Contracts

A contract is the foundation of every business relationship. It defines what each party has agreed to do, what happens if they do not, and how disputes will be resolved. Without one, you are relying on memory, goodwill, and assumptions - none of which hold up well in court.

Many small business founders operate on handshakes and email threads for far too long. That works until it does not. The moment a payment is late, a deliverable is not what you expected, or a partnership sours, a properly drafted contract is the single most valuable document in your business. It sets clear expectations, allocates risk, and gives you an enforceable legal position if things go wrong.

In Australia, contracts are governed by a combination of common law (case law built up over centuries) and statute - including the Competition and Consumer Act 2010 (Cth), the Australian Consumer Law (ACL), and the Electronic Transactions Act 1999 (Cth). Understanding the basics will help you negotiate better deals, avoid costly mistakes, and protect your business from unnecessary risk.

For a contract to be legally binding under Australian law, it must contain five essential elements:

1. Offer- one party proposes specific terms to another. The offer must be clear, definite, and communicated to the other party. An advertisement or price list is generally an "invitation to treat" rather than an offer.
2. Acceptance - the other party agrees to the offer on its exact terms. A counter-offer is not acceptance - it is a new offer. Acceptance can be communicated in writing, verbally, or by conduct (for example, starting the work described in the offer).
3. Consideration - something of value must be exchanged between the parties. This is usually money for goods or services, but it can be a promise to do (or not do) something. A gift or a promise without consideration is generally not enforceable as a contract.
4. Intention to create legal relations - both parties must intend the agreement to be legally binding. Commercial agreements are presumed to carry this intention. Social or domestic arrangements generally are not.
5. Capacity - each party must have the legal capacity to enter the contract. This means they must be of legal age (18 in Australia), of sound mind, and not acting under duress or undue influence. A company must be properly authorised to enter the agreement through its directors or authorised representatives.

If any of these elements is missing, the contract may be void or unenforceable. This is why verbal agreements - while technically capable of being binding - are risky. It is much harder to prove the terms were agreed, or that all elements were present, without something in writing.

Most small businesses will encounter several types of contracts as they grow. Here are the most common, what they cover, and when you are likely to need them.

This is not exhaustive. Depending on your business, you may also need supply agreements, distribution agreements, franchise agreements, partnership agreements, or joint venture agreements. The principle is the same: if there is a business relationship with obligations on both sides, put it in writing. See our contracts services for help getting started.

Regardless of the type of contract, there are several clauses that should appear in virtually every business agreement:

Scope of Work

Define exactly what is being provided, by whom, and to what standard. Vague scope is the number one source of contract disputes. Be specific about deliverables, timelines, milestones, and what is explicitly excluded.

Payment Terms

Specify the total price or rate, payment schedule, invoicing process, and what happens if payment is late. Include whether prices are GST-inclusive or GST-exclusive. Under the A New Tax System (Goods and Services Tax) Act 1999, businesses registered for GST must issue tax invoices for taxable supplies.

Liability and Indemnity

Limit your exposure by capping liability where appropriate - for example, to the total fees paid under the contract. Include indemnity clauses that allocate responsibility for third-party claims. Be aware that liability caps cannot exclude or limit consumer guarantees under the Australian Consumer Law.

Termination

Specify how either party can end the contract - with notice (typically 14 to 30 days) or immediately for cause (material breach, insolvency). Address what happens on termination: outstanding payments, return of property, and the survival of confidentiality and IP clauses.

Dispute Resolution

A well-drafted dispute resolution clause can save significant time and legal costs. Consider a stepped process: informal negotiation first, then mediation, then arbitration or litigation as a last resort. Specify the governing law and jurisdiction - for Australian contracts, this is typically the law of the state or territory where your business operates.

Governing Law

State which jurisdiction's laws will apply to the contract. For most Australian small businesses, this is the state or territory where you are based (for example, "This agreement is governed by the laws of New South Wales"). This becomes critical if a dispute arises - it determines which courts have jurisdiction and which local rules apply.

If your business sells goods or services to consumers - or even to small businesses - the Australian Consumer Law (ACL), set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth), imposes obligations that override your contract terms.

Consumer Guarantees

The ACL provides automatic consumer guarantees that cannot be excluded by contract. Goods must be of acceptable quality, fit for purpose, match their description, and come with a right to repair, replacement, or refund depending on the severity of the failure. Services must be provided with due care and skill, be fit for the consumer's specified purpose, and be delivered within a reasonable time. Any contract term that purports to exclude these guarantees is void.

Unfair Contract Terms

Since November 2023, the unfair contract terms regime has been significantly strengthened. Under the amended ACL, a term in a standard form contract (one that is not genuinely negotiated) is void if it is unfair - and the business can now face civil penalties for including or relying on an unfair term.

A term is unfair if it causes a significant imbalance in the parties' rights, is not reasonably necessary to protect the stronger party's legitimate interests, and would cause financial or other detriment to the weaker party. These protections now apply to consumer contracts and small business contracts where the upfront price does not exceed $5 million or the contract term is 5 years or fewer, with no headcount threshold.

If you see any of these in a contract presented to you, do not sign without negotiating changes or getting legal advice. Many of these clauses are negotiable - particularly in small business-to-business agreements where both parties have roughly equal bargaining power.

Electronic signatures are legally valid in Australia under the Electronic Transactions Act 1999 (Cth) and equivalent state and territory legislation. This means a contract signed via an e-signature platform (such as DocuSign, Adobe Sign, or similar) is just as enforceable as one signed with wet ink, with a few exceptions.

Electronic signatures are not valid for certain documents - including wills, powers of attorney, and some real property transactions (such as transfers of land) that require witnessing under state law. For standard commercial contracts, however, e-signatures are widely accepted and increasingly the norm.

Breach of Contract

A breach occurs when one party fails to perform their obligations under the contract - whether by not delivering, delivering late, delivering defective work, or failing to pay. Breaches can be minor (a delay that does not undermine the whole agreement) or fundamental (a failure that goes to the heart of the contract and entitles the other party to terminate).

Remedies

The primary remedy for breach of contract is damages - monetary compensation to put the innocent party in the position they would have been in had the contract been performed. Other remedies include:

• Specific performance - a court order requiring the breaching party to fulfil their obligations (rare in commercial contracts, usually reserved for unique goods or property).
• Injunction - a court order preventing the breaching party from doing something (for example, using your confidential information).
• Rescission - unwinding the contract entirely, as if it never existed (typically available for misrepresentation, duress, or unconscionable conduct).

Dispute Resolution Options

Going to court should be a last resort. It is slow, expensive, and unpredictable. Most commercial contracts include a dispute resolution clause that requires the parties to try alternative methods first:

• Negotiation - direct discussion between the parties to reach a commercial resolution. This should always be the first step.
• Mediation - a neutral third party facilitates discussion and helps the parties reach a voluntary agreement. Mediation is confidential, relatively quick, and far less expensive than litigation.
• Arbitration - a neutral arbitrator hears both sides and makes a binding decision. Faster than court but still involves legal costs.
• Litigation - formal court proceedings. For small claims, state and territory tribunals (such as NCAT in NSW or VCAT in Victoria) offer a simpler, lower-cost process for disputes under certain monetary thresholds.

Whatever path you take, keep thorough records of all communications, invoices, deliverables, and contract amendments. Good documentation is the best evidence if a dispute escalates.