How To Manage Business Risk Using Terms and Conditions of Trade 07 Dec 2011
Many businesses operate without clear written terms and conditions of trade. Services are provided and goods are supplied without any clear record of who will cover the cost if something goes wrong. Taking the time to prepare clear and reasonable terms and conditions of trade can help ensure that your business risk is identified and properly managed. The team at Parry Field Lawyers are experienced at drafting terms of trade to ensure that risks associated with your work are clearly identified and allocated.
What risks should my terms and conditions of trade cover?
Your terms and conditions should address a range of issues that create risk for your company. For most businesses, these include risk of:
- unpaid debts;
- incurring liability for negligence or breach of contract;
- your employees and directors incurring personal liability for company activities;
- damage to goods during delivery process; and
- force majeure events.
To manage these risks you need to have clear terms and conditions of trade, and you need to ensure that those terms and conditions are brought to your customers' attention and accepted by them before you agree to provide goods or services to the customer.
The purpose of your terms and conditions should be to expressly deal with these risks and bind your customer to an agreement as to what happens if any of these risks occurs.
How can I ensure my terms and conditions binding on my customers?
If you give quotations, your terms and conditions of trade must be inserted with the quotation form sent to the potential customer. If you don't use a quotation form, we strongly advise that terms of trade are sent to your customers anyway before you agree to carry out work for them. It is preferable to have your customers at least sign and fax back to you a copy of your terms and conditions. This gives you evidence that the customer saw and accepted your terms and conditions before the contract began.
If your business is typically done by oral agreements, don't be afraid of scaring customers off by asking for their signature on your quotation form or sending them a letter advising them of the terms and conditions upon which you will perform services. Getting things clear from the start will hopefully mean no misunderstandings later. Blame your terms and conditions on your lawyer if necessary. If a client is scared off, maybe it is a client you wouldn't want to have anyway!
Also, beware of receiving orders which purport to be "given on the terms and conditions set out in our order form". This may bind you to their conditions.
Your terms should specify when the contract price is to be paid and what interest you can charge on unpaid accounts. They should allow you to pass on your full legal and debt collection costs to the customer. They should ensure the customer gives you sufficient security for any goods or services you supply on credit. This security should be given in a form that complies with the Personal Property Securities Act 1999. For more advice on writing payment terms, see our article on how to write payment terms and conditions.
Limitation of Liability
Your terms and conditions should limit your maximum liability, and make it clear that you cannot be held liable for your customer's loss of profits or any consequential or economic losses. You can also limit your liability to replacement or refund of the particular defective item supplied or the particular defective service given. Your limitation of liability terms should also make it clear that your company's directors and employees are not personally directly liable to its customers.
Limitation of liability clauses can be complicated to prepare because historically the courts have tried to limit their application. A well drafted and reasonable limitation of liability clause can be effective in reducing your liability to customers to a manageable limit.
You also need to make sure that your limitation clauses comply with the Fair Trading Act and the Consumer Guarantees Act. Where you supply consumer goods or consumer services to consumers, you cannot contract out of the provisions of the Consumer Guarantees Act 1993. A limitation of liability clause that appears to release you from liability under the Consumer Guarantees Act may actually breach the Fair Trading Act 1986.
Where the Consumer Guarantees Act applies, you can still manage your risk of liability by, among other things, clearly and accurately setting out the limits of the goods and services you supply, and identifying any items that are not included.
As mentioned above, the Consumer Guarantees Act 1993 imposes implied guarantees on supplies of consumer goods and services. You can contract out of the Consumer Guarantees Act 1993 in relation to businesses, but not in relation to consumers. In relation to goods, the Sale of Goods Act 1908 may also impose warranties including that the goods are of merchantable quality and fit for the purpose for which the buyer is buying them. You can contract out of the Sale of Goods Act 1908.
In considering how to deal with warranties, you should also consider whether there are specific warranties that you do want to give your customers. An express warranty as to the quality of your goods and services can serve as a marketing tool that causes customers to choose your goods and services instead of your competitor's goods and services.
Delivery and Risk
Yours terms and conditions should expressly address who bears the cost if goods are damaged while be delivered to your customers or there are any delays in completing delivery. For example, it is common for terms and conditions to specify that goods are at the customer's risk from the time they leave your premises, even if you are the person delivering the goods. This can hep ensure that, if goods are damaged after they leave your premises, you are not responsible for the cost of repairing the damage.
Your terms and conditions should also excuse you from performance of your obligations to your customer if performance of your obligations becomes impossible because of an unforeseen event outside your control (such as an earthquake, terrorist act, or outbreak of war).
How can my lawyer help?
Because your terms and conditions will usually be used in connection with a very large number of sales, it is worth taking the time to make sure they are effective. In addition, particular businesses will have particular risks that are unique to that kind of business. The risks associated with a construction company will be different to those associated with a software company.
Your lawyer is the best person to advise you on what should be in your terms and conditions of trade and how to best ensure that the terms you trade on are yours, and not your customers.
Note. The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations.