Have you ever thought about what’s in your business terms and conditions? Believe it or not, it is quite common for small businesses and startups to cobble together their trading terms. These are often compiled from material they’ve found online. Those same businesses also wonder why they have issues in collecting payments from customers.
The reality is every supplier of goods and services must have suitable terms of trade governing the customer relationship. When done well, these documents protect you from errant customers. They also ensure that your business complies with applicable consumer protection laws. I’ve identified the key issues below.
Identify your customer
Do you know what entity your customer trades under, or do you just know their trading/brand name? If you are dealing with a procurement manager, they might complete an application using just their organisation’s trading name. This makes it very difficult for you, as the supplier, to take proper security over the goods you are supplying. It also impacts your ability commence proceedings against that customer to recover unpaid money or enforce other rights. Therefore, your application for supply of goods (and accompanying terms and conditions) must require your customer to supply:
- their full company/entity name as well as their business trading name;
- their ABN (Australian Business Number) and ACN (Australian Company Number) if applicable;
- the name of the directors, as well as any employee contact person; and
- contact phone number, email address and physical address.
The above information allows you to know who you are dealing with. It also enables you to run credit checks before accepting the application for credit. Knowing who your customer is also helps you to properly enforce your rights should you need to do so.
You should also include a requirement for the customer to supply trade references from at least two other parties. Your employees and accounts administrators must call those references and be satisfied of the reliability of this customer.
Delivery and ownership
Each time your customer places an order, you must deliver goods to that customer, or have them collected. Your trading terms need to make it clear:
- who owns the goods along each step of the journey;
- who has the risk in the goods (i.e. responsibility for loss or damage) at each step of the journey; and
- when does title in the goods (i.e. ownership) pass from you to the customer.
You will also want to ensure that you retain ownership of the goods until you get paid. You must also take security over those goods.
Registration of Security Interest
In the past, if you sold goods on a retention of title basis you could assert ownership over your goods until you were paid. This meant that if your customer faced financial difficulty, or had a liquidator appointed, you could take back any goods that you had supplied because you still owned them.
While this is still possible, since the implementation of the Personal Property Securities Register (PPSR) in 2012 the supply of goods on a retention of title basis is considered a security interest. This means that:
- in order to be effective, your security interest must be registered on the PPSR;
- registration must occur within certain time frames;
- in the absence of registration, your security interest will rank lower in priority to other registered security interests; and
- if you don’t register your security interest, a liquidator appointed in respect of one of your customers will have rights that rank above your rights, leaving you as just one of many unsecured creditors.
Therefore, when supplying goods and services on credit terms, your terms and conditions must deal with the PPSR and your employees must be trained in the registration of security interests on the PPSR each time a new customer is approved. You could be the ultimate loser in the event that your customer faces financial difficulty.
When extending credit to an organisation, it is always a good idea to also take a personal guarantee from the individuals behind the organisation (i.e. its directors). This means that those individuals are personally responsible for the organisation’s debts owed to you. This reduces your exposure in the event that a customer faces financial difficulty, by allowing you to pursue the directors personally. Some of my clients take this concept a step further by also insisting that the directors grant a charge over their assets as part of the guarantee. This is a type of security that can then be relied upon to lodge a caveat over any property in that director’s name.
Australian competition and consumer protection legislation includes certain ‘consumer guarantees’ that are implied into every consumer contract. Importantly, these consumer guarantees also apply to business to business transactions if:
- the amount paid for the goods or services is less than $40,000; or
- the goods are of a kind that is ordinarily acquired for personal, domestic or household use (even if they cost more than $40,000).
What are the consumer guarantees?
The consumer guarantees in respect of products and services are as follows:
- be of acceptable quality;
- match a description made by a salesperson or otherwise on labels, packaging and promotions (and meet any extra promises made with respect to the goods);
- match any demonstration or sample;
- be fit for the purpose that it is intended to be used for (or if a specific purpose has been made known to the supplier, the product supplied must be fit for that purpose);
- come with full ownership and not carry hidden debts or extra charges (this includes full rights to possess and use the goods); and
- have spare parts and repair facilities available for a reasonable time after supply.
- be provided with acceptable care, skill and technical knowledge;
- be fit for purpose intended and give rise to the results that had been agreed to; and
- be delivered within a reasonable time (if there is no agreed time frame to deliver the services).
What you can do?
The application of the consumer guarantees cannot be excluded entirely, so your warranty and returns policies must comply with the minimum requirements. Further, the law allows for certain limitations to be placed on their application, and your credit terms and conditions must include those limitations to limit your exposure.
Payment terms and conditions
Finally, you need to turn your mind to your agreed payment terms. The extension of credit is already a generous concession to your customers, so you need to ensure that you get paid at the end of the agreed credit period. You should consider:
- implementing a direct debit facility
- whether interest will accrue on overdue accounts and what rate of interest will apply
- how price changes dealt handled
- proper treatment of GST on all supplies that you make.
An up to date set of terms and conditions can save your business time and money on recovery of unpaid accounts. If you are just starting out, or if you would like your current documents reviewed, please get in touch.