Most of us understand the importance of reducing a commercial contract to writing.
However, even then, two parties will sometimes take different views on what the written words of the contract actually mean.
When courts investigate the meaning of words written in a contract, they call the exercise ‘contractual interpretation’. When you draft your own contract it’s important to follow the same principles that a court would apply if it were asked to interpret the words.
Firstly, the contract is considered objectively. That is, the parties themselves are not asked what they intended by the words, rather the question is what a reasonable third person, reading the contract would take the words to mean. The pre-contractual negotiations will often be irrelevant, as will the course of conduct after the formation of the contract.
Secondly, where the contract is in writing, effect should almost always be given to the written words. If a contract is silent on what is to happen in certain circumstances, then the loss lies where it falls. Courts will not add words to a contract unless it is necessary for the contract to work on the most fundamental level, or, the words to be implied are so obvious that they ‘go without saying’.
Thirdly, the contract should be read as a whole. That is, if two possible interpretations of a term arise, effect should be given to the interpretation that best aligns with the flavour of the rest of the contract.
Lastly, contracts are interpreted in the context of the relevant background. That is, if two interpretations of a contract arise, the one that seems most likely in the context should be adopted.
Merely putting something in writing is not always enough. Many commercial disagreements arise, because contracting parties have differing views on what the actual words mean. For that reason it’s always good practice to have important contracts drafted by a professional and to seek professional advice on the likely meaning of the words.
If you need assist drafting or understanding a commercial contract, contact Everingham Solomons because Helping You is Our Business.
When individuals enter into a business arrangement, it is common for those persons to enter into a partnership agreement which regulates the conduct of their relationship.
The same cannot be said for shareholders and directors in a proprietary limited company which conducts a business.
It is recommended that shareholders and their directors should enter into a Shareholders Agreement which will regulate their conduct and set out their duties and responsibilities, much like a partnership agreement.
Such agreements usually specify that each shareholder has the ability to hire and fire their own directors.
They also set out arrangements regarding the conduct of meetings of the board of directors and general meetings, voting rights as well as the requirement to prepare annual financial statements and to make such information available to all shareholders.
There will be provisions regarding distribution of profits, how working capital is to be contributed and/or raised and a dispute resolution procedure.
Most importantly there will be provisions indicating how a shareholders shares are to be dealt with in the event that a party wishes to sell their shares or is required to leave the company.
If a shareholder or director is guilty of misconduct or breach of the shareholders duties or is simply not fulfilling their duties, do the other shareholders have a right to exclude that person as a shareholder and to buy their shares?
If yes, how is the outgoing shareholder’s shares to be valued for the purposes of the share transfer to the continuing shareholders?
If a person is retiring because of illness or disability, how is that outgoing shareholder’s shares valued and who has the right to acquire those shares?
Generally it is the remaining shareholders who have the first option to purchase an outgoing shareholders shares.
Another perplexing question is whether a defaulting outgoing shareholder should receive the same value for their shares as a shareholder who is simply retiring and has not committed a breach of the terms of the Shareholder Agreement.
I encourage you to ascertain whether you have a Shareholders Agreement and if you would like any additional information regarding such agreements, please contact me or one of our business lawyers because at Everingham Solomons Helping You is Our Business.
A trust is a relationship between people (including companies) about property. One person, the trustee, holds the legal title to property for the benefit of other people, the beneficiaries. The trust itself is not a legal entity, rather just a set of accounts held by the trustee for the beneficiaries. Both the trustee and the beneficiaries may hold separate ‘personal’ property which is not subject to the trust relationship.
The development of the trust as a legal concept was all very chivalrous. About 600 years ago, before women were allowed to own property, men would go off on crusades, and bearing in mind they may never return, transferred the ownership in their property to another ‘trusted’ man to hold ‘on trust’ for their wife and infants.
Where a trust enters into commercial enterprise, the third-party deals only with the trustee. It can’t see the trust relationship or the beneficiaries. The trustee is liable to pay its debts but is entitled to reimburse itself out of the trust property for debts incurred for the beneficiaries.
As beneficiaries, people think they can’t be held liable for trust debts. They often think this because a limited liability company, acting as the trustee, stands between the beneficiaries and the debt.
That thinking however, has proven not always to be correct. In Ron Kingham Real Estate v Edgar, a corporate trustee controlled by Mr Edgar owed money to Ron Kingham. To prevent Ron Kingham being paid, Mr Edgar arranged for the corporate trustee to distribute all the trust property to the beneficiaries of the trust, predictably, Mr and Mrs Edgar.
The court found that the trustee was entitled to be reimbursed for the debt not only from the trust property (which had been depleted) but also from the assets held personally by Mr and Mrs Edgar. Through subrogation to that right, Ron Kingham was able to stand in the shoes of the corporate trustee and sue Mr and Mrs Edgar directly.
There are other decisions similar to the Ron Kingham case which are authority for the idea that the beneficiaries of all forms of trusts, including large investment trusts, can be held personally liable for trust debts.
If you have any queries relating to discretionary or fixed trusts, call Everingham Solomons Solicitors because Helping You is Our Business.
Electronic signature processes are increasingly being used by businesses and financial institutions. They offer convenience and potential cost savings particularly where documents might need to be signed by people in various different locations.
There are a number of digital platforms available but most involve –
The documents to be signed being uploaded to the cloud;
The intended signatory being notified by a link to access the document; and
The intended signatory opening the link and following on line instructions with the end result being that a signature is inserted into the document.
The generally accepted legal view is that legally binding documents can be created and executed in this manner however a recent New South Wales Court of Appeal case highlighted the problems that can arise.
The case concerned a guarantee purportedly signed by a company director via a particular e-signature platform. The guarantee was in favour of a supplier of goods to the company. Ultimately the company defaulted and the supplier sued the director under the guarantee.
The director successfully resisted the claim. He claimed that he had not used the platform to sign the guarantee and had no knowledge of the guarantee. Effectively, he argued that the platform had been used to forge his signature by someone who accessed the platform using his password.
The supplier had no reason to suspect that there was any irregularity with the guarantor’s signature. It argued that a decision against it would throw doubt upon the ability of creditors to rely upon electronic signatures at all but the Court said that was a matter for the legislature to address if it considered there was a sufficient public interest in doing so.
The moral of the tale is that businesses need to be careful in using electronic signature platforms and look for platforms with inbuilt security features that enable signature verification in the event of a dispute about authenticity.
At Everingham Solomons we have the experience to help you with your questions about proper execution of documents because Helping You is Our Business.
Distributed ledger technologies utilising “blockchains” are set to change the legal industry and the industries in which our clients operate. The cryptocurrency Bitcoin is an early application of this technology.
Please go online and look for the TED talk by Don Tapscott: “How the blockchain is changing money and business“.
DAOs – Decentralised Autonomous Organisations – are a fascinating example, and just may be the way businesses are run in the future. DAOs are organisations run mainly through computer coding and smart contracts. A DAO’s records and program rules are securely held on a blockchain for all stakeholders in the organisation to access, review and verify.
Take a General Manager of a DAO who is tasked by the Board with purchasing a new fleet of vehicles. She simply uploads her recommendation to purchase the vehicles to the DAO on her smartphone or tablet. The Board considers the recommendation and vote, again on their smartphones or tablets. The coding and smart contracts of the DAO are triggered once a Board majority is reached. The DAO automatically sends out the purchase order to the vehicle dealer, which then sends back its invoice. That is recognised and confirmed by the DAO, which requests the deposit funds from its bank and those are paid to the dealer. When the vehicles are ready for delivery, the dealer notifies the DAO and it directs its bank to pay the balance of the funds to the dealer, and confirms the delivery instructions. The DAO adjusts the organisation’s accounting records and asset register. The DAO minutes the Board’s resolution. The DAO informs the General Manager and the Board that the transaction is complete. The entire record of the transaction is recorded on the DAO’s blockchain.
These activities normally involve multiple levels of human interaction, reporting, cross-checking and paperwork. The DAO requires only minimal interaction at the outset by the General Manager and the Board. Imagine the efficiency and productivity gains that may be achieved. It’s all a bit frightening as well on a number of levels, much like people must have felt 100 years ago with the invention of motor cars! The social, ethical, legal and regulatory consequences to this technology are still to be developed.
Everingham Solomons will be monitoring these exciting developments for our own business and also for our clients because Helping You is Our Business.
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A class action bought by credit card, consumer and business deposit customers of a bank in relation to dishonour fees, late payment fees and the like has failed in the High Court.
We have all experienced these fees and felt annoyed at having to wear such a large amount for what seems to be a minor default on a credit card or bank account. The customers in this case argued that the fees they paid were not a reasonable estimate of the actual costs to the bank of their default. They argued that the fees amounted to the imposition of a penalty by the bank and were unenforceable. The customers demanded the bank repay those amounts to them and others in the class of customers.
Experts were called by both sides as to what actual costs were caused to the bank by events that triggered the fees. The customers argued that only a narrow range of costs were incurred by the bank. The bank’s expert included a broader range of costs.
The customers succeeded initially, the Federal Court finding that the fees charged by the bank were a penalty. On appeal the Full Federal Court disagreed. The High Court then settled matters by finding that the fees were not penalties; the bank was entitled to be compensated for a broad range of costs caused by the triggering events.
At Everingham Solomons, we have the experience and expertise to assist you with legal advice on your relationship with your bank, one of your key business partners because Helping You is Our Business.
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Whilst businesses always plan to succeed, statistics show that about 1 in 2 new businesses fail in the short to medium term. For this reason, it is always relevant when choosing a business structure to consider the personal liabilities for the business owners should things not go as planned.
Traditionally, trading through a structure like a company offered a significant degree of insulation from personal liabilities. With some fairly narrow exceptions, the worst-case result for the business owners was the loss of the money they put into the business. Business failure did not spill over to the separate assets of the business owners.
In more recent times, things have changed significantly. It is now much more difficult for business owners to avoid personal responsibility even when the business is run by a company.
An example of this is the recent Federal Circuit Court decision in FWO v Step Ahead.
In that case, the Fair Work Ombudsman successfully argued that particular sections of the Fair Work Act operated to make “accessories” such as company directors, personally liable to pay unpaid employee entitlements.
The case involved the failure of a private security business operating through a company structure with a Mr Jennings as it sole director, which had underpaid its staff in numerous respects.
Mr Jennings was found to be jointly and severally liable for wages and entitlements underpaid of some $23,000. On any view, Mr Jennings was not an innocent bystander:-
He was in sole control of the company,
two previous associated entities had failed, in one case leaving employee entitlements unpaid, and
a new company had been formed to take over the operations previously conducted by Step Ahead, cosmetically controlled by Mr Jennings’ son but with Mr Jennings in de-facto control.
The case is not however limited to the “rogue operator” situation. It has significant implications for all people involved in the management and ownership of businesses..
At Everingham Solomons, we have the experience and expertise to provide advice to businesses at all stages from formation to closure.
Undertaking work before being paid is a part of business. If you’ve been in business for a while you’ll know the difficulties that can arise in getting paid after the fact.
This is a situation where prevention is much better than cure. There are a number of steps that a business can take to greatly reduce the likelihood of payment problems arising.
Although it seems simple, the first is often overlooked. It is important to properly identify who your business is dealing with and to make an assessment of the creditworthiness of the entity you are contracting with. People and companies can enter into contracts, but nobody else. Identification troubles arise particularly when businesses purport to contract with business names, trusts and partnerships. The identity of companies and the people behind it can be verified by a search with ASIC.
Secondly, a business needs to have enforceable written contracts. Often these contracts can be generic documents suitable for adaptation to many different jobs, but, it is important that they clearly state the scope of the work and the payment terms. For the supply of goods, they may include retention of title clauses which provide the supplier with a form of security. The use and effect of such clauses is controlled by the Personal Property Securities Act.
When dealing with smaller companies particularly, the lines can be blurred as to whether the company owns any assets capable of satisfying its financial obligations or whether the assets are really owned by the people behind the company. In these situations it is always prudent to have the people behind the company guarantee the company’s performance of the contract. That is, if the company doesn’t pay, the people that stand behind it must.
In some cases, it may also be appropriate for a business to consider taking some form of security for the money they are to be paid. The mortgage is a form of security that most people are familiar with – if you don’t pay the bank as you promised, they take your house – but there are a great many other forms of security available to businesses. It’s possible to take security over assets other than land or to have a third party offer some form of security on behalf of the contracting party.
If you want to improve your business’s financial security, contact Everingham Solomons because Helping You is Our Business.
As a general rule, a small business employer is not required to pay redundancy pay; however, there are some circumstances where an employer may be legally required to make redundancy payments.
The National Employment Standards confirms that a small business employer is not required to pay redundancy where an employee’s position becomes redundant. Notwithstanding these National Employment Standards, an employer may be obliged to pay redundancy because of the terms of a “modern award” or an “enterprise agreement”.
Who is a “small business employer”?
An employer who employs fewer than 15 employees at that time is deemed a small business employer. The employee being dismissed must be counted; however, casual employees are not to be counted unless they are employed on a regular and systematic basis.
A number of modern awards prescribed redundancy pay for small business employers and the amount of redundancy pay depends on the terms of the award and the number of years’ service the employee has given to the employer.
Examples of modern awards which prescribe redundancy pay for small business are the Joinery and Building Trades Award, the Manufacturing and Associated Industries and Occupations Award.
There are also some employees who are not entitled to redundancy pay, for example where the employee has less than 12 months continuous service, the employee is a casual employee, the employee is terminated because of serious misconduct, the employee is employed for a specific task or an agreed period of time, there is a training agreement in place or the employee is an apprentice.
Whilst the majority of small businesses are exempt from paying redundancy pay under the National Employment Standards, there are certain modern awards which require some business employers to pay an employee redundancy pay.
At Everingham Solomons we have the expertise to assist you with all of your legal needs because Helping You is Our Business.
There is something inherently intriguing about placing numbers after words in a punchy turn of phrase where, in the absence of any context, they mean absolutely nothing.
The bemused reader can only wonder what marvels exist beyond the meaningless collaboration of symbols. It’s a government’s way of sparking interest in things that are, in reality, fairly mundane.
Mi6, Area 51 and Double-0-7 are great examples. They conjure images of deeply held national secrets, extraterrestrial technologies and sculpted men in dinner suits silently dispatching ultra-villains. All very snazzy stuff. Realistically, those types of institutions revolve around cubicle offices, stale drip coffee and endless data entry.
Division 7A of Income Tax Assessment Act 1936 is perhaps the Australian Government’s pièce de résistance. Interesting as it may sound, it’s the legislature’s way of restricting you from taking stuff out of your own company in a way that would allow you to shimmy past the tax man.
Broadly speaking, any time that a private company makes a payment, provides an asset, grants a loan or forgives a debt to a shareholder, the starting point is to say that the transaction is a Division 7A deemed dividend.
The effect of classifying the transaction as a dividend is that, instead of being a non-taxable gift or loan, the transaction becomes a taxable dividend. In essence, Division 7A stops your company giving you things, tax free.
There are however at least ten legislated exceptions to the general rule. Loans between a company and its shareholders can be excluded from the deemed dividends regime where the loans are documented, include a minimum interest rate and are repayable within certain timeframes.
Exceptions also exist where loans can be said to be made in the ordinary course of business and where loans are made between companies. The exceptions regime is complex and individual cases require specific analysis. Getting the documentation wrong can affect how much tax you pay.
Everingham Solomons has legal expertise in complex business matters. If you have a complex commercial problem, contact us because, Helping You is Our Business.
Most of us understand the importance of reducing a commercial contract to writing.
