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?

__________________________________________________

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.

____________________

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.

New scheme to prevent subcontractor rip-offs

The NSW Minister for Fair Trading is expected to today announce a new trust fund scheme designed to prevent insolvent builders from keeping money that is owed to subcontractors after the job is completed.

The new retention trust scheme is the first of its kind in Australia, and was developed in response to a 2012 enquiry into the causes of insolvency in the building industry (click here to see the enquiry’s Discussion and Issues paper).

Builders typically hold back party of the payments due to subcontractors until the work is completed, and any defect issues identified and dealt with.  Unfortunately this sometimes means that troubled builders use the funds for their own purposes.

The proposed scheme requires builders to retain funds owed to the subcontractor in a separate trust account – thereby protecting the money rightly owed to subcontractors, irrespective of the builder’s financial position.

The scheme will initially only apply to head contractors and their direct subcontractors on projects valued at more than $20 million.

Non-compliance with the scheme will incur fines of up to $22,000.

It is expected that the NSW Government will also conduct a review of security of payments legislation.

OTPPhoenix building company rising from the ashes

An example of a situation which the new scheme hopes to prevent is the case earlier this year of Walton Construction.  After the global financial crisis, Walton hit financial difficulties in the 2011-2012 financial year, so it recruited a corporate advisory group.  Walton subsequently transferred its assets into 2 new (“phoenix”) companies: Peloton Builders (later called Tantallon) and Lewton Asset Services.  Walton then went into liquidation, leaving plenty of subcontractors as unsecured creditors.  One subcontractor in particular was owed $696,000.

The Queensland Building and Construction Commission is holding a public examination of the case, including investigation into the key people in the matter.

ASIC also started investigating the matter when there were questions raised about the independence of the corporate advisory group (directors of whom were appointed directors in the 2 new companies) and the appointed liquidator.  ASIC sought to have the liquidators removed, but this was rejected by the Federal Court.  It is understood that ASIC is now appealing that decision.

Contact Melissa Lammers if you have any questions about subcontractors and the building industry.

If a builder is not paying, the sub-contractor still has rights to recover the money owed

This right arises under the Contractors Debts Act 1997 (NSW) (“the Act”).

Essentially, the Act provides that if a sub-contractor is owed money by a builder for work carried out for, or materials supplied to, the builder, then the sub-contractor can obtain payment of the owed money from the money that the principal contractor owes to the builder.

So, if a carpenter is having difficulties recovering monies owed by a builder, the carpenter would need to:

  • obtain a judgment from the Court for the monies owed,
  • issue a “Section 7 Certificate” to the principal contractor (section 7),
  • serve a notice of claim on the principal contractor (section 6(1)(b)).

The service of the notice on the principal contractor operates to “assign” the monies payable by the principal contractor, from the builder to the carpenter.  The principal contractor must then pay the monies owed to the carpenter.Builder

Of course, this will only apply if the principal contractor has not already paid the builder.

The carpenter also needs to keep in mind that proceedings under the Act must be commenced within 12 months after the debt becomes payable (section 17).

There are other rights that contractors have to recover monies owed under the Security of Payment legislation, which will be covered in a subsequent post.

Who is your customer?

A core element of business is the provision of goods and/or services to customers/clients for a price. And it is difficult for a business to be successful if there are difficulties with collecting that “price” from its customers, because this affects the business’ cash flow and ability to fund its ongoing operations.

When signing up a new customer, particularly if the customer will have the benefit of an account payable after a specified period of time (e.g. a 30 day account), is it is imperative that business owners ask themselves the question – who is the customer? Failure to accurately identify who the customer is can lead to significant problems down the track if the account is unpaid and the business needs to rely on the court system to recover the account from the customer.  Unless you know the correct legal entity behind your customer, then you will have difficulties commencing proceedings to collect any amounts owed.  13031460-default-notices--no-genuine-customer-info-used

In most cases, the customer is an individual or a corporation. There are a number of free online searches that a business can carry out to correctly identify the true legal identity of their customer:

You cannot assume that the name, ACN and/or ABN given to you by the customer are correct.  You need to conduct your own due diligence to make sure you know who your customer is.

Was the kiss in the contract?

8808432-lawYou may recall reading earlier this year about the wedding photographer who was sued by the bride and groom because, amongst other things, he missed photographing the all important first kiss.

Whilst the photographer’s fee for the day was $2,700, the disappointed bride and groom refused to pay the remaining $390 of his fee, and instead sued him for $6,400 for failing to capture the kiss, the ribbon cutting and the certificate signing. The photographer counter-sued (that is, filed his own claim against the bride and groom) for $6,000, which included the $390 balance outstanding for his fee, court fees and $63 for paying for a meal out of his own pocket.

The Victorian Civil and Administrative Tribunal considered the importance of the first kiss photo, agreed that a wedding kiss is difficult to capture, but nevertheless ordered the photographer to pay the newlyweds $710 for failing to meet the value of the $2,700 package, and ordered the newlyweds to pay for the photographer’s $63 meal.

The lesson to be learnt is this – if there is an expectation that the other party to a transaction is going to perform a particular service for you, make sure you spell out in detail exactly what level of service will be provided. And ideally, in writing. Hiring a photographer and ensuring that you instruct the photographer to capture all of the important photos comes down to discussing everything in detail, so make a list of the photos that you definitely would like (such as first kiss, cake cutting etc) and give it to the photographer so that the photographer can ensure that they are in the right place at the right time, taking the photo when it needs to be taken.

The list should form part of a written legal contract between you and the photographer, outlining the services to be provided on the day, and all of the other rights and obligations of each party. The contract then becomes an enforceable document should things go ary.

There are a number of other legal issues that should be discussed with the photographer as well, such as who owns the copyright of the photos – this issue came arose in a case earlier this year when Lowes clothing used a photo loaded onto the photo sharing website flickr.com, without first obtaining the photographer’s permission. The photographer sued Lowes for breach of copyright.