Types of contracts
A contract can be anything from a formal written document to a purely verbal promise. For example, a contract could be made simply because of a handshake deal to do a job where the only thing in writing is a quote on the back of an envelope.
Whatever its form, if you agree to provide a service to a hirer for money, you have entered into a contract. You are promising to do a job for the hirer and the hirer is promising to pay you for it.
A contract is a verbal or written agreement to do work in exchange for some benefit, usually a payment. The agreement is able to be enforced in the courts.
Types of contracts can include:
Written contracts provide more certainty for both parties than verbal contracts. They clearly set out the details of what was agreed. Matters such as materials, timeframes, payments and a procedure to follow in the event of a dispute, can all be set out in a contract.
A written contract helps to minimise risks as it is much safer to have something in writing than to rely on someone's word. A written contract will give you more certainty and minimise your business risks by making the agreement clear from the outset.
Benefits of a written contract:
A written contract can:
- Provide proof of what was agreed between you and the hirer.
- Help to prevent misunderstandings or disputes by making the agreement clear from the outset.
- Give you security and peace of mind by knowing you have work, for how long and what you will be paid.
- Clarify your status as an independent contractor by stating that the contract is a 'services contract' and not an 'employment contract'. This will not override a 'sham' contract, but a court will take the statement into account if there is any uncertainty about the nature of the relationship.
- Reduce the risk of a dispute by detailing payments, timeframes and work to be performed under the contract.
- Set out how a dispute over payments or performance will be resolved.
- Set out how the contract can be varied.
- Serve as a record of what was agreed.
- Specify how either party can end the contract before the work is completed.
Risks of not having a written contract
When a contract is not in writing, you are exposing yourself and your business to a number of risks including:
- The risk that you or the hirer misunderstood an important part of the agreement, such as how much was to be paid for the job or what work was to be carried out.
- The risk that you will have a dispute with the hirer over what was agreed because you are both relying on memory.
- The risk that a court won't enforce the contract because you may not be able to prove the existence of the contract or its terms.
Get advice before you sign
Before you sign a contract, it is a good idea to seek advice from your industry association, lawyer, business adviser or union.
When a written contract is essential
It's always better to have your contract in writing, no matter how small the job is. Any contract with a hirer that involves a significant risk to your business should always be carefully considered and put in writing. This is advisable even if it means delaying the start of the work. A written contract is essential:
- When the contract price is large enough to make or break your business if you don't get paid.
- Where there are quality requirements, specifications or specific materials that must be used.
- Where there is some doubt that the hirer has enough money to pay you.
- When you must have certain types of insurance for the type of work you are doing.
- Where the contract contains essential terms, such as a critical date for the completion of the work before payment can be made.
- Where you or the hirer need to keep certain information confidential.
- When it is required by your insurance company for professional indemnity purposes.
- Where there is a legal obligation to have a written contract (eg. trade contracts for building work in Queensland).
Many independent contracting arrangements use verbal contracts, which only work well if there are no disputes. A handshake agreement may still be a contract and may (though often with difficulty) be enforced by a court. However, verbal contracts can lead to uncertainty about each party's rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do.
Part verbal, part written contracts
Some agreements may be only partly verbal. For example, there may be supporting paperwork such as a quote or a list of specifications that also forms part of the contract. At the very least, you should write down the main points that you agreed with the hirer to avoid relying on memory. Keep any paperwork associated with the contract. The paperwork can later be used in discussions with the hirer to try to resolve a problem. If the dispute becomes serious, it may be used as evidence in court.
The most important thing is that each party clearly understands what work will be done, when it will be completed and how much will be paid for the work.
Examples of paperwork that may support a verbal contract
- quotes with relevant details
- lists of specifications and materials
- notes about your discussion—for example, the basics of your contract written on the back of an envelope (whether signed by both of you or not).
If the contract is only partly written or the terms of the work are set out in a number of separate documents (e-mail, quote etc.), it is to your benefit to make sure that any formal agreement you are being asked to sign refers to or incorporates those documents. At the very least, make sure the contract does not contain a term to the effect that the formal document is the 'entire agreement'.
A 'standard form' contract is a pre-prepared contract where most of the terms are set in advance and little or no negotiation between the parties occurs. Often, these are printed with only a few blank spaces for filling in information such as names, dates and signatures.
Standard form contracts often include a lot of legal 'fine print' and terms that you may not understand. They tend to be one-sided documents that mostly benefit the person who prepared the contract (for example, by shifting as much risk as possible to the contractor). If you don't understand the fine print or any other part of the contract, you should get advice. If you sign the contract, you will be required to comply with the fine print even if you didn't actually read it.
Tips for standard form contracts
Read every word before you sign
Read the fine print carefully and get advice about any terms you don't understand before you sign. Once you sign a contract you are bound by all of its terms. If there is an indemnity clause, don't sign until you understand the risks you are agreeing to accept if something goes wrong.
Cross out any blank spaces
Don't leave any spaces blank. If you don't need to fill in a blank space, always cross it out so the contract can't be changed after you sign it.
You have the right to negotiate any contract before signing, including a standard form contract. But remember that both parties must agree to any changes and record them in the contract you sign. Your union or industry association or a lawyer can help you prepare for negotiations.
Keep a copy
You should always have a copy of any contract you sign. It is best if you and the hirer sign two copies of the contract, so that you can both keep an original. If this isn't possible, ask for a photocopy and check that it is an exact copy. Remember to keep your copy somewhere safe for future reference.
A lawyer, your union or industry association might be able to provide you with information about some common standard terms used in contracts in your industry. They may also be able to provide you with a standard form contract for you to use.
Some independent contractors and hirers use a 'period contract', which is a contract template that sets out the terms for a business relationship where the contractor is engaged to perform work from time to time. In the building and construction industry, these contracts are called 'period trade contracts'.
The contract template will apply each time the hirer offers work to the contractor and the contractor accepts it. This can occur when the contractor provides a quote and receives a work order from the hirer, or the parties might sign an addendum (an addition to the contract) that sets out the specific work to be done or result to be achieved. Once the work starts, the contract template and the work order or addendum will form the total contract for the specific work.
Period contracts can work well for both parties. They allow for the flexibility of performing intermittent work over an agreed period. However, you should check the terms of the agreement to do each new job. Are they the same as those set out in the original contract template? Any term or condition that is different for a particular job, may change the terms of the original contract template.
If you are unsure about anything related to a period contract, get advice before you sign or agree to new work, even if you have performed work for that hirer previously.
Tip: Before you agree to start a new job under the contract template, check whether the terms and conditions are the same as those set out in the original contract template. If not, don't take on the work until you are happy with the changes to the contract.
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- Talk to your business adviser or mentor.
- To find a lawyer, contact the Law Society or the Law Institute in your state or territory.
- Indigenous Australians can contact the Aboriginal and Torres Strait Legal Service in your state or territory.
- Indigenous Australians can also contact the Australian Indigenous Chamber of Commerce. The Chamber may be able to assist you to find a business mentor or a business network to help you get started as a contractor.
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