UNFAIR TERMS IN SMALL BUSINESS CONTRACTS

Today the skills required to successfully run a small business are broad, – sales, marketing, accounting, production, supply chain management, negotiation, and human resources skills.  All, to varying degrees, are required in order to make a small business successful.

However, in addition to all that, one area that is regularly neglected by business owners is asking for specialist advice, and in particular, structural and legal advice either at the start or very early in the piece.  By obtaining proper structural advice will ultimately protect both your business as well as your personal assets and will minimise the chance of future financial distress.

A continuing theme we are seeing in our practice is small business owners who come to us in highly complex financial situations all based upon having signed what may be considered ‘unfair contracts’.   The majority of these business owners only meet with us after their business has begun to experience some distress, if not even further delaying it until they can no longer cope.

This is often been as a result of a dispute or misunderstanding after signing a contract and then realising that its’ terms are unfair and therefore unachievable.  When asked why they signed the contract in the first instance answers such as “it seemed alright” or “I didn’t notice anything untoward” or worse, “I didn’t think (or was told) I didn’t have an alternative” are given, yet if these business owners had simply visited a specialist in this area beforehand it is more than likely that all of the issues they are now facing could have been avoided in the first place.  Alternately they could have entered into that agreement fully informed, with risks known, and protections put in place.

A typical example is a business owner who is overwhelmed by a large conglomerate offering them work and the business owner believing that if they do not sign the contract their own business will never achieve its potential.  An example of this, which we have dealt with, was a small business in the building industry who was offered a contract to provide services to a global property group.  The business owner believed that the contract would transform his business, the only problem being the terms of payment and amounts paid were at the discretion of the global property group.  Within six months the global property group began to seriously delay payments and the business owner struggled to pay his debts.  This ultimately left the owner with no option but to liquidate his company as he was receiving statutory demands from his creditors and not paying staff super and the ATO.  Once in liquidation the property group denied liability and ignored the liquidator.  Alas the claim was not large enough to seek the support of a litigation funder and the risks of a failed litigation are too great.  The legal system these days is simply not designed to assist small business.

One area that we frequently see issues with is the relationship between large shopping centre providers and their tenants.   Small businesses believe that by signing up with a large shopping centre it will provide them with the exposure and foot traffic in order to guarantee that their business will be successful, whilst this is true often the terms and conditions relating to the lease contract often make it all but impossible to justify their continued tenure.

Examples of issues include “floating rents” where initial rent amounts are charged however a percentage of the amount of income above a monthly amount must be paid to the centre management as an additional fee, forced sales whereby centre management tell tenants to discount items in their store, no “exclusive area rights” whereby another group selling similar items can open up almost next door if they wish, extra charges for the appointment of key marketing and support staff of the centre; and the list goes on. Again these items are referred to in lease agreements and a thorough review would have uncovered these issues and far more thought given to their impact.

Insurance contracts too need to be appropriately reviewed as many businesses have sought our assistance in recovering on behalf of their organisation after an event has occurred and their insurance claim has failed.  Many policies assume certain pre-requisites before a claim can be enacted, for example segregation of duties, security systems being in place, or appropriate review of employee activities, if these prerequisites are not in place the insurance company may not pay on any claim.

Picking up a new client (particularly a big client) is always exciting for any small business, however it is important that appropriate due diligence is completed on the client before signing any agreements. The ramifications of not conducting appropriate due diligence can be fatal for a small business, no matter how good a client may seem it is always worth checking the fine print.

Success in business is only partially luck, in the main it is hard work, good planning and astute management.  It’s the same regardless of the size of the business, alas often the smaller you are the less you think it relevant.

I ask, why throw it all away that easily!