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Terms of Trade

28 November 2015

"Terms of Trade" are an essential document which set out the terms and conditions that apply between a supplier and customer where goods are being sold or services supplied. They are usually drafted to specify the particular rights and obligations of each party with reference to the industry in which the supplier operates. This article sets out the key issues to be covered by terms of trade, and key benefits for a business when they are appropriately drafted.

The customer’s acceptance of the terms of trade are often incorporated into a business’s usual processes, such as an account application form, or online sales purchase process. This is to ensure that the terms of trade are accepted prior to the first purchase. If the process is not followed correctly, the terms of trade may not be enforceable. Terms of trade on the back of an invoice are likely to fall foul of this requirement as they may not be seen and accepted by the customer until the transaction is complete.

The initial clauses of the terms of trade generally deal with the supplier’s business processes, for example, how orders are placed, how quotes are given, and that placing an order is confirming acceptance of the terms of trade. Other industry specific clauses can be included, such as whether the supplier is obligated to accept orders, delivery time frames, back order issues, and whether the customer or supplier can cancel an order. Clarifying these aspects will give customers certainty about how these issues are dealt with.

One of the most important roles of terms of trade is to document the terms of payment, especially if items are sold on credit. This will include the date the payment is due, any prompt payment discounts and the charging of interest on late payments. The terms of trade should also reserve the right to recover debt collection and other costs from the customer, and give a supplier the ability to alter payment terms or stop supply if, for example, a customer falls into arrears.

Where a customer is being provided with credit, the terms of trade should grant the supplier a security interest in goods supplied, and may be extended to cover all of the customer’s assets under the Personal Property Securities Act 1999, which is then registered by the supplier. This will classify the supplier is a secured creditor which among other things will enable the supplier to repossess goods supplied. Personal guarantees can also be a useful form of additional security for payment.

Another key feature of terms of trade is to ensure that warranties and guarantees implied by law are dealt with. These come from the Consumer Guarantees Act 1993, Sale of Goods Act 1908, and Fair Trading Act 1986. In a business context, many of these can be contracted out of, reducing the risk of liability of the supplier. However, these warranties and guarantees cannot be contracted out of in relation to sales to consumers.

Terms of trade are a useful tool to limit liability generally. The extent to which liability can be limited depends on the circumstances, and especially whether business or consumer customers are involved. Limiting liability should give the supplier comfort that a large claim is unlikely, and therefore a reasonable price can be charged for the goods or services. Without a limitation of liability, prices may have to be higher to take into account the increased risk.

Some terms of trade also need special purpose clauses inserted, for example, if intellectual property is being created or used by the supplier or customer. If not included, the likelihood of dispute around who owns the intellectual property or on what terms a party is entitled to use the intellectual property, increases.

These are just some key feature of terms of trade. The cost of establishing a terms of trade document for your business is a worthy investment to increase the likelihood of payment and to mitigate risk, and is likely to pay for itself fairly quickly. If you would like to discuss the applicability of terms of trade to your business, please give me a call.

 

Chris Steenstra is an Associate in the Commercial Corporate team at Norris Ward McKinnon, specialising in IT and Commercial Corporate law.  Email Chris at:  chris.steenstra@nwm.co.nz