by Clayton HellenTerms and Conditions of Trade – what to include and what not to include
The terms and conditions of a business are often the foundation of the agreement between a business and its customers for the provision of goods or services and in some instances may be the only documentary proof of the agreement.
Given the importance of the document, businesses must ensure that it is robust, accurate and up to date, particularly given the changes that have occurred to key pieces of legislation in recent years. A small investment in a review of terms and conditions can have a large return in the form of protecting the business’s rights and potentially recouping outstanding monies.
The commercial terms in such a document should be clear, including price, method of payment, delivery, and dimensions, plans and specifications. Beyond these fundamental commercial provisions, the terms and conditions should also include reference to the nature of a quotation and how such a quotation can be accepted. Even though acceptance at law may differ from the general meaning of acceptance, specifying in the terms and conditions the circumstances giving rise to acceptance will provide prima facie agreement by the parties as to when the contract is entered into. Similarly, the terms should cover the time of risk passing in goods supplied, and the granting of access to premises of the customer where services are to be provided at the customer’s location.
Many terms and conditions lack provisions that strengthen the business’s rights particularly in the instance of default of the purchaser. Notwithstanding the impact of the Personal Property Securities Act 2009 (Cth) (PPSA) (discussed below), it is useful for terms and conditions to contain a provision defining when title to goods passes and when it is retained by the supplier – again, this might be sufficient at first instance to provide protection to the supplier. Stronger protections can be found in charging clauses pursuant to which the supplier may take a mortgage over real or security interest over personal property of the customer. Such provisions should be coupled with a power of the supplier to appoint a receiver or receiver and manager in the event of default by the customer, under which the receiver has the power to do anything that either the customer or supplier can do, including to sell property of the customer to satisfy debts to the supplier. Suppliers should also seek to obtain a personal guarantee from a director of a corporate or trustee customer; this provides a strong disincentive for a customer to default as the guarantor will face the risk of bankruptcy should the debts of the customer not be paid. Another form of protection for a business, at least at first instance, is a clause under which the parties agree to limit the supplier’s liability and to define the manner in which defective goods or services are dealt with. While such clauses must expressly be subject to statutory warranties and guarantees (discussed below) they may generally serve as a first level of protection against potential claims by customers and can also expressly exclude liability for indirect or consequential loss and loss caused by the actions of the customer. The terms and conditions should also contain clauses relating to the circumstances under which the supplier is entitled to cease supply and when the agreement may be terminated so as to reduce or avoid uncertainty.
It can often be a commercial decision as to which of these protective provisions to include in terms and conditions as a supplier does not want to scare away potential customers. Alternatively, it may be the case that the provision is always included but the supplier’s actions can mitigate the effect of the provision. One example of this is the creation of a security interest under the PPSA and subsequent registration on the Personal Property Securities Register (PPSR). The elements required to give rise to a security interest that may be registered on the PPSR – attachment, the type of collateral used as security, whether the interest is a purchase money security interest (if applicable) – should always be expressed in the terms and conditions; however, a supplier may choose not to register the security interest on the PPSR to keep the customer onside. Strictly speaking, security interests should be registered on the PPSR within 20 business days of entry into the agreement in order to give the supplier protection should the customer go into liquidation within 6 months, so by not registering its security interest the supplier is risking the loss of its products or its right to claim priority over the personal property of the customer in the event of default. Unfortunately, this is a risk that a supplier who is just starting out and who has little bargaining power may be forced to take.
Certain types of clauses should not appear in terms and conditions due to the impact of legislation. Under the Australian Consumer Law (ACL), suppliers of goods and services are taken to give certain consumer guarantees that cannot be contracted out of, including guarantees as to:
- acceptable quality
- fitness for any disclosed purpose
- due care and skill
- reasonable time for supply
Not only will any provision in terms and conditions that purports to exclude, restrict or modify such guarantees be deemed void, the supplier will have committed an offence of having made a false or misleading representation in respect of the guarantee, exposing a corporate supplier to a pecuniary penalty of up to $1,100,000 and an individual supplier to a pecuniary penalty of up to $220,000. The supplier will be equally exposed if its terms and conditions contain a provision seeking to avoid all liability for defective or damaged goods, as the ACL provides for minimum thresholds for repair or replacement of goods and supplying services again.
Other types of clauses will be impacted by legislation regardless of what is written in the terms and conditions. For example, the ACL also provides that if a supplier uses a standard form consumer or small business contract which contains an unfair term, the term will be considered void. A business’s terms and conditions will usually be considered a standard form contract as they will be prepared in advance and not be subject to negotiation. The ACL provides examples of unfair terms, which include provisions that allow one party but not the other to:
- avoid or limit performance
- terminate the contract
- vary the terms of the contract
- vary the price without giving the other party the right to terminate
- renew or not renew the contract
- assign the contract
While potentially impractical, one means of avoiding the imposition of the unfair contracts regime is to allow customers the right to negotiate terms and conditions; another is to clearly notify the customer of which terms in the contract give unilateral rights to the supplier. A more practical approach, however, is to have the terms and conditions reviewed and updated to ensure that no such unfair terms exist.
Our experienced commercial lawyers can provide you with peace of mind by reviewing and updating your business’s terms and conditions. Please don’t hesitate to contact us.
by Clayton HellenInsolvency Law reforms and its impact on business and directors
The Insolvency Law Reform Act 2016 (Act) is due to commence operation on 1 March 2017 and is the first set of reforms proposed by the Australian National Innovation and Science Agenda (NISA).
The Act is generally a consolidation of the current rules which govern corporate and personal insolvency, as currently split between the Bankruptcy Act 1996 (Cth), the Corporations Act 2001 (Cth) (Corporations Act) and Australian Securities and Investments Act 2001 (Cth) and makes a number of changes including:
- increasing the powers of ASIC to regulate corporate insolvency;
- the registration of insolvency professionals;
- the introduction of a minimum remuneration of insolvency professionals without the need to hold a creditor’s meeting; and
- the improvement in the position of creditors to request information and review estate or external administration.
NISA proposals
The second set of reforms recommended by the NISA proposals paper (Proposal) issued in April 2016 if adopted will have a significant impact on business given the proposals include:
Reduction of bankruptcy period
The proposal recommends that the current default bankruptcy period be reduced from 3 years to 1 year with the effect that many of the restrictions placed on bankrupts such as obtaining finance and prohibition on overseas travel are reduced to 1 year. Despite the proposed reduction in the bankruptcy period, the proposal recommends that the period for the obligation to repay the bankrupts debts remain set at three years. In addition to the above the bankruptcy period may be extended up to eight years with income contributions to continue for that period. We note that any perceived risk as result of this change is easily mitigated by conducting bankruptcy searches as is appropriate due diligence for commercial transactions such as business acquisitions and loans.
Safe Harbour proposals
In addition the proposal seeks the introduction of safe harbour provisions to protect directors from personal liability for insolvent trading. The proposal has set out two models for the safe harbour provision with one being a defence to insolvent trading whilst the other will be a carve out and would require the liquidator to prove that the safe harbour provision should not apply. The two models are as follows:
- under the Model A, the directors would be able to absolve themselves of liability by appointing a restructuring advisor to develop a turnaround plan for the company; and
- under Model B, a carve out for s 588G of the Corporations Act would be introduced to allow directors to attempt to trade out of short term losses where it is reasonable to do so and any increases in debt do not materially increase the risk of loss to creditors.
These safe harbour provisions are aimed at providing directors with a restructuring option that allows them to retain control of the company whilst receiving formal advice rather than prematurely surrendering control to an external administrator. In relation to Model A, the recommendations have also provided for the defence to not apply where the director is disqualified at the time the debts are incurred, the defence is not satisfied, business activity statements have not been lodged or where there has been a significant failure to pay employee entitlements.
Both of the models discussed above contemplate the appointment of a restructuring adviser to lead the proposed turnaround activity and provide advice on the reasonable courses of action, whether the business is in fact reasonably capable of being saved. At this point in time it is uncertain what type of professional this adviser is likely to be; however the Proposal has noted that the restructuring advisor will need to be an accredited member an organisation approved by the Minister and that such organisations are likely to include (but not be limited to) the Law Society, CPA Australia, Chartered Accountants Australia and New Zealand, the Australian Restructuring, Insolvency and Turnaround Association and the Turnaround Management Association.
The main impacts of this proposal if adopted will likely be:
- insolvent trading claims becoming even less frequent, given the difficulty and expense required to pursue; and
- encouraging businesses and directors when facing financial distress to act much earlier in an attempt to fall within the safe harbour provisions;
- greater transparency with creditors as directors attempt to take reasonable steps in an attempt to save the business; and
- directors fully investigating the possibilities of restructuring and trading out of short term losses, without penalty of trading a company whilst insolvent where under the current regime they would likely resign or cease trading and apply for voluntary administration.
Ipso Factum clauses
The last recommendation of the proposals is that clauses which allow a contract to be terminated solely due to insolvency event are made unenforceable or void where the company is undertaking a restructure. The aim of this proposal is to prevent trade creditors and suppliers undermining the voluntary administration process by refusing to provide goods and services despite them still being paid on the basis of insolvency event.
It should be noted that this proposal does not affect the termination of a contract for reasons other an insolvency event such as non-payment of fee or the non-performance of the contract.
If you need advice on what this means for you and your business, contact us now or visit our dedicated insolvency space.
by Clayton HellenThe Pitfalls of Do It Yourself Wills
The purpose of drafting a will is to ensure that your assets are distributed according to your wishes when you pass away. As such wills and estate planning may appear straightforward particularly since will kits can be purchased from your local newsagent; However…