Beyond words: Understanding what you are signing

Carolyn Dorrian

Do you buy or sell products? Well, you are most likely receiving two or three agreements or terms and conditions on a daily basis – and we bet you don’t even read each line and just take the risk of not fully understanding the details what you are signing, right?

As you grow your business, the risks are higher, so why not start getting into the habit of learning to read your contracts or terms and conditions and start negotiating back. And if your business has already grown, then the risks are definitely higher and you better start immediately.

We know this is easier said than done, so we’ve put together 10 important tips for businesses to break down the document you are signing and to understand what you are signing:

1)Any contract or terms & conditions (T&Cs) are usually broken down into four main sections:

  • the recitals which is basically the storytelling part of the document;
  •  the definitions;
  • the contract terms;
  • and the signing pages.

2)The recitals or background part define the scope and purpose of your document. Make sure you read this and ensure it tells the correct story and the scope is not too broad.

3)Make sure the correct entity is detailed in this document. For example, the contract may accidentally detail your individual name instead of your company and your ABN. You would not want guarantee the contract personally (unless intentional).

4)In relation to the contract terms of what you are signing, there are only a few sections generally that you need to ensure and negotiate your rights. Every document is negotiable so don’t feel time-poor and cornered to sign something you haven’t read. Easiest option for you not to lose the deal is to say, “the document is with your lawyer” or “your lawyer is still reviewing it” (even if you don’t have one).

5)Make sure you look at the section usually called “governing law” and ensure that the law is the location that your company is registered in such as New South Wales. Do not allow the governing law to be a country overseas as this will often become an expensive process for you if something does go wrong and if you wanted to enforce the contract, in New South Wales for example, you won’t be able to.

6)Make sure that your liability is limited to whatever your public liability insurance is. Do not give an unlimited liability and indemnity to the other side as this can often bring down your company and everything that you have worked so hard for.

7)If you see words such as “security” or “PPSR”, try and delete it as this usually relates to the other company taking security or charges over your property.

8)Make sure to double check the duration of the document and if there are any options for renewal and those timeframes.

9)Especially if you are a small business and likely to change your shareholdings or buy other businesses (for example), make sure that any clauses relating to “change of control” or “transfer” or “transition” are carefully checked. Too often, there are clauses that say that in the event there is a change of shareholder, ownership or director, you owe the other party compensation or the contract may be terminated. That would be the last thing you would want to happen.

10)Most importantly, check the price and if there are any increases – how the prices are to increase each year.

We also bet you didn’t know that from 12 November 2016, a new law will protect small businesses from unfair terms and conditions, especially if you are getting a business loan. The new unfair contract term protections will apply to standard form small business contracts entered into, or renewed, on or after 12 November 2016, where the upfront price payable under the contract does not exceed $300,000 – or $1 million if the contract is for more than 12 months.

Carolyn Dorrian, Principal solicitor, Dorrian & Co