A contract is a legally binding agreement entered into by two or more parties, which contains three basic components:
- Agreement (offer and acceptance)
- Consideration (exchange of goods or services)
- Intention (agreement to be legally bound).
Businesses enter into a variety of contracts all the time with suppliers, customers, insurers, landlords, financiers, partners, employees and so on.
Some of the legislation which you need to be aware of and to abide by when entering into contracts includes:
- Competition and Consumer Act 2010
- Contracts Review Act
- Credit Act
- Fair Trading Act
- Sale of Goods Act.
So, do you know what contracts your business has and with whom? Are they regularly reviewed to ensure compliance? If the answer is ‘no’, some form of compliance training would be recommended. This would provide a basic understanding of contracts and how to manage them effectively.
Contract law changes all the time, due to determinations by judges in individual cases and changes to legislation at a state and federal level.
For instance, the Competition and Consumer Act 2010 (formerly the Trade Practices Act), now has an unfair contracts regime relating to consumer and financial contracts, where if a contract is found to be unfair, it can be deemed to be non-existent.
Terms found to be unfair in a contract might include terms:
- that allow one party only to change the terms of the contract
- that penalise one party only for any breaches
- that allow one party only to terminate the contract
- that allow one party only to avoid or limit their performance
- that restrict one party’s right to sue the other.
Similarly, the Contracts Review Act 1980 (NSW), of which most states have equivalent legislation, provides that if a contract is found to be unjust, the court can refuse to enforce it, change any of its provisions, or declare it to be null and void.
The penalties for breaches of the Competition and Consumer Act can be very costly. So can having a contract declared void. Therefore, effective contract management is vital for every business.
Contract management is about efficiently managing the creation, execution and analysis of contracts to ensure maximum performance and minimal risk.
It involves conducting a review of existing contracts to determine whether they comply with current legislation, incorporating where possible preventative controls, and creating procedures for regular future review.
As well as determining legal compliance, your contracts should also be reviewed for other forms of compliance to ensure your business is not losing money.
This includes comparing the contract with current pricing and also with the terms and conditions of the contract (i.e. are your suppliers honouring the agreed discounting structure and are they providing the agreed level of service?).
No matter what size your business, contract management is an essential practice to mitigate risk and reduce costs, and compliance training, as part of a learning management system, is an excellent way to learn exactly what is required.
