Guide to Making Effective Business Contracts – Contractors

The purpose of this Guide is to assist your business to:

1. Understand how most Contractors and Suppliers make everyday business contracts,
2. Understand how and why to make contracts incorporating relevant standard form Terms & Conditions of Trade, and
3. Establish and utilise our Standard Form Contracts package to make everyday business contracts with Clients incorporating the Terms & Conditions of Trade that we have prepared specific for your business.

If you have already purchased our Business Contracts Package, we suggest that you review this Guide and each of the Standard Form Contracts documents carefully and contact us should you have any questions. To obtain the greatest benefit from our Business Contracts and the contracts that you make in future it is important that you have an adequate understanding of how the documents interrelate and the effect of specific terms of the Terms & Conditions of Trade.

A Contract will exist when a business agrees to perform work or supply goods or services for consideration. In most cases, a Contract will exist regardless of whether the Contract is in writing or evidenced in writing. For any term or condition to form part of a Contract it must have been agreed at the time the Contract was made.

Despite common practice, standard form Terms & Conditions cannot be incorporated into a Contract by their inclusion on a Tax Invoice issued after the Contract was made and when typically the goods or services have been supplied or partly supplied.

Therefore, standard form Terms & Conditions are only incorporated into and form part of a Contract if they are disclosed to and accepted by the other party at the time the Contract is made

Businesses make Contracts in different ways and in many cases a business will make Contracts in more than one (1) way. Usually Contracts will arise as a result of either:

• Quotation, Order & Acceptance – Pre-contractual negotiations often include a verbal or written Quotation followed by an Order or request to enter into a Contract on the basis of that Quotation, or

• Point of Sale (Cash or Credit) – At the point of sale, at which time either cash is paid (retail sales) or credit extended to the Customer. If credit is extended to the Customer it should only be done so on the basis of a pre-existing Credit Account Agreement that has arisen from the prior acceptance of a Credit Application submitted by the Customer.

The Terms & Conditions of Trade of effective Contracts must be incorporated prior to or at the time the Contract is made. The earlier and more obvious the disclosure the more likely it is that the Terms & Conditions of Trade are incorporated into the particular Contract.

Our Business Contracts will enable your business to incorporate your Terms & Conditions of Trade in Contracts by the disclosure and acceptance via a Credit Application and/or an Order issued in relation to a Quotation.

Our Contract Variation Form also includes an affirmation of the applicability of the Terms & Conditions of Trade to the particular Contract being varied.

Our Business Contracts package for Contractors & Suppliers includes the following:

• Credit Application,
• Quotation Template (including Order & Order Acceptance forms),
• Customised Terms & Conditions of Trade,
• Contract Variation Form,
• Personal Guarantee & Indemnity, and
• ‘Final Notice – Overdue Account’ Letter Template.

This Guide includes an overview of each of the above documents and instructions on how to use them. Please visit our website for examples of the Business Contracts Package documents.

If you have sought our assistance in the making of effective Contracts because your business provides goods or services to your Customers on credit, you should now endeavour to obtain a completed Credit Application from all of your existing and recurring Customers.

The obtaining of a signed Credit Application will ensure that:

• Your Customer has acknowledged prior disclosure and acceptance of the Terms & Conditions of Trade, and
• The Terms & Conditions of Trade will be incorporated into Contracts that you make with the Customer in future.

We suggest that you use the following Letter Template to submit Credit Applications and disclose your new Terms & Conditions of Trade to your existing recurring Customers.

Dear NAME,

Please note that we have recently reviewed our Terms & Conditions of Trade. Our new Terms & Conditions of Trade will apply to all future Orders and Agreements with your business.

We enclose a copy of our Terms & Conditions of Trade for your attention. Please take the time to read them carefully.

We also enclose a Credit Application. Please complete, sign and return the Credit Application to confirm your receipt and acceptance of our Terms & Conditions of Trade. Your prompt return of the signed Credit Application is appreciated and will avoid delays associated with the completion of a Credit Application at the time of your next Order.

If your business has an existing Credit Account with us, please note that the enclosed Terms & Conditions of Trade will apply to all Orders submitted after the date of this letter.
Please do not hesitate to contact us should you have any questions.

You should keep copies of the letters that you send out in your Customer files as evidence of the fact that disclosure of your Terms & Conditions of Trade was made should any dispute about such disclosure or incorporation arise in future.

New Customers

As your business receives enquiries for new Customers or recurring Orders from a Customer that has not previously signed or accepted a Credit Application, provide a Credit Application to the Customer and insist that it be completed, signed and returned.

What to do with completed Credit Applications

Upon receipt of a completed Credit Application consider making enquiries with a Credit Reporting Agency and Trade References provided for the purpose of assessing the Customer’s history and creditworthiness. The signed Credit Application includes the consents that your business requires to obtain a Credit Report in relation to the Customer.

The Credit Application allows you to specify payment terms for a particular Customer different to those for Customers who do not have a Credit Account with your business. If you are prepared to extend credit to the Customer, include the payment terms that you are prepared to offer and the credit limit you approve for the Customer at the bottom of the Credit Application, then date and sign the acceptance of the Credit Application and send a copy to the Customer for their records.

Credit Applications & Quotations

When making subsequent Contracts with Customers who have submitted an accepted Credit Application you should still utilise the Quotation Template to create certainty in relation to the price and description of goods or services to be supplied in respect of a particular Contract.

The Quotation Template is provided in Word format so that you can prepare individual Quotes for Customers. Importantly, the Quotation Template includes particulars of the Contract that are referenced in the Terms & Conditions of Trade. The effectiveness of the Terms & Conditions of Trade will, therefore, be affected if you omit relevant particulars from a Quotation.

Who is Your Customer?

When making any contract in business it is fundamental that the ACN and/or ABN of the Customer be verified so as to identify the true legal entity (person/company) that your business is contracting with.

If the Customer is a company or a sole trader, consider the need for personal guarantees (see pages 5 and 6). If the Customer is a Trust, contact the Customer and find out the name of the Trustee of that Trust and ensure that the Quotation is directed to the Trustee. Personal guarantees are also highly recommended when contracting with a Trustee of a Trust.

Submitting Quotations

When submitting Quotations to Customers you should make it your practice to attach the Terms & Conditions of Trade so that there can be no dispute about whether those terms were disclosed to the Customer.

Creating Specific Purpose Quotation Templates

It is often the case that a business will use the Quotation Template to develop more than one (1) Quotation Template for specific Contracts and to make it easier for employees to prepare accurate Quotations.

Please note that care should be taken to ensure that when a Quotation is given it does not omit a Contract particular that will be relevant to a future Contract that the Quotation relates to. Preserving the consistency of references in the Terms & Conditions of Trade to the particulars contained in the Quotation is essential and will avoid problems with uncertainty or ambiguity of a Contract.

The final page of the Quotation Template includes an Order and Order Acceptance form.

Clause 1 of the Terms & Conditions of Trade clarifies that the submitting of the Quotation is not an offer the acceptance of which will give rise to a Contract. This is to avoid situations where a Customer might allege that a Contract has arisen from the verbal acceptance of a Quotation.

If a Customer wishes to enter into a Contract on the basis of the Quotation, an Order in the form included in the Quotation Template should be submitted to your business. If your business is then still willing to supply the goods or services as contemplated in the Quotation, you should complete and return the Order Acceptance.

Clause 1 of the Terms & Conditions of Trade clarifies that a Contract (or Agreement) will arise upon an Order being accepted by an Order Acceptance. This procedure should be preferred practice so that your business has an opportunity to make further enquiries and obtain Credit Reports in relation to a Customer following the receipt of the Order (and Privacy Consent contained therein) before deciding whether to enter into the Contract and extend the credit that would flow from the supply of goods or services.

It should be noted that Clause 1 of the Terms & Conditions of Trade also contemplates an Agreement arising from either the submission of:

1. A written Order, or
2.  A verbal or written Offer by a Customer, followed by either:
   • a written Order Acceptance,
   • a verbal acceptance, or
   • the supply of the goods or services.

The above is to cater for supplies made to Customers who have submitted an accepted Credit Application and will enable your business to maintain that an Agreement incorporating the Terms & Conditions of Trade arose despite a written Order Acceptance not being provided to the Customer should the Customer deny the existence of an Agreement. Notwithstanding, we strongly recommend that in all circumstances you obtain a signed Order and provide a signed Order Acceptance in the form of those attached to the Quotation Template for all Agreements that you make in business hereafter.

It is beyond the scope of this Guide to address the purpose and affect of every Clause contained in the Terms & Conditions of Trade that come with our Standard Form Contract Packages. These Terms & Conditions of Trade will, however, be prepared specifically to suit your business.

As indicated earlier, you should review the Terms & Conditions of Trade carefully and contact us should you have any questions. To be able to obtain the greatest benefit from our Standard Form Contracts and the Contracts that you make in future it is important that you have an adequate understanding of how the documents interrelate and the effect of specific terms of the Terms & Conditions of Trade.

The Clauses in the Terms & Conditions of Trade are intended to comprehensively cater for all circumstances relevant to the Contracts that your business makes. The terms also cater for the making of Contracts with Customers with different Contract particulars.

Your attention is drawn to Subclause 1.1 of the Terms & Conditions of Trade. That Clause provides that those Subclauses referred to will apply to Agreements unless, or to the extent that, the corresponding Quotation or Order expressly specifies otherwise. Therefore, if those Subclauses are not to apply to a particular Contract, it should be made apparent in the Quotation or Order.

If a Customer is not willing to accept the Terms & Conditions of Trade because they contain provisions entitling your business to real and personal property security, you should propose that your business will instead supply the goods or services upon payment in advance. In this case you should still make a Contract incorporating the Terms & Conditions of Trade albeit that the security provisions could be omitted by including an express amendment to that effect in the particular Quotation or Order.

The Contract Variation Form is provided in Microsoft Word.

A Contract Variation Form should be prepared and submitted to the Customer whenever there is a variation to the original Contract. A Variation may relate to the scope or description of goods or services to be supplied or the manner in which the supply is to occur. A Variation nearly always also relates to the price.

The “Variations” Clause of the Terms & Conditions of Trade provides that a Variation occurs if:

• The Agreement deems a Variation,
• The Customer requests your business to perform a Variation and subsequently you perform the Variation in accordance with the Customer’s direction, or
• The Customer and your business agree in writing to a Variation, including agreement as to the price of the Variation.

You should review the Terms & Conditions of Trade carefully to identify those provisions where a Variation is deemed.

Subclause 3 of the ‘Variations’ Clause provides that where a cost proposal is provided in relation to a Variation, unless the cost proposal is rejected by the Customer in writing within two (2) business days, the amount of the cost proposal is deemed to be the price of the Variation. Notwithstanding, it should be your preferred practice that the Customer sign the Variation Acceptance at the bottom of the Contract Variation Form in all instances where possible.

Our Standard Form Contracts package includes a standard form Personal Guarantee & Indemnity. This document should be used where:

1. The Customer is a sole trader or a partner of a partnership, and you require the Customer’s spouse or other third party to personally guarantee the payment of monies for goods or services supplied to the Customer,
2. The Customer is a company and the personal guarantee of that the Director(s) or any other third party is required, or
3. No guarantee was provided or required initially from the Customer (for example in a Credit Application) and, in the course of supplying the goods and services, the Customer defaults in payment. As a condition of your business continuing to supply of any goods or services or refraining from taking any immediate enforcement action, your business might insist that the Directors and/or their spouses or other third parties now provide a personal guarantee for the Customer’s obligations under the relevant Agreement(s).

When submitting the Personal Guarantee & Indemnity to a Guarantor for signing you should ensure that a copy of the Terms & Conditions of Trade is attached so that the prospective Guarantor cannot deny that they were aware of, or agreed to guarantee all of the obligations of the Customer in, those Terms & Conditions of Trade.

You should always give a Guarantor the opportunity to obtain independent legal advice in relation to the Personal Guarantee & Indemnity and not exercise any pressure or undue influence in relation to their signing of the document. This is because such pressure may result in the Personal Guarantee & Indemnity not being enforceable at law.

The Personal Guarantee & Indemnity is legal form of Deed. Therefore, it is only legally enforceable if it has been signed in the presence of an adult witness. The witness must be over the age of 16 years and preferably someone unrelated to your business. This is so there can be no suggestion that your employees have overly pressured the person to give the guarantee. Upon receipt of a Personal Guarantee & Indemnity you should ensure that it has been duly signed by the Guarantor(s) in the presence of a witness and that witness has also signed and printed their name where indicated.

Businesses often extend credit to Customers without any security whatsoever. Your bank would not extend that sort of credit to your business without security in the form of a personal guarantee and/or Mortgage over real property, so why should your business offer credit to your Customers without security.

Personal guarantees should ideally be obtained whenever your business makes a Contract with a company or a sole trader. The Guarantees should be sought from the Directors of the company or the spouse of the sole trader, if any.

Company Directors and/or their Spouses

At law the liability of a company is limited to the value of the assets owned by the company. Often the paid up share capital of a company is as little as $2.00. If a company does not have sufficient funds or assets available to pay a debt, an action for payment cannot be brought in respect of the Director’s personal assets in the absence of a personal guarantee.

Spouse of a Sole Trader or Spouses of Persons in Partnership

It is common for persons in business to hold their residence and other assets in the names of their spouses so as to prevent action being brought against those assets to recover payment of a business debt. Recovery action can only be taken against the property of a spouse of a sole trader or partner of a partnership if that spouse has given a personal guarantee.

What if a Person is Not Willing to Give a Personal Guarantee?

A personal guarantee can arise from a signed Credit Application or by the signing of a Personal Guarantee & Indemnity.

If a Director of a company or their spouse or the spouse of any sole trader/partner are unwilling to provide a personal guarantee you should:

1. Ask yourself why your business is prepared to extend credit to the Customer if the Customer’s own Directors or spouses are not prepared to back the Customer’s ability to pay for the goods or services you supply, and
2. Consider obtaining searches to identify whether the company or the sole trader/partner own any real property and Credit Reports to evaluate the Customer’s creditworthiness before agreeing to extend credit to the Customer without a signed personal guarantee.

Using our Standard Form Contracts to make Contracts incorporating your Terms & Conditions of Trade will allow your business to obtain security for payment in the form of:

1. Personal Guarantees
2. Real Property Security – Security over real property (land and buildings) owned by the Customer and/or any Guarantor. You will have the right to register a Caveat over the title to any real property owned solely or jointly by the Customer or any Guarantor in the event of a default by the Customer under an Agreement.
3. Retention of Title to Goods – If your business supplies goods, your Terms & Conditions of Trade will include a “Retention of Title” Clause entitling you to reposes goods that have not been paid for in the event of a Default. Please note, however, that following the introduction of the Personal Property Securities Act, unless a Security Interest is registered on the Personal Property Securities Register, a right to enforce a retention of title clause may be lost where the Customer becomes insolvent or where the Customer has granted an interest over the goods to a third party who has registered a Security Interest in priority to your business’ security interest.
4. Personal Property Security – Security over personal property within the meaning of the Personal Property Securities Act 2009 (Cth), subject to registration of a Security Interest on the Personal Property Securities Register.

We draw your attention to the “Default & Termination of Contract” Clause in the Terms & Conditions of Trade.

A Customer will be in breach of an Agreement if it fails to:

• Make a payment within seven (7) days of the due date for payment, or
• Remedy a non-money breach within 14 days (or such greater period allowed) of your business giving notice in writing of the breach.

Where the Customer is in default of the Agreement your business will have the right to:

1. Suspend the supply of goods or services under the ‘Suspension’ Clause until the breach has been remedied,
2. Terminate the Agreement by notice in writing to the Customer,
3. Recover interest on any overdue monies,
4. Recover all costs and disbursements incurred in connection with the recovery of monies owing by the Customer including legal fees, collection agency costs and bank dishonour fees,
5. Cancel the supply of all or any part of the goods or services in connection with any other Contract made with the Customer to which the Terms & Conditions of Trade apply,
6. Register a Caveat, pursuant to the “Real Property Security” Clause, over the title to any real property owned or partly owned by the Customer or any Guarantor, and
7. Exercise rights under the Personal Property Securities Act subject to your business having registered a Security Interest on the Person Property Securities Register.

If your business does not already have a written Debtor Management Procedure you should take the time to develop and implement a Debtor Management Procedure for your business.

We suggest that your business use our ‘Final Notice – Overdue Account’ Letter Template at an appropriate stage of your Debtor Management Procedure to alert your Customer to the rights that you have under the Terms & Conditions of Trade and the implications for it if payment is not then forthcoming.

If a Customer becomes aware that you intend to invoke these rights it will often prompt them to reprioritise their liabilities and make payment to your business. This is particularly the case when you draw the Customer’s attention to your right to recover collection costs in addition to the debt should external collection action be required and preparedness to enforce securities and/or personal guarantees.

Each State and Territory has specific legislation governing the rights of parties to recover prompt payment for the supply of construction work or related goods and services. In New South Wales these rights are contained in the Building and Construction Industry Security of Payment Act 1999 (NSW).

If your business carries out construction work or supplies related goods or services, the Terms & Conditions of Trade contain provisions that will assist your business to more easily serve valid Payment Claims under the Security of Payment Laws. In turn, this will entitle you to utilise the security of payment regime to recover payment promptly when necessary.

Having an adequate understanding of how the Security of Payment Laws apply to your business and can be utilised to recover payment promptly should be a high priority for your business. We recommend you download our free Security of Payment Guide. Take note that strict time limits apply to applications for Adjudication of a Payment Claim. It is, therefore, advised that you obtain legal advice from one (1) of our Building Lawyers at the earliest possible stage of any anticipated dispute or delinquent payer.

If you suspect that you may have difficulties recovering payment of a future Payment Claim call and speak to one (1) of our Building Lawyers right away. It is important that you have an understanding about your right to apply for Adjudication in relation to a particular instance to avoid, where possible, costs and delays associated with defended Court proceedings if a dispute is anticipated. We will not charge you for your initial telephone enquiry.

The Personal Property Securities Act 2009 came into effect on 30 January 2012 and radically changed the laws affecting interests in personal property. Personal Property includes almost all forms of property other than real property (land).

If your business supplies goods subject to a retention of title clause, unless you have registered a Security Interest in relation to the goods or equipment on the Personal Property Securities Register (‘the PPSR’), you will be risking losing your interests in those goods.

If you do not register a Security Interest and a Customer goes into Bankruptcy or is placed into Liquidation, your position will be that of an unsecured creditor. This means that you will only receive a payment if there are sufficient funds to first pay all secured creditors and Bankruptcy/Liquidation costs in full.

Further, even if you have enforced a retention of title clause prior to the Customer becoming insolvent it is likely that the payment you receive will be recoverable by a Trustee in Bankruptcy or Liquidator unless you also held a registered Security Interest in relation to the goods or equipment to which the payment related.

Even if the Customer does not go into Bankruptcy or has a Liquidator appointed there is a chance that your business could lose your interest in the goods or equipment if a third party is granted a Security Interest and registers that Security Interest on the PPSR in priority to your business.

The new Personal Property Securities regime is not something that should be ignored and can entitle your business to enjoy new protections that did not exist previously if the regime is used effectively.

See our website for more information about the Personal Property Securities Act 2009 .

Please note that this Guide contains general advice only. While the information in this Guide was accurate at the date of preparation, the law may have changed since that time. Roberts Crosbie Mortensen shall not be responsible for any actions taken or not taken on the basis of this information. You should obtain specific legal advice from one of our Commercial Lawyers in relation to any particular matters affecting your business.