A to Z of Commercial Law: Tips for professionals and for clients

By |2022-06-28T15:10:09+10:0023-5-22|

I recently wrote a series of short LinkedIn articles under the title “A to Z – Commercial Law: Tips for Professionals and Clients”, based on issues which have arisen during my 25+ years as a commercial lawyer. Writing twice a week for 13 weeks was definitely a challenge. This article collects those tips together, for business owners, accountants, financial advisors, and other providers of professional services. Following my own tip “K: Knowledge,” I’m sharing those tips with you.

‘Accounting Principles’ may seem a strange topic for a lawyer to talk about – but they come up constantly in commercial law work. Numbers are always being measured and compared in deals, and accounting principles help set ‘rules’ about how to do the measuring.

It’s routine for a buyer / landlord etc. to ask for a promise that financial data matches accounting principles. This is often defined (in Aus) to mean standards “required by the Corporations Act” or “issued by the [accounting professional bodies]” or “generally accepted”. Seems pretty reasonable, right?

The challenge for clients is that often, they haven’t been closely following accounting principles in preparing their own sets of numbers. Why not? Well, they’re seldom required to follow them all – their accounts are mainly for their own private use, and it’s been OK to glide past some trickier principles. There’s often a cost saving in skipping some. For example – they may not include all employee leave, or may not closely consider when revenue is recognised.

Client Tip: ask your accountant what this sort of ‘Accounting Principles’ promise will REALLY mean for you.

Professionals Tip: don’t treat this as mere routine – consider the facts.

How do you tackle this issue when it arises?

What on Earth are “Back-to-Back promises”, and why do you need to consider them? When sourcing goods or services & reselling or transforming them – this is a big challenge to manage.

Your customer will insist on a blend, or final product, which meets ALL of their key specs – what’s going to happen if the input components are of mixed quality? Is your upstream supplier of say, video animations, achieving what you need to deliver the compiled training material? Upstream problems may cascade into larger, costly issues.

Your key customer (with the attractive project budget) probably has lofty expectations to match. For your smaller customers – consumer guarantees about quality are probably implied into deals with them – like it or not!

Suitable back-to-back promises from your suppliers is a key element of managing these risks. What do you need? When do you need it? Does a special person have to deliver it? How will you measure it (objectively) to assess whether it meets the mark?

Client tip: make an effort to write down and agree on these key factors. It’s crucial – if you can’t resolve those things now, what hope do you have in a dispute?

Professionals tip: thoroughly understand your client’s process; draft thoughtfully.

“Very few people think accurately enough so that … “what they have in mind” can serve as intelligent communications” – Marvin H. Swift – (Harvard Business Review, Jan 1973).

I was taught that “clear thinking = clear drafting” – and clear thinking is definitely the right place to start, when writing.

Can you draw a flowchart of the clause or document you’re about to prepare? If not, then consider stopping, making some notes (handwritten, for me) and working out a plan – before you continue typing or dictating.

We’ve all seen well-intended-but-awful paragraphs in emails or docs. How do they come about? It might be a lack of understanding, but it’s probably just a lack of concentration or preparation!

  • What’s your process for writing look like? Mine’s roughly:
  • Read the background material (docs, client call notes, etc.), making a few notes (often in different colours) as I go;
  • ‘Step back’, think & reflect on what the client wants to achieve, and ID the main constraints;
  • Jot a few bullet points to give structure;
  • Go! (draft / revise);
  • Add an example, if practical;
  • Go back to my list, to ensure all issues are covered.

Client and Professionals tip: consider drawing a short flowchart – it’s a great writing aid.

When you invest in a private business venture, the money you’re expecting to get back – dividends or distributions – is usually a crucial part of your decision.

When you buy in to that company or unit trust – will you get the dividends / distributions you’re expecting? You’re probably (intellectually, at least) prepared for the business risks which may affect the success of the business – but there are lots of other factors which can get between business success and the actual return to owners.

Does the business owe money to others? You might have investigated the debt owed to external lenders, but have earlier investors got shareholder / unitholder loans, or similar, in place? If so, what are the repayment terms for those? It’s pretty common for loans from the ‘owners’ to be repayable whenever they demand the money – that could be a rude financial shock for the business!

Is one of the owners (or, perhaps you) working in the business? What gets paid first – their bonus, or dividends to all owners? (Hint: it’s probably the bonus).

If there’s a falling out with the other owners – it happens – will there be any dividends at all, or will deadlock trap the money in the business?

Client tip: Think about what might get between you and the money.

If you have a heart problem, you see a cardiologist; for a brain condition – a neurologist.

It’s the same for commercial transactions – you should choose the right expert for the right task. Mature professionals, with client’s interests at heart, will happily co-operate to deal with the tricky parts of a client’s situation.

It’s very common for commercial work to involve financial and tax issues – your lawyer is unlikely to know all of the subtle angles which need considering, on those topics. Similarly, it’s doubtful that your accountant or tax adviser will obsess about the true meaning of your ‘exclusive’ rights, scope of restraints, limitation of liability and similar joys :).

Tax advisory accountants; employment lawyers; financial planners; commercial litigators; planning & environment professionals; strata and property lawyers – you might need help from one or more of these. In commercial law, part of the job is to recognise when that’s needed, then work with the right person.

Professionals tip: Know your limits. Get the client true help from true experts.

Client tip: Never expect one person to know everything.

Fatigue is a huge factor in commercial transactions. It may be the first time the client has started a franchise system, or had a chance to sell their business – it’s strange and unusual to them. In contrast, the other side is probably more experienced – they know what they want, and it’s often a bit different to what the client needs or expects!

It can be tiring and confusing for clients to work out deal terms – deals can seem so ‘technical’. (Hint: technical points really are commercial points – they’re usually about risk, responsibility, tax and other things affecting MONEY).

When deal fatigue sets in, clients may be tempted to just ‘give in’ to whatever is ‘standard’ – but will they be happy with that compromise? What about next year – will they still be happy then?

Professionals tip: figure out what’s really important to your client. Explain issues with real words, not jargon! Do it face to face, if you can – not just by email. Give examples, and help them get time and space to make good long term decisions.

Client tip: tell your adviser what’s important to you. Tell them again if needed! Ask them for ideas to achieve those. Stick to what’s important to you, and try to make decisions you’ll be happy with a few years from now.

Guarantees: best friend or worst enemy? It depends how you treat them. There are two main contexts for guarantees in commercial matters:

  1. Guarantees as implied conditions – e.g. when selling goods or services in an Australian Consumer Law context (just one example of implied guarantees). Are guarantees implied into what you’re doing? Better find out!
  2. Financial guarantees – when someone promises that someone else (e.g. a company; a business partner) will do something – and promises to pay if they don’t. When should these be accepted and requested? Well, generally when deferred payment is going to occur – especially if there’s no other meaningful security.

Professionals tip: Don’t be blasé about guarantees – assess the merits when clients are asked for them, or when you’re asking for them. Are they necessary, appropriate and limited?

Client tip: Think hard about whether you’re willing to take the risk of providing (implied, or financial) guarantees. If you offer them, set $ or time limits. For financial guarantees – seek a benefit in return. BIG TIP: Ask for financial guarantees from others when deferred payment is to happen!

“Proper preparation prevents poor performance.”

Doing your ‘homework’ is an important part of being ready to advise, or ready to enter a commercial deal. You won’t be working towards your goals, nor managing risk very well, if you’re scrambling for the facts.

It’s worth listing some free tools which I use nearly every day to help with preparation – to be prepared for who and what we’re dealing with:

They’re completely free – they’re full of useful info – you’re crazy if you’re not using them. Do you rely on these?

My other ‘homework’ tips are fairly basic – but often overlooked – here they are:

Client tip: Read the background material, well in advance – make notes. Arrange to speak with your professional advisers BEFORE you get into that crucial meeting with the other side.

Professionals tip: Be meticulous, avoid complacency – don’t ever assume you have faced an identical situation before.

Indemnities are just about the scariest thing on the commercial law planet. They probably scare your lawyer, too – in my experience, many lawyers don’t understand them and can’t explain them.

Despite this – they’re endemic, and to turn this post a bit more serious – you can’t avoid them.

What is an indemnity? Basically – a promise to be responsible for something (and if needed, pay), when you wouldn’t normally be responsible. Commercial counterparties will ask for indemnities to:

  • shift risk your way;
  • cover them for situations they don’t want a bar of;
  • deal with you, on terms which they would not consider otherwise.

Starting to sound reasonable? Not so fast…. parties with power (landlords, head contractors; customers with big budgets and high expectations; more sophisticated parties) will over-use them, include them in everything, and set their scope too widely.

If asked to provide indemnities, consider these things:

  • can I really control that situation which they want me to be responsible for?
  • can I get (or afford) insurance for that? (spoiler – the answer is often ‘No’)
  • can I make a narrower promise?
  • does the other side control this event – should we share the risk?

“Justice” is a pointless goal in many disputes.

Helping people exit from their commercial & business arrangements is a significant part of what commercial lawyers do. We understand how those arrangements come together, how they’re supposed to work, and common causes for their failure. This means we’re well equipped to help, when things get difficult.

It’s sad to see business relationships break down – but inevitable, at times. “Justice” is rarely available – memories differ; people’s perceptions change over time and even if everything is written down properly (…unlikely), the parties’ conduct probably doesn’t match those words.

Clients can be very determined to achieve exactly what they think they’re entitled to – their perception of justice. Is this achievable? Often, some pragmatism is necessary. Achieving all those expectations may be unrealistic and often requires litigation – which can be very expensive, slow and uncertain.

This does NOT mean that hard issues should be avoided or that you should compromise on important points. In my experience, clients tend to compromise more easily on exactly the points they shouldn’t – the ones with real future impact.

Tip: get expert help to guide you through commercial disputes.

This one is an even split for clients and professional advisors.

Professionals: never hoard your knowledge. 1st, share it with your team – don’t ‘silo’ it to retain ‘power’ – improve your team to serve clients. 2nd, share it with anyone else who asks – we’re not running a cabal. You’ve probably developed huge range and breadth in your field of focus – it’s incredibly valuable. Add earned experience and reflection to that and – wow! Put it out there – it will be refined and developed as you do.

Obviously, don’t read miles of specific material to give case-specific advice unless you’re engaged – but if someone asks “Should I trademark?” or “What do I aim for in my T&Cs?” then answer frankly. [P.S.: “Almost always” + “Clear scope for what you’re doing & not doing; limit liability; + technicals”]

Clients: Your knowledge of your business is unmatched. Share it with advisers – you’ll get more customised, useful advice. Don’t censor / limit what you tell us. Share your goals. Explain specifics – we’ll adapt. Also – sharing your business acumen and insight is an incredible gift to us advisers – you’ll get that gift returned.

Commercial clients often see opportunity – not risk. Return on capital is their focus – not potential loss of capital! This can make losses [the risk of loss] really hard to effectively discuss with clients.

Professionals: Do you focus on risk issues in discussions, to the (potential) detriment of a constructive client relationship? Or do you adopt their ‘sunny side up’ attitude when talking, but put all of your risk warnings in writing (as our insurers would encourage!).

Clients: Do you want to hear the things which really concern us, and why, or do you find that too ‘negative’… it’s ‘solutions’ which you’re after, not ‘problems’, right?

This issue is not simple to resolve. Merely dumping all your risk warnings in an email and saying ‘well, I told them…’ is definitely NOT the best professional approach to take. Similarly, clients – blocking your ears to genuine concerns is definitely NOT the best approach. It’s really your interests we have at heart – we want to reduce your risk of loss.

Only one thing works for me – tell the client what I really think. Use examples. Written notes may help with focus, but I must effectively communicate about risks and concerns. For me – face to face is the most effective, where possible.

Why can we just, “meet in the middle”?

Heard this phrase often? I certainly have – it’s a common shorthand version of desires expressed by clients (and sometimes by the other side).

So, what’s the problem with that approach – if we asked for 12 changes and they agreed to 6, that’s pretty good, isn’t it? Not if #7, which they refused, is the biggest risk factor for us, and one we can’t control or mitigate through other means.

For example: we got the concessions we were seeking on limitation of liability and insurance – they’re now more realistic. The price and annual price reviews are agreed. But wait, what’s this – they don’t own the intellectual property and only have a licence to use it, which can be terminated tomorrow? How will we deal with the business damage to us, if that happens? Oh wait… we can’t because of the lock-in and capex for us.

Not all issues are created equal, and not all issues can be be resolved ‘commercially’ – some issues are foundational and are part of the framework of the deal.

Client tip: term of the agreement; termination rights; ownership of key elements – these things are crucial.

Professionals tip: you know this stuff, so please stop being silly about it :).

Numbers – they’re everywhere. People talk about gross, net, effective, cap rates, coupons, yield and an ever-increasing and diverse range of other jargon. They deduct fixed numbers from incrementing numbers; they say ‘discount’ when they mean… almost anything.

Are you sure what others mean when they use these terms? In my experience – people rarely mean the same thing when using ‘number words’, even when they are using the same words. If that doesn’t make your ‘danger radar’ go off – then you need to invest in a radar upgrade :).

You never, ever want to have a situation where you were right about technical meaning, but the client didn’t get the outcome they expected. There are several methods to reduce the risk of this and to achieve better understanding:

  • use actual numbers when you can.
  • use examples, when you can’t use actual numbers.
  • check your examples very carefully. You’ll want to use a spreadsheet so you can track any errors.
  • make sure you always run at least two sets of numbers through any formula you may spell out.
  • consider the impact of negative numbers on formulae (minus a negative = a positive; -ve times -ve is +ve, and so on. Often missed!
  • make sure everyone sees and agrees on those numbers.

You never know the ‘other side’ in a matter as well as you think you do!

People will constantly tell you that they know, like and trust the other party in a transaction – especially when discussing the terms or structure of a deal, towards its beginning. That’s a great start for a new business relationship – but it’s not enough. Unfortunately, nearly everyone thinks that way early on… but a significant proportion of people are wrong.

The other side (your potential ‘partner’, co-shareholder, investor, funder, franchisor/ee or buyer) does not think like you. They do not have exactly the same objectives and commercial (and other) drivers as you do – if you’re lucky, you will share some of those – but never, ever all of them.

This is why commercial lawyers ask detailed, thorough questions and want to understand context – we’re looking for a true understanding of what you think needs to happen. This allows us to compare your understanding and expectations to those of your counterparty, as shown in the paperwork. The paperwork (at least the first version) very rarely matches.

A common understanding (or knowledge about where one is missing) is an essential foundation for any new business relationship. Let us help achieve that.

It’s been 9.5 years since the Personal Property Securities Register began – and most SMEs (and professionals) still don’t comprehend it.

If you get your approach to PPS right, then it’s an easy tool to improve your credit management and to enhance recovery in challenging situations. If you get it wrong, or ignore it – then brace yourself for some hard news when insolvencies ramp up – perhaps later in 2021.

Implementing PPS is really simple – the core of it are these steps:

  • put some appropriate terms in your trading terms;
  • get the terms agreed (signed, or accepted by practical steps) – you’re probably doing that already anyway – especially if you’re offering goods on credit;
  • have a staff member make an online registration or two (each usually costs $6, takes about 10 minutes) as part of your own client onboarding, before you supply.

Usually, that’s the last time you will need to think about it for 7 years (25 if you pay $25). Unless your customer fails – then you’ll be so glad you did it.

If you’d like help with terms, your credit process, or even your staff training – we can help. We consider PPS so important that we trained our support staff, to enable them to train yours. Please stop ignoring PPS, before it’s too late.

Stephen’s original tip for Q was about any Questions which readers wanted to raise. We’ve skipped letter Q for this retrospective article.

Restraints of trade (often called ‘non-competes‘) come up often in employment, business sale, franchise, and similar contexts. They cause a LOT of confusion.

Here are the main elements:

Confidentiality. Yes, I realise this is not classically considered a ‘restraint’ – but in fact, it can be one of the most useful and logical types of restriction. Having a thoughtful ‘keep information confidential and don’t use it’ obligation is likely to get you a long way towards your restraint / non-compete goals. Enforceability is good – the common law position often helps you to enforce confidentiality. Solid confidentiality may be all you need!

Non-solicit obligations. Again, not a classic ‘restraint’. Usually obliges you not to approach staff or customers (or accept work from customers) – usually with some time periods built in.

True restraint or ‘non-compete’ obligations. Business people often treat these as though they weren’t enforceable and regularly fail to take them seriously. That’s a mistake. An obligation not to pursue business in an industry, within an area, for a period of time may stand up depending on the context and scope. Overreach happens often. Courts will consider enforcing reasonable restraints of this type.

Read more about non-competes in Stephen’s article: Non-competes: How long is too long?

Security for promises: this distinguishes the professionals from the amateurs, to be frank.

If you head to a bank to borrow money, you know that a mere promise to pay it back will not get you the loan. If they give it to you at all, the rate will be higher and the amount available will be lower – they want security for your promise, because their capital is at risk.

Now, think of situations where your capital might be at risk:

  • you’re starting a business and funding it with your own savings;
  • you’re lending business proceeds back to it for cashflow;
  • customers are asking you to extend them credit;
  • you’re selling the business (or shares) and the payment is spread over time.

You should be taking security in all of these situations, to improve your chances of recovery if things go poorly. (I said ‘improve’ – there are few certainties in business.) Yet, people are constantly unwilling to ask, afraid of offending, or just too disorganised.

It’s your capital – if you’re giving other people access to it, act like a bank: assess their credit-worthiness and resources, take adequate security, price in risk if you need to… and be willing to say ‘No’ if it doesn’t stack up.

Read more about non-competes in Stephen’s article: The problem with promises.

Trademarks: you probably need one! A registered TM is one of the best value, most useful tools available to a business owner.

So often, I see people choose and develop brands like this:

  • choose a business name they like;
  • see if they can get a related domain name, Instagram handle etc. which is close to that;
  • try to obtain a company name or registered business name which is close to those things;
  • trade, and ignore the brand / name control issue until much, much later on.

That process constantly leads to problems and unnecessary expense. It all but guarantees that, if you have a brand / name problem – it will be an expensive one to solve (if it can be solved at all).

A much better approach would be:

  • choose a business name you like;
  • check if it’s able to be trademarked. If it’s an obvious no, go back to step 1.
  • apply for the TM. That application can cost as little as $330 (with initial feedback within 5 business days).

Do not – whatever you do – think ‘maybe we should trademark, one day’ – then wait 6 months (or several years, as we commonly see). That gives others the chance to get in ahead of you with their own registration, or to establish their own use of the brand.

Registered TMs are a powerful tool – but only if you use them.

Let’s discuss unfair requests in contracts. There is a common perception that courts will not enforce contracts which are ‘unfair’. I often see this perception translate into a reluctance to negotiate hard issues. That perception is, basically, wrong.

The whole contract law and civil court system has evolved to enforce contracts. Yes, sometimes you can hope for relief from unfair obligations – but that is the exception, not something you can count on as an outcome.

Classic examples of terms which some people consider ‘unfair’ (and which they don’t negotiate hard as a result) include:

  • payment conditions (e.g. what you must do to ‘earn’ your lease incentive);
  • indemnities and limitations;
  • end conditions for a franchise, lease or similar;
  • warranties about facts / risks in a transaction.

Yes, there is some (limited) relief available for small business entities under the Unfair Contract Terms legislation. Frankly – it’s not that useful (because you need a final decision in a court case before you know whether the judge agrees it is ‘unfair’ – slow, expensive, and uncertain). ‘Unfair’ is rarely as ‘obvious’ to the other side.

There’s no substitute for sticking to your issues when negotiating and engaging with the real issues.

It’s a good story – but is it true?

Your counterpart (the landlord; your future business partner; the person hoping for your involvement or investment) may 100% believe it – but is it accurate, and consistent with what you expect?

Business owners are often full of hope, aspiration, and optimism. It’s brilliant, getting to regularly deal with such entrepreneurial people – it’s one of the genuine highlights of my job as a commercial lawyer.

One of my roles is: verification – is it true; can we confirm what we are told; what’s missing? Do the paperwork and the facts match the story?

When you hear the term ‘due diligence’ – that is not a magical or mysterious process. DD often includes checking that what we (and you) have been told is real; asking open-ended questions to shed more light on the facts, and consulting third-party sources (‘searches’ etc.) to see whether they confirm the story. Or they may raise more questions – that happens a lot.

How often does the paper match the story? Based on 25+ years’ experience and hundreds, perhaps thousands of deals – hardly ever. Identifying the key issues and problems, and how to preserve the deal and bridge the gaps – that’s the best bit.

Weird requests – we’ve all had a few. How do you handle them, when they come up?

Some of the odder requests we’ve experienced recently include:

  • I want you to send me your precedent for this agreement, so that I can see what you changed. I’m not sure what struck me the most about that one – probably the sense of entitlement…
  • Can you please explain how a setoff clause works? I’ve never seen one before (This from a very experienced practitioner…)

I don’t bring these up to mock (though some gentle mockery may be deserved in those cases) – but because I want to talk about how to handle weird or odd requests. The main options are:

  1. Bridle at the request – get on your high horse and make a fuss about it. (Almost never smart or in service of the client, in my opinion, but you may consider it.)
  2. Accede to the request. Your instinctive reaction is probably “No way” – but I recommend you ask yourself whether it may be in the client’s interests to comply.
  3. A gentle no, or some other compromise.

What are you most likely to do, when faced with this sort of challenge?

OK, I had to cheat a bit to manage letter ‘X’ in this series. External material is a key factor in providing worthwhile advice. Here are some examples:

  • Schedules containing practical information. Very often, when we’re asked to review draft contracts, this information is missing. It can be very hard to understand what’s actually happening. Also – it’s common to see signed versions, still with incomplete information.
  • Documents which are referred out to – such as franchise manuals, fitout guides, sets of rules etc.. Often, these aren’t provided until much later.
  • The plan of (say) the location, and access routes. Without this, it’s tough to gain context for advice on important risk and use issues.

Tip for professionals: you can’t work effectively in a vacuum – you need to source this key information and review it (typically, just enough to aid comprehension – don’t try to rewrite it). Without doing that – your advice may head off at a tangent, or have gaps. Your advice needs to respond to the real world situation!

Tip for clients: don’t withhold this info from your advisors – nor proceed on the basis of your own assumptions. Get actual info, choose the right advisors, and trust them to know what’s worth looking at.

Getting to ‘Yes’ can be tricky, for professional advisors.

We take our responsibilities to clients very seriously, and we’re trained to see risks. The more experienced and engaged we get, the more risks we see!

I’ve seen clients take some awful risks and get some horrible outcomes as a result. I spotted some of those risks in advance and clients ignored advice about them – but I was clueless about some of the others (due to lack of context, limited scope, or basic misjudgement).

All of this can lead to a tendency for advisers to prefer ‘No’. Sometimes, that’s the right answer and you should have the guts to stick to it. But, you have to sell it. Beware, you run the risk of your entrepreneurial client just going ahead and doing it anyway, but not involving you – and that’s much, much worse.

Tips for advisers: first, the obvious – it’s not your decision to make. Your duty is to be dispassionate but engaged, to communicate effectively; to persuade!

Tips for clients: Don’t get annoyed or dismiss advice as ‘negative’ – rather, consider how to manage the risks identified, and ask your adviser to suggest solutions or alternatives. And, if you’re still struggling to get to ‘Yes’… then consider any solid reasons underlying the ‘No’.

I’ve reached Z in the alphabet – this one was tough. I asked colleagues for suggestions; those were… interesting.

‘Zugzwang’ was one suggestion: this is a chess concept, where being required to move next causes a severe disadvantage. That appealed a little – sometimes the best thing to do in negotiation is just to shut up and wait – but it was a bit pretentious for my taste.

‘Zzzzzz’ was another: the theme would have been ‘don’t be asleep at the wheel; challenge your assumptions and habits, to continuously improve’. Worthy, but didn’t make the cut.

I’ve ended up at ‘Zombies’ – i.e. zombie companies. This term refers to entities which may look alive, and even move – but they’re actually dead, and are just denying it. They’ve been propped up by Cash Flow Boost, JobKeeper, access to personal resources, and much kinder ATO enforcement – but those supports have run out. In some cases, core assets are gone too. Many of these businesses will die, this year.

Please consider the impact of these zombies on your supply chains and in your customer base. Strong credit control systems (including a decent application form, terms and conditions and PPS registration) can help mitigate the damage. We can help with that – give us a call.

Stephen leads our Commercial Law team and can be contacted at sjr@nicholsons.com.au or call him on (07) 3226 3944.

Sign up to receive our latest articles straight to your inbox button

Related articles

Leave A Comment

Go to Top