KŌNAE AKO 4
Seminar: Contracts and Negotiations
HE PAEMAHI KŌWHIRINGA THE ELECTIVE PROJECT
Introduction
Contracts are an important part of every business. They can take many different forms, from something as simple as a small cash sale between a business and a customer, to a detailed document resulting from lengthy negotiations between several parties. As a small business owner, it is important to be familiar with the various types of contracts and agreements that exist, as well as the laws, rights, and responsibilities that apply to each type. This will help your small business run smoothly while also protecting it from risk.
Often, before a contract can be signed or an agreement reached, you will need to negotiate. This will involve meeting with the other people or businesses (parties) and working out the details of the contract so both you and the other party or parties come away satisfied. Unfortunately, many contracts are lost or end up onesided because of poor negotiation skills. Part A of this seminar will look at different strategies and skills that you need to maintain effective relationships, minimise risk, and maximise value from your contracts.
A contract is a legally binding agreement between two or more parties in which one party agrees to provide something (a product or service) in exchange for something else in return (usually money). There are five basic elements of a valid contract that this seminar will examine in Part B. These five elements include: an offer, acceptance, consideration, intention, and certainty. If a contract lacks even one of these five elements of a valid contract then the contract will not have legal effect and, as a result, cannot be legally enforced.
As a small business owner, you are likely to have already encountered a range of contracts and agreements in your business. The most common types of contracts would be those you enter into with customers every time you make a sale, and those you enter into with suppliers when making a purchase. Aside from these, another frequently encountered type of contract is the employment agreement. Other examples of situations where a contract may be in place include commercial leases, confidentiality agreements, and consignment agreements with other businesses. Part C of this seminar will examine the types of contracts and agreements that most small business owners are likely to confront.
Contents
This seminar covers the following topics:
Part A: Negotiating a Business Contract
• Negotiation Skills
• Negotiation Strategy
• Negotiation Tactics
Part B: Essential Components of a Business Contract
• What is a Contract?
• Offer
• Acceptance
• Consideration
• Intention
• Certainty
• Contract Disputes
Part C: Types of Business Contracts and Agreements
• Customer Contracts
• Supplier Contracts
• Employment Agreements
• Commercial Leases
• Confidentiality Agreements
• Consignment Agreements
Part A: Negotiating a Business Contract
“The art of effective listening is essential to clear communication, and clear communication is necessary to management success.”
- James Cash Penney
Every businessperson will, at some point, have to negotiate contracts, whether that be with employees, customers, suppliers, or other businesses. A successful negotiation requires the two parties come together with the purpose of negotiating an agreement that is acceptable to both. The best contract negotiation is one where everyone ends up better off.
Negotiation Skills
Nixon (2016) identifies ten negotiation skills that are necessary to reach agreement. These are listed below and then outlined in more detail:
• Problem Analysis
• Preparation
• Active Listening
• Emotional Control
• Verbal Communication
• Collaboration and Teamwork
• Problem Solving
• Decision Making Ability
• Interpersonal Skills
• Ethics and Reliability1
Problem Analysis
To negotiate well, you must understand what is being negotiated. You need to identify the issues to be covered, the people who are involved, and your preferred result. When these things are not made clear, it can result in mistakes being made or time being lost as people struggle to clarify what the contract needs to cover. In contrast, when everyone is clear about the subject of negotiation, it is much more likely that a positive result will be achieved in a reasonable amount of time.
One example of negotiation in small business is when there are disagreements with an employee about wages or employment benefits. Being clear about the issue can help to find a result that all parties will accept. For example, if your employees are worried about conditions rather than money, and you do not understand this, then offering them a generous raise will not help in the negotiation as much as you might expect (and certainly will not help your bank balance!).
1 Nixon. (2016).
Preparation
It is important to prepare for a negotiation. Often, the most favourable outcome is not achieved by the person who has the best position, but by the person who has done the most preparation.
Make sure that you are familiar with all the information relevant to the topic. In addition, think about other information that is not directly relevant, but which may be useful. For example, if the price of a product or service is under negotiation, it is still important to have information available which relates to customer service, delivery time, etc. Never approach a negotiation blind, and always have an idea of the outcome you would like.
Preparation includes thinking about who you will be negotiating with, and what outcome they are likely to want. This can help to avoid potential problems as well as locate areas of agreement. It might be the case that you both already agree – in that case, all you will need to negotiate is the finishing details!
Even if there are still significant disagreements, however, knowing what they are likely to be before negotiations begin can help you to prepare. If there are significant problem areas, decide how you will approach them. Think about what outcome you want and what outcome you are willing to accept if you must – this will help you see how much room you have for negotiation.
Active Listening
A common reason people are unsuccessful when negotiating is that they do not listen. When the parties do not understand each other, negotiations can drag on and fail needlessly. You must develop the skill of being an active listener. You should use your ears, but also your eyes. Understanding body language is very important in a negotiation. It can help you understand the other party’s position and, if you are good at it, you will be able to see how they feel about what they say.
By actively listening to the other party, you are in a better situation to be able to find the key areas of compromise and what is, and what is not, open to negotiation by the other party. An excellent negotiator with active listening skills should:
• Be motivated to listen to the other party,
• Never interrupt when the other party speaks,
• Pay attention to non-verbal cues,
• Allow the other part to present their story first,
• React to the message and not the person,
• Stay calm, and
• Avoid distraction.2
It is always tempting to try to do most of the talking. After all, it seems common sense that if you dominate the discussion, you are more likely to get your own way. However, this is not necessarily the case. When you talk most of the time and do not listen, you lose the opportunity to discover areas that may be open for compromise. That is not to say that it is not important to get your point across, but it is just as important to listen to the other party. This helps you to understand their point of view and gives you the chance to make a more convincing case in response.
Emotional Control
It is important to keep emotions in check during a negotiation. Whilst negotiations can be frustrating, allowing emotions to take control can make it much harder to get what you want. Some negotiators know this and will try to provoke you on purpose. You should therefore make an effort to keep calm during the negotiation.
A common problem with letting emotions take over is that emotional people tend to adopt an ‘all or nothing’ approach, whereas calm, rational people are more able to compromise. When one or both parties are making extreme demands and are unlikely to back down, negotiations almost always end poorly. In worst cases, the relationship between the parties can be damaged beyond repair.
Example: Tanya
Tanya, a retail assistant, is frustrated with her job. She is not a very emotionally-controlled person. She arranges a meeting with her manager to discuss a pay increase and improvements to her working conditions. However, she arrives at the meeting visibly upset and overwhelmed. Although her manager is very reasonable and willing to consider her suggestions, Tanya is too upset to realise this. Instead, she interprets every question from her manager as an objection to her requests.
Her manager notices this and attempts to set up another meeting. Unfortunately, Tanya becomes even more emotional at the thought of repeating the experience. She walks out on her job before another meeting can be arranged.
Verbal Communication
It is no good having a great argument if you cannot make your position clear to the other party. Being able to communicate clearly and efficiently is a huge asset in many areas of business, but especially negotiation.
As a negotiator, you should have excellent verbal communication skills so that you are able to present your desired outcomes in a way which clearly outlines your case and convinces the other party that you have an effective argument. If you possess poor communication skills, the other party (if they have stronger verbal communication skills) may come out better off in the negotiation even if their argument is not necessarily superior to yours.
When you are negotiating, you must have the skills to not only clearly state your desired outcome (what you want), but also the ability to explain your reasoning effectively (why you want it). State your needs clearly and calmly and explain why you need it. Provide evidence to support your argument.
Collaboration and Teamwork
Negotiation sometimes requires the ability to work in a team. This may be because the knowledge and skills required for the negotiation are too great for just a single person, or simply because you are working together with other parties to negotiate with someone else. You will need to make sure that everyone on your negotiating team knows their role and works well with the other team members.
The ability to collaborate is also helpful in reaching an agreement with the other party. Remember that you are trying to come to a solution which is acceptable to both parties. For this reason, it helps to identify areas of common interest and to be able to work together with the other party to reach an agreement.
HEI TAUIRA:
Problem Solving
Effective problem-solving skills can help you to understand the reason why negotiation is required and help you find mutually beneficial solutions. While you should enter negotiation with a clear strategy and clear goals, you do not know everything. Opportunities may therefore arise during the negotiation and you need to be able to identify and take advantage of them. For this reason, being able to brainstorm ideas, think on your feet, and quickly work to resolve problems are essential negotiation skills.
For example, if an employee asks you for a pay increase, even if you value the work they are doing, it may not be possible to come to an agreement. It may be that you consider the pay increase is too large, that they are already fairly compensated, or your cashflow situation means you cannot afford a pay increase right now. However, this does not mean the negotiation has failed. In this case, other benefits may be offered to the employee instead of a pay increase. In fact, studies have shown that quite often, other benefits are preferred by the employee.3 As a small business owner, instead of making a pay increase the goal, focus on solving the issue by providing alternatives such as increased flexibility in their role and the ability to work from home on some days.
Decision Making Ability
When it comes to negotiations, an effective decision-maker should be able to choose from several workable solutions to a problem. This can sometimes be difficult, as situations are often complex and present many options. The goal should be to create situations that are of benefit to both parties on a personal and business level and one in which both parties leave the negotiation happy.
In business, and especially in negotiation, many choices will involve trade-offs. Just about every option open to you will have some positive and some negative aspects. In general, you should be looking for the option that has the biggest positives and the smallest negatives.
Example: Dimitri
Dimitri, the owner of a small furniture business, has decided to relocate his business to larger premises after a successful first year in business. He finds a location he likes, and a commercial lease agreement is signed by both parties. However, the landlord, Audrey, requires another month to prepare the premises for Dimitri.
Dimitri would like to move in sooner, but he is flexible as he is able to continue using his current premises for another month. Dimitri also wants to take possession of certain fittings and fixtures, but Audrey does not want to include these (even though she does not need them). Dimitri and Audrey negotiate and a decision is reached in which Audrey will be given the extra month in exchange for the inclusion of the fittings and fixtures.
HEI TAUIRA:
3 For example, see Glassdoor. (2015).
Interpersonal Skills
To be an effective negotiator, you must be able to get on well with others. This requires many skills and personal qualities. Being able to reach an agreement in a professional manner can help establish and maintain a healthy working relationship.
DEFINITION:
Interpersonal skills: The set of abilities enabling a person to interact positively and work effectively with others. Development of the interpersonal skills of employees is a key goal of training and development initiatives, and is considered a constructive way to handle office disputes and other personnel issues. These skills include the areas of communication, listening, delegation of tasks and leadership.
BusinessDictionary.com. (2017).
You must be patient. Sometimes negotiation takes longer than we would all like. Even so, it is best to remain calm and keep your eye on your goal. Other people may not be as quick as you, or might need more time to feel comfortable with the outcome. Cultural background can play an important role in how (and how quickly) people and groups make decisions, and it is VERY important to respect this!
You must also have the ability to be convincing without resorting to threats or insults. Always show respect to other people and their views, even if you find their views ridiculous. Present yourself as confident but not overbearing, and keep a positive attitude. It is generally better to be constructive rather than destructive. Lastly, show appropriate gratitude to others. When the negotiation is concluded, thank the other party for their time, even if the negotiation was not successful.
Ethics and Reliability
Your reputation is one of your key assets as a businessperson. It is important that both parties in a negotiation can trust the other party will follow through on any promises and agreements that have come about from the negotiation. People only like to negotiate with someone else if they consider them trustworthy. As a small business owner, it is necessary to develop a reputation of trust so that your employees and other businesses believe you will follow through on what you say.
Hold yourself to the highest ethical standards. If you treat other people well and with respect, you will find that others will do the same for you. Even though you do not have to reveal everything in a negotiation, you should not tell lies. People generally accept withholding information in a negotiation, but they are much less accepting of outright lies. If you have a reputation for dishonesty, other businesspeople will avoid dealing with you.
Negotiation Strategy
Before you enter a negotiation, you should have a good idea of your goals, as well as an idea of what you think the other party wants. You now need to think about your strategy for the negotiation: how are you going to convince the other person to agree to your goals?
When developing a negotiation strategy, you will have to think about the effect of the negotiation on your business relationship with the other party. What happens if you get your desired outcome but the relationship is ruined? Might it not be a better choice to compromise now in order to preserve a valuable business relationship for the future? Keep in mind that what seems like a big win now can turn out to be a disaster in the long term if it means the other party refuses to deal with you again.
In any negotiation, you have control over two basic factors:
• How much you pursue your own goals (i.e. how much you insist on getting your own way), which is your degree of assertiveness
• How much you accept the goals of the other party (i.e. how much you are prepared co-operate with what they want).4
We can show how these two factors combine using a negotiation matrix, shown in Figure 1. The vertical axis represents how much you pursue your own goals (assertiveness) and the horizontal axis shows how much you are prepared to accept the goals of the other party (co-operation).
The negotiation matrix gives us five basic negotiation strategies. Each strategy depends on how much someone is prepared to push their own interests and how much they are prepared to co-operate. For example, if you moderately push your own interests and moderately co-operate, you will be compromising with the other party. Remember, you have control over both factors. Even though you do not have control over what the other party wants, you do have control over how much you are prepared to co-operate with them.
4 Henshall, D. (2015).
Figure 1: Negotiation Matrix
Strategy 1: Problem Solving / Collaboration
In some cases, you can accept the other person’s goals and pursue yours at the same time. For example, if you want permission to build an extension onto your stockroom and your landlord thinks that would improve the value of their premises, then both parties get something they want. This is a ‘win-win’ situation. In these cases, you solve the problem or collaborate with the other party (see Figure 1). When negotiating, you should always try to look for win-win situations, because they make it much easier to reach a solution.
Your strategy in this case will be trying to find common ground with the other party. Your main job will be persuading them that the deal is in both your interests. People are usually quite good at understanding what is in their own interests, so it is not usually difficult to use this strategy.
Strategy 2: Dominating / Competing
Sometimes the parties’ goals will not be compatible. For instance, you might only be able to get what you want if the other person gives up their goal, and vice versa. If you then decide to aggressively pursue your own interest at the expense of the other person, you will be taking a dominating or competitive approach (see Figure 1). This creates a ‘win-lose’ outcome.
It is much harder to get what you want in these situations, and aggressively pursuing your own interests might ruin your business relationship with the other party. You should therefore carefully consider the value of the relationship before you start trying to force the issue.
Whether or not you are successful with this strategy depends on how much power you have in the relationship. If you have very little power, it will be harder to make your case, but if you have a lot, you will likely be able to get your own way if you want to. In many cases, you will not have enough power to force the issue (and you probably should not do that), so you will have to persuade the other party to make the deal. Since the other party will suffer a loss, the aim is usually to persuade them that the loss will be minimal.
Another common strategy in a win-lose situation is to show the other party that it is really a ‘win-win’ in the long run. For example, to get a supplier to take a loss today, you can persuade them that your future loyalty is worth it. This strategy will only work if you have a trustworthy reputation, so it is one reason to always be honest in your dealings. However, in general and where possible, you should always try to nudge the negotiation towards a genuine ‘win-win’ outcome which has obvious benefits for both parties.
Strategy 3: Accommodating / Yielding
A third possibility is that you are less aggressive in pursuing your own goal and more accommodating of the other party. In other words, you agree to take a loss. This does not necessarily mean you are literally taking a financial loss – instead it means that you are taking a position where you have a less favourable outcome than the other party does.
While this might sound like a bad outcome because you do not get your own way, it can sometimes be the best option. For example, when the business relationship is more valuable to you in the long term than getting your own way right now, it can make sense to yield to the other person.
Your strategy in these cases is simple: minimise your losses. Remember that you do not have to come to an agreement. In some cases it can be simply better to walk away than to yield. This may be if, for instance, you believe the other party is being overly dominant and is therefore not someone you would want to deal with in the future. However, if it is still in your interests to proceed with negotiations, point out to the other party that you are doing them a favour just by yielding, and negotiate the best terms you can get.
Strategy 4: Avoiding
If you do not clearly assert what you want, yet are not willing to compromise and allow the other party to get what they want, then you are going to be in a lose-lose situation. The cause for this may be that you are not very committed to the negotiations – perhaps you have a better alternative you could pursue. Another possible reason is that you are not in a favourable position, and intentionally want to stop the negotiations from moving forward in favour of the other party. That is, you are essentially avoiding the negotiation. On the other hand, it may be that you simply lack negotiation skills.
If you are intentionally avoiding negotiation as the outcome may not be in your favour, this could be a good strategy. However, if you do this more than once or twice, you may get a reputation for avoiding difficult situations. Is this how you would like people to think of you and your business?
Strategy 5: Compromising
It is rare for a negotiation to be a straightforward case of dominating or full collaboration. Negotiations are complex and will often involve making compromises. In these cases, you give up some of what you want and the other party does so as well. In general, this strategy requires you to try to swap every loss you take for a win. For example, if a customer wants lower prices, you can counter by asking them to buy more in return.
Keep in mind that compromise is a matter of degree – one party might still do better than the other, but not as well as if the issue had simply been forced.
Preparing a Strategy
Before you enter a negotiation, it is a good idea to work out in advance where you think it will fall on the negotiation matrix. To do this, take the following steps:
1. Make a list of the things you need from the negotiation as well as the things you do not need, but want. This will show you your goals for a successful negotiation as well as other things you might want to push for. It will also show you your bottom line: the point at which the outcome will no longer make business sense. In addition, work out what your best alternative to the negotiation is. This is what you would fall back on if the negotiation failed – it will help show you how important the negotiation is to your business.
2. Make a list of what you think the other party needs and wants from the negotiation. This should give you a basic idea of how strongly they will push for their goals and whether their goals are compatible with yours. Look for any win-win solutions, but also try to identify factors the other party would benefit from and which you would be willing to offer them if you need to compromise.
3. Consider how important the business relationship is to you in the long term. Compare this with how important your needs and wants are for your business. Consider the relative power you and the other party have in the business situation. This will tell you how far you should push your own interests in the negotiation over those of the other party. You do not want to ruin a valuable business relationship just to get your own way on a minor issue. Sometimes it might be better to find someone else to negotiate with rather than ruin an existing business relationship.
HEI TAUIRA:
Example: Anahera
Anahera has a long-standing business relationship with her main supplier, RobCo Industries, from whom she buys parts. Anahera has a good personal relationship with the owner of RobCo and often gets special treatment or discounts from RobCo due to the long relationship between the businesses. The main benefit of being with RobCo, however, is their reliability – they have never let Anahera down in the ten years she has been a customer.
Recently, Anahera has been approached by RobCo’s biggest rival, Vault-tec, who has offered significantly lower prices. She is very tempted to accept their offer, but she knows that it would ruin her business’s long-term relationship with RobCo. In addition, she does not know how long Vault-tec will continue to offer these prices. It could be the case they are only offering low prices in the short term to entice customers away from RobCo.
Anahera realises she might be able to use this as an opportunity to get RobCo to offer her a lower price, if not the same price as Vault-tec are offering. She wonders how much she could push RobCo for a discount without also ruining their relationship. Although Anahera needs the parts, she does not absolutely have to get them at the lower price (although it would really help her profits!).
Using the negotiation matrix, Anahera sees there are several strategies available to her. In regards to negotiating with RobCo, she can aggressively pursue her own interests and try to force RobCo to lower prices by threatening to leave for Vault-tec, or she can try to compromise for a smaller discount. The other option is she can simply do nothing. From the perspective of her negotiations with Vault-tec, this would mean it is a lose-lose situation – Vault-tec do not get a new customer, and Anahera does not get lower prices. It is similar to simply yielding to RobCo, with the exception that no negotiation even takes place.
Anahera decides that her relationship with RobCo is simply too valuable to risk by trying to force RobCo into offering her the low price. She does, however, think that RobCo values her enough to make it reasonable to ask for a smaller discount this time in view of her loyalty. She therefore decides to try to pursue a compromise strategy. Luckily, the people at RobCo also value their relationship with Anahera and are not willing to risk it over a few dollars – the businesses agree that Anahera will get a small discount for her orders over the next three six months, and that the two parties will meet to re-assess the situation again after that time.
Once you know how likely you and the other party’s interests line up, you can see where they fall into the negotiation matrix. Keep in mind that some negotiations will be complex – they will involve more than one issue. If a negotiation is complex, then some issues might be ‘win-win’ and others ‘win-lose’. In this case you want to get a good sense of the negotiation as a whole. For example, is it generally a win-win situation, but with a few minor compromises, or is it largely a case of you needing to get your own way?
When a negotiation is complex, you can approach each issue individually, but always remember that the deal will be judged as a whole. If the other party benefits in some aspects, but thinks that it is overall a bad deal, they might walk away.
If your interests are compatible, you should aim for a problem solving or collaborative approach. Try to quickly establish areas of common interest in the negotiation and focus on ways you and the other party could work towards shared goals. Win-win solutions are almost always the best – both sides get what they want and the business relationship either stays the same or improves from mutual benefit or working together.
On the other hand, if your interests are opposed, you will have to think carefully about the value of the relationship. If the issue does not matter so much to your business, and you cannot compromise, the best strategy might be better to avoid negotiation altogether.
If it is really important, you may have no alternative but to push your own interests. If this is the only strategy available, you should be very careful. Since interests are opposed, the possibility of a negative outcome increases.
You should therefore be firm, but not unreasonable – the idea is to get the other person to accept the situation as the best result, rather than making them feel completely powerless. Try to work up to your position rather than immediately stating it at the outset – this gives the other party time to get used to the idea.
The same is important if your strategy is to compromise. A compromise is something that is generally worked towards, so your initial negotiating position will be different from your goal. Remember that compromise takes two people: your first offer will be looked on as only an offer and not as your final position. If you intend to compromise, it is often important that you do not immediately state your final position: the other party may see it as your starting point and start expecting you to compromise further.
Similarly, if you are forced into yielding or accommodating, you should do so professionally, in a way that preserves your dignity and your reputation as a businessperson. While winning is important, being able to accept minor, tactical losses is also a valuable business skill in the long term. Try to use the opportunity to build goodwill, so the other party is more likely to seek or accept a more favourable outcome for you in the future.
Negotiation Tactics
Your negotiation strategy is your overall plan for achieving your goals in the negotiation, such as pushing for collaboration. Your tactics are how you will carry out that strategy.
While dishonesty is unacceptable, there is usually some degree of deception in business negotiation. Rather than lying, this comes in the form of people holding back information or pretending to be less committed than they actually are. Each party is trying to do the best for themselves, so each has an incentive to appear less willing to compromise than they really are. For instance, many negotiations start with both parties stating bottom lines that are not really bottom lines (i.e. false bottom lines). The idea behind the tactic is to try to gradually draw the other party closer to one’s own position with the hope that both parties can ‘meet in the middle’.
You should not get too bothered about other people’s negotiation tactics. While it can be annoying, bear in mind that, over time, most tactics stop being useful. This is because both parties build trust in each other and know the other party will be fair. In the meantime, when you are negotiating with people you have not dealt with at all (or for very long), it is likely that you will have to do some work to get a good deal.
TĪWHIRI:
Try not to give away your negotiating position through your body language. For example, if you are really happy with the way the negotiation is going, try not to show it as this may lead them to believe they have been too generous (and thus entice the other party to negotiate harder in their favour). Being able to show a ‘poker face’ is even more valuable in business than it is when playing poker.
If the negotiations are complex, with many issues to be covered, it is best to try to deal with the ‘win-win’ issues first. These are the easiest things to agree upon and once there is some agreement, it is harder for the participants to give up and walk away. Similarly, if you want something that you think the other party will find it hard to agree to, try to leave this issue until much later in the negotiation.
Some other useful negotiation tactics are as follows:
• Be wary of making the first offer, but do so when necessary. The disadvantage is that the person who makes the first offer gives away more of their bargaining position. On the other hand, an advantage is that the first offer has an ‘anchoring effect’ because it sets the baseline for the negotiation – in this case making the first offer can ensure the outcome is closer to what you would prefer.
• Show that you have your limits. If you reach your bottom line, make it clear to the other party that you are prepared to walk away. Keep in mind that you might actually have to walk away. If you threaten to leave when your lines are crossed, but never actually do, future negotiation partners will not take your threats seriously.
• Take advantage of market competition, but only if it does not threaten an important relationship. If you do not have any existing relationships for a particular situation, and someone else is offering a deal that is similar to (or better than) that of the party you are negotiating with, use this as leverage to get a better deal.
• Try to work out the other party’s actual limits. These might be quite different from what they are prepared to admit.
• Keep a close eye on their body language. It can give away their real position.
• If the negotiation is not going the way you had hoped, change the subject to some other area of the negotiation. This will allow you to make progress and come back to the hard part later.
• If the other party makes an offer you do not think is serious, tell them directly you do not take it seriously. If it is a ridiculous offer, it is likely just a negotiating tactic. If they tell you they were actually serious, it is likely time to walk away.
• If the other party claims they have to check with someone else before they can accept your offer, then that other person is who you should really be negotiating with. People will often use someone else as a buffer to avoid direct negotiation. You can ask to negotiate with the person who is really in charge: if they really want the deal, they will have to negotiate in person. However, if you are in the weaker position, and you want the arrangement more than the other party, you may not get a say in who you negotiate with.
• At the end of a long negotiation, the other party might introduce ‘one more thing’. This is a tactic to take advantage of the fact that you are tired and want everything to be over. In this case, the best option may be to simply refuse and say it should have been brought up long before now.5
Remember that the other party may try to use many of the same tactics as you, or even more. Always remember this is business, it is not personal. The other person is just trying to advance or protect their interests, like you are, and it is just as acceptable for them to do it as it is for you. Lastly, consider the reputation you want to develop. You do not want to be seen as a pushover by the rest of the business community, but nor do you want to be seen as someone who is unreasonable or to be feared. You should aim to be seen as someone who cannot be taken advantage of, but who is fair and worth doing business with. If you develop a reputation as a fierce and uncompromising negotiator, you might find that everyone else decides on an avoidance strategy.
Discussion Questions:
• What do you find the most stressful part of negotiating? Why is this so stressful for you?
• Do you think you are good at negotiating? Why or why not? What could you do to improve?
• If you find that you are often in a position where you need to yield in order to come to an agreement, what can you do to improve your chances of a more favourable outcome in future?
• What negotiation tactics do you think are unreasonable or unethical?
5 Bucholz, C. (2014).
Part B: Essential Components of a Business Contract
“A valid contract requires voluntary offer, acceptance, and consideration.”
- Robert Higgs
What is a Contract?
A contract is an agreement between two or more parties that is intended to be legally enforced. As a small business owner, you will typically sign many contracts, but not all contracts need to be in writing to be enforceable. Furthermore, even if the parties intend for a contract to be legally enforceable, this does not mean that it will be. It is therefore important to understand what a contract needs to make it valid, binding, and enforceable.
DEFINITION:
Contract (kirimana): A legally binding agreement between two or more parties. When we enter into a contractual agreement, we promise to do certain things and not to do other things depending on what is in the contract. Most contracts do not have to be in writing to be legally enforceable.
Business Terms in Aotearoa. (2012).
There are several ways in which a contract may be created:
• Orally
• In writing
• By inference or conduct
• By a combination of all or any of the above6
When a contract is created by inference or conduct, this means that a court would reasonably infer from the behaviour of the parties that a contract had been created. Their behaviour implies an agreement between them. For example, if you order a product online and pay for it, a legal contract is created between you and the seller.
For any agreement to be lawful there must be an offer which is accepted, and for which consideration is given, an intention to create a legal relationship, and certainty of terms. There may be special rules around contracts that concern specific subject matters, such as employment contracts, the sale of land, and the sale of goods.
These conditions are broken down into five essential elements of a valid contract:
• Offer
• Acceptance
• Consideration
• Intention
• Certainty7
6 Macnicol & Co Certified Accountants Ltd. (n.d.).
7 Knowsley. (2011).
Offer
For a contract to exist, one party must make a clear offer to another party. This can be a written offer, a verbal offer, or a combination of both written and verbal.
HEI TAUIRA:
Example: Mun Chiu and Xiu Mei – Part 1
Mun Chiu and his wife, Xiu Mei, want to renovate the main bathroom of their house. This includes the installation of a new shower, vanity, tiles, and under-tile heating. Mun Chiu looks online and finds a local bathroom installation business, consisting of a small team of plumbers, electricians, and tilers.
Mun Chiu contacts the business via email and arranges a time to meet with Wayne, the owner of the business, to discuss the work required. Wayne visits their home and, after looking at the existing bathroom, he sits down with Mun Chiu and Xiu Mei to discuss the work required. Mun Chiu and Xiu Mei choose the shower, vanity and tiles they would like and decide they would like electric, rather than hydronic (hot water), under-tile heating.
Several days later, Wayne e-mails Mun Chiu and Xiu Mei a written quote for $12,000. This quote is an offer to provide the products and services that the couple want at a price of $12,000.
Acceptance
Acceptance is when one party agrees to the offer. Acceptance can be either verbal or written, but if the offer is made in writing, which includes email, and the offer requires acceptance to also be in writing, then acceptance must also be in writing. In this case, it would not be sufficient to accept the agreement over the telephone or in person.
HEI
TAUIRA:
Example: Mun Chiu and Xiu Mei – Part 2
Mun Chiu and Xiu Mei look at the quote together. They agree to accept the quote and feel that $12,000 is fair. Since the quote specifically requested the couple to reply in writing, Mun Chiu and Xiu Mei sign the ‘letter of acceptance’ included with the quote and drop it off at the premises of the bathroom installation business.
Consideration
This is what each party agrees as their part of the bargain. It is something of value that is exchanged between the parties. In most cases, this is money in exchange for a product or service. The consideration must be something legal and must not be something that has already been done (a past consideration).
HEI TAUIRA:
Example: Mun Chiu and Xiu Mei – Part 3
Wayne has offered to renovate a bathroom by providing and installing a new shower, vanity, tiles, and undertile heating for Mun Chiu and Xiu Mei. In exchange for doing this, Mun Chiu and Xiu Mei have agreed to pay him $12,000. The products, services, and / or money provided by each party is their ‘consideration’.
Intention
For the contract to be legally enforceable, there needs to be an intention between the parties to enter into a binding contract. This means all the parties involved must intend to be bound by the contract. The existence of an agreement with sufficient consideration is usually enough. However, in some cases, a clause may be included which states that the contract is not binding unless the parties sign to say they intend it to be binding.
This factor is important as sometimes people may say something as a joke, or may make an ‘off-hand comment’ which they are not serious about.
HEI TAUIRA:
Example: Mun Chiu and Xiu Mei – Part 4
The letter of acceptance which Mun Chiu and Xiu Mei signed included a clause which stated that, by signing the letter, a legal contract will be formed. This clearly shows there is an intention for both parties to be bound. However, even if this clause was not included, the fact that one party provided a letter of acceptance, and the other signed it, is likely to be sufficient to show there is an intention for both parties to be legally bound.
Certainty
The terms of the contract must be certain. These include the terms of consideration, what the contract is for, and how and when the contract will be carried out. The terms should be specifically agreed by both parties, but in certain circumstances the terms will be implied. This means that any reasonable person would take them to have been agreed to within the contract. Vague or uncertain terms make the contract unenforceable.
HEI TAUIRA:
Example: Mun Chiu and Xiu Mei – Part 5
The quote Mun Chiu and Xiu Mei receive from Wayne includes specifications and prices for the installation of the shower, vanity, tiles, and under-tile heating. It also states the installation date. Unfortunately, the supplier no longer has stock of the vanity T-800 unit Mun Chiu and Xiu Mei had chosen, but the quote clearly states this and an alternative equivalent model vanity (for the same price) is included. By signing the letter of acceptance, Mun Chiu and Xiu Mei agree that the alternative model is acceptable.
Contract Disputes
Contract disputes can often be resolved through one of four processes:
` Mutual settlement. This is a method of resolving disputes without the cost of legal action. It usually involves the parties meeting in person to reach a compromise. Neither party is likely to receive everything they want, but the dispute is resolved.
` Mediation. This is when the parties discuss the problem with a mediator and reach an agreed solution.
` Arbitration. This is when the parties submit their dispute to an arbiter who makes a binding decision.
` Court. This is a method of resolving disputes where the parties argue their case in front of a judge.
Example: Mun Chiu and Xiu Mei – Part 6
Mun Chiu and Xiu Mei arrive home to find that, whilst the new shower, vanity, and tiles have been installed, there is no under-tile heating in the bathroom. Mun Chiu contacts Wayne to ask why under-tile heating has not been installed, but Wayne claims that under-tile heating was not part of the bathroom installation. Mun Chiu and Xiu Mei dispute this as the quote clearly provides for the installation of under-tile heating.
Wayne checks the quote and sees that there has been an error on his part. As a result, he offers to deduct $1,500 from the invoice, but he is unwilling to damage the tiles by removing them and installing under-floor heating. Wayne sends Mun Chiu and Xiu Mei an amended invoice for $10,500 (calculated as $12,000 - $1,500).
Mun Chiu and Xiu Mei arrange for a quote from another bathroom installation business for the installation of under-tile heating. The quote is for $3,500. This includes the installation of under-tile heating and replacement of the tiles. Mun Chiu and Xiu Mei inform Wayne of this, but he feels $1,500 is a fair deduction.
Mun Chiu and Xiu Mei believe this is unfair and, as a compromise, they are only prepared to pay $8,500, since they will need to pay someone else $3,500 to do the extra work. After a mutual settlement agreement, Wayne accepts $8,500 as full payment. The consideration is that for savings of $3,500, Mun Chiu and Xiu Mei surrender that which they are entitled to: under-tile heating as part of a renovated bathroom. In turn, Wayne surrenders his right to full payment of the invoice to avoid a lawsuit for failing to supply goods and services agreed. Neither party is happy, but the dispute is resolved.
Discussion Questions:
• Consider the situation where you sell products or services online. At what point is the offer made and acceptance given?
• What benefits are there of requiring customers to agree to terms of trade when making a purchase on your website?
• Consider the situation of a retail store. At what point is the offer made and acceptance given?
• Assume someone selects a bottle of alcohol from a supermarket shelf and takes it to the counter to purchase along with the correct amount of money. Under contract law, why is it that the business is not required to sell the alcohol to the customer?
• Have you been involved in a contract dispute (as a small business owner or customer)? How could it have been avoided?
HEI TAUIRA:
Part C: Types of Business Contracts and Agreements
“If there is a range of possible acceptable outcomes, then there is always a set of outcomes that will make both of us happier than the minimum acceptable outcome would.”
- Mark Gordon
Business contracts are a part of every business. There are numerous situations in which business contracts are made, and although they all must contain the essential elements of a contract discussed in Part B, they have different purposes. Some contracts are simple and easy to understand, while others are more complicated; some are about business relationships and people, while others are about things.
This part of the seminar will examine six common types of business contracts you may encounter in your own small business, some of which you are likely to have encountered already. These are:
• Customer Contracts
• Supplier Contracts
• Employment Agreements
• Commercial Leases
• Confidentiality Agreements
• Consignment Agreements
Customer Contracts
Customer contracts are legally binding agreements that are made between a customer (buyer) and a merchandiser (seller). These do not have to be in writing to be enforceable. A customer is considered to have accepted the terms and conditions of a customer contract as soon as the product or service has been purchased.
If the contract is put in writing, it should cover details such as the terms on which the business will provide the product or service to the customer and the customer’s obligation to pay for the product or service. It should also include details around other rights and obligations, including a customer’s rights if any dispute should occur.
HEI TAUIRA:
Example: Ric
Ric has become too old and weak to carry his rubbish bags down his long driveway for roadside collection every week. He decides to pay to use a rubbish collection service instead. Ric phones Waldo’s Wheelie Bins, who then send him details to set up an automatic payment for their service. Ric sets up the payment and lets the business know. A few days later he receives the wheelie bin, which he quickly fills with rubbish. No written contract was signed, but by paying for the service and using the wheelie bin, Ric is considered to have accepted the terms and conditions of the contract.
Terms of Trade
Since customer contracts do not need to be in writing, there is greater potential for misunderstandings to occur. Therefore, all businesses should have clear terms of trade, put in writing, which they make all customers aware of. A terms of trade document protects the legal rights of a business by outlining the terms and conditions that exist between a supplier and customer whenever products or services are sold or supplied.
It is important that the terms of trade are displayed clearly for customers to read. If you sell online, it is common practice to require customers to tick a box to confirm they agree to the terms of trade before an order can be placed. If purchases are made by other means, discussing the terms of trade should be included in the usual sales process. This is to ensure that the customer is aware of the terms of payment and conditions of purchase, and understands that by making a purchase they are agreeing to them.
TĪWHIRI:
Terms of trade may not be legally enforceable if they are not shown to the customer until after the transaction is complete. For example, including terms of trade on the back or bottom of a receipt (which is printed after the transaction has been completed) is unlikely to be legally binding.
The initial sections of the terms of trade usually deal with the supplier’s business processes. These include:
• Processes around how orders are placed,
• How quotes are provided to customers,
• Whether the supplier is required to accept orders,
• Delivery time frames and back orders, and
• Whether the customer or supplier can cancel an order.8
Including these details in the terms of trade may make customers feel more comfortable placing an order with your business as they will know there are processes and guidelines in place for ordering and customer interaction.
An extremely important area to cover within your terms of trade is your requirements for payment from customers, particularly when the products or services are sold on credit. The terms of trade document should state the payment due date, any prompt payment discounts, and specific information around interest and penalties on overdue payments. It should also state whether the customer will be responsible for any debt collection fees which may arise if payments are not made on time. Note that you cannot make a customer responsible for paying debt collection fees unless they have agreed to this in advance.
Where the customer is given credit, the terms of trade should provide the supplier a security interest in goods supplied. This could also be extended to cover all the customer’s assets under the Personal Property Securities Act 1999. This is then registered by the supplier. The security interest clause means the supplier is considered to be a secured creditor. This provides permission for the supplier to repossess the goods that were supplied to the customer. Personal guarantees can also be a useful form of additional security for payment.
Another key feature of a terms of trade document is ensuring that legal warranties and guarantees are handled appropriately. In New Zealand, these warranties and guarantees are covered by the Consumer Guarantees Act 1993, Contract and Commercial Law Act 2017, and Fair Trading Act 1986. Figure 2 provides a brief outline of these three Acts. Refer to the ‘Guide to Business Law in New Zealand’ resource for further details.
8 Ibid.
Act Description
Consumer Guarantees Act 1993
Contract and Commercial Law Act 2017
The CGA provides private consumers (but not business customers) certain guarantees for goods and services they purchase.
These include guarantees regarding (for example) goods being of an acceptable quality, being delivered within a reasonable time, being fit for the purpose they were provided for, and being at a reasonable price (if no price was agreed prior).
The CCLA applies to the sale of goods not covered by the CGA. As such, it covers sales between businesses including the rights of both buyers and sellers.
It includes default rules which cover a sale if there is not an expressed contract in place.
The FTA has a wider scope than the CGA. It covers your business’s relationships with everyone it engages with in the course of business operations. The basic point of the Act is to encourage fair business practices.
Fair Trading Act 1986
THE FTA prohibits misleading and dishonest conduct, false representations, and unfair practices. It also covers consumer information and product safety standards.
In some cases, it is necessary to include special purpose clauses in the terms of trade document. For example, if intellectual property is being created or used by a supplier or customer there may be disagreement around who owns the intellectual property and on what terms that intellectual property is able to be used.
USEFUL WEBSITES:
The following websites may be useful when developing terms of trade for your business.
• Auckland Chamber of Commerce, Terms of Trade – https://www.taranakichamber.co.nz/ media/5470748/terms-of-trade-3.pdf
• LittleBizOnline, (Oct 2016). How to write terms and conditions for your business in 5 easy steps – https:// www.littlebizonline.co.nz/write-terms-conditions-business-5-easy-steps/
• HowTo Law, How to Draft Terms of Trade – https://www.howtolaw.co/draft-terms-of-trade-392065
Figure 2: Terms of Trade Warranties and Guarantees
Layby
A layby is an agreement between a customer and a retailer whereby a customer pays for a product or products in instalments and the retailer holds onto the product until the customer has paid the full amount owing on the product. The customer does not own the product until the final payment is made. Unlike a credit contract, the customer does not incur any interest charges or credit fees as a result of using the layby system.
Layby purchases are covered by the Fair Trading Act 1986. This Act specifies that layby agreements must be in writing and a copy must be given to the customer at the time of purchase. It must be legible, presented clearly, and expressed in plain language.
Furthermore, the following information must be provided on the front page of the agreement:
• The business’s name, street address, phone number, and email address.
• A clear description of the goods to be supplied under the agreement.
• A summary of the consumer’s right to cancel the agreement.
• Whether or not a cancellation charge will be imposed.
• If a cancellation charge will be imposed, either the amount of that charge (if it is a fixed fee) or a clear description of how the charge will be calculated.
The contract must also specify the total price payable under the agreement, as well as the date of the agreement.
The customer has the right to cancel a layby agreement at any time before they take possession of the products covered by the agreement. On the other hand, the business can only cancel a layby agreement if:
• the customer has breached a material term of the agreement,
• if, due to reasons outside of their control, the product is no longer available, or
• the retailer has stopped trading due to bankruptcy, receivership, or liquidation.
Refer to the ‘Guide to Business Law in New Zealand’ resource for more information about the Fair Trading Act 1986 and layby sales.
Made-to-Order
A made-to-order agreement is an agreement in which a product is manufactured or designed for a customer according to a customer’s specifications. For example, a customer may require a garage storage unit that is of a specific measurement to fit in the garage or they may require a certain number of cupboards and drawers.
A made-to-order agreement should include:
• Conditions that require the customer to accept responsibility for the accuracy of the information and specifications they provide. This includes measurements and any other information that is needed to ensure the product is suitable for the customer’s needs.
• Conditions around the return of any made-to-order products. It is unlikely that you will want to accept the return of a made-to-order product because the product has been designed around a customer’s own unique specifications.
• A clear statement that your business is unable to offer refunds or exchanges (unless faulty) once the order has been placed.
Factor to Consider:
If you offer consumer credit, such as hire purchase arrangements, you are required to abide by the Credit Contracts and Consumer Finance Act 2003. Information about this Act can be found in the Guide to Business Law in New Zealand resource.
TĪWHIRI:
It is important to have a written made-to-order agreement when a customer is demanding that you do make something that has a reasonable or high risk of failure. This will ensure that you are not responsible under the Consumer Guarantees Act 1993 if the product or service fails or is not suitable. For instance, consider the example of Bruce, where an unreasonable customer wants a business to make something which the business owner has expressly recommended against.
HEI TAUIRA:
Example: Bruce
Bruce has a large feature window in his new home. He has caught his neighbours glancing through his window (he believes they are spying on him) and has therefore decided to arrange for a blind to be installed for privacy. Unfortunately, the window is very large so Bruce is unable to find a ready-made blind that is large enough to fit the window. He is extremely disappointed.
Bruce consults The Blind Man, a made-to-order blind business, and he arranges for a consultant to measure the window and discuss the different blind options with him. The consultant measures the window and returns to his workshop. He returns the following week with several different options to present to Bruce.
Mervyn, the consultant, informs Bruce that his options include either a PVC or aluminium blind, or two smaller wooden blinds. Bruce says he likes the idea of wooden blinds, but only wants one large blind. Mervyn recommends against it as the window is likely to be too large to support the weight of a single wooden blind. Bruce then says he is only interested in a large wooden blind and would like one to be made.
Mervyn informs Bruce that a single wooden blind can be made and fitted, but it would not be covered under warranty. Bruce is willing to take the risk. Mervyn includes a condition in the made-to-order agreement in which the customer (Bruce) accepts that the blind is unable to be exchanged or refunded and that it does not carry a warranty because it is outside of the recommended manufacturer’s specifications.
A few months after the blind was made and installed, it came away from the wall while Bruce was adjusting it. He is left with two holes in his wall and a broken blind. As the sale agreement included a condition around the unsuitability of the blind, Bruce is unable to demand compensation or a replacement blind.
Supplier Contracts
A supply contract is an agreement between a business and another which supplies goods or services to it over time. It is basically the terms of trade of the supplier, although it is more likely you will be able to negotiate different terms. Furthermore, these agreements tend to require different clauses than terms of trade developed for individual consumers.
The terms of a supply contract will usually include details of:
• Supply conditions, including quantity, price, discounts, ordering periods, and delivery times,
• Payment terms,
• Specifications of goods or services supplied (scope of goods),
• Warranty periods for defective goods or services,
• Limited liability (risk of loss or damage),
• Intellectual property,
• Confidentiality,
• Insurance,
• Dispute resolution, and
• Termination and exclusion clauses.9
Whilst there is no legal requirement for this type of agreement to be in writing, it is recommended that you do prepare a written agreement. It will minimise the potential for disagreements between your business and the supplier in respect to the rights and responsibilities of each of the two parties.
Purchase Orders
A purchase order is a document that is issued by a business to a supplier. It provides the supplier with a summary of the products and services that the business intends to purchase from them. It includes a list of products or services, the quantity required, and the approved price. Note that once both parties agree to the purchase order, it becomes a legally binding contract between the two parties.
The purchase order should include the following information:
• The issue date of the purchase order,
• The name and address of the buyer,
• The name and address of the supplier,
• A purchase order number (issued from the buyer),
• A list of the products and services being ordered, along with the price and quantity of each product and service, and
• The purchase order terms and conditions.
Whilst they may seem like a lot of unnecessary extra work for a small business, purchase order agreements play an important role. If a purchase order agreement is used, there is less chance of the incorrect product or quantity being ordered. This is particularly important for inventory control purposes – holding stock on hand ties up working capital for a business and small business owners need to be careful they do not end up with excess stock or stock which they cannot sell. Thus, using a purchase order provides clear evidence of goods ordered, so the business owner does not feel obliged to pay for goods incorrectly supplied to them.
It is not uncommon for a purchase order to be confused with an invoice. However, these are two very different documents (see Figure 3).
9 Queensland Government – Business Queensland. (2016).
3: Purchase Order vs. Invoice10
Purchase Order Invoice
Used to order products or services from supplier. Used to notify the buyer that payment is due.
Issued by the buyer.
Sent to the seller.
Issued by the supplier.
Sent to the buyer.
Purchase order comes before the invoice. Invoice is created after the purchase order.
Defines the terms of the sale.
HEI TAUIRA:
Example: Ririwai
Ririwai is the administrator of a retail store. He has been informed by the store manager that the training room requires a new set of desks and chairs. Ririwai creates a purchase order which includes the required quantity and requirement for the desks and chairs. The business that sells the desks and chairs receives the order. A few days later the business confirms they can supply the desks and chairs with the required specifications.
The furniture business approves the purchase order and takes the payment. Once that payment is received, the desks and chairs are shipped along with a packing slip. An invoice is then emailed to Ririwai. The invoice confirms the payment was received or, alternatively, the due date of the payment.
On receipt of the package, Ririwai checks the packing slip against the goods received to ensure these match. He then checks the packing slip against both the invoice and the purchase order, to make sure he was supplied with the products he requested and is being invoiced for the right products too.
TĪWHIRI:
If your business accepts purchase orders from customers, you should have a clear process in place for notifying the buyer that their order has been ‘accepted’. Remember, a legal contract must have both an offer and acceptance. When a purchase order is sent, it is the buyer making an offer to purchase specific items. A contract is made when this offer is accepted.
Confirms that the sale occurred. 10 InvoiceBerry. (2016).
Figure
Employment Agreements
Employment agreements are a common type of business contract. It is a legal requirement that every employee in your business has a written employment agreement. The employment agreement can either be an individual or a collective agreement. You must keep a copy of each of your employee’s employment contracts. Note that employment agreements are covered in more detail in the Employment Law seminar and in the ‘Guide to Business Law in New Zealand’ resource.
USEFUL WEBSITE:
The Ministry of Business, Innovation and Employment has a useful tool to help you to create employment agreements for your staff. The tool also covers your legal requirements as an employer.
• Ministry of Business, Innovation and Employment (MBIE), Employment Agreement Builder – https://www. employment.govt.nz/starting-employment/employment-agreements/employment-agreement-builder.
Note that an individual employment agreement is required by law to include:
• the names of the employer and employee
• a description of the work to be performed by the employee
• an indication of where the employee is to perform the work
• the agreed hours or an indication of the arrangements relating to the times the employee is to work
• the wages or salary payable to the employee (which must be at least as high as the relevant minimum wage)
• an explanation of the services available for the resolution of employment relationship problems
• a provision that confirms the employee’s right to be paid at least time and a half for working on a public holiday
• a statement of the fact that a probationary period applies and the duration of the period (if applicable)
• a statement of the fact that a trial period applies, the duration of the trial period, and the employer’s right to dismiss the employee during the trial period (if applicable)
• an employee protection provision in the case of business restructuring (if applicable)
• how the agreement will come to an end, if it is a fixed-term agreement.
Note that an employment agreement can contain other terms and conditions that the employee and employer have agreed to, provided that they are not contrary to the law. For example, it may specify the notice period required for resignation and termination, include a clause regarding reimbursement of expenses, and may outline the expectations of the employee in regards to confidentiality and intellectual property.
Commercial Leases
Whilst many small businesses are home-based, operating from home is not practical for many other businesses. Unless they own a building they can operate from, they are likely to need to enter into a commercial lease agreement to use premises owned by someone else.
Commercial leases are governed by the Property Law Act 2007. In comparison, when you rent a residential property, this is covered by the Residential Tenancies Act 1986. In a lease, the landlord is sometimes referred to as a ‘lessor’ and a tenant is sometimes referred to as a ‘lessee’.
There are various types of leases:
• A periodic lease is an ongoing lease arrangement that does not have a specific end date. The arrangement is typically on a month-by-month, or even a week-by-week basis. The lease ends following a period of notice being given by either party.
• Fixed-term leases apply to a specific period. At the end of the period, the arrangement ends unless it is renewed or converted into a periodic lease. Usually, the fixed period is specified using dates. However, a lease may terminate on the occurrence of a future event. Under the Property Law Act 2007 (the Act), the event must be specifically defined in the lease. If that event does not occur within ten years of the commencement of the lease, the lease will terminate on the tenth anniversary. An exception to this is if the lease arrangement specifies a different date on which the lease will terminate if the event does not occur.
• If the lease agreement does not specify that it is a fixed-term agreement or a periodic tenancy, it is referred to as a ‘statutory tenancy’ and under the Act, either party can terminate the agreement by giving 20 working days’ notice.
• A registered lease is the most formal type of lease arrangement as it is registered under the Land Transfer Act 1952 and recorded on the title to the property. The benefit of this arrangement is that the interests of the lessee are then put above any unregistered interests. This makes the lease more secure.
The Agreement to Lease and Deed of Lease
When you lease a premises, it is normal practice to first sign an ‘Agreement to Lease’. This sets out the broad terms of the lease, such as the period it covers and lease payments. The next document to sign is a ‘Deed of Lease’. This includes all the basic terms covered in the Agreement to Lease, but also goes into further details.
In New Zealand, the Auckland District Law Society (ADLS) prepares standard agreements and deeds which are commonly used. If you intend to lease premises, it is a good idea to require that the current versions of these documents are used. One reason for this is that you can be sure it covers all terms you are likely to need within a contract, and another reason is that your lawyer is likely to be familiar with it.
The Auckland District Law Society (ADLS) sells its standard documents on its website. If the lessor (landlord) provides you with an ADLS Agreement to Lease or Deed of Lease, you can go to the website to check that it is the latest version.
• Auckland District Law Society, Legal Documents – https://www.adls.org.nz/adls-store/legal-documents/
A Deed of Lease should cover the following areas:
• The period (term) of the lease
• Lease payment amounts including payments for ‘outgoings’ (such as electricity, rates, etc.)
• When rent reviews occur
• A proper description of the premises and any carparks and access areas
• The permitted use of the property (that is, what type of business operations will be carried out on the premises)
• Whether the lease can be assigned or the premises be subleased by the lessee (tenant)
• Responsibility for arranging insurance and how the cost of this is covered (and whether there are certain risks for which the premises are not insured)
• The responsibilities the lessee has in regards to maintenance and care of the premises
• The responsibilities the lessor (landlord) has in regards to maintenance
• Who is responsible for the legal costs involved in preparing the lease and renewing it
• Whether the lease can be renewed and any processes regarding this
• The freedom the lessee has to fit-out the premises (e.g. paint it and make changes so it is suitable to their needs)
• The condition the premises must be left in when the lease is terminated
• The fixtures and fittings included within the lease
Factor to Consider:
The lessor may require that the lessee provide a personal guarantee for the lease arrangement. If you sign such a guarantee, this means you personally become fully liable for all obligations for the term of the lease. Thus, even if you have a company and that company enters the lease agreement, ultimately, you will be responsible for it.
Obviously, this is not in your favour, especially if you do not retain your interest in the business for the entire term of the lease. Also recall that a lessee remains responsible for a lease agreement even if it is assigned to a third party (unless agreed otherwise). If you sign a personal guarantee, you may find yourself personally liable for the debts of a business which you have never had any form of financial interest in.
Lease Payments
Most payments of leases in New Zealand are made according to one of two types: net lease or gross lease. With a net lease, there are two components of the payment made by the lessee. One is the base rental amount, which simply covers the cost of the actual premises. The other part is referred to as ‘Outgoings’ (or ‘Operating Expenses’ or simply, ‘OPEX’). The outgoings portion covers costs such as insurance and rates, and sometimes electricity, as well as any costs associated with running and maintaining the common areas of the building. This may include, for example, exterior cleaning costs, security and maintenance of lifts.
Quite often, the amount of the outgoings is estimated in advance and the lessee then makes monthly payments of the estimated outgoings. At the end of the period, a ‘wash up’ is done whereby actual costs are calculated and any overpayment is returned to the lessee and any underpayment is charged to the lessee.
With a gross lease, the lessee makes one payment to the lessor, which covers both the base rental amount as well as amounts that would typically be included in the ‘outgoings’ charge.
Confidentiality Agreements
A confidentiality agreement, also known as a ‘non-disclosure agreement’, is a formal contract in which two or more parties agree not to disclose information that is covered by the agreement. These agreements are often used to protect non-public information about a business, particularly information to do with trade secrets and copyrights.
As a small business owner, there will be instances in which you need to disclose information to another party that is private or valuable to the business. The other party may be an employee, a contractor, a strategic alliance partner, or a potential investor, for example. In many cases, the person, people, or business to whom you are sharing information will be able to benefit from using this information. A confidentiality agreement can be used to prevent them from acting on the information as well as to protect your business from the other party simply passing on your confidential information to others.
The information being protected could be an idea for a new type of technology or confidential information about an employee, such as their mental health history or criminal record. Remember, you have a legal requirement under the Privacy Act 2020 to protect personal information (such as details about employees), so personal information cannot be shared unless the person has given consent or it is provided for under the Act.
You should use a confidentiality agreement whenever you are disclosing information that is sensitive to your business. This includes (but is not limited to) when you are:
• Considering the sale of all or part of a business,
• Considering buying a franchise,
• Appointing a distributor or other agent to carry out business on your behalf,
• Disclosing sensitive information to a service provider, such as an accountant, consultant or employee, or
• Showing ideas, plans, prototypes, or early stage works.11
A confidentiality agreement should be signed before confidential information is disclosed. However, it is possible that some information may have already been disclosed prior to the confidentiality agreement being signed. It is in the best interests of your business to ensure that any previously disclosed information is also covered by the confidentiality agreement and that those parties signing the agreement know this.
Even though you can, and should, use confidentiality agreements, it is important to think very carefully about what confidential information you disclose, when you disclose it, and who you disclose it to. Many people sign confidentiality agreements without any thought or care, so there is always a chance someone may disclose confidential information without remembering they are not allowed to. Whilst you can take legal action against them, the damage caused from the breach in confidentiality may be more than the compensation you could receive.
Consignment Agreements
A consignment agreement is an agreement between a consignee (customer) and consignor (supplier) for the storage, transfer, sale, or use of a product or service. The stock is in the possession of the customer, but is still owned by the supplier. An arrangement is made with the supplier in which the ‘title’ of the stock is transferred to the customer when the stock has been sold. The agreement means the customer has no ownership of the product or service until it has been sold.
DEFINITION:
Consignment Contract: A contract by which a seller (consignor) delivers goods to an individual or entity (consignee) that will sell them. For goods sold, the consignee will remit the price to the consignor less a commission. Goods not sold may be returned to the consignor.
Dictionary of International Trade. (2017).
HEI TAUIRA:
Example: Grant
Grant is the owner of Grant’s Plants, a Taupō garden centre and nursery. Grant has these seeds on consignment for Limerick Seeds, a supplier of garden seeds in Australia and New Zealand. At the end of the month, Grant informs the Limerick Seeds sales representative for the Waikato region of the quantity of each packet of seeds sold during that month. An invoice is then raised for payment of the seeds that have been sold.
Consignment agreements were discussed in the ‘Planning Product Distribution’ seminar, and a sample agreement was given. A summary of some of the main terms which should be included in an agreement are as follows:
• A statement that the consignee is responsible for goods in his / her possession.
• The amount of commission the consignee will be taking and whether any additional costs will be deducted. Additional costs could include rental space, an administration fee, and insurance costs.
• A statement that the consignor (supplier) will set the prices at which the products will be sold.
• When payment is expected and the method of payment.
• A clear statement that goods remain the property of the consignor until they are sold.
• A clause which enables the consignor to conduct a physical stocktake of products held by the consignee to ensure that all sales are accounted for.
• The duration of the agreement.
• How products are to be returned at the end of the arrangement.
• A requirement for the consignee to hold the products at a specific location (i.e. their main business premises). Additional terms may relate to factors such as how the items will be displayed, who is responsible for advertising (and how they may be advertised), and how records of inventory will be kept.
Discussion Questions:
• Which types of contract should you get legal advice for?
• Are there any situations, other than the ones listed in this part of the seminar, for which you have entered into a written business contract?
• Are there any lessons you have learned through your experience in developing contracts? For example, are there any clauses which you have found to be important to include in a particular type of contract?
References
Bucholz, C. (2014). 6 Negotiating Tactics that Professionals Use. http://www.cracked.com/blog/6-negotiatingtactics-that-actual-professionals-use/
Citizens Advice Bureau. (2017a). Employment Agreements http://www.cab.org.nz/vat/eb/ea/pages/home.aspx
Fitzherbert Rowe Lawyers. (2013). You, Your Customers and the Law. https://www.fitzrowe.co.nz/articles/item/youyour-customers-and-the-law
Glassdoor. (2015). Q3 2015 U.S. Employment Confidence Survey. https://press-content.glassdoor.com/app/uploads/ sites/2/2015/10/ECS-Q32015-Supplement.pdf.
Henshall, D. (2015). Developing Differentiated Negotiation Strategies. http://purchasingpractice.com/developing-adifferentiated-negotiation-strategy/ InvoiceBerry. (2016). What’s the Difference Between a Purchase Order and an Invoice? http://blog.invoiceberry. com/2016/11/whats-difference-purchase-order-invoice
Knowsley, A. (2011). Rainey Collins Lawyers. Contracts: How to Ensure that Your Agreement Can Be Enforced. https://www.raineycollins.co.nz/your-resources/articles/contracts-how-to-ensure-that-your-agreementcan-be-enforced
LawHawk. (2016). LawHawk Guide to Confidentiality Agreements https://www.lawhawk.nz/resources/documentguides/confidentiality-agreement-guide.
LawLive. (n.d.). Legal Contracts & Documents. https://lawlive.co.nz/commercial-supply-contracts.
Loi, K. (2013). All You Ever Need to Know About Purchase Orders https://blog.procurify.com/2013/09/23/all-youever-needed-to-know-about-purchase-orders.
Macnicol & Co Certified Accountants Ltd. (n.d.) Essential Features of a Valid Contract. http://macnicol.co.nz/fact_ sheetscontracts___essential_features
Moore, D. (2013). Norris Ward McKinnon. Protecting Confidential Information? http://www.nwm.co.nz/protectingconfidential-information.
Net Lawman. (n.d.). Confidentiality Agreements – Mutual Confidentiality Agreement https://www.netlawman. co.nz/d/confidentiality-agreement
Nixon, R. (2016). 10 Steps to Achieving Win-Wins with Effective Negotiation Skills. http://www.exceledgeintl.com/ negotiation-skills
Queensland Government – Business Queensland. (2016). Negotiating Supplier Contracts https://www.business.qld. gov.au/starting-business/planning/suppliers/finding-suppliers/contracts
Smith and Partners. (2018). What is a Deed of Lease? http://www.smithpartners.co.nz/library/articles/commercialproperty-law/deed-of-lease/
Steenstra, C. (2015). Norris Ward McKinnon. Terms of Trade http://www.nwm.co.nz/terms-of-trade
Young, K. (2015). Job Hunting: Skills and Experience – Boost Your Negotiation Skills. https://www.careers. accaglobal.com/careers-advice/career-development/developing-your-skills/boost-your-negotiationskills.html
Disclaimer
The information in this publication is not intended as a substitute for professional advice. Te Wānanga o Aotearoa expressly disclaims all liability to any person / organisation arising directly or indirectly from the use of or reliance on, or for any errors or omissions in, the information in this publication, including any references to third parties. Whilst efforts have been made by Te Wānanga o Aotearoa to ensure the accuracy of the information provided, the adoption and application of this information is at the reader’s discretion and is his or her sole responsibility.
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This publication was revised in October 2021.
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