When a business is small, many arrangements run on a handshake or a string of emails. As it grows and takes on customers, suppliers and partners, often overseas, the cost of an unclear arrangement grows too.
For families trading between Australia and Asia, a relationship once settled by a phone call between two families may later need to be enforceable against a company whose owners have changed.
This article outlines, in general terms under Australian law, the main commercial contracts a growing business commonly uses and the issues each can raise.
Terms of trade and credit terms
Terms of trade set the basis on which a business sells to its customers: ordering, pricing, delivery, risk, payment, credit, returns and disputes. Where goods are supplied on credit, suppliers commonly include a retention of title clause, under which the supplier keeps ownership until it is paid.
Under the Personal Property Securities Act 2009 (Cth), a retention of title arrangement is generally treated as a security interest. To protect it against the customer’s other creditors and an insolvency administrator, the supplier usually needs to register it on the Personal Property Securities Register (PPSR). Special priority may be available for a purchase money security interest, but registration must meet strict timing and detail requirements. An unregistered interest, or a late or defective registration, may leave the supplier as an unsecured creditor. Credit applications and directors’ guarantees are worth reviewing at the same time.
Supply and distribution agreements
A supply agreement governs purchases from a manufacturer or wholesaler: specifications, quality, minimum orders, pricing, delivery, warranties and interruption of supply. A distribution agreement appoints a business to resell products, perhaps in a territory or channel, and may deal with exclusivity, targets, marketing, use of trade marks, after-sales support and termination. Some arrangements may be franchises with their own regulatory obligations, and exclusivity may raise competition law issues. Disputes often arise over termination and what happens to stock and customers afterwards.
Agency agreements
An agent acts on behalf of a principal, for example to find customers or negotiate contracts, rather than buying and reselling on its own account. The distinction between an agent and a distributor matters for who bears risk, who is liable to customers, how commission is paid and how the relationship ends. Agents who introduce buyers of businesses or real property, or who arrange finance or financial products, may need a licence.
Licensing and intellectual property
A licence allows another party to use intellectual property, such as a trade mark, software, recipe, design or know-how, without transferring ownership. Key questions include what is licensed, exclusivity, territory, term, royalties, quality control and termination. Before licensing anything, the business should be confident it owns the intellectual property; work created by contractors or co-founders may not belong to the business unless it has been assigned.
Confidentiality agreements
A non-disclosure agreement (NDA) is often signed before discussions with a potential partner, investor, buyer or manufacturer. It may define confidential information, permitted use, recipients and duration. Its value depends on being able to prove what was disclosed and to enforce it, which can be harder overseas.
Service agreements
Businesses providing or buying services, such as technology, logistics or marketing, commonly use a service agreement or master services agreement with statements of work covering scope, service levels, fees, ownership of deliverables, data and termination. Contractors may in law be employees, which affects entitlements and tax.
Unfair contract terms in small business contracts
The unfair contract terms regime in the Australian Consumer Law, and a parallel regime for financial services, applies to standard form consumer contracts and to standard form contracts with small businesses. Reforms that took effect on 9 November 2023 widened the definition of a small business contract and made it unlawful to propose, use or rely on an unfair term in such a contract, with civil penalties available. The changes generally apply to contracts made or renewed on or after that date, and to terms varied or added on or after it.
Whether a term is unfair depends on matters such as whether it causes a significant imbalance, whether it is reasonably necessary to protect legitimate interests, and transparency. One-sided termination, variation and liability clauses commonly attract attention.
Limitation of liability
Most commercial contracts try to limit a party’s liability, for example through caps, exclusions of indirect or consequential loss, time limits for claims and indemnities. Courts interpret these clauses according to their wording and context. Some liabilities cannot be excluded, including consumer guarantees under the Australian Consumer Law in many cases, and a one-sided limitation may also raise unfair terms issues.
Governing law and dispute resolution in cross-border contracts
A contract with a supplier in China or a distributor in Malaysia should say which country’s law governs it and how disputes will be resolved. Otherwise a dispute may begin with an argument about where it should be heard.
Options include court proceedings in an agreed jurisdiction, mediation, and arbitration. Many contracts provide for a stepped process, such as negotiation between senior people, then mediation, then arbitration or court. Arbitration is often chosen for cross-border contracts because awards can generally be enforced in the many countries that are parties to the New York Convention, which Australia implements through the International Arbitration Act 1974 (Cth). Mediation can preserve relationships that matter. Enforcing a court judgment overseas depends on the country.
Template or tailored contracts
A template written for another industry, country or deal can leave gaps or include terms that do not work in practice. Our commercial work is supported by a broad library of contract precedents, which we adapt to the client’s deal, industry and counterparties rather than issuing a generic form.
A hypothetical scenario
Consider a family-owned food importer in Melbourne that sold to cafés on credit using terms written years earlier, and that appointed a distributor in Singapore by email. When a large customer entered administration and the distributor began selling a competitor’s products, questions arose about whether the retention of title was registered correctly, whether the distributor was exclusive, which law applied and where any dispute would be heard. The right approach depended on facts that needed advice.
Questions to discuss with your adviser
- Do our terms of trade include retention of title, and is it registered correctly on the PPSR?
- Are any of our standard contracts small business contracts that could contain unfair terms?
- Is each overseas arrangement an agency, distribution, licence or franchise?
- Do we own the intellectual property we are licensing?
- Which law governs each cross-border contract, and how will disputes be resolved?
Frequently asked questions
Do I need to register my terms of trade on the PPSR?
The terms themselves are not registered, but a retention of title or other security interest under them may need to be registered to be effective against third parties. Timing and accuracy matter.
Do unfair contract terms laws apply to business-to-business contracts?
They can apply to standard form contracts where at least one party is a small business as defined. Since 9 November 2023 penalties can apply.
Should a cross-border contract use arbitration or mediation?
It depends on the parties, the countries and where enforcement may be needed; many contracts combine both.
Every family’s situation is different, and the answer often turns on details. Book a consultation so we can review your documents and circumstances before you act.
How Chua Tan Associates can help
Chua Tan Associates has practised in Melbourne since 1990 and prepares and reviews commercial contracts for growing businesses, including terms of trade, supply, distribution, agency, licensing, confidentiality and service agreements, often for businesses trading with Asia. Justin Chua trained in accounting (Bachelor of Commerce, accounting major), has run his own businesses and is a Nationally Accredited Mediator and an Accredited Family Business Advisor, which informs how we draft dispute resolution clauses. We work with the client’s accountant and with lawyers in Asia, and we advise in English, Mandarin and Cantonese.
Important: This article is general information only and must not be relied on. It is not legal, tax or financial advice, does not take your circumstances into account, and may not reflect changes in the law after publication. Laws of other countries may also apply. Do not act or refrain from acting on the basis of this article. Reading it or contacting us does not create a lawyer–client relationship. Please book a consultation for advice on your situation.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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