What is a Deed of Novation?

Consider this – you have entered into a contract to purchase a property, but for various reasons, the property no longer suits you.  But it will suit your parents perfectly.  So can you transfer the contract over to your parents, so that your parents are the purchasers?

Also consider this – your business has a really valuable commercial contract, supplying services to a large organisation.  However you are moving interstate and closing up the business, but rather than letting the valuable commercial contract lapse, you would like to instead transfer the benefits (and obligations) under it to a friend’s business which is operating within the same industry.

So how are these transfers dealt with legally?  With a Deed of Novation.

A Deed of Novation is used when a party wishes to transfer or assign its rights and obligations under an existing contractual arrangement to another party – that is, the outgoing party is substituted for the incoming party without changing the original rights and obligations under the original agreement.

The effect of such a Deed is that the outgoing party is released from its obligations under the contract, and the various rights and obligations under the contract are transferred to the incoming party.

From the point of view of the other party to the contract, nothing changes – although they would need to consider and consent to the transfer (see below)Question

What is the difference between novation and assignment?

  • Novation transfers both rights and obligations under the contract to the incoming party, whereas assignment transfers rights only.
  • Novation requires tri-partite consent (that is, the consent of all parties – the outgoing party, the incoming party and the remaining party), whereas assignment may not require the remaining party’s consent (subject to the actual wording of the contract)
  • Novation results in a new agreement on the same terms as the original agreement, whereas assignment doesn’t necessarily discharge the original agreement, meaning that the outgoing party will remain bound by any obligations

Points to consider

It is important to consider the following points when considering a deed of novation:

  • does the original contract allow one party to novate its rights and obligations to another party?
  • does the novation require pre-approval from the remaining contractual party?
  • is there a requirement for pre-approval not to be unreasonably withheld?
  • would it make more commercial sense to terminate the existing contract, and replace it with a new contract?
  • who will be liable for past performance or default prior to the novation?  Will the incoming party take on the rights and obligations pre-dating the novation?
  • what will be the effective date of the novation?  The date of the agreement, or some other pre-determined date?

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Contact the team at Shire Legal on 9526 3444 or info@shirelegal.com.au if you have any questions about Deeds of Novation, or commercial agreements generally.

What does it mean to be proactive, rather than reactive?

We have all heard of the saying – “be proactive, rather than reactive” – but what does that actually mean, particularly when you are talking in the context of a legal firm? It means taking steps sooner rather than later to avoid issues arising, rather than only taking steps once the issue has arisen – which usually takes more time, money and worry. In the legal context, this can best be demonstrated by looking at some of the issues we have dealt with in recent years, issues which could have been avoided if the client had their legal affairs in order at the start:

Situation 1OTP An employer was in dispute with an employee as to what the employee’s entitlements were.  The employee claimed that ….  How could this have been avoided?  By having a customised employment agreement drawn up and signed off by both parties at the time that the employee commenced. Commercial

Situation 2 After operating her business successfully for a period of years, a client allowed her sister to start working in the business as well, and after a short time, transferred ownership of the business name to her sister, and also allowed her to operate the bank account.  The client had a falling out with her sister, following which her sister proceeded to operate her own business under the same trading name, took some of the business’ core equipment, and continued to draw monies out of the bank account.  Neither the client nor the sister knew how to resolve the dispute between them.  How could this have been avoided?  By having a partnership agreement drawn up between them, they could set out the circumstances within which the partnership would come to an end, and what steps would need to be taken to those circumstances.

Situation 3ACCC A client was challenged by the ACCC about the labelling on its product.  How could this have been avoided?  By having a specialist lawyer review and approve the proposed labelling before it went into production.  The review would ensure compliance with labelling requirements regarding:

CommercialSituation 4 At the end of the fixed term of the franchise agreement, the franchisee was unsure as to whether or not they should renew the franchise agreement for a further term.  In the meantime, the franchisee continued to operate the franchised business, giving the franchisor the impression that the franchise had been renewed (although documents had not been signed).  When the franchisee decided to exit the franchise, the franchisor attempted to bind the franchisee to the terms of the franchise agreement, and sought damages.  How could this have been avoided? By approaching a specialist franchise lawyer at the end of the fixed period, the franchisee could have been guided as to what to do and not to do, to preserve their rights regarding the agreement, and to avoid creating the impression that the franchise agreement was continuing.

Situation 5 A client entered into negotiations with a prospective purchaser of its business, and subsequently signed off on a 1 page document by which the client agreed to sell the business to the purchaser for a fixed price.  This created a number of issues – the real asset to be sold was not the business as such, but the client’s shares in a Pty Ltd company which owned the business.  The lease was in the company’s name, and any change in control of the company lessee required the landlord’s approval.  Some of the business assets were under lease, and not owned by the company as such.  Although the client and the purchaser had negotiated to settle the deal within a matter of days, the matter eventually settled after a number of months because of the numerous issues to be dealt with.  How could this have been avoided?  By contacting lawyers at first instance, the 1 page document could have been drafted with the correct details and with the correct procedures, ensuring that the deal was negotiated and settled within a reasonable time frame and with correct documentation in place.

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Statements like “I don’t need a lawyer” or “I haven’t got the time/energy/money to get a lawyer involved in this” could end up costing you more time/energy/money in the long run.

Please contact the team at Shire Legal to discuss your situation and see how we can help you to minimise the time/energy/money spent in resolving any issues you may have.

Have you entered into an unfair contract?

Have you ever entered into a business contract which you think is unfair? Was it a standard form contract which offered plenty of protection for one party but not the other? Smaller businesses now have protection from unfair contracts under laws which were introduced on 12 November 2015.

Which contracts will the law apply to?

The laws will apply to standard form contracts (that is, where the terms and conditions are set by one party with no negotiation) entered into or renewed on or after 12 November 2016 where:

  • at least one of the businesses employs less than 20 people,
  • the price of the contract is no more than $300 000, or $1 million if the contract is for more than 12 months, and
  • the contract relates to the supply of goods or services (including financial goods or services), or the sale or grant of an interest in land.

It does not matter whether the smaller business is the customer or the supplier – the laws apply equally.

The ACCC, Australian Securities and Investments Commission, and state and territory offices of fair trading will enforce this law.

Which contracts will the law specifically NOT apply to?

The laws will not apply to the following types of contracts:

  • contract of marine salvage or towing
  • charterparty of a ship
  • contract for the carriage of goods by ship
  • constitution of a company, managed investment scheme or other kind of body
  • small business contract that is covered by Commonwealth, state or territory law that is prescribed by the regulations.

 How do I know if a contract is unfair? 

Ask yourself:

  • does the contract allow one business, but not the other, to change or cancel the contract, or to limit or avoid their obligations
  • does the contract penalise one business, but not the other, for breaching the contract?
  • are there terms within the contract that are not reasonably necessary to protect the stronger business?

If so, then it may be considered an unfair contract.

But we have plenty of standard form contracts which we give to all of our customers and suppliers!

We suggest that you:

  • know your customers/suppliers – so you know whether they fall within the definition of smaller business. Ask questions!
  •  review your contracts with smaller businesses as a matter of priority, so that you can ensure that your contracts are fair, and you avoid investigation by ACCC, ASIC and/or Fair Trading. If your contracts do contain terms that may be considered unfair, then consider how important the terms in that contract are to your business and whether the terms protect your legitimate business interests.
  • consider structuring the value of the contract so that you exceed the monetary threshold
  • consider developing a separate set of contracts for smaller business clients, and another set of contracts for other business clients – if you are in the transport industry, develop a separate set of contracts for shipping contracts (being an excluded contract).

The law will only apply to contracts entered into or renewed from 12 November 2016, so there is approximately 12 months for you to review and amend your standard form contracts if required.

What can we do if we believe that our small business has entered into an unfair contract?

Whilst having an unfair term in a contract is not an offence (meaning that no pecuniary penalties apply), the smaller business has the right to commence court proceedings against the other business to apply for orders that part of the contract is set aside (that is, declared void) or varied (that is, changed so that it is fair).

If the other business attempts to enforce the unfair term(s) against the smaller business, then the smaller business could seek compensation from the Court.

Of course, it is always our recommendation that if you believe that you have rights against another party, obtain legal advice first, then attempt to negotiate a resolution to the issue without rushing off to Court.

Introducing the Food and Grocery Code of Conduct

A voluntary code of conduct for the food and grocery industry has been introduced under the Competition and Consumer Act 2010. The Code governs certain conduct by grocery retailers and wholesalers in their dealings with suppliers.

Only those retailers and wholesalers that have elected to be bound by the Code by written notification to the ACCC will be bound by it.

For the purposes of the Code:
* a retailer is a corporation that carries on a supermarket business
* a wholesaler is a corporation that purchases groceries from suppliers to resupply to a supermarket
* a supplier is someone who is carrying on (or seeking to carry on) a business of supplying groceries for retail sale by another person (including another business).

An important element of the Code is the express requirement for retailers and wholesalers to deal with suppliers in good faith – for example, during the bargaining stages of establishing grocery supply agreements, during the term of the agreement, and in dealing with any disputes.

As stated by the Small Business Minister Bruce Billston,

“this is about promoting fair and healthy competition.”

There are concerns in the industry that the Code has not gone far enough because it is not mandatory, and only binds those that have voluntarily signed up to it.  It is believed that Coles and Woolworths will be signing up, however Metcash (IGA) at this stage has refused.

Things to know when selling a business

When you are selling a business, you are transferring ownership of a bundle of rights, responsibilities and assets that are used together to create profit for their owner. These rights, responsibilities and assets need to be clearly identified so they can be effectively transferred from seller to buyer.

The components of a business can include:

  • the registered business name
  • business goodwill
  • business premises (lease or ownership)
  • equipment
  • fixed assets
  • stock
  • current orders
  • supply agreements
  • patents and trademarks
  • business licences
  • debtors
  • employees

QuestionOther considerations include:

  • should the prospective purchaser sign a confidentiality agreement?
  • will any unpaid accounts (debt) remain with the previous owner, or will the right to recover the debt be transferred to the new owner?
  • what are the taxation implications?
  • have all representations made to the prospective purchaser been accurate?
  • what consents and approvals are required for the sale to proceed?

What is included in the sale value?

When negotiating a price for a business the following component categories are considered:

  • Fixed Assets and Equipment

The seller must complete a full inventory of assets and equipment of the business; the price the buyer pays for these assets will be what is called the “book value”. The “book value” is the price at which the asset was originally valued. The seller also needs to determine whether there is a mortgage or bill of sale over the assets, which must be paid out at settlement.

The business premises will be the most contentious of these assets. If the premises are not owned but leased then the buyer must be sure that they can obtain the rights to the use of the premises either through a transfer of the lease, a new lease or through the purchase of the building.

  • Business Goodwill

This will give the business a value above that of the assets alone. It is an intangible property right. It is generally represented by the value in the reputation of the business, good location, market penetration and good relations with its customers, suppliers and employees. In a tangible sense, “goodwill” will involve business names, the business location, telephone numbers, names of products and services, customer lists, people, efficiencies, systems, processes, techniques etc.

If the combination of these components of goodwill does not produce a profit (or cashflow) in excess of a reasonable return for the assets employed in the business, then goodwill has no value.

To increase the value of the business for the seller, the components of goodwill should be registered so as to become saleable commodities (e.g. registering the business name and/or logo as a trademark). Meanwhile, the buyer should exercise diligence in determining what these components of goodwill are worth and whether they are already registered. These may be amongst the most valuable items of a business and crucial to future business success.

  • Stock in Trade

This consists of all commodities used in the production of saleable goods, goods being produced and finished goods. Whilst the value of this stock will be originally based on an estimate, it is important for the buyer that this stock be accurately valued just before settlement of the sale and is within 10% of the original estimate.

Not included in the value of the business will be any ‘encumbrances’. Any mortgages, charges, or bills of sale over any stock or assets must be settled by the seller before the sale. If any stock or assets are the subject of a lease or hire purchase then the seller must be sure they can be transferred to the buyer or that the seller can pay them out. It is important that searches through ASIC (if the seller is a company), and the Registrar General’s office are made to ensure that all these obligations have been settled and the seller is not a bankrupt.

What are the steps in a sale of business?

  1. Preliminary negotiations, pre-exchange searches (“due diligence”), negotiation of special conditions, agreements signed.
  2. Exchange of contracts takes place at the offices of the vendor’s solicitors, where a deposit of 10% of the purchase price is usually paid. Contracts are now legally binding.
  3. The purchaser’s solicitor sends to the vendor’s solicitor “requisitions on title”, which are a list of questions sent to the vendor’s solicitor. If the answers turn out to be false or misleading, these will provide protection to the purchaser.
  4. After exchange, the vendor will generally have a number of obligations to fulfil, as stated in the contract for sale. These include: executing the necessary documents to transfer title, discharging a mortgage and acquiring a lessor’s consent to a transfer of lease.
  5. The contract for sale will state a completion date, when settlement will occur. Settlement generally occurs at a place nominated by the vendor. The solicitors for the buyer and the seller must have all the relevant documents signed and the appropriate cheques.

It is crucial you know exactly who your customer is

Imagine this – you own a business selling widgets.  A man called John Smith calls your business and orders 100 widgets for a total cost of $10,000.  He pays a 10% deposit of $1,000, and asks you to send the widgets and the invoice for the balance of $9,000 to JS Building.  You prepare the invoice with 7 day terms and deliver it to the given address, along with the widgets.

JS Building doesn’t pay.  You call John Smith but he doesn’t return your calls.  You send a number of statements for the overdue balance to JS Building at the address where the widgets were delivered, but you don’t receive any payment.

You consider commencing court proceedings to recover the balance.  But who do you sue?  Do you sue John Smith?  Do you sue JS Building?  Or could it be JS Building Pty Ltd?

Question

To avoid this happening to you, it is crucial that you correctly identify who your customer is, because if you commence proceedings against the wrong legal entity, then it will be difficult if not impossible to recover the debt.  If you sue John Smith, he may file a defence saying that he was representing JS Building Pty Ltd.  So you then commence proceedings against JS Building Pty Ltd and find out that the company has since gone into liquidation and has no assets to its name.

Make sure that you correctly identify your customer from the outset.  Ask for a purchase order.  Make sure that the purchase order identifies who the customer is – it is not enough for there to be a stylish logo on the purchase order with the words “John Smith Building”.  You are not contracting with the logo – you need to know who is behind the logo.  As suggested above, it could be John Smith trading as JS Building, or it could be JS Building Pty Ltd.  Depending on the value of the transaction, it may be worthwhile for you to obtain an online ASIC search of the business name and/or corporation.

Make sure everything is documented.  Not only should you ask for a purchase order, but you should then provide an invoice, noting the payment terms and your other terms and conditions, and follow up non-payment as soon as it is overdue.  The longer a debt is unpaid, the harder it will be to recover – as noted above, you don’t want to be the last creditor in line waiting payment from a company that is in severe financial trouble and heading into liquidation.

Contact the team at Shire Legal if you require assistance with drafting your terms and conditions and/or recovering an unpaid debt.

Why do I need a lawyer when I start my business?

Starting a new business is a big event in anyone’s life. You’ve probably had the idea for the business in the back of your mind for some time, or perhaps someone has approached you with a business idea which they would like to develop with you. So you want to make sure it is a success. Part of this success is due, in part, to ensuring that you dot all the i’s and cross all the t’s when starting out. Being diligent at the start, and managing the potential risks that the business may or may not incur, is of significant importance. Because dealing with the risks at the start is a lot easier than dealing with the problems that come down the track if you don’t properly plan.

Anticipate the difficult by managing the easy

This is where advice from a lawyer can be so crucial to a business’ success. There are a number of legal issues that you should give due consideration to before you start trading, such as:

  • what business structure is most appropriate?  Should you operate as a sole trader, in a partnership, or as a registered corporation?
  • are you allowed to use the business name you wish to use?  Does another existing business already use the same or a similar business name?  Has that other name been registered?  Is there a trademark similar to your chosen business name?
  • what premises will the business operate from?  Will you be required to sign a retail or commercial lease?  How long will you have the right to occupy those premises?
  • what will the terms and conditions for your dealings with clients/customers be?  what rights will you have against them to recover unpaid debts?
  • are there any intellectual property issues that you need to consider, such as registering your logo as a trademark?
  • what laws will you need to comply with in your chosen business?  Workplace health and safety?  Trade practices?  Industrial relations?
  • what rights and obligations do you want to establish in terms of your partnership or directors/shareholders?

We always recommend that clients wishing to start up a new business speak to us about the various legal issues involved (part of our “Legal Health Check” service), and discuss the steps that can be taken to adequately manage the risks with each of the issues.