Agreeing Terms
Introduction
Terms of trade
Unfair contract terms
How a contract is formed
Supplying services
Some useful ‘standard’ clauses
Introduction
It is essential that you agree Terms of trade (Terms) with your customers. Why is this so important? Once agreed, Terms are a contract between you and your customer. They form the basis for any legal action which you may need to take against your customer or which your customer may take against you.
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Terms of trade
Terms may enable you to:
- protect your rights;
- limit your liabilities and
- provide some security for the debt where goods are sold on credit.
You should always agree Terms before providing your goods or services to a customer. A good time to agree Terms is at the point where you tell your customer that he may trade with you on credit.
Drafting Terms of trade is an area where specialist legal advice is necessary. This is especially true in specialist areas of trading. Unless the Terms of trade are properly drafted, you may be limiting your ability to use legal action to get your customer to pay his debts to you.
Many businesses do not need to agree separate legal contracts with all their customers and prepare ‘Standard Terms of trade’ which are sent to customers.
What do I need to include in my Terms of trade?
The standard types of terms and conditions include the following:
- A definition section at the start.
This will clearly identify and define the important words used in the Terms. Examples of this would include who is the 'buyer' and 'seller', which 'goods' or 'services' are referred to, the 'date of delivery' and 'place of delivery'. A definition section is useful if a dispute arises, as a Court is likely to look at it for guidance in determining the issue.
- When and where delivery will take place.
- How the price is charged, the manners of payment and what penalties occur on default of payment.
- The passing of risk and ownership in the goods.
For example, we ordered goods from Company X, which then puts them aside as our goods but still on its premises. It is arguable that although they have not been delivered we are the owners of those goods as ownership has passed to us upon the goods being set aside. Except in the case of a contract with a consumer, the risk normally passes with ownership and therefore the goods are at our risk. Without us realising it the goods are held at our risk even though they are on Company X's premises. It may also be advisable to consider a clause to cover responsibility for payment and risk when the goods are in transit. Note, however, that there are special concessions protecting consumers in this situation.
- The right, if any, to reject the goods.
How soon can this be done and by what method? Consider also after what time the goods or services may be considered to have been 'accepted' by the purchaser or buyer. Consider also building into this clause the opportunity for the individual to inspect the goods or services, and for what periods of time.
- What happens in the case of delayed delivery or non-performance of the contract?
This includes considering whether this is to be tolerated, if so, for how long and what will the consequences be? For example, can the company allege there is a breach of contract, or will there be a further period of time to remedy the situation? This may depend on whether a clause 'making time of the essence' has been included.
- Events which are beyond the company's control, for example strikes, riots, act of God and so on. These would normally prevent you from being liable to perform the contract, as it is not within your control. These are referred to as "Force Majeure".
- The effect or impact of any matters which are subject to copyright, patent or trademarks.
If this is the case, attempt to obtain the appropriate authority or consent, usually by licence, to enable usage to occur. If not, consider who will be responsible for any loss arising out of breach of use.
- Whether a bankruptcy, winding-up, insolvency or similar event would frustrate the contract and bring it to an end.
If so, will the company still be paid for all work up to that date? It is very important, especially if goods have been supplied but remain unpaid for, to have a retention of title clause so that title in the goods does not pass until payment is received in full. The company then retains ownership of the goods and any subsequent purchaser risks not having acquired title. Hence, the goods should be released back to the company. These are referred to as 'Romalpa' clauses. Without such a clause, the company would be an unsecured creditor.
- A dispute clause
In the event of a dispute, either a clause which will refer the matter to arbitration, upon both parties agreeing to the same, or alternatively, a clause stating which law is applicable to the contract. Normally, if both parties are located and the contract is entered into in the UK, then it would be sensible to have UK jurisdiction. In the absence of such a clause, it is open for the Courts to consider the most appropriate jurisdiction.
- Exclusion / Limitation of liability clause
Such a clause, if successful, would operate to limit / exclude the company's liability in the event of fault being established on its part. In contracts involving consumers, it is not possible to exclude liability for breach of a terms implied by the Sale of Goods Act 1979, and neither can a company exclude liability for death or bodily injury under any circumstances where it is at fault. However, for all other types of loss and in all non-consumer cases, with the exception of death and bodily injury cases, it may be possible for the liability to be limited or excluded. In such circumstances the company has to prove that its clause is reasonable in the circumstances of the case.
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Unfair contract terms
It is important to be aware of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). In the main, these Regulations apply to contracts made between businesses selling or supplying goods or services and their consumer customers. A business must now have regard to these Regulations as well as the Unfair Contract Terms Act 1977 (UCTA) when drafting their standard terms and conditions of business.
The effect of UTCCR is to prohibit the use of unfair contract terms in consumer contracts where the terms have not been individually negotiated with the consumer. Of course, this will be the norm with standard terms and conditions as the consumer will generally contract on the basis of the terms presented to him.
A ‘consumer’ is defined in the Regulations as a person acting outside of business and, accordingly, a company itself cannot be a consumer.
A key principle is that contractual terms should be drafted in plain and clear language, which defines the main subject matter of the contract, and give clear information about the price of the goods or services supplied.
An unfair term is one which has not been individually negotiated and causes an imbalance in the rights and obligations under the contract to the detriment of the consumer. Within the Regulations is a specific list of terms which may be considered unfair.
The Director General of Fair Trading is empowered to consider complaints relating to the fairness of any contractual term and also to act to prevent the continued use of such terms. Furthermore, ‘Qualifying Bodies’ (for example the Data Protection Registrar, Trading Standards Departments, and the Consumer's Association) have powers to apply for an injunction to prevent the continued use of an unfair term. In addition, the Director General and the ‘Qualifying Bodies’ may require traders to produce copies of their standard Terms and to give information regarding their use in order that complaints can be investigated.
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How a contract is formed
Generally, your customer will offer to buy goods or services from you. If you accept the offer, a contract will normally be entered into. However, two further requirements exist:
- First there has to be 'consideration' i.e. the price of the promise of the contract. Examples of this could be a deposit paid, or work being started on the contract.
- Second, both parties should intend to create a legal relationship.
To ensure that there is no dispute over whose terms and conditions apply, it would be prudent to include a term to the effect that acceptance of the offer is upon your standard terms of business. If your customer accepts the contract or order on your terms, then these will take precedence.
If, however, your customer disputes this and sends their own terms in return, this could lead to problems. This is known as the 'Battle of the Forms'. Essentially, a Court will resolve the dispute on the basis of whose terms were last mentioned or contracted upon. As this is a complex legal area, specialist advice should be taken. You should try to ensure that your terms and conditions are the ones upon which the contract is being entered into. Even if your customer contacts you and states that the contract is being entered into, you should, at that stage, reiterate that the contract will only be entered into upon your terms.
In addition to terms expressly agreed between the parties and recorded in writing, it is important to be aware that some other terms are implied by law. The Sale of Goods Act 1979 (as amended) implies into contracts terms that provide that goods must be:
- as described;
- of satisfactory quality;
- fit for their purpose and
- corresponding to any sample previously shown to the buyer.
Failure to meet these implied terms may allow the customer to reject the goods and claim a full refund, provided that the customer takes this step within a reasonable period. What is ‘reasonable’ depends on the nature of the goods, but in most cases it must be within a month of taking physical possession. The alternative remedy is to claim damages equal to the cost of repair or replacement.
The Sale and Supply of Goods to Consumers Regulations 2002 apply to consumer contracts. A breach of the above implied terms entitles the consumer to request either repair or replacement of the goods, but the seller can oppose this if he can show that it is impossible or disproportionate for him to comply when there is other relief available to the consumer. In such a case the seller will have to offer the consumer a full or partial refund. Such a request must be satisfied within a reasonable period and without significant inconvenience to the consumer.
Under normal contact law the consumer has to prove the breach but the above regulations create an exception where the consumer finds a defect within 6 months of receiving the goods. In such a case the burden of proof reverses and it is for the seller to disprove the allegation. If you are dealing with a commercial buyer, as opposed to a consumer, the same implied terms may apply but it is possible to exclude or limit liability by including a clause to that effect in the contract. The key question will be whether or not the terms of the clause are reasonable in the circumstances.
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Supplying services
The Supply of Goods and Services Act 1982 deals with implied terms for the supply of services. These are that:
- reasonable care and skill shall be exercised by the provider;
- contractual obligations will be honoured within a reasonable period and
- a reasonable price will be charged in the absence of an agreed price.
A breach of the implied terms would usually lead to a claim for damages for any loss sustained as a consequence.
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Some useful ‘standard’ clauses
By way of illustration, we set out below typical standard clauses. However, we cannot guarantee that these will be suitable for use in your business contracts and you should seek specific professional advice.
- Time of Essence
Time shall be of the essence of the contract and the goods shall be delivered by the seller to the buyer by the date for delivery or any extended date as provided for under Clause X. The seller shall supply the buyer with such programme of manufacture and delivery as the buyer may reasonably require. The seller shall give the buyer notice immediately if such programme is or is likely to be delayed and the buyer shall have the right to require the seller to take such steps at the seller's expense as may be required in order to deliver the goods by the date for delivery.
The seller shall at his own expense deliver the goods to the buyer at the delivery point specified in the purchase order and unless otherwise specified in the purchase order delivery shall include the off-loading of the goods. If the goods are incorrectly delivered the seller will be responsible for any additional expense incurred in delivering them correctly.
- Passing of Property
The property in the goods shall not pass to the buyer until payment has been received by the seller in full for the goods and for any other goods supplied by the seller or any associated company of the seller to the buyer.
For the purpose of this clause, the buyer undertakes that until he or she has made payment in accordance with sub-clause X:
- not to remove, deface or cover up any identification marks on the goods or marks indicating that the goods are the property of the seller;
- to store the goods separately from those belonging to the buyer or others;
- to allow the seller unrestricted access to the buyer's works or other place where the goods are stored for the purpose of removal of the goods.
- Passing of Risk
The risk in the goods shall pass to the buyer on delivery as defined in clause X above.
If delivery is to be made to a carrier for onward transmission to the buyer, then unless otherwise instructed by the buyer, the seller will arrange for the benefit of the buyer, insurance of the goods on the basis of carrier's risk. The premium for such insurance shall be added to the contract price and paid for by the buyer.
- Retention of Title
All goods and / or parts used by the company in performing the contract on behalf of the customer shall be, and shall remain, both legally and equitably, the property of the Company until such time as the invoice price has been paid in full by the customer. Further, the Company shall be entitled to enter onto the customer's premises at all reasonable times for the purposes of removing such goods and / or parts should the customer default in payment.'
The Seller herein shall retain a specific, as well as a general lien, over goods upon which the Seller has performed services, at the specific request of the buyer as security for monies owing to the Seller by the buyer whether on this or any other contract between the parties. In the event of an invoice submitted to the buyer, by the Seller, remaining unpaid for a period of three months, the Seller shall exercise his right to sell the said goods under the aforesaid lien and to apply the proceeds of such sale in satisfaction or reduction of such invoice amount.
- Instalments
You should consider instalments with new clients, particularly where credit references are less than perfect. Your credit terms can require the customer to pay in instalments or pay a deposit prior to you delivering the goods or service.
For a suitable agreement, please see Instalment payments agreement letter.
- Contractual Interest
A powerful tool to getting paid on time is to have the customer agree that interest is payable at a rate which varies with your Bank's base rate on any overdue debts. This is much more enforceable if it is agreed in writing by the customer rather than just being in your Terms.
For a suitable agreement, please see Agreement for contractual interest.
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