Getting your business terms and conditions right
There is nothing worse than working and not getting paid so it is vital to ensure your trading terms and conditions are right before you make a deal. We asked business lawyer Verona Cocks for advice on how to do this.
Q: How can I best protect my business against late or non-payment?
A: Ensure that you have terms and conditions of business which govern your trading relationship with the customer and specify terms of payment at the start. While this may seem obvious to most, it is surprising how many businesses either don' t do this at all, or have terms and conditions which prove to be ineffective because they are not incorporated into the contract between the parties.
Q: How should terms and conditions be incorporated?
A: Ideally they should be contained in a signed document. One way to do this is to get your customer to sign an account application form for payment which contains your terms and conditions of business. If this is not always possible then you should ensure that your terms and conditions are contained in a document which forms part of the contract with the client. This can be the purchase order form or on a letter confirming the order.
Q: What about quotations and invoices?
A: Quotations can become a contractual document if accepted by the customer. Invoices are post-contractual documents but many businesses still put their terms and conditions on the back of invoices even though cannot be incorporated in this way. The exception is where there has been a consistent and continuous course of dealings between the parties so that it can be said that the terms and conditions have become incorporated over a period of time. Suffice it to say it is safer to have things in writing and for them to be signed.
Q: What if my customer pays late or not at all?
A: If you have a regular customer who continually pays late you need a term which requires the customer to pay interest on late payments. You may also wish to have a clause which allows discounts for early payment to encourage payment on time. In addition, you may want to put in an option to reduce the payment period (limiting your exposure) in the event that your client becomes insolvent. It is always worth investing in a good credit control manager and to include a term reserving your position not to trade further until the customer's account is brought up to date.
Q: How can I get my goods back if my customer does not pay or becomes insolvent?
A: In these circumstances, it is extremely useful to have a clause in your terms and conditions which allow you to retain legal ownership until all monies have been paid. This will enable you to recover any of your goods still in the possession of the customer, even if they are goods from a different delivery for which the customer has paid. This prevents the need to identify specific goods in relation to specific invoices, which otherwise would be necessary.
Q: What happens if the goods have been sold or used?
A: If your goods have been sold to a third party who does not have notice of your terms and conditions (in particular, your retention of title clause), then that third party will not be bound by that clause and will obtain good title (i.e. ownership). If your goods have been used in the manufacture of a larger product, you will only be able to establish ownership of your goods if they can be removed from the larger product without causing damage to it. If your goods have been manufactured into something else to the extent that they have lost their identity, then you will not be able to recover them.
Q: What happens if my customer goes into administration?
A: If your terms and conditions contain a retention of title clause, you should contact the administrator immediately to obtain access to the company's site in order to identify your goods. If possible, you should take photographs to show that your goods were at the company's premises at that particular time. Once your goods are identified you should apply stickers and labels. Try to agree this with the administrator before doing so. In addition, you should prepare an inventory and get either the administrator to co-sign the inventory to prevent later argument. The next stage is to demand the return of your goods. Generally, the only situation in which this can be refused is if the goods have already been sold to a third party.
Q: What if the administrator refuses to deliver up the goods, and they have not yet been sold to a third party?
A: There are many reasons why this may happen, not least because the administrator may not have had the opportunity to consider the contractual documents. However, in such circumstances, a letter should be sent to them requiring that they abide by the retention of title clause or to return the goods or pay their invoice value. In certain circumstances the administrator now requires permission from the Court to deal with goods which are subject to a retention of title clause.
Q: What if they won't provide this undertaking?
A: You would need to consider applying to a court for an injunction to force them to deliver up your goods. The courts have held that where an undertaking of the above nature is given they will not grant an injunction because it is not necessary. Usually, however, the administrator will give such an undertaking as otherwise they can be personally held liable for paying your legal costs.