Guide to Making Effective Business Contracts – Professional Services

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

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

If you have already ordered 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 Service.

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.

Professional Service 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:

1. Engagement Letter & Acceptance – Pre-contractual negotiations, usually in the form of a telephone enquiry requesting services, followed by an engagement letter confirming or seeking instructions to proceed and acceptance of terms of service prior to undertaking work, or
2. Verbal Instructions – Verbal instructions and verbal agreement to provide services only. Often the scope of work, method of evaluation of fees and payment terms are not discussed or are susceptible to challenge.

The Terms & Conditions of Service 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 Service are incorporated into the particular Contract. If the disclosure is not adequate the terms of the Terms & Conditions of Service will not form part of the contract.

Our Business Contracts will enable your business to incorporate your Terms & Conditions of Service in Contracts by the disclosure and acceptance via an acceptance Form (Agreement for Services) issued in relation to an Engagement Letter/Proposal.

Our Standard Form Contracts package for Business & Professional Services businesses includes the following:

• Engagement Letter/Proposal Template,
• Acceptance (Agreement for Services) form,
• Terms & Conditions of Service,
• 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.

The Engagement Letter/Proposal Template is provided in Word format so that you can prepare individual Engagement Letters/Proposals for Clients. Importantly, the Engagement Letter/Proposal Template includes particulars of the Contract that are referenced in the Terms & Conditions of Service. The effectiveness of the Terms & Conditions of Service will, therefore, be affected if you omit relevant particulars from an Engagement Letter/Proposal.

Who is Your Client?

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

If the Client is a company or a sole trader, consider the need for personal guarantees (see pages 3 and 4). If the Client is a Trust, contact the Client and find out the name of the Trustee of that Trust and ensure that the Engagement Letter/Proposal is directed to the Trustee. Personal guarantees are also highly recommended when contracting with a Trustee of a Trust

Submitting Engagement Letters/Proposals

When submitting Engagement Letters/Proposals to Clients you should make it your practice to attach the Terms & Conditions of Service so that there can be no dispute about whether those terms were disclosed to the Client.

Creating Specific Purpose Engagement Letter/Proposal Templates

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

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

The final page of the Engagement Letter/Proposal Template includes an Acceptance form.

Clause 1 of the Terms & Conditions of Service provides that a Client will be deemed to have accepted the Engagement/Proposal and the Terms & Conditions of Service if the Client gives a verbal acceptance or continues to provide instructions after receiving it. Notwithstanding, we recommend that you insist on the Client returning the signed Acceptance form in every instance.

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

As indicated earlier, you should review the Terms & Conditions of Service carefully and contact us should you have any questions. Most Clauses should be relatively easy to understand. 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 Service.

The Clauses in the Terms & Conditions of Service 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 Clients with different Contract particulars.

If a Client is not willing to accept the Terms & Conditions of Service because they contain provisions entitling your business to real and personal property security, you should offer that your business will instead provide the services upon payment in advance. In this case you should still make a Contract incorporating the Terms & Conditions of Service albeit that the security provisions could be omitted by including an express amendment to that effect in the particular Engagement Letter/Proposal or Acceptance form.

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

1. The Client is a sole trader or a partner of a partnership, and you require the Client’s spouse or other third party to personally guarantee the payment of monies for services supplied to the Client,
2. The Client is a company and the personal guarantee of the Director(s) or any other third party is required, or
3. No guarantee was provided or required initially from the Client and, in the course of providing the services, the Client defaults in payment. As a condition of your business continuing to provide any 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 Client’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 Service is attached so that the prospective Guarantor cannot deny that they were aware of, or agreed to guarantee all of the obligations of the Client in, those Terms & Conditions of Service.

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 Clients for tens of thousands of dollars 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 Clients 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?

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 Client if the Client’s own Directors or spouses are not prepared to back the Client’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 Client’s creditworthiness before agreeing to extend credit to the Client without a signed personal guarantee.

Using our Standard Form Contracts to make Contracts incorporating your Terms & Conditions of Service 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 Client. You will have the right to register a Caveat over the title to any real property owned solely or jointly by the Client in the event of a default by the Client under an Agreement.
3. Lien over Documents – If your business will receive or create important documents, your Terms & Conditions of Service will include a right to claim a lien over those documents as security for payment of monies in the event of a Default.
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 (see below).

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

A Client will be in breach of an Agreement if it fails to make a payment within seven (7) days of the due date for payment.

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

1. Suspend the provision of services under the ‘Suspension’ Clause until the breach has been remedied,
2. Terminate the Agreement by notice in writing to the Client,
3. Recover interest on any overdue monies,
4. Recover all costs and disbursements incurred in connection with the recovery of monies owing by the Client including legal fees, collection agency costs and bank dishonour fees,
5. Register a Caveat, pursuant to the “Real Property Security” Clause, over the title to any real property owned or partly owned by the Client or any Guarantor, and
6. Exercise rights under the Personal Property Securities Act subject to your business having registered a Security Interest on the Person Property Securities Register (see below).

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 Client to the rights that you have under the Terms & Conditions of Service and the implications for it if payment is not then forthcoming. If a Client 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 Client’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.

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).

Even though you may have a right to a Security Interest under your Terms & Conditions, if you do not register a Security Interest on the Personal Property Securities Register (‘the PPSR’) and a Client 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 payment prior to the Client 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.

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 Lawyers 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.