Terms of trade provide an opportunity for a business to mitigate major areas of risk when supplying goods and services to another person. However in practise terms of trade are often incomplete, inappropriately drafted and infrequently reviewed. This can lead to major issues for all businesses. So what are some key areas of risk that a business’s terms of trade should cover?

Make Sure Your Terms of Trade are Binding:

Even well drafted terms of trade will fall short simply because a business does not have the right protocols in place. A terms of trade is in essence a contract and therefore has to be accepted by the customer. Ideally terms of trade would be signed by all customers as execution shows acceptance of the terms. Quotes and other order materials should also refer to your terms of trade.

Penalties and Cost of Recovery:

Without a clear contractual term entitling you to costs of recovery you will be left with your rights at law. This may mean interest is only recoverable at a rate applied by the Court’s which is less than a penalty rate and reasonable legal costs as per the relevant courts scale usually between 1/3 to ½ of actual costs. A well drafted terms of trade may allow you to recover not only the core debt but also penalty interest rate and all of your legal costs.

Taking Security:

A terms of trade can also provide for guarantees from directors, particularly relevant in a tightly held company situation. Further, a supplier can take security in the goods provided by registration of a security interest under the Personal Property Securities Act 1999 (PPSA). Where recovery of monetary losses through litigation is not be feasible, recovery of the physical goods might be. A registered security interest will also rank you above unsecured creditors in the event of liquidation. Exclusion of Liability A terms of trade presents a business with an opportunity to carefully consider and limits its liability. This may be anything from a term determining when risk in the goods pass or provisions on insurance. But equally terms of trade often limit the liability of the seller to the value of the goods, or the cost of repair. Where the transaction involves a consumer, a consumer has greater protection arising from consumer protection legislation but there are still opportunities to exclude liability so terms of trade remain important.

This post was published in the FMCG Business magazine