How to set up trading terms and conditions for your business
This is a third article in a series of articles on invoice payment and debt collection issues.
In our first article we discussed why it is important to clearly identify every new customer and provided tips on essential elements of a good credit application form.
In our second article we discussed how to set up an effective credit assessment procedure.
In this article we will show you how to set up Trading Terms and Conditions, also known as Terms of Trade (“Trading Terms”) for your business.
The obvious question is – why is it important for your business to have Trading Terms?
Trading Terms describe the terms and conditions on which your business is prepared to supply its product and services to its customers. Essentially, it is an agreement between your business and each of your customers that can and should be used whenever any issues arise in relation to your products and services or in relation to payments for those products and services.
Should you ever need to initiate any legal action to recover unpaid debts, your Trading Terms will be one of the main documents that will form the basis of your legal claim.
So, what should be the essential elements of your Trading Terms document?
2. Definitions and Applicability
The terms Customer, Supplier, Goods, Services and Price should be clearly defined in your Trading Terms. For example:
- the term Customer could be defined as any person described as the Customer on a quotation (or an invoice) provided by the Supplier (you) to the Customer; and
- the term Goods could defined as the goods and services supplied by the Supplier to the Customer as described on an invoice provided by the Supplier to the Customer.
Depending on the nature of your business and the complexity of the products or services you supply, other terms may need to be defined in your Treading Terms.
Your Trading Terms should also state that the Goods are supplied by you to the Customer exclusively on the terms and conditions set out in that document. Should any legal disputes arise in the future in relation to the supply of the Goods, this will assist the courts in determining what documentation should be taken into account to adjudicate the claim.
3. Price and Payment
Your Trading Terms should also clearly state on what basis the Price for your goods and/or services supplied will be determined.
For example, your Trading Terms may state that the Price for the Goods supplied will be as indicated on the invoice provided by you to your Customer in relation to the Goods.
Alternatively, the price for the Goods supplied may be based on the price indicated on a written quotation provided by you to the Customer in respect of the Goods, provided the Customer has accepted that price within the time specified on the quotation.
In relation to the payment for the Goods, your Trading Terms should clearly state whether:
- the full payment must be made prior to the delivery of the Goods; or
- the full payment must be made on delivery of the Goods; or
- a deposit must be paid prior to the delivery of the Goods (in the amount stated on the written quotation) and the balance of the price must be paid on the delivery of the Goods; or
- if the Customer has been approved for the supply of Goods on credit terms, the full payment must be made within the time specified on the credit application signed by the Customer and approved by you (for example, within 60 days following the end of the month in which the invoice for the supply of the Goods was issued).
4. Retention of Title arrangements
It is very important that your Trading Terms include Retention of Title provisions (ROT provisions). These provisions will ensure that the ownership of the Goods supplied by you to your customer will remain with you until all the Goods that you have supplied to the Customer have been paid for in full.
For example, a very simple retention of title clause will state:
The legal and beneficial ownership of the Goods will remain with the Supplier until such time as the Supplier has been paid in full in cleared funds for all Goods supplied by the Supplier to the Customer.
It may also be beneficial to include certain restrictions on the Customer in respect of the Goods (until such time as all the Goods have been paid for in full). For example, your Trading Terms may also include the following provisions:
(a) the Customer shall hold the Goods as bailee of the Supplier;
(b) the Customer must not sell or deal with the Goods in any way without prior written consent of the Supplier or except in the ordinary course of the Customer’s business;
(c) the Customer must store the Goods separately and identify the Goods clearly indicating Supplier’s ownership of the Goods; and
(d) the Supplier my recover possession of the Goods from any premises controlled by the Customer and the Customer grants irrevocable licence to the Supplier to enter such premises for that purpose.
With the introduction of the Personal Property Securities Act 2009 (Cth), the abovementioned retention of title arrangements will need to be registered on the Personal Property Securities Register in order to ensure that the Supplier’s interest in the Goods is fully protected.
This issue is beyond the scope of this article. We recommend that you seek legal advice to determine whether registration of ROT provisions would be commercially beneficial for your business.
5. Other Terms
There are a number of other terms that you may consider including in your Trading Terms. These are:
- provisions that will allow you to stop work or withhold supply, should the Customer fail to pay for the Goods in accordance with the Trading Terms;
- provisions that will allow you to recover any enforcement costs, including legal costs on full indemnity basis, should you need to initiate legal action against your customer to recover your money or the Goods;
- provisions that will allow you to charge interest on any overdue amounts;
- provisions that limit your liability, to the extent permitted by law, in respect of the Goods; and
- confidentiality provisions that will ensure that all pricing information and other commercially sensitive information is strictly confidential and must not be disclosed to any third party.
The aim of this article was to provide you with a general appreciation of the essential elements of the Trading Terms document.
We hope that you now have such appreciation and will be able to assess whether your business will require new Trading Terms or may need to amend existing documentation.
We strongly recommend that you seek legal advice if you wish to amend or develop new Trading Terms for your business.
In the next article will provide you with some useful tips on how to effectively communicate with your Customers.