A possible point of failure in start-ups is an inattention to the legal relations of the involved parties, e.g. those between multiple cofounders, those between founders and investors, and those between the business and consumers. The common theme with these agreements is that they all, in some way, should protect the financial interests of start-ups and their partners or shareholders. This document has the purpose of providing guidance in maintaining effective legal agreements to protect these interests.
Split into two categories, first, business agreements both internal and external involving the start-up. Second, those between the start-up and their consumers.
Important contractual considerations for business agreements
Have a written contract
Having a legal document detailing the agreement between parties to business is the only way to properly protect the interests of everyone. Without a written agreement, the courts themselves are left to interpret what the agreement is (ATCO Controls Pty Ltd v Newtronics Pty Ltd (2009) VR 411).
Ensure the contract’s terms are complete and certain
In Queensland, Common Law requires that terms to contracts be sufficiently certain. Otherwise, the offending clause(s) will likely be void. Fortunately, the courts recognise that at the time of drafting agreements, it sometimes is not possible to draft with complete certainty. In these cases, the courts will be satisfied only if there is certainty regarding a process to determine the otherwise uncertain matter (Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd  HCA 53). For example, a term to an employment agreement promising only ‘a yearly performance bonus’ would be void for a lack of certainty. However, if the term included a process which would certainly determine the bonus value (e.g. a mathematical formula, or, a specific process to be carried out by management), the term would be sufficiently certain despite the uncertainty surrounding the actual value of the bonus.
Pre-emptively deal with breaches of contract
What happens in the case of a breach of contract? In most cases, the answer should be anything but litigation. This is especially important for start-ups with limited funds—due to the prohibitive cost of going to court.
For this reason, business agreements should include terms detailing the process of remedying breaches. These processes can include usual forms of alternate dispute resolution such as: negotiation, arbitration, and mediation. Alternatively, they may be as simple as fines for breach. Both alternatives offer a lower likelihood of court, therefore, a lower cost.
The importance of transparency with consumers
An important consideration for any individuals involved in a start-up business is that of honesty. Australian Consumer Law provides several relevant protections for consumers that start-up owners should be familiar with. These can be split into three categories: guarantees relating to goods; guarantees relating to services; and protections relating to the fulfilment of promises.
Guarantees relating to goods
The Competition and Consumer Act 2010 (Cth) Schedule 2 provides, among other things, three relevant guarantees relating to goods. They are that:
- the goods are of acceptable quality [s54];
- the goods are fit for any disclosed purpose [s55];
- the goods match their description, if sold in that way [s56];
- the goods match any sample or demonstration model, if sold in that way [s57]; and
- that all express warranties relating to the goods are be complied with [s59].
Guarantees relating to services
Schedule 2 of the Competition and Consumer Act 2010 (Cth) also has similar guarantees for the supply of services. They are that:
- due care and skill be exercised in the supply of services [s60];
- the services are fit for any disclosed purpose [s61]; and
- the services are supplied within a reasonable time [s62].
Protections relating to the fulfillment of promises
Even further, Schedule 2 of the Competition and Consumer Act 2010 (Cth) protects against suppliers’ failure to fulfil promises more generally. These protections exist in Part 2-1—Misleading or deceptive conduct and Part 3-1 Division 1—False or misleading representations, and they provide that:
- offering rebates, gifts, prizes, etc. with the intention of not providing them, is prohibited; and
- persons, in trade or commerce, must not engage in conduct that does, or is likely to, mislead or deceive [s18].
Consequently, most (if not all) pre-meditated failures to fulfil promises will be illegal. This is important for start-ups to be aware of because a breach of the ACL can result in pecuniary penalties and liability for damages suffered by relevant consumers.
More information on misleading and deceptive conduct can be found on the ACCC website (see False or misleading statements and Avoiding misleading and deceptive conduct when advertising and selling).
Alternatively, you can contact our friendly team on 07 5563 8970 to book an initial consult today.