Terms and Conditions of Trade – what to include and what not to include

Terms 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 a terms and conditions 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 and conditions 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:

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.

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