Contractual agreements – A practical guide

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What is the best way to enter into an agreement for the supply of services/goods?

A written agreement specifying the terms of trade should be exchanged between the parties.

Usually parties enter into business dealings in good faith, expecting the best of the other party in anticipation that all will benefit or profit from their new business venture.

An initial Credit Account Application or Terms of Trade should set out the basis for all future business dealings between the parties.

Identifying the exact parties to the agreement must be recorded in the agreement.

Often agreements identify a group of companies, without specifying any one particular company or individual responsible for payment for the services/goods to be provided.

A company must be identified by its ACN – Australian Company Number and ABN – Australian Business Number.

This is often an omission in agreements entered into.

When debts become due and payable, the responsible party for payment of the debt is not clearly defined and recovery of the debt is difficult, when the parties are in dispute.

If a company is the party responsible for payment of the debt, personal guarantees should be obtained from the company directors for payment of the debt, should the company fail to pay within the specified terms for payment – ie. 14 or 21 days.

Further, security for payment of the debt should be obtained (formerly known as a Charge) over the assets of the individual or company receiving the services or goods (now known as a General Security Interest), capable of registration on the Personal Property Securities Register.  Click here to access the Australian Government PPSR website.

Should your business operate as a company, individual sole trader or a partnership?

There are advantages to all of the above business structures.  Determining the correct business structure at the start will enable you to make informed choices and take calculated risks in operating your business.

You should consult your accountant to determine what structure is best for your business.  Your accountant will assist you to set up your business, comply with tax obligations and monitor the profit and loss of your business.

In summary:

  1. a company protects you from personal liability, if the business operates at a loss and ceases to trade. However, often the company director is required to provide a personal guarantee to obtain finance, pay rent and operate the business.  Further, if a company is placed into liquidation, the directors may be liable for the company debts incurred, if the company incurred debts which it could not pay at the time.
  2. A sole trader – operating as an individual – is the easiest way to run your business. The tax compliance obligations are the easiest to maintain and understand, however if the business fails to pay its debts, the individual operator of the business is personally liable for those debts incurred.  The assets in the individual’s name are at risk from a failed business venture.  This may include the family home.
  3. Partnerships spread the risk between the parties. However, one partner is jointly and severally liable for all other partners.  In addition to the need to work well with a partner, it is also vital that you have the same goals and aspirations for the business.

Should you enter into a new agreement for a continuing business relationship?

As mentioned above, there should be a principal agreement which identifies the rights and liabilities between the parties.  The invoice for the services or goods supplied for each transaction should then refer to the principal agreement, which identifies the terms of trade.

Identifying the likely issues at the start of a relationship, as opposed to dealing with the issues in dispute when they arise, is a much better way to maintain a professional working relationship.

If the parties have been trading without an agreement in place, now is the perfect time to send proposed terms of trade.

Please contact SRM Lawyers to answer any enquiry you have relating to your business and trading relationships.

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