminated, though
the other party may seek compensation or damages.

Some contracts may specify what will be payable if there is a breach. This is often called liquidated
damages.

If there is a dispute regarding the contract it is important both parties communicate clearly to attempt
to resolve the matter. You may consider using our low-cost dispute resolution service or seek legal
advice to help resolve your dispute.