Legal Issues

Contracts

A contract is a binding legal agreement, which is created when there has been an offer, an acceptance of the offer, consideration (usually the price of goods or services supplied) and an intention by the parties to enter into a legal relationship.

There are many types of contracts that will affect your business.  Not only will you contract with your customers but you will also enter into agreements concerning contracts:

• for the supply of telephone services;
• of employment with your employees;
• (lease) for premises;
• for the supply of financial services such as an overdraft;
• with suppliers;
• for the supply of administrative services such as photocopying, fax and email;
• with professional services providers such as accountants and lawyers;
• with customers.

When dealing with your customers it is important that you establish a system that records your agreement with your customer to prevent any arguments later on.  It will also help to allow you to collect bad debts efficiently.  The system could be as simple as providing a quote which the customer accepts by signing and returning to you.

Generally speaking, it is not necessary for a binding legal agreement to be in writing.  There are a few of exceptions to this general rule, most notably contracts for the sale of land, which must be in writing.  However, it is good business practice to record in writing the terms of the agreement.  Many contracts are not in writing but there is usually written evidence of some of the terms of the agreement, such as the quote for the goods or services supplied.

A person who signs a written contract or a document forming part of a contract is taken to have expressly agreed to the inclusion of those written terms in the contract.  If a contract has not been signed it does not mean that there is not a contract.  Whether there has been a binding legal agreement will have to be established by other means, such as the conduct of the parties and what was said between them.  If a contract has been signed it is easier to establish the actual terms of the contract.

Leases

A lease is a special type of contract between the lessor (the owner) and the lessee to use the property of the owner.  A lease can relate to land, or to personal property such as motor vehicles, photocopiers and telephone systems.  Where the lease relates to land the owner is called the "landlord" and the lessee is called the "tenant".

The Retail Leases Act 1994 applies to "retail shop leases".  This term is defined by the Act to include most of the businesses that are generally considered to be retail businesses.  There are some exclusions, most notably shops with an area of 1,000 square metres or more.  The Act also does not apply to leases for less than six months or more than 25 years.

Under the Act the term of the lease should be for a minimum of five years (including any additional term under right to renew).  If it is to be for a shorter period, the tenant must see their solicitor or conveyancer to get a section 16 certificate.  The Act also regulates how the rent can change and the outgoings that the landlord can recover.  The landlord cannot recover outgoings unless they are specified in the lease.  The way they are to be recovered and how they are to be apportioned are also specified.

The terms of the lease are generally negotiated between the landlord and the lessee, or in some instances the solicitors of the two parties.  Some of the main issues that need to be addressed in the lease are the term of the lease, the amount and frequency of the rent, details of the tenant's responsibility for the property outgoings, permitted uses of the property, the option if applicable and the bond or bank guarantee if applicable.  It is advisable to consult with a solicitor to assist you in negotiating the terms of your lease.  If you need help in finding a solicitor you can get assistance from the Law Society.

In NSW the lessee pays for his own legal costs.  The lessor can no longer pass on their costs for entering the lease.

If the lease is for retail premises then the lessor needs to make sure the lease complies with the guidelines set out in the Retail Leases Act.  For more information about entering a retail shop lease, please visit the Retail Tenancy website and be sure to read the Retail Tenant's Guide, found under "online forms".

Obligations of the Lessee

Most leases hold the lessee responsible for keeping the premises, fixtures and fittings in good repair.  Many leases provide for payment of all or a portion of costs of rates, insurance, maintenance and so on.  Make sure these are clearly stated and obtain an estimate of your share, as they are additional to your base rent.  If you vacate premises before the lease expires you may still be liable for payment of rent and ongoing costs if a new tenant cannot be found.  The lessee should make the same inquiries he would make if he were purchasing the property.

Registration of the Lease

In NSW if the lease period exceeds three years, including any options, a memorandum of the lease should be prepared and registered with the Land Titles Office.

What Information do I Need Before Signing the Lease?

The lessor must provide the lessee with a signed copy of the lease.  If the lease is for a retail shop, the lessor is also required to provide a Disclosure Statement to the lessee at least seven days before the lease is entered into.  The statement should be read carefully as it contains important information such as the location and area of the premises, the lease term, outgoings and the permitted use of the premises - be sure to read the appendix.  Both parties should make sure that they speak to their solicitor, accountant, the local council (to be sure there is approval for the use) or business adviser before they sign the lease.  It is particularly important to get expert advice on the GST implications of leases signed after December, 1998.

Equipment Leases

An equipment lease is a means of financing the purchase of cars, plant and office equipment.  Lease terms can be for up to five years.  The leased equipment is still owned by the bank or finance company until the expiry of the lease term, at which stage you may be able to purchase the asset by payment of the residual value, decided on in the terms of the lease agreement.  Lease payments are normally tax deductible.

Obligations of Warranties & Guarantees

There are four types of warranties:

• Voluntary Warranties – these are given by manufacturers, resellers or service providers who choose to stand behind their goods or services.  If a manufacturer, retailer or service provider chooses to give a voluntary warranty or guarantee, then the law requires that person or business honour it.
• Extended Warranties – these usually give a purchaser similar benefits to a manufacturers warranty, but over a longer period.  These warranties may apply only after the manufacturer's express warranty has run out.
• Specified Warranties – these are imposed by State/Territory laws for particular products, such as used cars.
• Implied Warranties – these are imposed by the Trade Practices Act and some State fair trading laws.  With some exceptions relating to purchases by businesses, they cannot be excluded or modified by manufacturers, resellers or service providers, and importantly they apply in addition to any voluntary or extended warranty.  The Trade Practices Act provides more information on warranties.

Personal Guarantee

Where you operate a business other than as a sole trader or partnership, you may at some stage be asked to enter into a personal guarantee.  This will be especially so where you operate you business under the umbrella of a company.  A company is a separate legal entity and the directors of a company have only a very limited liability for the debts or other obligations of a company.  A personal guarantee is a way of making the directors personally liable for the obligations of the company or other legal business.  It is advisable to get legal advice before entering into a personal guarantee.

Partnership Agreements

It is advisable to draw up a written partnership agreement that sets out the specific conditions applying to the partnership.  It should spell out the rights and duties of each partner and should include some method for resolving disputes.  It should also make clear the liabilities of each partner and their entitlement to and share of profits.

Restraint of Trade

When you sell or buy a business the agreement will usually contain a restraint of trade clause, which will restrict the seller of a business from opening a competing business within a certain area for a specified time.  Such clauses can also be included in a contract of employment with your employees to prevent them from approaching your customers or starting a similar business to yours in your area.

Prevention of Bad Debts

Bad debts affect your cash flow.  Consequently, it is important that you have a system in place to deal with your debtors.  There are several ways of preventing or minimising your bad debts:

Director’s Guarantee:  This is a document whereby a director or some other officer of a company personally guarantees that the company will pay.  When dealing with companies (especially companies with which you have not done business before) it is good practice to obtain from at least one of the officers of the company a personal guarantee.  Under the law, as a general rule, where you contract with a company you can only sue the company and not the directors.  The consequence of this is that if the company does not pay your only remedy is to sue the company;  which often has no assets.  However, if you have a director’s guarantee you can also sue the person who gave the guarantee as well as the company.

Part Payment:  If at all possible, request that your customers part pay your invoice.  For example, request 50% at the commencement of the work and the balance upon completion.  If it is a particularly long job send them periodic invoices.

Act Quickly:  Most businesses work on a monthly invoicing system.  This is fine provided that your computer does not just spit out the invoices with no-one following up with any recovery processes.  A letter of demand should always be sent after an invoice is unpaid for 30 days.

Charge Interest:  Make it clear to your customer or client that interest is charged after, say, 30 days.  A sentence should be included in your quote and on your invoice to the effect that interest will be charged.

Offer a Discount:  Offer a discount if the invoice is paid early.  This often encourages people to pay and to pay early.

Despite the measures above, you can expect that at least some of your customers, for whatever reason, will not pay.  When you finally decide that legal action is necessary you will need to engage a solicitor or a debt collection service, which you can find in the yellow pages.

Who is an Employee?

The law distinguishes between two types of service contracts:

Contracts of Service:  Permanent, full-time or regular part-time workers are generally employed on a contract of service.  The worker contracts with the employer to provide his or her service for a wage or salary.  Under this type of contract the employer is obliged to pay the wage or salary and the worker is an employee.

Contracts for Service:  Independent contractors who undertake work for a fee and leave when the work is done perform the work under a contract for service.  The worker is not an employee.

The type of contract can be determined by what is known as the control test.  A worker is an employee if the employer controls the work to be done, the way it is to be done and the hours worked by the worker.

Part-time, casual and permanent employees are employed under a contract of service and the employer is responsible for payment of workers’ compensation, PAYG tax deductions and superannuation.  Regular part-time and permanent employees are also entitled to statutory entitlements such as annual leave loading and holiday pay.

An independent contractor is not an employee and is usually responsible for his or her own taxation arrangements and insurance.

If an employee performs their work negligently so as to cause loss or damage to a third party, then the employer will be liable.  If, however, a subcontractor performed the work negligently then the employer will not usually be liable.

Unfair Dismissals