Why should I bother with Terms of Business?

Category: Commercial

While many deals are done on the basis of a handshake or a phone call and the parties end up happy, asking if written Terms of Business are important is like asking whether you should have insurance or whether we need a highway code.

Your terms of business are the rules by which you and your customers will co-exist and while from time to time you may both agree to ignore them or take a more flexible route, they become important if things go wrong.

They can also help to establish or manage your customer’s expectations before they place their order with you; misplaced expectations can lead to an unhappy customer even if you do not feel that you have done anything wrong.

In some respects (though consumers enjoy a number of protections) you can choose what to put in and what not to put into your terms of business.  Some organisations like to try to micro-manage the relationship and cater for every eventuality while others prefer to focus on the main issues.

What are the main issues you must consider?

There is no ‘standard’ one-size fits all terms of business and they will vary from industry to industry and business to business but in most cases the same core elements are important.

As regards your business to consumer contracts, you have much less say due to consumer protection laws though in fact having written terms of business can be essential to ensure that you comply with your statutory obligations (in particular under The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 and The Consumer Rights Act 2015). Those would fill many articles in their own right and are not the focus here.

For business to business contracts, there is much greater freedom to set out the rules in your terms of business but the main elements for most businesses will be:

Formation of the legal contract: The terms of business should seek to avoid any argument as to when a legally binding contract is made and on whose terms of business.  You should reserve the right to reject orders, even if you have sent out a quotation, as you may find that the customer does not have a good credit rating or tries to place the order on different terms, or that you suddenly receive more orders than you can sensibly manage at one time. None of us likes to turn down business, but accepting a bad contract or being stretched and making a bad job of things can be worse.

Payment terms: These are a critical element of most terms of business and should set out whether any advance payments are required, how the price is calculated (e.g. if there is an hourly or daily element, or variable quantities), what payment is due on delivery, what the remaining payment terms are, and what you can do if they don’t pay (such as charge interest or withhold further deliveries). Clear payment terms can be vital for your debt recovery; delays in recovering payment due to arguments over what is due when can seriously affect your cash flow.  A debt on paper does not pay the bills and cash is still king.

There are many more issues that you need to consider in this process, such as…

Intellectual property rights: Who owns the rights to designs and can you reuse them for other customers for example.

Ownership of goods: If your customer does not pay you for goods, can you just go around and collect them?

Specifications: Is there any tolerance in specifications? Can you substitute for a near alternative, are there strict deadlines for delivery?

Cancellation and late payments: What can you do if the customer doesn’t pay as agreed?  You may opt to ‘down tools’ but that may have dire consequences for you.

Limiting your exposure: Can you ensure that when it goes wrong, that the consequences are clear and manageable.  Could that delay on a £100 job trigger £1m penalties that land on you?

These points are just the start.  As the main article says, you need to understand whether the complexity is appropriate and adds greater value than not having any terms of business or skipping anyone clause.

A properly drafted set of terms of business can help avoid misunderstanding, dispute and costly litigation and like an insurance policy may be a relatively small upfront cost to avoid a much greater headache later on.

Austin Blackburn heads up the Commercial Team at Nash & Co Solicitors.

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