Navigating commercial law can be complex, and misunderstandings are all too common. These misconceptions often lead to costly mistakes or missed opportunities. In this blog, we’ll debunk some of the most widespread myths to help you avoid potential pitfalls and make more informed decisions.

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1. "My company is a separate legal entity, so I can't be held personally liable."

This is one of the most frequently misunderstood aspects of commercial law. While it’s true that a company is considered a separate legal entity, directors and officers can still be held personally liable under certain circumstances. For example, this can occur if directors breach their duties, trade while insolvent, or engage in fraudulent or negligent activities. Directors owe a duty of care to the company and must act in its best interest. If these duties are breached, personal liability can arise despite the company’s separate legal status.

Sierra Legal’s tip: Directors need to be particularly cautious during financially challenging periods for the company to avoid insolvent trading, which could result in personal liability for the directors.

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2. "A handshake deal is just as enforceable as a written contract."

While Australian contract law recognises verbal agreements in some cases, relying on a handshake deal can be risky. Without a written contract, it can be difficult to prove the terms of the agreement if a dispute arises. Written contracts provide clarity and reduce the chances of misunderstanding. Additionally, certain transactions, like those involving the sale of land, are legally required to be in writing. In commercial dealings, a well-drafted written contract is always preferable to avoid costly legal disputes.

Sierra Legal’s tip: Always seek a written contract for key business transactions, even if there’s trust between the parties. It’s about protection, not distrust.

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3. "If it's in the contract, it must be enforceable."

Not necessarily. Just because a term is written into a contract, that doesn’t automatically make it legally binding. Some terms may be deemed unfair or unenforceable, especially in the context of consumer and small business contracts. Under the Australian Consumer Law (ACL), unfair contract terms can be voided, particularly in standard form contracts. These include terms that create an imbalance of power, allow one party to terminate without good reason, or impose harsh penalties on one side.

Sierra Legal’s tip: Ensure contracts are balanced and compliant with all applicable laws. Don’t assume every term will hold up in court, especially if it unfairly favours one party.

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4. "As a shareholder, I have the right to manage the company."

Shareholders often believe they can control or manage the company’s day-to-day operations. However, this is not usually the case. Typically, the board of directors is responsible for managing the company. Shareholders are generally entitled to vote on significant matters, such as appointing directors or approving major transactions, but they do not get involved in daily management. Shareholders are the owners, but the directors are the decision-makers.

Sierra Legal’s tip: As a shareholder, it’s essential to understand the limits of your rights. Shareholder agreements and the company’s constitution often outline these boundaries, so it’s important to be familiar with them.

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5. "You don’t need legal advice for small transactions.”

Many individuals and small business owners believe that legal advice is unnecessary for small transactions, assuming the risks and complexities are minimal. They often think that they can handle these transactions on their own without incurring legal fees. However, even small transactions can carry significant legal implications.  

Sierra Legal’s tip: Always consult a legal professional, regardless of the transaction size. Doing so will allow you to make better-informed decisions and ultimately contribute to the success of the transaction.

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Conclusion

Legal issues can be complex, and misunderstandings can lead to costly errors or missed opportunities. By seeking legal advice when entering contracts, managing corporate governance, or addressing liability matters, you can protect your interests and ensure compliance with the law.  

Contact the team at Sierra Legal today to explore how we can support you.

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