Articles

Terms of Trade - An Essential Part of Your Business

Thursday, June 01, 2017

Terms are Essential:

Companies that provide goods or services on standard terms (including credit terms) should be regularly having a legal health check of their terms and their practices for ensuring the terms they are using accurately reflect their business practices, meet all of their requirements and cover off their key risks – as well as ensuring they are appropriately brought to the attention of customers or clients so that they are valid, enforceable or binding.

Terms of trade (which may be called "terms of engagement" or "standard terms of contract") will often contain virtually all of your key legal rights and remedies in respect of the customers that you supply and if drafted appropriately, can greatly assist in managing disputes in a cost-effective and beneficial way, allow ready enforcement of your legal rights, and ensure that you are complying with the law in respect of the information you obtain about your customers and the way that you conduct business.

Importantly, your terms of trade will contain and protect a supplier's main right – the right to be paid for the goods and/or services that the supplier provides – and often how that payment will be calculated.

In a legal sense, terms of trade are absolutely essential to your business.

Bad Terms Will Damage Your Business

Despite the terms of trade being so essential, we have seen numerous examples of people utilising terms of trade that they have taken or adapted from sources on the internet or copied from businesses that are quite different in the way they operate.  Setting aside issues of copyright, using terms that "don't fit" can cause no end of problems.  We have seen goods suppliers using terms that are entirely directed at services, suppliers of goods having delivery and risk provisions that do not match their actual business practices, people warranting matters that are not within their control and even New Zealand businesses using terms that refer to law and jurisdiction of other countries.  

Often, these problems make the terms difficult or impossible to enforce, or worse, give customers claims in respect of breaches of terms that the supplier could never have performed.  Even if the terms loosely fit, very few businesses (if any) are identical in every respect of their business – using "template terms" is a recipe for disaster, no-one is an exactly standard person in an exactly standard business.

"Short" Terms are Not Always Best For You

We are also often very surprised to hear people say that they want their terms to be "short and simple" so they will not be off-putting to their clients.  However, faced with the same clients in a dispute situation, those same people wish that their terms had been much more detailed, accurate and highly protective of their rights and interests.  

We are often tasked with assisting clients (both suppliers and customers) that are involved in disputes over arguments over trade terms.  Sometimes the dispute is that those terms are confusing, incomplete or lacking important protections available under existing contract or statutory law – and these were left out to keep the terms "short and to the point".  Often, the person seeking to rely on the terms was never aware the terms were lacking, or had omitted certain terms without having an appreciation of the risk they were taking.

Striking a balance between "user-friendly" terms and the management of risk is not always a simple exercise.  As our clients know their businesses best, there is a degree of commercial judgement required.  However, to enable our clients to make effective judgements, we provide full advice so our clients know the risks entailed in taking shortcuts. We also get to know the businesses of our client in more detail, so we can be sure we have covered all key points of risk.  This also helps us assist with other related issues - have you considered getting guarantees for the customer – and if so, why not?  Do you provide credit?  What information do you collect from your customers?  Do you fulfil the requirements of the Privacy Act 1993 in collecting that information?  What information may you want to send to them?  We then help you secure your position appropriately and help you fulfil other business objectives that you may not have considered.

Terms Directed at Consumers Have Special Rules

Standard terms directed at people that are ordinarily acquiring credit or your products for household or domestic purposes have their own special rules.  There are a large number of consumer protection statutes in New Zealand and these need to be considered carefully.  Equally, if you are not providing goods or services in such circumstances, you need to be clear about that and ensure that the consumer protection statutes are excluded to the fullest extent possible.

Terms Need to be Agreed

Once you have terms of trade, they also need to be brought to the attention of the other party and you need to be sure you have clear evidence that they have agreed to them.  If you cannot evidence this agreement, your terms may not form part of your contract and you may not be able to enforce them.  Arguments over whether terms have been agreed or not can be costly.  We assist to ensure that your business practices clearly evidence that your customers have agreed with your terms.   Depending on the business relationship and context, this can be as simple as:

  1. having a customer sign an account or credit application form including the terms;
  2. sending the terms by email and getting confirmation they are accepted and retaining those emails; or
  3. having a person tick a tick box on your website, confirming that they have read and agreed to your terms before providing them a gateway to complete further business.

There are lots of statutes your terms need to take account of.

There are a lot of statutes that impact on your terms of trade and your business – as well as impact on certain rights you may wish to enforce.

A number of these statutes may imply or provide for certain default terms if they are not excluded.  Some of these statutes (such as the Privacy Act 1993) may require you to provide certain details and adopt certain practices about people you collect information from.  The Fair Trading Act 1986 ("FTA") prohibits certain trade practices.  Other statutes, such as the Personal Property Securities Act 1999, may require you to obtain certain information from your customers and assert certain legal rights to ensure you have security over goods you part possession with prior to being paid.  We are familiar with all of the statutes and law that will impact on your terms and we will use this knowledge to help navigate you through these legal issues in an effective and efficient way.

Changes to Law

The law changes.  Even if you have good terms of trade, you should be having regular updates to make sure that a recent legal change has not had an undesired impact on your terms.  You can also take advantage of changes to legislation that might benefit you.  For example, until mid-2014 certain provisions of the FTA could not be contracted out of, following that date, commercial actors can potentially contract out of certain provisions of the FTA – and that contracting out can appear in your terms.  From 1 September 2017, the Contract and Commercial Law Act 2017 will come into effect.  This consolidates various contract and commercial law statutes (such as the Sale of Goods Act 1908, Carriage of Goods Act 1979) that often appear in terms of trade, and will be repealed following 1 September 2017.  While this statute preserves prior law, there are some minor exceptions – and it would avoid confusion if terms of trade referred to correct and up-to-date law.

Terms Are Essential

Terms of Trade can have good enforcement provisions that assist you to get paid quickly and maximise your cash flow.  If you cannot enforce the terms you want with customers, you can lose a lot of money, both in arguments with customers or through being unable to enforce the terms you need.

The only way to avoid this is to have well drafted, up-to-date terms of trade that comply with law, reflect your business practices and requirements and manage your risks – and are able to be demonstrated as being agreed by the customer and therefore binding.  Being in a position to use standardised terms of trade means that you do not need to enter different contracts with each customer, so there is already a cost saving that one size will fit all (although we will reserve your rights to agree different terms with customers if you wish!).  We recommend that cost saving is used by making sure you get appropriate legal support to ensure your standard terms are the best that they can be.

We think the points we have made are pretty conclusive that ensuring that you have good terms of trade is something that warrants legal expenditure; it is a cost that will more than pay for itself in terms of good business and risk management.  We are happy to help.

Please kindly direct any enquiries to:

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz) or
Harry Forsythe on (09) 306 6727 (hforsythe@mcveaghfleming.co.nz)

 

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.   

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