7 Things Start-Ups Need to Know to Avoid a Lawsuit

Are you a business start-up looking for lawyer tips? In this article, we offer 7 tips to avoid common mistakes made by start-ups and new business owners. In summary, they are:

  1. Your terms of trade with your customers should be clear and sound.
  2. Define the role of your business partners in the business.
  3. You should have contracts with your suppliers which are fair to you.
  4. Be aware of other people’s “intellectual property rights” so you do not inadvertently infringe on them.
  5. Before purchasing a business or property or signing a lease of commercial premises, consult your solicitor.
  6. Manage your debts to suppliers.
  7. Ensure your promotional material does not make unjustified claims.

1. Your terms of trade with your customers should be clear and sound.

Do you know the number one cause of small businesses landing up in Court?  Most often it is a contractual dispute arising from either the absence of a written agreement, a misunderstanding about the agreement or even a poorly drafted or inappropriate document.  The best way to minimise this risk is to have written contracts in place for all your business arrangements and to ensure that those contracts are clear, complete and tailored appropriately for your business situation.

Well-drafted terms and conditions for your business can go a long way to reduce misunderstandings with your customers.  Each customer’s “acceptance” of your terms and conditions should also be recorded, whether by signature or otherwise.

2. Define the role of your business partners in the business.

Unless your rights, duties and interests in a business partnership are set out in some type of agreement, these things will be determined according to the rules set out in the Partnership Act.  Some of these rules may not correlate with your understanding of what your partner’s role in the firm should be, for instance, the rules:

  • that he or she is entitled to share equally in the capital and profits of the business;
  • that he or she is entitled to be indemnified by you for all liabilities incurred by him/her “in the ordinary and proper conduct of the business of the firm.” (In practice this means you would be jointly liable with your business partner for all such debts incurred by him/her on behalf of the business).

It is therefore recommended that you have a suitable Partnership Agreement, clearly documenting the arrangement between you.

3. You should have contracts with your suppliers which are fair to you.

Many service provider’s terms and conditions are “non-negotiable” particularly for the supply of utilities such as telecommunications, electricity and water.  If you are not happy with those terms and conditions your one alternative may be to find another supplier.

This is not necessarily the case when your business is in the process of purchasing a customised one-off item, a large item or is about to enter into a long-term service or purchase arrangement with a supplier.  In these circumstances, you may be in a better bargaining position.  Before you sign/accept the supplier’s contract or terms and conditions, they should be checked out by your business lawyer who can suggest changes so that the contract is not so one-sided in the supplier’s favour.

4. Be aware of other people’s “intellectual property rights” so you do not inadvertently infringe on them.

What are known as “intellectual property rights” include: copyrights, trademarks, patents and registered designs.

Before ordering and purchasing your stationery with your newly designed logo, it is a good idea to check you are not potentially infringing someone else’s registered trademark particularly in relation to the type of products or services you sell.  Your business lawyer can check and clarify this issue for you.  If you are an internet business, you may need to arrange a search of trademarks registered in other countries to which you offer goods for sale over the internet, so as to avoid inadvertent infringement of trademarks registered elsewhere.

You may also wish to consider protecting your “brand” from the start by having your logo registered as an Australian trademark.  For those intending to franchise a business (or a business idea), trademark registration is a particularly important part of the franchisor documenting all the intellectual property rights that will ultimately be “licensed” to each franchisee under the Franchise Agreement.

Contrary to popular belief, the registration of your trading name (in Australia with ASIC) does not give you ownership in the registered name.  Your compliance with such legal requirements (to obtain an ABN and business name registration) would not necessarily stop others from registering that name or a similar name as a trademark, or as part of a trademark, if that name has not previously established a reputation in Australia in association with another business, product or service.

5. Before purchasing a business or property or signing a lease of commercial premises, consult your solicitor.

When you purchase a business or a franchise, or if you take on of a lease of retail premises, this could be the biggest one-off deal you negotiate.  Please consult your lawyer before signing anything or moving into retail or commercial premises.  It helps to have us involved in the process from the start so we can help you minimise the stress involved by drawing on our experience in negotiating literally hundreds of contracts.

Start by identifying any other “property” that your business may need to operate (such as the right to use someone else’s copyright material) and consult your business lawyer about having a legally appropriate agreement in place (such as a lease, assignment or licence).

6. Manage your debts to suppliers.

Ultimately your ability to pay your debts as and when they fall due is a financial matter concerning your cash flow and possibly the financial arrangements with your bank.  (On this, please speak to your financial adviser).

If you think a product or service provided to you is faulty, it is best to communicate your concern to the supplier ASAP to give them an opportunity to fix or rectify the problem before they bill you.  If the problem is not fixed and you ignore the supplier’s invoice and/or reminder letters, you could find yourself becoming the defendant to debt recovery court proceedings initiated by the supplier.  It is far better to clarify your legal position early-on by consulting a business lawyer.  With that knowledge and your solicitor’s input, you may possibly arrive at a negotiated settlement with the supplier of faulty goods or services.

7. Ensure your promotional material does not make unjustified claims.

In advertising, as well as all your other business dealings, you must not mislead or deceive the anticipated audience (deliberately or inadvertently) otherwise you will be in breach of the Australian Consumer Law. Misleading someone may include lying to them, leading them to the wrong conclusion, creating a false impression, leaving out (or hiding) important information or making false or inaccurate claims.  In determining if a particular piece of advertising is misleading and deceptive, regard will be had to the overall impression imparted to the intended audience.

The Australian Consumer Law imposes other more specific obligations on businesses such as the requirement that businesses do not make false or misleading representations about the characteristics of goods or services, including sponsorship, price, place of origin, warranties, availability of spare parts or the buyer’s need for goods.

Before going ahead with an extensive advertising campaign, it’s a good idea to arrange for your business lawyer to check the materials’ compliance with the Australian Consumer Law.

Disclaimer: N.B. The articles published on this website are general information only and are not intended to be definitive advice on the subject area. They do not constitute legal advice and should not be relied upon as such. For legal advice relating to your particular situation, please contact us today and talk to a business lawyer.

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