March 2025
As a business owner, it is prudent to protect your interests. Most business owners establish essential layers of protection, by structuring their businesses appropriately and securing essential insurance coverage to minimise potential personal exposure from creditors.
Yet, one critical safeguard that is often overlooked is having a set of clear, well-drafted Terms of Trade defining the rules of engagement with customers. Without a robust set of Terms of Trade, businesses leave themselves vulnerable to late payments and costly litigation.
Terms of Trade is a written contract between your business entity and customers, containing terms like payment obligations, delivery expectations, liability limitations, and dispute resolution mechanisms (amongst others).
It can be tempting to copy generic Terms of Trade, but this often leads to inconsistencies and gaps in protection. For the Terms of Trade to provide the intended protection, they should be specifically tailored to your business operations and be clear, comprehensive, and easy to understand.
What sorts of things should your Terms of Trade cover?
Clearly outline payment terms, such as due date, accepted payment methods, and whether prices include or exclude GST.
For international transactions, ensure currency of payment is clearly specified and include exchange rate implications, such as who is responsible for bank charges or currency conversion fees.
Include the right to charge interest on the overdue amounts, whether at a fixed interest rate (for ease of administration) or a variable rate (if you prefer flexibility tied to market condition).
Include the right to recover legal and debt collection costs in the event of non-payment and to allow your business to suspend delivery of future orders for non-paying customers until all outstanding amounts have been paid in full.
Clearly state delivery obligations, such as who is responsible for delivery costs and ensure that the delivery and collection arrangements work practically.
State clearly when the transfer of risk in goods occurs according to your business operations and ensure your insurance coverage is aligned with the transfer of risk. Failure to match insurance terms with the passage of risk could leave your business exposed to financial loss in the event of damage, theft, or loss.
Include a provision to retain title of goods with a right to recover possession until full payment is made, providing your business with security interest in the goods supplied and proceeds arising from the sale of the goods. This allows your business to register a financing statement on the Personal Property Securities Register (PPSR).
Some businesses may choose to perfect their security interests by registration on the PPSR, while others may not. The key is to include the right and then make an informed decision based on the specific business circumstances (such as registering security interests with key customers or clients who have significant outstanding balances). Even if the security interest is unperfected, it still takes priority over unsecured creditors, offering an additional layer of protection.
Clearly outline the scope of warranty, including duration, process for claiming, specific defects covered, and limitations on repair or replacement obligations.
Warranties stated must not take away or reduce your customer’s statutory rights. Any terms that attempt to restrict these rights may be considered unfair and unenforceable under the Fair Trading Act 1986 and the Consumer Guarantees Act 1993.
The limitation of liability provision should be crafted carefully, as it depends on whether your customers are consumers or businesses.
If you are dealing with businesses, there is a greater flexibility in limiting liability. In these cases, you should seek to contract out of the Consumer Guarantees Act and the Fair Trading Act as far as possible, and to limit or exclude liability for indirect, consequential, or punitive damages. Where appropriate, include caps on damages.
Clear termination provisions should include specifying the conditions under which your business or customers may terminate, the processes for doing so, whether there are any fees associated with early termination, and any obligations that survive termination.
As tempting as it may be to draft a set of Terms of Trade which absolve you of any liability, be aware of the inclusion of any aggressive and unfair terms and conditions in your Terms of Trade as they may be found unenforceable under the Fair Trading Act in respect of consumers and small business to business contracts of an annual contract value of $250,000 or less.
Factors to take into account when determining if a contractual term is unfair include whether the term:
Obvious examples of unfair terms include heavily one-sided termination provisions, unilateral variation provisions, and limitations and exclusions of liability.
Once you have established the Terms of Trade, it is crucial that your customers have agreed to them prior to the supply of goods or services, such as having your customers sign a document containing the terms or accepting them via an online portal before completing orders.
Merely displaying the Terms of Trade on your website or printing them on the back of invoices is insufficient as these approaches fail to confirm that your customers have notice of and agreed to the Terms of Trade before placing an order.
The cost of obtaining a well-drafted, tailored set of Terms of Trade is a worthwhile investment – far better than spending that money on litigation down the track. Many disputes can be avoided simply by having clear, enforceable Terms of Trade from the outset. Rather than being tied up in legal battles, businesses can then focus on growth, profitability, and building strong customer and supplier relationships.
If you have any questions about drafting or reviewing your Terms of Trade, please contact your lawyer.